Question $38$ Marks

An investment offers the following year$-$end cash flows:

End of Year Cash Flow

$1$ R$20000$

$2$ R$30000$

$3$ R$15000$

Required:

Using a $15$ percent interest rate, convert this series of irregular cash flows to an equivalent $($in

present value terms$)3-$year annuity.

Question $410$ Marks

On January $1,$ the total market value of Tysseland company was R$60$ million. During the year,

the company plans to raise and invest R$30$ million in new projects. The company$$s present

market value capital structure, shown here, is considered to be optimal. There is no short$-$term

debt.

Debt R $30000000$

Common equity $30000000$

Total capital R $60000000$

MBA$5903$

MAY$/$JUN $2023$ SUPPLEMENTARY EXAMINATION

$6$

New bonds will have an $8\%$ coupon rate, and they will be sold at par. Common stock is currently

selling at R$30$ a share. The stockholders$$ required rate of return is estimated to be $12\%,$

consisting of a dividend yield of $4\%$ and an expected constant growth rate of $8\%.($The next

expected dividend is R$1\mathrm{.}20,$ so the dividend yield is R$1\mathrm{.}20/$R$30=4\%).$ The marginal tax rate is

$40\%.$

Required:

$4\mathrm{.}1.$ In order to maintain the present capital structure, how much of the new investment must

be financed by common equity? $(3)$

$4\mathrm{.}2.$ Assuming there is sufficient cash flow for Tysseland to maintain its target capital

structure without issuing additional shares of equity, what is its WACC? $(5)$

$4\mathrm{.}3.$ Suppose now that there is not enough internal cash flow and the company must issue

new shares of stock. Qualitatively speaking, what will happen to the WACC? No numbers

required to answer this question.Question $3$

An imestment offers the following year$-$end cash fowa:

Required:

Using a $15$ percent inlerest rate, corvert this series of irregular cash flows to an equivalent $($in

present value terms$)3-$year annuity.

Question $4$

On January $1,$ the total market value of Tysseland company was R$60$ million. During the year,

the company plans to raise and invest R$30$ milion in new projects. The company's present

market value capital structure, shown here, is considered to be optimal. There is no short$-$term

debt.

New bonds will have an $8\%$ coupon rate, and they will be sold at par. Common stock is currently

seling at R$30$ a share. The stockholders' required rate of return is estimated to be $12\%,$

consisting of a dividend yield of $4\%$ and an expected constant growth rate of $8\%.($The next

expected dividend is $R1\mathrm{.}20,$ so the dividend yield is R$1\mathrm{.}20$VR$30=4\%).$ The marginal tax rate is

$40\%.$

Required:

$4\mathrm{.}1.$ In order to maintain the present capital structure, how much of the new imvestment must

be financed by common equity?

$4\mathrm{.}2.$ Assuming there is sufficient cash flow for Tysseland to maintain its target capital

structure without issuing additional shares of equity, what is its WACC?

$4\mathrm{.}3.$ Suppose now that there is not enough internal cash flow and the company must issue

new shares of stock. Qualitatively speaking. what will happen to the WACC? No numbers

required to answer this question.