MAC2602 NOVEMBER 2017

Question 1
Question number Answer
1.1 b
1.2 d
1.3 c
1.4 a
1.5 b

, Question 2
2a) Cost of equity
Ke=Rf+B(Rm-Rf)
=0,09+1,39(0,055)
=8,14%

2b) Weighted average cost of capital
Type of debt/equity Total amount % Portion Interest rate Weighting
Ordinary shares( w1) 13,620,000.00 51% 8.14% 0.0415
Debentures (w2) 3,090,000.00 12% 8.28% 0.0096
Long term loan(w3) 10,000,000.00 37% 10.50% 0.0393
Total 26,710,000.00 0.0904
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Therefore WACC is 9.04%

Workings
Ordinary shares(w1)
Market value of the shares(1 200
000*11,35) 13,620,000
Cost of equity 8.14% Please refer to solution for 2a

Debentures(w2)
Market value of the debenture 3,090,000
Interest rate after tax(11,5%*0,72) 8.28%

Long term loan(w3)
Market value 10,000,000
Interest rate 10.50%



2ci) Three factors that increase risk and affect the entire market
The state of the world economy
The state of the national economy
Political stability of a country
Market sentiments eg JSE

2cii) Three factors that increase risk and affect a specific entity
High business risk
High financial risk
Labour unrest and strikes