FIN3701 ASSIGNMENT 2 2023 SEMESTER 1

FIN3701 ASSIGNMENT 2 2023 SEMESTER 1QUESTION 1 [10 marks] Bonga currently has a portfolio of ordinary shares representing several different companies. Bonga considers it to be a well-balanced investment portfolio, but he wants to reduce the overall risk of the portfolio a bit more by including ordinary shares from Titan Mining Corporation. The following information on Titan Mining Corporation is available: For the period 2017 to 2020, the company paid the following dividends per year respectively: R3,14; R3,55; R3,89; and R3,95. The 2021 dividend is expected to increase by the average growth rate of the dividends between 2017 and 2020, and the dividend will increase by 10% per year indefinitely from 2022 onwards. Bonga requires a return of 15% on his investment portfolio and is not prepared to pay more than R52,00 per ordinary share of Titan Mining Corporation. 1.1 Calculate the current price of Titan Mining Corporation’s ordinary share. (8 marks) Growth rate (2017 – 2020): Using a Financial calculator: PV = -3.14 FV = 3.95 N = 3 Comp I/Y = 7.95% The average growth rate = 7.95 2021 and 2022 dividends 2021 = 3.95 (1+0.0795) = 4. 2022 = 4. (1+0.10) = 4. Terminal value at the end of 2021: T (2021) = 4. (0.15−0.10) = 93.80855 This study source was downloaded by from CourseH on :13:04 GMT -06:00 A+ Value of the share Value of the share = 93.80855+4. (1+0.15) = R85.2805 1.2 Should Bonga purchase Titan Mining Corporation shares to include in his investment portfolio? Provide reasons for your answer. (2 marks) No, Bonga should not purchase Titan Mining Corporation. Since Bonga is not prepared to pay more than R52 for Titan shares, its value shows that it carries a higher price than the R52 cap. QUESTION 2 [12 marks] The power systems company Raging Volts is currently 70% equity financed and aims to raise R2 million to fund a set of attractive investment opportunities. Debt financing may be obtained at an after-tax cost of 16%. The company’s management wants to introduce 40% debt in the capital structure while keeping the cost of each financing source together with its market value the same. Ordinary shares are currently selling for R30 per share. The company paid a dividend (Do) of R1,50 per share in the previous financial year and had a growth rate of 7% over the past few years. It is expected that this growth rate will be maintained in future. The company’s tax rate is 29%. 2.1 Calculate the component costs associated with capital investments financing. (2 marks) Cost of equity: 30 = 1.50(1+0.07) (ke−0.07) 30(ke-0.07) = 1.50(1+0.07) 30ke – 2.10 = 1.50 + 0.105 30ke = 3.705 Ke = 3.705 30 = 12.35% This study source was downloaded by from CourseH on :13:04 GMT -06:00