FIN3701 Assignment 2 (QUALITY ANSWERS) Semester 2 2024

This document contains workings, explanations and solutions to the FIN3701 Assignment 2 (QUALITY ANSWERS) Semester 2 2024. For assistance whats-app us on 0.6.8..8.1.2..0.9.3.4... QUESTION 1 [25 marks] Bakoni Group (Pty) Ltd is considering investing in a new cable car. The company can either borrow the funds required to purchase the cable car or it can enter into a finance lease with a reputable finance house. The current tax rate is 28%, and tax is payable in the year that it is incurred. The South African Revenue Services (SARS) will allow lease, interest and maintenance costs to be deducted for tax purposes. Assume that Bakoni Group (Pty) Ltd has sufficient taxable income to ensure that all deductions can be made immediately (i.e. there is no assessed loss). Lease option: Finance lease payments of R90 000 per year, payable in arrears, will need to be made for a period of five years. Bakoni Group (Pty) Ltd will be responsible for maintenance costs of R50 000 per year, beginning in year 2. Purchasing option: The company can get the funds required to purchase the cable car through a five-year loan from Absa Bank at an interest rate of 10%. The new cable car can be purchased at a cost of R400 000. Bakoni Group (Pty) Ltd will qualify for a wear-and-tear allowance of 25% per year on the straight-line method from SARS. The estimated residual value of the asset at the end KINDLY NOTE THAT THERE ARE TWO COMPULSORY ASSIGNMENTS FOR THE SECOND SEMESTER. 11 of five years is R60 000. Bakoni Group (Pty) Ltd will be responsible for maintenance costs of R50 000 per year, beginning in year 2. REQUIRED: Purchase option 1.1 Calculate the annual payment. (2 marks) 1.2 Calculate the annual interest expense deductible for tax purposes for each of the five years. (5 marks) 1.3 Calculate the after-tax cash outflow resulting from the purchase for each of the five years. (5 marks) 1.4 Calculate the present value of cash outflows resulting from the purchase. (3 marks) Lease option 1.5 Calculate after-tax cash flow. (6 marks) 1.6 Calculate the present value. (2 marks) 1.7 Evaluate whether Bakoni Group (Pty) Ltd should borrow the funds from Absa Bank and purchase the asset or lease the asset from a finance house. (2 marks) QUESTION 2 [25 marks] The following information about Madia Tools, a manufacturer of lathe tools, is available: The company is 20%-equity financed and has 10 000 outstanding ordinary shares, each valued at the market price of R25. The company pays 60% of its earnings as dividends and pays 28% company tax. The expected sales are R530 000, fixed costs are estimated at R250 000 and variable costs are estimated at 30% of sales. The cost of acquiring new debt from the bank is 10%. The company has analternative of introducing 30% debt into its capital structure while keeping the cost of each financing source and its market value the same. REQUIRED 2.1 Calculate the number of shares for the current structure. (6 marks) 2.2 Calculate the EPS for the current structure. (5 marks) 2.3 Calculate the WACC of the current structure (80% debts and 30% debts) (4 marks) 2.4 Calculate the company value for the current structure and 30% debt (8 marks) 2.5 Make recommendations for capital structure and provide reason (2 marks)