FIN3701
Assignment 1
(COMPLETE
ANSWERS) Semester
1 2025 (340717)
DUE 31 March 2025
, ACTIVITIES
QUESTION 1 [12 marks] Mphoreng Industries is considering replacing its existing machine, which was
purchased three years ago at a cost of R1 million. The machine is depreciated at 30% per annum and
can be sold today at R900 000. The new machine will cost R700 000 with R20 000 installation cost
and R5 000 transportation costs. The use of the new machine will decrease the working capital with
R8 000. Assume a 40% capital gains tax per annum. REQUIRED: FIN3702 1.1 Calculate the book value
of the existing machine. Show all calculations. (3 marks) 1.2 Calculate the tax implication from the sale
of the existing machine. (3 marks) 1.3 Calculate the after-tax proceeds from the sale of the existing
machine. (2 marks) 1.4 Calculate the initial investment associated with the replacement of the existing
machine. FIN3703 (4 marks) QUESTION 2 [12 marks] A firm with a cost of capital of 11% is evaluating
two mutually exclusive projects, X and Y. The initial investment is R400 000 for project X and R525
000 for project Y. Cash inflows associated with the two projects are given below. Year INV3701
Project X Cash inflows (R) Project Y Cash inflows (R) BAN3702 1 140 000 175 000 2 165 000 150 000 3
190 000 125 000 4 190 000 100 000 5 80 000 6 50 000 REQUIRED: Which project should the firm
choose, considering risk concepts in capital budgeting? (12 marks) QUESTION 3 [12 marks] Marombo
currently has a portfolio of ordinary shares representing several different companies. Marombo
considers it to be a well-balanced investment portfolio, but he wants to reduce the overall risk of the
portfolio a bit more by including ordinary shares from Mamphela Mining Corporation. The following
information on Mamphela Mining Corporation is available: For the period 2020 to 2023, the company
paid the following dividends per year respectively: R3,14; R3,55; R3,89; and R3,95. The 2024 dividend
is expected to increase by the average growth rate of the dividends between 2020 and 2023, and the
dividend will increase by 10% per year indefinitely from 2022 onwards. Marombo requires a return of
12% on his investment portfolio and is not prepared to pay more than R52,00 per ordinary share of
Mamphela Mining Corporation. REQUIRED: 4.1 Calculate the current price of Mamphela Mining
Corporation’s ordinary share. (10 marks) 4.2 Should Marombo purchase Mamphela Mining
Corporation shares to include in his investment portfolio? Provide reasons for your answer. (2 marks)
QUESTION 5 [14 marks] The power systems company, Raging Volts, is currently 80% equity financed
and aims to raise R2 million to fund a set of attractive investment opportunities. Debt financing may
be obtained at an after-tax cost of 15%. The company’s management wants to introduce 60% debt in
the capital structure while keeping the cost of each financing source together with its market value
the same. Ordinary shares are currently selling for R30 per share. The company paid a dividend (Do)
of R1,50 per share in the previous financial year and had a growth rate of 7% over the past few years.
It is expected that this growth rate will be maintained in future. The company’s tax rate is 29%. The
company has a market value of R300 000. REQUIRED: 5.1 Calculate the component costs associated
with capital investment financing. (2 marks) 5.2 Calculate the weighted average cost of capital
(WACC), the break point of equity and the break point of debt under the current structure. (5 marks)
5.3 Calculate the WACC, the break point of equity and the break point of debt under the proposed
structure. (5 marks) 5.4 Calculate the number of shares under the current structure. (1 marks) 14 5.5
Calculate the number of shares under the proposed structure. (1 marks)
Assignment 1
(COMPLETE
ANSWERS) Semester
1 2025 (340717)
DUE 31 March 2025
, ACTIVITIES
QUESTION 1 [12 marks] Mphoreng Industries is considering replacing its existing machine, which was
purchased three years ago at a cost of R1 million. The machine is depreciated at 30% per annum and
can be sold today at R900 000. The new machine will cost R700 000 with R20 000 installation cost
and R5 000 transportation costs. The use of the new machine will decrease the working capital with
R8 000. Assume a 40% capital gains tax per annum. REQUIRED: FIN3702 1.1 Calculate the book value
of the existing machine. Show all calculations. (3 marks) 1.2 Calculate the tax implication from the sale
of the existing machine. (3 marks) 1.3 Calculate the after-tax proceeds from the sale of the existing
machine. (2 marks) 1.4 Calculate the initial investment associated with the replacement of the existing
machine. FIN3703 (4 marks) QUESTION 2 [12 marks] A firm with a cost of capital of 11% is evaluating
two mutually exclusive projects, X and Y. The initial investment is R400 000 for project X and R525
000 for project Y. Cash inflows associated with the two projects are given below. Year INV3701
Project X Cash inflows (R) Project Y Cash inflows (R) BAN3702 1 140 000 175 000 2 165 000 150 000 3
190 000 125 000 4 190 000 100 000 5 80 000 6 50 000 REQUIRED: Which project should the firm
choose, considering risk concepts in capital budgeting? (12 marks) QUESTION 3 [12 marks] Marombo
currently has a portfolio of ordinary shares representing several different companies. Marombo
considers it to be a well-balanced investment portfolio, but he wants to reduce the overall risk of the
portfolio a bit more by including ordinary shares from Mamphela Mining Corporation. The following
information on Mamphela Mining Corporation is available: For the period 2020 to 2023, the company
paid the following dividends per year respectively: R3,14; R3,55; R3,89; and R3,95. The 2024 dividend
is expected to increase by the average growth rate of the dividends between 2020 and 2023, and the
dividend will increase by 10% per year indefinitely from 2022 onwards. Marombo requires a return of
12% on his investment portfolio and is not prepared to pay more than R52,00 per ordinary share of
Mamphela Mining Corporation. REQUIRED: 4.1 Calculate the current price of Mamphela Mining
Corporation’s ordinary share. (10 marks) 4.2 Should Marombo purchase Mamphela Mining
Corporation shares to include in his investment portfolio? Provide reasons for your answer. (2 marks)
QUESTION 5 [14 marks] The power systems company, Raging Volts, is currently 80% equity financed
and aims to raise R2 million to fund a set of attractive investment opportunities. Debt financing may
be obtained at an after-tax cost of 15%. The company’s management wants to introduce 60% debt in
the capital structure while keeping the cost of each financing source together with its market value
the same. Ordinary shares are currently selling for R30 per share. The company paid a dividend (Do)
of R1,50 per share in the previous financial year and had a growth rate of 7% over the past few years.
It is expected that this growth rate will be maintained in future. The company’s tax rate is 29%. The
company has a market value of R300 000. REQUIRED: 5.1 Calculate the component costs associated
with capital investment financing. (2 marks) 5.2 Calculate the weighted average cost of capital
(WACC), the break point of equity and the break point of debt under the current structure. (5 marks)
5.3 Calculate the WACC, the break point of equity and the break point of debt under the proposed
structure. (5 marks) 5.4 Calculate the number of shares under the current structure. (1 marks) 14 5.5
Calculate the number of shares under the proposed structure. (1 marks)
