FIN3701 Assignment 1 (DETAILED ANSWERS) Semester 2 2025 - DISTINCTION GUARANTEED

FIN3701 Assignment 1 (DETAILED ANSWERS) Semester 2 2025 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references...ojo Resources is seeking to invest R10 million in a new mining project to expand its gold production capacity. The management of the company prefers to maintain the present 35% debt, 55% equity and 10% preference shares capital structure. Debt financing can be obtained by issuing a 5-year R1,000 bond. The current price of the bond is R1 200 and it pays 10% coupons. Jojo Resources has a beta of 1.3. The expected return on the market portfolio is 16% and the current risk-free rate is 8%. The company is contemplating issuing 10% preference shares, which are expected to sell for a par value of R60 per share. The cost of issuing and selling the shares is expected to be 5%. The tax rate is 29%. REQUIRED: 2.1 Calculate Jojo Resources’ component costs. (11 marks) 2.2 Calculate the company’s weighted average cost of capital. (9 Bakoni Enterprises is considering investing in either of two mutually exclusive projects. Cash flows associated with the two independent investments are given below. The risk-free rate is 8% and the risk premium is 2%. Project A Year Cash flows Certainty equivalents .00 .80 .70 .60 ..40 Project B Year Risk-adjusted cash flows 5 150 000 KINDLY NOTE THAT THERE ARE TWO COMPULSORY ASSIGNMENTS FOR THE SECOND SEMESTER. The purpose of this assignment is to evaluate your knowledge of the fundamental aspects of decision making for long-term investment. Study chapters 9, 10, 11 and 12 in the prescribed book and the relevant learning units to complete this assessment. 11 REQUIRED: 1.1 Use the concept of risk and cash inflows to calculate the NPV and IRR relating to the investment in project ARangwato Cosmetics is considering replacing its existing fragrance-mixing machine that was purchased two years ago at a cost of R60,000. The existing machine is depreciated on a straight-line method over five years. The existing machine can be sold today for R60,000. The new machine will cost R91,200 with R10,000 installation cost and R8,800 transportation cost. The use of the new machine will require an additional amount of R12,000 to invest in the working capital. This amount represents a cash outflow. Assume a 28% tax rate per annum. REQUIRED: 3.1 Calculate the book value of the existing machine. Show all calculations. (2 marks) 3.2 Calculate the tax implication from the sale of the existing machine. (2 marks) 3.3 Calculate the after-tax proceeds from the sale of the existing machine. (2 marks) 3.4 Calculate the initial investment associated with the replacement of the existing machine. (4 marks)