FIN3701 Assignment 2 (COMPLETE ANSWERS) Semester 1 2026 - DUE 17 April 2026; 100% TRUSTED Complete, trusted solutions and explanations.

Exam (elaborations)

FIN3701 Assignment 2 (COMPLETE ANSWERS) Semester 1 2026 - DUE 17 April
2026; 100% TRUSTED Complete, trusted solutions and explanations.

QUESTION 1 [15 marks] Oreatli Company’s optimal capital structure consists of
30% debt and 70% equity. The interest rate on its debt is a constant 12%, while the
cost of ordinary share funding from retained earnings is 15%. The company’s
marginal tax rate is 28%. Oreatli has identified the following investment
opportunities: • Project A: cost = R70 000; IRR = 16,5% • Project B: cost = R70 000;
IRR = 15,2% • Project C: cost = R40 000; IRR = 12,4% • Project D: cost = R60 000; IRR
= 10,1% Oreatli has R120 000 in available earnings. REQUIRED: 1.1 Calculate Oreatli
Company’s weighted average cost of capital (WACC). (3) 1.2 Based on its WACC and
the amount of retained earnings available, which projects should Oreatli Company
undertake? (6) 1.3 Assuming Oreatli Company follows a residual dividend policy,
calculate the amount of dividends it will pay and determine its retention ratio.


1.1 Calculation of WACC (3 marks) WACC
( 𝑤 𝑑 × 𝑘 𝑑 × ( 1 − 𝑇 ) ) + ( 𝑤 𝑒 × 𝑘 𝑒 ) WACC=(w d

×k d

×(1−T))+(w e

×k e

)

Where:


𝑤𝑑
0.30 w d


=0.30, 𝑤 𝑒
0.70 w e

, =0.70 𝑘 𝑑
12 % k d


=12%, 𝑘 𝑒
15 % k e


=15% Tax rate 𝑇
28 % T=28%

After-tax cost of debt:


12 % × ( 1 − 0.28 )

12 % × 0.72
8.64 % 12%×(1−0.28)=12%×0.72=8.64%

Now calculate WACC:


WACC

( 0.30 × 8.64 % ) + ( 0.70 × 15 % )
WACC=(0.30×8.64%)+(0.70×15%)

2.592 % + 10.5 %
13.092 % =2.592%+10.5%=13.092%

WACC ≈ 13.09%

1.2 Investment Decision (6 marks)

Decision rule: Accept projects where IRR > WACC (13.09%)