QUESTION ONE $[20]$

You have been appointed as a financial consultant by the directors of Chennai Holdings. They require you to calculate the cost of capital of the company.

The following information is available on the capital structure of the company:

$$

$1500000$ Ordinary shares, with a market price of R$3$ per share. The latest dividend declared was $90$ cents per share. A dividend growth of $13\%$ was maintained for the past $5$ years.

$$

$100000012\%,$ R$1$ Preference shares with a market value of R$2$ per share.

$$

R$1000000$ Debentures due in $7$ years with a current market value of R $951356$ and a before tax cost of $10\%$

$$

R$90000014\%$ Bank loan, due in December $2016$

Additional information:

$1.$

The company has a tax rate of $30\%.$

$2.$

The beta of the company is $1\mathrm{.}7,$ a risk free rate of $7\%$ and the return on the market is $15\%.$

Required:

$1\mathrm{.}1$ Calculate the weighted average cost of capital $($WACC$).$ Use the Gorden Growth Model to calculate the cost of equity. $(17)$

$1\mathrm{.}2$ Calculate the cost of equity, using the Capital Asset Pricing Model. $(3)$

QUESTION TWO $[15]$

The shareholders of Bee$-$Bee Company have voted in favour of a buyout offer from Honey Ltd$.$ The information pertinent to each firm is as follows:

Data Bee$-$Bee Honey

$1$

PE Ratio $412$

Share in Issue $120000240000$

Earnings $($after tax$)$ R $360000$ R $720000$

Bee$-$Bee shareholders will receive one share in Honey for every share they hold.

$2\mathrm{.}1\mathrm{.}1$ What will the EPS of Honey be after the merger? $(4)$

$2\mathrm{.}1\mathrm{.}2$ Calculate Honey$$s share price and PE ratio if the NPV of the acquisition is zero. $(6)$

$2\mathrm{.}1\mathrm{.}3$ What is the value of Bee$-$Bee to Honey? $(5)$

QUESTION THREE $[15]$

Island Enterprises has the option to invest in machinery in projects A and B but finance is only available to invest in one of them. You are given the following projected data:

Project A $($R$)$

Project B $($R$)$

Initial cost

$450000$

$450000$

Net profit:

Year $1$

$36000$

$69000$

Year $2$

$75000$

$69000$

Year $3$

$102000$

$69000$

Year $4$

$129000$

$69000$

Year $5$

$81000$

$69000$

Additional information

$1.$

All cash flows take place at the end of the year except the original investment in the project which takes place at the beginning of the project.

$2.$

Project A machinery will be disposed of at the end of year $5$ with a scrap value of R$60000.$

$3.$

Project B machinery will be disposed of at the end of the year with a nil scrap value.

$4.$

Depreciation is calculated on a straight$-$line basis.

$5.$

The discount rate to be used by the company is $12\%.$

$2$

Required

Use the information provided by Island Enterprises to answer the following questions:

$3\mathrm{.}1$ Calculate the payback period for project B$.($Answer must be expressed in years and

months$)(3)$

$3\mathrm{.}2$ Calculate the accounting rate of return $($on average investment$)$ for project A$.($Answer must be expressed to two decimal places$)(4)$

$3\mathrm{.}3$ Calculate the net present value of each project. $($Round off amounts to the nearest

Rand.$)(6)$

$3\mathrm{.}4$ Using your answers from question $3\mathrm{.}3,$ which project should be chosen? Why? $(2)$

QUESTION FOUR $[20]$

Discuss the following sources of long$-$term financing for a business:

$4\mathrm{.}1$ Ordinary and preference shares $(8)$

$4\mathrm{.}2$ Debentures $($secured and unsecured$)(8)$

$4\mathrm{.}3$ Convertibles $(4)$