MAC2602 Assignment 2 Unique no.866943 (2022)

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MAC2602 Assignment 02 - Unique no. 866943

Question.1.
Table 1 (Option.1.) Table 2 (Option.2.)
Funded by equity only 50% equity and 50% debt funding

Total assets R600 million: Total assets R600 million:
Equity R600 million (R400m + R200m) Equity R500 million (R400m + R100m)
Debt R0 million Debt R100 million (0+R100 m)
Rm Rm
Earnings before interest & tax (EBIT) 126500000 Earnings before interest & tax (EBIT) 126500000
(115000000 x 1.10) (115000000 x 1.10)
Interest 0 Interest (100000000 x 9%) -9000000
Profit before tax 126500000 Profit before tax 117500000
Income tax expense @ 28% -35420000 Income tax expense @ 28% -32900000
(a) Net profit 91080000 Net profit 84600000




(b) Return on assests (ROA) = Net Profit/Total Assets Return on assests (ROA) = Net Profit/Total Assets
= 91080000/600000000 = 84600000/600000000
= 15.18% = 14.10%

(c) Return on equity (ROE) = Net Profit/Equity Return on equity (ROE) = Net Profit/Equity
= 91080000/600000000 = 84600000/500000000
= 15.18% = 16.92%


d) Interest on debt is a deduction for tax purposes
and therefore makes it cheaper financing option.
The ROE increased when the expansion was
funded by debt.

e) Capital structure (option 2 )
Debt: = 100000000/600000000 Debt:
= 1:6
= 17%
Equity = 500000000/600000000 Equity
= 5:6
= 83%
Therefore the capital structure is 17:83 (D:E)

Question.2.
a) Types of funding:
Equity Debt
Ordinary share capital 55000000 Debentures @ 13% per annum 4500000
Non-distributable reserves 2600000 Long-term loan 5500000
Retained income 7200000
64800000 10000000


Capital structure = the mix of debt and equity (D:E ratio)
Debt:Equity = 10000000/64800000
= 1:6.48
= 15.43%
Equity = 84.57%


Therefore the capital structure is 17:83 (D:E)



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