FIN4801 Assignment 2 (COMPLETE ANSWERS) 2026 - DUE June 2026

FIN4801 Assignment 2 (COMPLETE ANSWERS) 2026 - DUE June 2026; 100% TRUSTED Complete, trusted solutions and explanations. For assistance, Whats-App 0.6.7-1.7.1-1.7.3.9. Ensure your success with us.. 1.1 Question 1 (3 Mark) What is the market risk premium in terms of CAPM? Also, state the formula for CAPM and highlight the market risk premium in yellow in the formula. Question 2 (2 Marks) What is the cost of equity for the company in the following scenario: “Bricks Ltd., a brick manufactory, is a zero-leverage firm and is solely financed by equity. It is traded on the JSE and has a beta of 1.5 associated with its shares. The risk-free rate is 5%, the market risk premium is 6%. What is the cost associated with the equity of Bricks Ltd.? (Use CAPM.) “ Indicate the correct answer option in your answer, only write down the most correct option in your answers. a. 12% b. 14% c. 16% d. 17% Question 3 (2 Marks) 2 Company Z issued R10 000 par value bonds with a coupon rate of 13% which will mature in 20 years’ time. The YTM on the bonds are 11%. What would the bond sell for in the present? Write down only the current value of the bond. Question 4 (3 Marks) Hamada’s equation can be used to estimate the change of beta resultant from a change in leverage. Suppose a company has a beta of 1,20 with a debt/equity ratio of 1.50 and that the applicable tax rate is 27%. What would the unlevered beta be for the company as determined by the equation? Question 5 (1 Mark) Company X pays interest to the amount of R1 800 a year on total liabilities of R20 000. It can also issue bonds with a YTM of 5%. What will the relevant before tax cost of debt be when calculating that WACC for the company? Write down only the relevant before-tax cost of debt. Question 6 (3 Marks) Company Y has a target debt to equity ratio of 50%. Currently its book debt to equity ratio is 60% and it expects to revert to the target ratio very soon. The company has an after-tax market cost of debt of 7% and a market cost of equity of 14%. What is the WACC for the company? Question 7 (3 Marks) Company Y has a target debt ratio of 50%. Currently its debt ratio is 60% and it expects to revert to the target ratio in the near future. The company has a market cost of equity of 10%. While it has no bonds, it has interest payments of R1 000 000 on liabilities of R. Assume the tax rate is 27%. What is the WACC for the company? Question 8 (6 Marks) A company is considering a new capital structure. Currently, the company has debt of R20 million and equity of R40 million. The debt is in the form of bonds with a current yield to maturity of 10% 3 on a par value of R10 000 with a remaining life of 10 years and an annual coupon payment of 9.39%. The company has a share price of R10 per share with 5 million outstanding shares. The cost of equity associated with the company’s equity is 14%. Determine the WACC for the company. A tax rate of 27% applies. Question 9 (2 Marks) A company can issue bonds at an after-tax cost of 10% and has a cost of equity of 14%. The company has shares trading at R10 on the stock exchange while it has R in liabilities. The tax rate is 27%. What is the company’s WACC? Write only the WACC for the company. Question 10 (4 Marks) a. Take your student number as the future value of a loan. The loan has terms of 5% p.a. over 10 years. What is the present value of the loan? b. Suppose that the company that put out the loan has total equity of R, what would the weight of debt financing be in the capital structure assuming that the loan is the only debt the company has? Question 11 (8 Marks) The cost of capital is very important for various financial decisions, the principle of using marginal values is discussed in the study materials, refer to this and any outside sources if you wish (using academic citations if you do). Provide an argument as to why being able to calculate a forward looking cost of capital is important for making accurate financial decisions. Keep your argument to two paragraphs at the most, and if you use any sources, remember to cite them.