Question 1: WACC (20)

Sivuyile Construction is financed by R100 million long-term debt, R20 million preferred

shares and 5 million issued ordinary shares. The firm can raise debt by selling R1000 par

value, 10% coupon rate (paid semi-annually), 10 year bonds at a discount of R50 and has to

pay R20 in floatation cost. It can also sell 9% preferred shares with a par value of R100 at a

discount of 10% on par value and has to pay R7 per share in floatation cost. Sivuyiles

ordinary shares have a beta of 1.5, trades at R30 each, and a dividend of R5 per share has just

been paid. The risk free rate is currently 8% while the total market return for the past amounts

to 15%. The companys tax rate is 30%. Calculate Sivuyiles weighted average cost of capital

(WACC)

Note:

I = annual coupon rate

Nd = net proceeds from the sale of debt (bond)

n = number of years to a bonds maturity

Question 2: Capital Structure (20)

Ntombi Consulting is presently reviewing its capital structure and the following two capital

structures are presently under consideration. Structure A is made up of 60% debt ratio and

ordinary shares for the balance. It is expected that the ordinary shareholders required rate of

return will be 20%. Structure B is made up of 10% preferred shares, 20% debt and ordinary

shares for the balance. It is expected that the ordinary shareholders required rate of return

will be 25%.

The following information is supplied:

The total assets for each of the two capital structures are R4 million. The required rate of

return on the preferred shares is 10%

The par value of the ordinary shares is R25 per share

The interest rate on all loans is 12%

The company tax rate is 30%

Assume an EBIT level of R450 000

At a R450 000 EBIT level, which capital structure will you chose if you want to

a. Maximize earnings per share?

b. Maximize share price

Question 3: Capital Budgeting (20)

You are tasked to perform an analysis of the manufacturing plant and to present your

recommendation on whether the company should open the new plant or not. If the new plant

is opened, it will cost R500 million today and the expected cash flows are shown in the table

below. The companys required rate of return is 12%

YearCash Flow

0 -500 000 000

160 000 000

290 000 000

3170 000 000

4 230 000 000

5205 000 000

6140 000 000

7110 000 000

870 000 000

9-80 000 000

Required:

a. Calculate the payback period, modified payback period and net present value of the

proposed plan.

b. Based on your analysis, should the company open the new plant?