Question 1

Helao Limited ("HL") wants to replace their aging fleet. They think the old fleet is costing too much in repairs and maintenance and therefore would want a new fleet to reduce costs. They consider this fleet replacement a project and therefore they would like to know the cost of capital to use to assess the viability of the fleet replacement project. Their present capital structure is as follows: 600 000 N$2 ordinary shares now trading at N$2.40 per share. 200 000 10% N$3 preference shares trading at N$2.50 per share A bank loan of N$ 1 000 000 at 12% p.a. (payable in 5 years' time). Additional information The company's beta is 1.4. The return on the market is 15% and the risk free rate is 6%. Its current tax rate is 28%. Its current dividend is 50c per share and it expects its dividends to grow by 7% p.a.

Calculate HL's weighted average cost of capital using both methods of determining cost of equity.

Question 2

Namibia Trading Limited ("NTL") has the choice of purchasing one of two machines namely, Machine A and Machine B. Both machines have five year useful life, with only Machine A having a residual value of N$300 000. The annual volume of production for both machines is estimated at 200 000 units, which can be sold at N$20 per unit. Depreciation is calculated on the machines using the straight line method (cost method). Machine A costs N$4 800 000 excluding installation cost of N$300 000. The annual operating costs are estimated at N$380 000 (excluding depreciation). A major overhaul at a cost of N$200 000 is expected to be undertaken at the end of year three. Fixed costs are estimated at N$2 100 000 (excluding depreciation). Machine B costs N$5 100 000 including installation cost of N$400 000. The annual operating costs are estimated at N$330 000 (excluding depreciation). Fixed costs are the same as Machine A. The weighted average cost of capital is 14%

2.1 Calculate the payback period of Machine A and Machine B (answer must be expressed in years, months and days).

2.2 Use the net present value method to determine which machine should be purchased by the company.

2.3 Calculate the accounting rate of return (on average investment) of Machine B.

Question 3

The following information relates to Windhoek Alarm Systems ("WAS") for the financial years 2021 and 2020.

Summarised Statement of Financial Position as at 30 November 2021
	2021	2020
	N$	N$
Assets
Non- current/fixed	7 000 000	6 000 000
Inventory	500 000	300 000
Receivables	450 000	420 000
Cash	650 000	80 000
Total Assets	8 600 000	6 800 000
Equity and Liabilities
Share capital (N$2 shares)	5 000 000	4 400 000
Retained Income	900 000	500 000
Long term Debt	2 000 000	1 000 000
Payables	700 00	900 000
Total equity and liabilities	8 6000 000	6 800 000

Summarised Statement of Profit and Loss for the year ended 30 November 2021
	N$
Sales (50% on credit)	3 000 000
Cost of sales	2 000 000
Depreciation	120 000
Interest Expense	80 000
Net Income before Tax	900 000
Dividends	330 000
Retained Income	300 00

Additional information Shares are currently trading at N$2.30 per share. The new shares were issued at the beginning of the year. Similar businesses have a return on investment of 15%

3.1 Calculate the following ratios for 2021 and comment. Ratios for 2020 are given in brackets

3.1.1 Current ratio (0,89:1)

3.1.2 Acid test ratio (0,56:1)

3.1.3 The debtors collection period (81 days) [all debtors are on 60 days accounts

3.2 Calculate the earnings per share and dividends per share for 2021.

3.3 How many shares were issued in 2021?

3.4 Calculate the market to book ratio. Explain the significance of this ratio

3.5 Calculate the return on equity using the Du Point Identity/Formula. Will the management be happy with this return?

Question 4

Simunye Enterprises ("SE") is budgeting to sell 1 000 units of product S in the forthcoming period. The selling price per unit of S is N$50. The cost of producing one unit of S is N$25. If SE sells on credit, they will incur a collection cost of about N$1 per unit sold. The weighted average cost of capital for SE is 15%. The normal year has 365 days.

Calculate the profit to the SE if:

4.1 All sales are for cash;

4.2 Sales are made on credit and customers pay within 30 days;

4.3 Sales are made on credit and a 2% discount is granted if customers pay in 10 days. 50% of the customers will take advantage of the discount.