FIN3701
ASSIGNMENT 2
SEMESTER 2
2023 (520459)
[Document subtitle]
[DATE]
[COMPANY NAME]
[Company address]
, FIN3701 ASSIGNMENT 2 SEMESTER 2 2023
QUESTION 1 [20 marks]
MediPharm Ltd has optimal capital structure weights of 40% debt and 60%
equity. MediPharm is in the 30% tax bracket and is evaluating four
independent investment proposals. PROJECT INITIAL INVESTMENT (R)
INTERNAL RATE OF RETURN (IRR) (%)
A 100 000 17
B 200 000 15
C 125 000 14
D 100 000 11
MediPharm senior financial analyst has gathered the following information:
MediPharm can raise R150 000 through the sale of a R1 000 par value, 8%
annual coupon rate and a ten-year debenture. The debenture will be issued at
5% discount and R20 flotation cost per debenture. Additional funds will be
raised through the bank loan with an after-tax cost of 10%. R375 000 is
available through retained earnings. Additional funds will be raised through
the issue of new ordinary shares. The company pays a regular dividend of
R10, has a growth rate of 3% and nets R87.30 after flotation costs. The
flotation costs are calculated at 3% of the par value (R90) of a share.
FIN3701/101/2/2023 11 REQUIRED:
1.1 Calculate the WACC associated with each range of financing/break-point.
(18 marks)
1.2 In which project do you recommend that the company invest its funds?
Give motivation for your choice. (2 marks)
1.1 Calculate the WACC associated with each range of financing/break-point. (18
marks)
To calculate the Weighted Average Cost of Capital (WACC), we need to
determine the cost of each component of the capital structure and their respective
weights.
Debt Component:
ASSIGNMENT 2
SEMESTER 2
2023 (520459)
[Document subtitle]
[DATE]
[COMPANY NAME]
[Company address]
, FIN3701 ASSIGNMENT 2 SEMESTER 2 2023
QUESTION 1 [20 marks]
MediPharm Ltd has optimal capital structure weights of 40% debt and 60%
equity. MediPharm is in the 30% tax bracket and is evaluating four
independent investment proposals. PROJECT INITIAL INVESTMENT (R)
INTERNAL RATE OF RETURN (IRR) (%)
A 100 000 17
B 200 000 15
C 125 000 14
D 100 000 11
MediPharm senior financial analyst has gathered the following information:
MediPharm can raise R150 000 through the sale of a R1 000 par value, 8%
annual coupon rate and a ten-year debenture. The debenture will be issued at
5% discount and R20 flotation cost per debenture. Additional funds will be
raised through the bank loan with an after-tax cost of 10%. R375 000 is
available through retained earnings. Additional funds will be raised through
the issue of new ordinary shares. The company pays a regular dividend of
R10, has a growth rate of 3% and nets R87.30 after flotation costs. The
flotation costs are calculated at 3% of the par value (R90) of a share.
FIN3701/101/2/2023 11 REQUIRED:
1.1 Calculate the WACC associated with each range of financing/break-point.
(18 marks)
1.2 In which project do you recommend that the company invest its funds?
Give motivation for your choice. (2 marks)
1.1 Calculate the WACC associated with each range of financing/break-point. (18
marks)
To calculate the Weighted Average Cost of Capital (WACC), we need to
determine the cost of each component of the capital structure and their respective
weights.
Debt Component:
