FIN3701 ASSIGNMENT 2 SEMESTER 1 OF 2025 - INCLUDES THE 2024 EXAM SOLUTIONS WITH CALCULATIONS

FIN3701
ASSIGNMENT 2
SEMESTER 1 OF 2025

UNIQUE NUMBER: 340720

,FIN3701 ASSIGNMENT 2 SEMESTER 1 OF 2025
UNIQUE NUMBER: 340720
DUE DATE: 24 APRIL 2025




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,QUESTION 1. [20 marks]

REQUIRED:

1.1 Calculate the WACC associated with each range of financing/break-point. (18 marks)


Breakpoint of debt = R160 000/0.40 = R400 000

Breakpoint of equity = R425 000/0.60 = R708 333


Range (R0 – 425 000):

Cost of long-term debt (YTM)

 Par value = R1 000

 Coupon rate = 8% annually → PMT = R80 per year

 Term = 10 years → N = 10

 Discount = 5% → Issued at 95% of par = R950

 Flotation cost = R20

 Net proceeds (PV) = R950 - R20 = R930

 FV (redemption at maturity) = R1 000


So the components are:

FV = R1 000

N = 10

PV = -R930 (cash inflow for the company)

PMT = R80

Comp: I/YR (9.10)


After-tax cost of debt = Cost of debt × (1−Tax rate)

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,After-tax cost = 9.10% × (1 − 0.30)
= 9.10% × 0.70 = 6.37%



Cost Of Equity

Given:

 Dividend (D₁): R10 (assumed to be next year’s dividend)

 Growth rate (g): 3% or 0.03

 Net proceeds (P₀) after flotation costs: R87.30

 Par value: R90

 Flotation cost = 3% of R90 = R2.70
(This checks out, since R90 - R2.70 = R87.30)



Formula – Cost of Equity via DDM with flotation:

( )

( )




Therefore, the cost of equity is approximately 14.44%.



Weighted Average Cost of Capital (WACC) for MathethePharm:

The optimal capital structure weights are given as:

( )

( )




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, The formula for WACC is:

( ) ( )

Where:




( ) ( )



Range (R400 000 – R708 333):

Additional funds: after-tax cost = 10% (given)

Cost of equity




( ) ( )


Range (R708 333 and above):

Additional funds: after-tax cost = 10% (given)

Additional funds:
We are given:



( )

Expected dividend next year:

( )

( )

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