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MBA5903 Assignment 2 (COMPLETE ANSWERS) 2024 - DUE 23 September 2024

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MBA5903 Assignment 2 (COMPLTE GROUP ASSIGNMENT ANSWERS) 2024 - DUE 23 September 2024 ;100 % TRUSTED workings, Expert Solved, Explanations and Solutions. For assistance call or W.h.a.t.s.a.p.p us on ...(.+.2.5.4.7.7.9.5.4.0.1.3.2)........... Question 1 25 Marks Genius Innovators Company (GIC) has just designed a new product manufacturing system. GIC Management must now choose from the following three alternative options: • Sell the design outright to another company with 2 years payment, or • License the design to another manufacturer for a period of five years, or • Manufacture and market the system. Your consulting company has assigned you to advise GIC on the following: 1.1. The cost of capital that GIC should use in evaluating the options. (5) 1.2. Calculating the net present value (NPV) of each

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MBA5903
ASSIGNMENT 2 2024
UNIQUE NO.
DUE DATE: 23 SEPTEMBER 2024

, MBA5903

Assignment 2 2024

Unique Number:

Due Date: 23 September 2024

Strategic Financial Management

Question 1

1.1 Cost of Capital Calculation (5 Marks)

To determine the cost of capital that GIC should use in evaluating the options, we will
calculate the Weighted Average Cost of Capital (WACC). Given the information:

 Debt-to-equity ratio: 1:3 (hence, Debt = 25%, Equity = 75%)
 Company Tax Rate: 30%
 Beta (β): 0.75
 Risk-free rate (South Africa Treasury Bond): 6.5%
 Market rate of return: 10%
 Cost of debt: 8%

Steps to calculate WACC:

1. Cost of Equity (Ke): Using the Capital Asset Pricing Model (CAPM):

Ke=Risk−free rate+β×(Market return−Risk−free rate)

Ke=Risk−free rate+β×(Market return−Risk−free rate)

Ke=6.5%+0.75×3.5%=6.5%+2.625%=9.125%

2. After-tax Cost of Debt (Kd):
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Samuel C. Weaver, John Fred Weston Strategic Financial Management
Publisher: 2008 ISBN: 9780324318760 Edition: Unknown

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