FIN3701 Assignment 2 (COMPLETE ANSWERS) Semester 1 2024 (505104) - DUE 24 April 2024

FIN3701 Assignment 2 (COMPLETE ANSWERS) Semester 1 2024 (505104) - DUE 24 April 2024 ;100% TRUSTED workings, explanations and solutions. for assistance Whats-App.......0.6.7..1.7.1..1.7.3.9 .......... QUESTION 1 [10 marks] Bonga currently has a portfolio of ordinary shares representing several different companies. Bonga considers it to be a well-balanced investment portfolio, but he wants to reduce the overall risk of the portfolio a bit more by including ordinary shares from Titan Mining Corporation. The following information on Titan Mining Corporation is available: For the period 2017 to 2020, the company paid the following dividends per year respectively: R3,14; R3,55; R3,89; and R3,95. The 2021 dividend is expected to increase by the average growth rate of the dividends between 2017 and 2020, and the dividend will increase by 10% per year indefinitely from 2022 onwards. Bonga requires a return of 15% on his investment portfolio and is not prepared to pay more than R52,00 per ordinary share of Titan Mining Corporation. REQUIRED: 1.1 Calculate the current price of Titan Mining Corporation’s ordinary share. (8 marks) 1.2 Should Bonga purchase Titan Mining Corporation shares to include in his investment portfolio? Provide reasons for your answer. (2 marks) KINDLY NOTE THAT THERE ARE TWO COMPULSORY ASSIGNMENTS FOR THE FIRST SEMESTER. QUESTION 2 [15 marks] The power systems company Raging Volts is currently 70% equity financed and aims to raise R2 million to fund a set of attractive investment opportunities. Debt financing may be obtained at an after-tax cost of 16%. The company’s management wants to introduce 40% debt in the capital structure while keeping the cost of each financing source together with its market value the same. Ordinary shares are currently selling for R30 per share. The company paid a dividend (Do) of R1,50 per share in the previous financial year and had a growth rate of 7% over the past few years. It is expected that this growth rate will be maintained in future. The company’s tax rate is 29%. The market value of power systems company Volts is R2 000 000. REQUIRED: 1.1 Calculate the component costs associated with capital investment financing. (3 marks) 2.2 Calculate the weighted average cost of capital (WACC), the break-point of equity and the break-point of debt under the current structure. (4 marks) 2.3 Calculate the WACC, the break-point of equity and the break-point of debt under the proposed structure. (4 marks) 2.4 Calculate the number of shares under the current structure. (2 marks) 2.5 Calculate the number of shares under the proposed structure. (2 mark) QUESTION 3 [25 marks] Hammerson Ltd is an all-equity financed company with 10 000 outstanding ordinary shares, each valued at the market price of R25,00. The company has decided to modify its capital structure to capture the tax benefits of debt. The plan is to have a target debt ratio of 30%. The company pays all its earnings as dividends and is subject to a 28% tax rate. The expected sales are R530 000, fixed costs are estimated at R250 000 and variable cost are estimated at 30% of sales. Details of the pursued capital structures are as follow: • Capital structure A at 30% debt ratio Hammerson Ltd will acquire debt at a before-tax cost of debt of 11.75%. REQUIRED: 3.1 Which capital structure would you advise the company to choose if its objective is to maximise earnings per share (EPS)? (8 marks) 3.2 Calculate the weighted average cost of capital (WACC) for both the current and proposed debt structures. (13 marks) 12 3.3 Which capital structure would you advise the company to choose if the aim is to maximise shareholder wealth?