FIN3701 Assignment 2 (COMPLETE ANSWERS) Semester 2 2026 - DUE 8 September 2026

FIN3701 Assignment 2 (COMPLETE ANSWERS) Semester 2 2026 - DUE 8 September 2026; 100% TRUSTED Complete, trusted solutions and explanations. For assistance, Whats-App 0.8.1..2.7.8..3.3.7.2... MathethePharm Ltd has optimal capital structure weights of 40% debt and 60% equity. MathethePharm is in the 30% tax bracket and is evaluating four independent investment proposals. Project Initial investment (R) Internal rate of return (IRR) (%) A 100 000 18 B 200 000 15 C 125 000 13 D 100 000 12 MathethePharm’s senior financial analyst has gathered the following information: MathethePharm can raise R160 000 through the sale of a R1 000 par value, 8% annual coupon rate and a ten-year debenture. The debenture will be issued at 5% discount and R20 flotation cost per debenture. Additional funds will be raised through the bank loan with an after-tax cost of 10%. R425 000 is available through retained earnings. Additional funds will be raised through the issue of new ordinary shares. The company pays a regular dividend of R10, has a growth rate of 3% and nets R87.30 after flotation costs. The flotation costs are calculated at 3% of the par value (R90) of a share. KINDLY NOTE THAT THERE ARE TWO COMPULSORY ASSIGNMENTS FOR THE SECOND SEMESTER. The purpose of this assignment is to evaluate your knowledge of some of the fundamental issues in the long-term financing decisions of a company. To complete this assessment, you must study chapters 13, 14 and 17 of the prescribed book and the relevant learning units. 11 FIN3701/101/2/2026 REQUIRED: 1.1 Calculate the WACC associated with each range of financing/break-point. (18 marks) 1.2 In which project do you recommend that the company invest its funds? Motivate your choice. 2 marks) QUESTION 2 [6 marks] AfriChem Industries Ltd, is a Pan-African chemicals manufacturing company, and it is contemplating two expansion opportunities that would promote industrialisation and create job opportunities in Africa: Purchase of a new fertiliser manufacturing plant in South Africa for R7.5 million. Purchase of a new plastic recycling factory in Botswana for R2.5 million. AfriChem Industries target capital structure is 75% equity and 25% debt. AfriChem Industries can currently obtain debt at 21% before tax and equity at 10%. Investment International Rate of Return (IRR) Intended financing Method Chemical plant (South Africa) Plastic factory (Botswana) Internal rate of return (IRR) = 9.5% Internal rate of return (IRR) = 9% Intended financing method: equity Intended financing method: debt REQUIRED: 2.1 Advise the Chief Financial Officer (CFO) as to which investment(s) should be pursued. Justify your recommendations by making use of the companies weighted average cost of capital (WACC). (10 marks) QUESTION 3 [20 marks] Malaika Holdings Ltd, a pan-African retail and distribution company operating in South Africa, Kenya, Ghana, Zambia and Botswana, is in the process of restructuring its capital structure to improve shareholder value and enhance its competitiveness in African markets. The company is currently financed entirely through ordinary share capital and has 10 000 ordinary shares outstanding. Each share has a book value and market value of R35. Management plans to introduce debt financing into the capital structure. The funds raised through debt will be used to repurchase and retire some of the existing shares. The company aims to maintain the same total financing requirement after the recapitalisation. The company distributes 100% of its earnings as dividends and is subject to a corporate tax rate of 30%. 12 The following operating projections are available for the next financial year: Item Amount (R)Expected sales revenue 530 000 Fixed operating costs 251 000 Variable operating costs 30% of sales The board is considering the following capital structure alternatives: Capital Structure A: Regional Expansion through Development Finance To support the expansion of distribution centres across Southern Africa and improve access to affordable consumer products in rural communities, the company intends to finance 40% of its capital structure with debt. The required loan will be obtained from Standard Bank South Africa at an annual interest rate of 20%. Capital Structure B: Digital Retail Growth Strategy To finance investments in digital commerce platforms and intra-African supply chain integration under the African Continental Free Trade Area (AfCFTA), the company intends to finance 50% of its capital structure with debt. The required loan will be obtained from Capitec Bank at an annual interest rate of 18%. REQUIRED 3.1 Earnings per Share Analysis (10 marks) Calculate the earnings per share (EPS) under both capital structures and advise management on which capital structure should be selected if the objective is to maximise earnings per share (EPS). 3.2 Weighted Average Cost of Capital (WACC) (6 marks) Calculate the weighted average cost of capital (WACC) for: Capital Structure A (40% debt financing) Capital Structure B (50% debt financing) Assume the cost of equity remains unchanged. 3.3 Shareholder Wealth Maximisation (2 marks) Which capital structure would you recommend if the primary objective is to maximise shareholder wealth? Support your answer using financial management principles.