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FIN3701 Assignment 2 (COMPLETE ANSWERS) Semester 1 2026 - DUE 17 April 2026; 100% Correct solutions and explanations.

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FIN3701 Assignment 2 (COMPLETE ANSWERS) Semester 1 2026 - DUE 17 April 2026; 100% Correct solutions and explanations. Assignment number Semester 1 02 Due date: 17 April 2026 Unique number: 224278 Assignment 02 – Semester 1 Due date: 17 April 2026 Unique number: 224278 The purpose of this assignment is to evaluate your knowledge and understanding of fundamental issues related to a company’s long-term financing decisions. To complete this assignment, you need to study chapters 13, 14 and 17 of the prescribed book, along with the relevant learning units. Answer the following questions and submit your assignment at . QUESTION 1 [15 marks] Oreatli Company’s optimal capital structure consists of 30% debt and 70% equity. The interest rate on its debt is a constant 12%, while the cost of ordinary share funding from retained earnings is 15%. The company’s marginal tax rate is 28%. Oreatli has identified the following investment opportunities: • Project A: cost = R70 000; IRR = 16,5% • Project B: cost = R70 000; IRR = 15,2% • Project C: cost = R40 000; IRR = 12,4% • Project D: cost = R60 000; IRR = 10,1% Oreatli has R120 000 in available earnings. REQUIRED: 1.1 Calculate Oreatli Company’s weighted average cost of capital (WACC). (3) 1.2 Based on its WACC and the amount of retained earnings available, which projects should

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, FIN3701 Assignment 2 (COMPLETE ANSWERS) Semester
1 2026 - DUE 17 April 2026; 100% Correct solutions and
explanations.
QUESTION 1

1.1 Weighted Average Cost of Capital (WACC)

𝑇ℎ𝑒 𝑊𝐴𝐶𝐶 𝑖𝑠 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑢𝑠𝑖𝑛𝑔 𝑡ℎ𝑒 𝑓𝑜𝑟𝑚𝑢𝑙𝑎:

𝑊𝐴𝐶𝐶 = (𝑤𝑑 × 𝑟𝑑 × (1 − 𝑇)) + (𝑤𝑒 × 𝑟𝑒)𝑊𝐴𝐶𝐶
= (𝑤_𝑑 \𝑡𝑖𝑚𝑒𝑠 𝑟_𝑑 \𝑡𝑖𝑚𝑒𝑠 (1 − 𝑇)) + (𝑤_𝑒 \𝑡𝑖𝑚𝑒𝑠 𝑟_𝑒)𝑊𝐴𝐶𝐶
= (𝑤𝑑 × 𝑟𝑑 × (1 − 𝑇)) + (𝑤𝑒 × 𝑟𝑒)

𝑊ℎ𝑒𝑟𝑒:

 𝑤𝑑 = 0.30𝑤_𝑑 = 0.30𝑤𝑑 = 0.30 (𝑑𝑒𝑏𝑡 𝑤𝑒𝑖𝑔ℎ𝑡)
 𝑟𝑑 = 12%𝑟_𝑑 = 12\%𝑟𝑑 = 12% (𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡)
 𝑇 = 28%𝑇 = 28\%𝑇 = 28% (𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)
 𝑤𝑒 = 0.70𝑤_𝑒 = 0.70𝑤𝑒 = 0.70 (𝑒𝑞𝑢𝑖𝑡𝑦 𝑤𝑒𝑖𝑔ℎ𝑡)
 𝑟𝑒 = 15%𝑟_𝑒 = 15\%𝑟𝑒 = 15% (𝑐𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦)

𝑊𝐴𝐶𝐶 = (0.30 × 12% × (1 − 0.28)) + (0.70 × 15%)𝑊𝐴𝐶𝐶
= (0.30 \𝑡𝑖𝑚𝑒𝑠 12\% \𝑡𝑖𝑚𝑒𝑠 (1 − 0.28))
+ (0.70 \𝑡𝑖𝑚𝑒𝑠 15\%)𝑊𝐴𝐶𝐶
= (0.30 × 12% × (1 − 0.28)) + (0.70 × 15%)
= (0.30 × 12% × 0.72) + 10.5%
= (0.30 \𝑡𝑖𝑚𝑒𝑠 12\% \𝑡𝑖𝑚𝑒𝑠 0.72) + 10.5\%
= (0.30 × 12% × 0.72) + 10.5% = (0.30 × 8.64%) + 10.5%
= (0.30 \𝑡𝑖𝑚𝑒𝑠 8.64\%) + 10.5\% = (0.30 × 8.64%) + 10.5%
= 2.592% + 10.5% = 2.592\% + 10.5\% = 2.592% + 10.5%
= 13.09% = 13.09\% = 13.09%

Answer:
Oreatli Company’s WACC = 13.09%



1.2 Investment Decision
Connected book
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Lawrence J Gitman, Roger Juchau, Jack Flanagan Principles of Managerial Finance
Publisher: 2014 ISBN: 9781775788874 Edition: Unknown

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