Wits Ventilation Company Ltd (WVC) is a company that specializes in the manufacture of ventilation systems...
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Wits Ventilation Company Ltd (WVC) is a company that specializes in the manufacture of ventilation systems for shopping centres and other commercial buildings. WVC manufactures all of the ducting as well as the electrical circuits and wiring, but they buy the motors for the ducting system from suppliers in the USA or Germany. WVC has identified eight new export markets that WVC could sell and export their products to. The marketing manager of WVC has studied these markets in detail and together with the financial manager has also calculated what rates of return WVC can expect to earn in these markets as follows: Market Nigeria Egypt Mauritius Australia Japan Germany Spain France Rate of return (%) 10.53% 12.46% 11.82% 8.55% 8.46% 9.02% 11.50% 9.34% If WVC enters any of these markets, they will have to make certain modifications to their ducting systems in order to comply with legislation in each of these countries. As a result, WVC will require a new machine in order to modify the ducting system to each individual country's specification. The problem is that a separate new machine will be required for the modifications for each specific country as each country has its own unique safety requirements and standards. The marketing manager has obtained quotes for the new machine. Each new machine will cost $500 000. You can assume that the current rate of exchange is $1 = R17. Calculate all figures to two decimal places. REQUIRED: (1) Calculate the amount of retained earnings that WVC will have available at the end of the current financial year. (6) (2) Calculate WVC's weighted average cost (WACC) both before and after the issue of new capital. (15) (3) Determine which countries WVC should export to and what MVC's total capital budget should be. Discuss your recommendations. WVC's current capital structure is as follows: Source Ordinary shares (1.5 million issued shares) Retained earnings Preference shares (7.5% R100 par value) Debentures (9% R1 000 par value) Weighting 30% 30% 10% 30% WVC's financial manager considers this capital structure to be optimal. The financial manager also tells you that the company's policy is to distribute 25% of its after-tax earnings as a dividend. After tax earnings for the last financial year amounted to R4 per share. The financial manager tells you that after tax earnings and dividends usually grow at 10% per annum. The company's tax rate is 28%. Any new machines that WVC requires will be financed from retained earnings and other sources of finance. WVC does not have any capital available from existing preference shares or debt. The financial manager has determined that new shares could be issued at the current market price of R50 per share and floatation costs would be 8% of the current market price. The company can also raise R5 million from the issue of new 10 year debentures at a par value of R1 000, with a coupon rate of 10%. These debentures will be semi- annual coupon bonds. Floatation costs of 3% of the par value will be incurred on the issue of the new debentures. (Note: You must use the approximation formula when calculating the cost of debt). Any amount of money can be raised from the issue of 9.5% preference shares. New preference shares will have a par value of R100 each, will be under priced by 3% and floatation costs will amount to 5% of the par value of each preference share. (4) The rand has weakened significantly against the US dollar during 2022. WVC is concerned that if the rand weakens further against the US dollar that the purchase of the required machinery will cost far more, in rand terms, than WVC is currently budgeting for. You are required to explain to WVC what methods/instruments they can use to hedge against the potential weakening of the rand. You are only required to discuss one method/instrument. Use diagrams and/or calculations in your answer and explain the method/instrument that you suggest that WVC should use. (12) [40] Wits Ventilation Company Ltd (WVC) is a company that specializes in the manufacture of ventilation systems for shopping centres and other commercial buildings. WVC manufactures all of the ducting as well as the electrical circuits and wiring, but they buy the motors for the ducting system from suppliers in the USA or Germany. WVC has identified eight new export markets that WVC could sell and export their products to. The marketing manager of WVC has studied these markets in detail and together with the financial manager has also calculated what rates of return WVC can expect to earn in these markets as follows: Market Nigeria Egypt Mauritius Australia Japan Germany Spain France Rate of return (%) 10.53% 12.46% 11.82% 8.55% 8.46% 9.02% 11.50% 9.34% If WVC enters any of these markets, they will have to make certain modifications to their ducting systems in order to comply with legislation in each of these countries. As a result, WVC will require a new machine in order to modify the ducting system to each individual country's specification. The problem is that a separate new machine will be required for the modifications for each specific country as each country has its own unique safety requirements and standards. The marketing manager has obtained quotes for the new machine. Each new machine will cost $500 000. You can assume that the current rate of exchange is $1 = R17. Calculate all figures to two decimal places. REQUIRED: (1) Calculate the amount of retained earnings that WVC will have available at the end of the current financial year. (6) (2) Calculate WVC's weighted average cost (WACC) both before and after the issue of new capital. (15) (3) Determine which countries WVC should export to and what MVC's total capital budget should be. Discuss your recommendations. WVC's current capital structure is as follows: Source Ordinary shares (1.5 million issued shares) Retained earnings Preference shares (7.5% R100 par value) Debentures (9% R1 000 par value) Weighting 30% 30% 10% 30% WVC's financial manager considers this capital structure to be optimal. The financial manager also tells you that the company's policy is to distribute 25% of its after-tax earnings as a dividend. After tax earnings for the last financial year amounted to R4 per share. The financial manager tells you that after tax earnings and dividends usually grow at 10% per annum. The company's tax rate is 28%. Any new machines that WVC requires will be financed from retained earnings and other sources of finance. WVC does not have any capital available from existing preference shares or debt. The financial manager has determined that new shares could be issued at the current market price of R50 per share and floatation costs would be 8% of the current market price. The company can also raise R5 million from the issue of new 10 year debentures at a par value of R1 000, with a coupon rate of 10%. These debentures will be semi- annual coupon bonds. Floatation costs of 3% of the par value will be incurred on the issue of the new debentures. (Note: You must use the approximation formula when calculating the cost of debt). Any amount of money can be raised from the issue of 9.5% preference shares. New preference shares will have a par value of R100 each, will be under priced by 3% and floatation costs will amount to 5% of the par value of each preference share. (4) The rand has weakened significantly against the US dollar during 2022. WVC is concerned that if the rand weakens further against the US dollar that the purchase of the required machinery will cost far more, in rand terms, than WVC is currently budgeting for. You are required to explain to WVC what methods/instruments they can use to hedge against the potential weakening of the rand. You are only required to discuss one method/instrument. Use diagrams and/or calculations in your answer and explain the method/instrument that you suggest that WVC should use. (12) [40]
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Answer 1 To calculate the amount of retained earnings available at the end of the current financial year we need to consider the net income and any dividends paid out during the year Lets assume that ... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0071339476
Volume 1, 6th Edition
Authors: Beechy Thomas, Conrod Joan, Farrell Elizabeth, McLeod Dick I
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