FIN3701 Assignment 2 Semester 2 2025 (148229)

FIN3701
ASSIGNMENT 2 SEMESTER 2 2025

UNIQUE NO. 148229
DUE DATE: 18 SEPTEMBER 2025

,Question 1 — MathethePharm Ltd (bit-by-bit solution)

1) Key data (used exactly as in your assignment)

1. Target capital structure: 40% debt, 60% equity.

2. Tax rate: 30%.

3. Projects (independent):

o A: cost R100 000, IRR 18%
o B: cost R200 000, IRR 15%
o C: cost R125 000, IRR 13%
o D: cost R100 000, IRR 12%
o Total required if all accepted = 100k+200k+125k+100k = R525 000.
4. Debentures: par R1 000, coupon 8% → coupon = R80 per year, 10 years, can
raise R160 000 total. Issue at 5% discount and R20 flotation per debenture.

5. After debentures, extra debt via bank loan with after-tax cost = 10%.

6. Retained earnings available = R425 000. Additional equity via new ordinary
shares.

7. Dividends: 𝐷0 = 𝑅10, growth 𝑔 = 3% . New-issue net proceeds = R87.30. (We
use 𝑃0 = 𝑅90 for retained earnings cost.)

2) Step A — Debenture: compute proceeds and YTM (cost before tax)

A.1 proceeds per debenture

 Par = 1 000
 5% discount → receive 1,000 × (1 − 0.05) = 950
 Less flotation per debenture = 20
 Net proceeds = 950 − 20 = R930

A.2 YTM (solve for 𝑘𝑑 such that price = PV of coupons + redemption) Equation:

, 10
80 1000
930 = ∑ +
(1 + 𝑘𝑑 )𝑡 (1 + 𝑘𝑑 )10
𝑡=1


Solving numerically gives:

𝑘𝑑 ≈ 0.0909532131 = 𝟗. 𝟎𝟗𝟓𝟑𝟐𝟏𝟑𝟏% ( before tax)

A.3 After-tax cost of debenture

𝑘𝑑, deb,after = 𝑘 𝑑 (1 − 𝑇) = 0.0909532131 × (1 − 0.30) = 0.0909532131 × 0.70
= 𝟎. 𝟎𝟔𝟑𝟔𝟔𝟕𝟐𝟒𝟗𝟐 = 𝟔. 𝟑𝟔𝟔𝟕%

(Every digit above comes from the YTM solve and the exact 0.7 multiplier.)

3) Step B — Cost of equity (retained earnings and new issue)

Dividends next year:

𝐷1 = 𝐷0 (1 + 𝑔) = 10 × 1.03 = 𝟏𝟎. 𝟑𝟎

B.1 retained earnings (no flotation, use 𝑃0 = 90)

𝐷1 10.30
𝑘𝑒,ret = +𝑔= + 0.03
𝑃0 90

Compute numerator/division:

10.30
= 0.1144444
90

So

𝑘𝑒,ret = 0.1144444 … + 0.03 = 𝟎. 𝟏𝟒𝟒𝟒𝟒𝟒𝟒𝟒𝟒𝟒 = 𝟏𝟒. 𝟒𝟒𝟒𝟒%

B.2 new ordinary shares (use net proceeds R87.30)

10.30
𝑘𝑒,new = + 0.03
87.30

Compute: