BEC524 Individual Assignment (DETAILED ANSWERS) 2023 - DUE: 5 October 2023

BEC524 Individual Assignment (DETAILED ANSWERS) 2023 - DUE: 5 October 2023 100% TRUSTED workings, explanations and solutions. For assistance call or us on +/ 2/ 5/ 4 /7 /7 /9 /5 /4 /0 /1 /3 /2 . Question 1 (30 Marks) You have been called upon to advise a client with regard to an investment of R100 000 in shares in the industrial sector of the JSE. You have gathered data and assigned probabilities to expected returns under four possible market conditions. The following probabilities have been assigned to two individual shares, and to a unit trust. The unit trust is widely diversified portfolio with a beta of 1. Market condition Probability Expected Return Aruntex (%) Expected Return Boumet (%) Expected Return CD Trust (%) Poor 0.2 -10 10 -5 Moderate 0.3 5 10 15 Good 0.4 30 15 25 Exceptional 0.1 45 20 35 You may assume that despite the small number of readings, the distributions all have the characteristics of a normal distribution. In addition, you may assume that borrowing and lending is possible at the risk-free rate of 10%. Required: (a) Find the expected return, standard deviation, and co-efficient of variation for each of Aruntex and Boumet. (10) (b) Find the correlation co-efficient for the returns from Aruntex and Boumet. (5) (c) Calculate the beta of Boumet. (5) (d) If your client borrowed R70 000 and invested R170 000 in a certificate of deposit Trust, calculate the expected return and the total risk of the investment. (5) (e) If your client invested R20 000 in Aruntex and R80 000 in Boumet, calculate the expected return and total risk of the portfolio. (5) Question 2 (10 Marks) Studies have indicated that a firm’s annual financial statements are an important source of information for making equity investment decisions. Yet, other studies indicate that share prices do not react significantly to the publication of the annual financial statements. How would you reconcile these results with each other and with the Efficient Market Hypothesis? (10) Question 3 (20 Marks) OPM is a private equity company that invests in established small to medium unlisted companies that have growth potential within the agricultural and industrial sectors. OPM was required to undertake valuations of its investments as of 31 May 2014. OPM owns a controlling interest in Crescent Chickens (Pty) Ltd, which supplies poultry products to its customers throughout the country. Its customers are major food retailers and fast food chains and the company has a 2% market share. As part of the valuation process, OPM is required to determine the WACC of Crescent Chickens (Pty) Ltd and the following information is relevant: • The current yield on the R186 long term government bond is 7.8% per annum, while short term government treasury bills are yielding 4.9% per annum. • The prime overdraft rate is presently 8.5% per annum. • The average historic market risk premium for the South African equity market is 5.5% per annum. • Current information applicable to listed poultry producers and the wider agricultural sector is presented below: Variable Average value of all listed poultry producers Average agricultural sector value Leveraged beta 1.58 1.31 Unleveraged beta 1.26 1.02 Debt-Equity ratio 35% 40% Earnings before interest, taxation, depreciation and amortization (EBITDA) multiple 5.5 6.7 Mr. Henry Kopman (a manager at OPM) believes the most appropriate way to lever and unlever betas is to use the following Hamada formula: BU=BL/ [1 + (1 – T) (D/E)] Where: BU= unlevered beta BL= levered beta T= taxation rate D=market value of debt E=market value of equity The corporate tax rate is 28% interest on long term borrowings is payable at a variable rate linked to the prime overdraft rate. The interest rate payable is set at 250 basis points (2.5%) above the prime overdraft rate. OPM’s target long term debt-equity ratio for Cresent Chickens is 25% and is based on market values. Required: Determine the weighted average cost of capital (WACC) that should be employed to discount the future operating cash flows of Crescent Chickens (Pty) Ltd. (20) Question 4 (20 Marks) Futhi Supplies is a company involved in the transport of produce from WaZulu-Natal to the Johannesburg metropolitan area. The company operates six refrigerated trucks. The company is evaluating the purchase of two new refrigerated trucks which is expected to be more economical than two of the current trucks due to advances in refrigeration technology and improved fuel economy. The company expects to achieve an increase in before-tax earnings of R432 000 per year. This is made up as follows: fuel savings of R222 000 per year, and a reduction in claims of R180 000 per year, as well as a reduction of fixed costs of R30 000 per year. An analysis of the fixed costs indicates an increase in annual accounting depreciation of R120 000 and a reduction owing to variations in product temperatures. The cost of the two new trucks is R1.2m. The current trucks, which have tax values of zero, can be sold for R150 000 each. The future residual value of the existing trucks is expected to be zero in five years’ time. The company is able to depreciate the new truck on a straight-line basis over five years. The residual value of the new trucks in five years’ time is expected to be R300 000 each. The company’s cost of capital is 14% and the corporate tax rate is 28%. The tax effects on the sale of the existing trucks will occur at the same time as the sale. Required: a. What are the incremental cash flows of investing in the new trucks? (5) b. Determine the NPV of investing in the two trucks. (10) c. What is the IRR of the investment? (5) Question 6 (10 Marks) During 2022, Hybrid Ltd non-current assets remained constant at R150m. Its current assets fluctuated as shown below. Rmillions Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Current assets 80 70 Required: a. Calculate the level of Hybrid’s permanent assets during 2022 and state the percentage of permanent current assets. (5) b. Calculate the maximum level of temporary assets in 2022 and state the month in which it occurred. (2) c. What was the level of temporary assets in June? (3) Question 7 (10 Marks) Pharmagen Ltd is undertaking major research and development and is making a rights issue to raise the required financing. The company has currently 30 million shares in issue. The company needs to raise R42 million. The share price has been trading within a range of R111.00-R15.00 in the last year, but the latest quoted price is R12.00 per share. The subscription price for the rights issue will be R90.00 per share. What is the expected ex-right price? (10)