QUESTION $1$

The management of Octopus Limited, a manufacturing entity, is considering a new investment opportunity that requires information about the current cost of capital of the company. The capital structure of Octopus Limited is as follows:

o $4$ million ordinary shares with par value of $50$ cents each, currently trading at R$5\mathrm{.}00$ per share. The company has a beta $()$ of $1\mathrm{.}6,$ a risk free rate $()$ of $9\%$ and a return on the market $()$ of $17\%.$

o $1\mathrm{.}5$ million $13\%,$ R$2$ preference shares, with a market value of R$3\mathrm{.}50$ per share.

o R$3$ million $11\%,$ debentures due in $5$ years with a current yield$-$to$-$maturity of $8\%.$

o R$90000016\%,$ Bank loan, due in December $2025.$

Additional information:

o Octopus Limited has maintained a dividend growth rate of $12\%$ per annum over the past $5$ years. The latest dividend paid was $100$ cents per share.

o The company$$s tax rate is $30\%.$

Required:

$1\mathrm{.}1$ Calculate the weighted average cost of capital $($WACC$)$ of Octopus Limited. Use the Capital Asset Pricing Model to calculate the cost of equity.

$1\mathrm{.}2$ Calculate the weighted average cost of capital $($WACC$)$ of Octopus Limited. Use the Gordon Growth Model to calculate the cost of equity.

$1\mathrm{.}3$ Show ALL calculations.

QUESTION $2$

$2\mathrm{.}1$ The sales forecast of a popular product sold by PSC Retailers Limited is $600000$ units for the forthcoming financial year. It is estimated that PSC Retailers will purchase each unit of the product for R$2.$ The carrying cost of inventory equals $25\%$ of the purchase price of goods. The ordering cost is R$45$ per order. Two days are required for delivery. The desired safety stock for PSC Retailers is $18000$ units. This amount is on hand.

Required: $($round off to nearest whole number$)$

$2\mathrm{.}1\mathrm{.}1.$ Calculate the Economic Order Quantity $($EOQ$)$ of the product.

$2\mathrm{.}1\mathrm{.}2.$ Determine the number of orders for the product to be placed next year.

$2\mathrm{.}2.$ Osmoff systems $($Osmosys$)$ is a small, owner$-$managed business in the information technology sector in Johannesburg, South Africa. Osmosys$$ credit sales for the year ended $31$ December $2021$ amounted to approximately R$5$ million, and average accounts receivable days were $60.$ Sales are expected to increase by $20\%$ over the next year. Because of the rapid expansion of its client base, there has been a steady deterioration in accounts receivable collection and a rapid increase in its overdraft, despite high profits. After repeated concerns raised about the Osmosys$$ overdraft risks, the bank providing overdraft facility to the business has now refused to extend the overdraft any further and has suggested that Osmosys factors its accounts receivable or employ an experienced credit controller, on a part$-$time basis. Osmosys currently has one credit administrator.

The following information is available:

$1.$ If Osmosys employs an experienced credit controller, the cost to the business will increase by R$120000$ per annum. The credit administrator will continue in the current role, working with the credit controller and the cost to Osmosys of the credit administrator is expected to be R$72000$ next year. It is anticipated that the accounts receivable days can then be reduced to $40$ days.

$2.$ A local factoring organisation has offered to factor Osmosys$$ accounts receivable on the following terms:

$$ An advance of $80\%$ of the value of sales invoices $($which Osmosys would fully utilise$).$ The remaining value of the receivables will be financed with the overdraft facility.

$$ An estimated reduction in accounts receivable days to $35$

$$ An annual administration$/$service fee of $2\mathrm{.}3\%$ of credit sales

$$ Interest charge on advances of $12\%$ per annum

$$ A credit protection charge of $2\%$ of credit sales

$$ The factor will take over the credit management and the credit administration department at Osmosys will be disbanded and the employees will be absorbed elsewhere within Osmosys.

$3.$ It is anticipated that Osmosys will take advantage of early settlement cash discount. The early settlement cash discount is available on purchases amounting to $40\%$ of its credit sales. The supplier of Osmosys has made available the following credit terms:

$2\mathrm{.}5/30$ net $60$

$2/35$ net $60$

$1\mathrm{.}5/40$ net $60$

$4.$ Current overdraft rates are $10\%$ per annum.

$5.$ Assume that there are $365$ days in a year.

$6.$ Assume that Osmosys$$ credit sales and purchases occur close to each other.

Required:

By undertaking a detailed quantitative analysis, determine whether it is financially beneficial for Osmoff Systems to factor its accounts receivables for the year ended $31$ December $2022,$ as compared to employing a credit controller $($show ALL calculations$).$