,INV3701 Assignment 1 (COMPLETE ANSWERS) Semester 2 2025
- DUE 4 September 2025;100% trusted ,comprehensive and
complete reliable solution with clear explanation
QUESTION 1 [10 MARKS] An analyst has been asked to value
telecommunication companies, Fluid 5G Networks Ltd and Enterprise
5G Networks Ltd. The telecommunications industry is a mature industry
with few competitors. One segment that is growing is 5G Networks;
while the telecommunications sector is expected to grow at a steady rate
of 5%, the 5G Networks segment is expected to grow at 10%. Fluid is
the largest company in the 5G Networks segment. Fluid is considered a
very stable company within the telecommunications sector and the 5G
Networks segment. Fluid has an equity beta of 1.00. The current market
price of Fluid’s share is R14.85. The analyst collects selected financial
information from Fluid’s income statement and cash flow information
(for the last fiscal year) and from Fluid’s balance sheet (for the last two
fiscal year ends). The information is shown in Exhibit 1. There is no
preferred share, and no longterm asset sales occurred in 2024. INV3701
ASSIGNMENT 1, SEMESTER 2, 2025 2 Exhibit 1: Selected Fluid
Financial Information (R million except for rates and ratios) Income
statement 2024 EBITDA R1 461 Operating income R1 169 Interest
expense R150 Income tax rate 30% Dividends R357 Balance sheet Total
current assets R2 408 R2 577 Net PPE R3 794 R4 150 Notes payable
R600 R644 Long-term debt R2 020 R2 070 Total liabilities R3 210 R3
378 Total equity R2 992 R3 349 Other information 2024 Cash flow from
operations (CFO) R1 020 Investment in fixed capital (FCInv) R500
Risk-free rate 3.00% Cost of debt 6.00% Cost of equity 8.00% Target
D/E ratio 1.00 Enterprise is the fifth largest company in the 5G
Networks segment of the telecommunications sector. Enterprise is
considered a growth company within the telecommunications sector and
the 5G Networks segment. Enterprise has not issued bonds, and all of
Enterprise’s debt is considered short and medium-term. For the fiscal
year 2024, free cash flow to the firm (FCFF) is R143 million, and free
, cash flow to equity (FCFE) is R120 million. Enterprise pays no
dividends. Enterprise’s earnings are expected to grow at 14% for three
years, and then at the expected overall rate of growth in the 5G
Networks segment into perpetuity. Enterprise’s equity beta is 1.20. The
risk-free rate is 3%. INV3701 ASSIGNMENT 1, SEMESTER 2, 2025 3
The analyst has been asked to investigate the effect each of the
following corporate events, if taken during 2024, would have on Fluid’s
FCFE: a) A 20% increase in dividends per share. b) Repurchase of 25%
of the firm’s outstanding shares using cash. c) New common share
offering that would increase shares outstanding by 30%. d) New issue of
convertible bonds that are not callable for five years and would increase
the level of debt by 10%.
QUESTION 1 [10 marks]
1.1 The free cash flow to equity (FCFE) for Fluid for 2024 is closest
to. (2 marks)
Formula:
FCFE=CFO−FCInv+(Net Borrowing)FCFE = CFO - FCInv + (Net\
Borrowing)FCFE=CFO−FCInv+(Net Borrowing)
From the information:
CFO = R1,020 million
FCInv = R500 million
- DUE 4 September 2025;100% trusted ,comprehensive and
complete reliable solution with clear explanation
QUESTION 1 [10 MARKS] An analyst has been asked to value
telecommunication companies, Fluid 5G Networks Ltd and Enterprise
5G Networks Ltd. The telecommunications industry is a mature industry
with few competitors. One segment that is growing is 5G Networks;
while the telecommunications sector is expected to grow at a steady rate
of 5%, the 5G Networks segment is expected to grow at 10%. Fluid is
the largest company in the 5G Networks segment. Fluid is considered a
very stable company within the telecommunications sector and the 5G
Networks segment. Fluid has an equity beta of 1.00. The current market
price of Fluid’s share is R14.85. The analyst collects selected financial
information from Fluid’s income statement and cash flow information
(for the last fiscal year) and from Fluid’s balance sheet (for the last two
fiscal year ends). The information is shown in Exhibit 1. There is no
preferred share, and no longterm asset sales occurred in 2024. INV3701
ASSIGNMENT 1, SEMESTER 2, 2025 2 Exhibit 1: Selected Fluid
Financial Information (R million except for rates and ratios) Income
statement 2024 EBITDA R1 461 Operating income R1 169 Interest
expense R150 Income tax rate 30% Dividends R357 Balance sheet Total
current assets R2 408 R2 577 Net PPE R3 794 R4 150 Notes payable
R600 R644 Long-term debt R2 020 R2 070 Total liabilities R3 210 R3
378 Total equity R2 992 R3 349 Other information 2024 Cash flow from
operations (CFO) R1 020 Investment in fixed capital (FCInv) R500
Risk-free rate 3.00% Cost of debt 6.00% Cost of equity 8.00% Target
D/E ratio 1.00 Enterprise is the fifth largest company in the 5G
Networks segment of the telecommunications sector. Enterprise is
considered a growth company within the telecommunications sector and
the 5G Networks segment. Enterprise has not issued bonds, and all of
Enterprise’s debt is considered short and medium-term. For the fiscal
year 2024, free cash flow to the firm (FCFF) is R143 million, and free
, cash flow to equity (FCFE) is R120 million. Enterprise pays no
dividends. Enterprise’s earnings are expected to grow at 14% for three
years, and then at the expected overall rate of growth in the 5G
Networks segment into perpetuity. Enterprise’s equity beta is 1.20. The
risk-free rate is 3%. INV3701 ASSIGNMENT 1, SEMESTER 2, 2025 3
The analyst has been asked to investigate the effect each of the
following corporate events, if taken during 2024, would have on Fluid’s
FCFE: a) A 20% increase in dividends per share. b) Repurchase of 25%
of the firm’s outstanding shares using cash. c) New common share
offering that would increase shares outstanding by 30%. d) New issue of
convertible bonds that are not callable for five years and would increase
the level of debt by 10%.
QUESTION 1 [10 marks]
1.1 The free cash flow to equity (FCFE) for Fluid for 2024 is closest
to. (2 marks)
Formula:
FCFE=CFO−FCInv+(Net Borrowing)FCFE = CFO - FCInv + (Net\
Borrowing)FCFE=CFO−FCInv+(Net Borrowing)
From the information:
CFO = R1,020 million
FCInv = R500 million
