FIN3701/101/2/2025
ASSESSMENT 2
Financial Management
FIN3701
Semester 2
Department of Finance, Risk Management and
Banking
This tutorial letter contains Assignment 02 for the module, FIN3701.
BARCODE
Open Rubric
, KINDLY NOTE THAT THERE ARE TWO COMPULSORY ASSIGNMENTS FOR THE
SECOND SEMESTER.
Assignment Semester 2
number
02
Due date: 18 September 2025
Unique number: 148229
Assignment 02 – Semester 2 Due date: 18 September 2025 Unique number: 148229
The purpose of this assignment is to evaluate your knowledge of some of the
fundamental issues in the long-term financing decisions of a company. To complete this
assessment, you must study chapters 13, 14 and 17 in the prescribed book and the
relevant learning units.
QUESTION 1
MathethePharm Ltd has optimal capital structure weights of 40% debt and 60% equity.
MathethePharm is in the 30% tax bracket and is evaluating four independent investment proposals.
Project Initial investment Internal rate of
return (IRR)
(R) (%)
A 100 000 18
B 200 000 15
C 125 000 13
D 100 000 12
MathethePharm’s senior financial analyst has gathered the following information:
MathethePharm can raise R160 000 through the sale of a R1 000 par value, 8% annual coupon
rate and a ten-year debenture. The debenture will be issued at 5% discount and R20 flotation cost
per debenture. Additional funds will be raised through the bank loan with an after-tax cost of 10%.
R425 000 is available through retained earnings. Additional funds will be raised through the issue
of new ordinary shares. The company pays a regular dividend of R10, has a growth rate of 3% and
nets R87.30 after flotation costs. The flotation costs are calculated at 3% of the par value (R90) of
a share.
2
, FIN3701/101/2/202
REQUIRED:
1.1 Calculate the WACC associated with each range of financing/breakpoint
Cost of new issue of equity
R10 x (1.03) + 0.03 = 14.80%
R87.30
Cost of retained earnings.
R10 x (1.03) + 0.03 = 14.44%
R90
After-tax cost of debt (Debenture)
Input Function
R1 000 FV
-R930 PV
10 N
R80 PMT
I/YR = 9.10% (before-tax cost)
After tax cost = rd(1-t) = 9.10(1 – 0.30) = 6.37%
After-tax cost of debt (Bank loan) = 10% (given)
Breaks in the weighted average cost of capital.
BP (debt) = 160 000/0.4 = 400 000
BP (equity) = 425 000/0.60 = 708 333
3
ASSESSMENT 2
Financial Management
FIN3701
Semester 2
Department of Finance, Risk Management and
Banking
This tutorial letter contains Assignment 02 for the module, FIN3701.
BARCODE
Open Rubric
, KINDLY NOTE THAT THERE ARE TWO COMPULSORY ASSIGNMENTS FOR THE
SECOND SEMESTER.
Assignment Semester 2
number
02
Due date: 18 September 2025
Unique number: 148229
Assignment 02 – Semester 2 Due date: 18 September 2025 Unique number: 148229
The purpose of this assignment is to evaluate your knowledge of some of the
fundamental issues in the long-term financing decisions of a company. To complete this
assessment, you must study chapters 13, 14 and 17 in the prescribed book and the
relevant learning units.
QUESTION 1
MathethePharm Ltd has optimal capital structure weights of 40% debt and 60% equity.
MathethePharm is in the 30% tax bracket and is evaluating four independent investment proposals.
Project Initial investment Internal rate of
return (IRR)
(R) (%)
A 100 000 18
B 200 000 15
C 125 000 13
D 100 000 12
MathethePharm’s senior financial analyst has gathered the following information:
MathethePharm can raise R160 000 through the sale of a R1 000 par value, 8% annual coupon
rate and a ten-year debenture. The debenture will be issued at 5% discount and R20 flotation cost
per debenture. Additional funds will be raised through the bank loan with an after-tax cost of 10%.
R425 000 is available through retained earnings. Additional funds will be raised through the issue
of new ordinary shares. The company pays a regular dividend of R10, has a growth rate of 3% and
nets R87.30 after flotation costs. The flotation costs are calculated at 3% of the par value (R90) of
a share.
2
, FIN3701/101/2/202
REQUIRED:
1.1 Calculate the WACC associated with each range of financing/breakpoint
Cost of new issue of equity
R10 x (1.03) + 0.03 = 14.80%
R87.30
Cost of retained earnings.
R10 x (1.03) + 0.03 = 14.44%
R90
After-tax cost of debt (Debenture)
Input Function
R1 000 FV
-R930 PV
10 N
R80 PMT
I/YR = 9.10% (before-tax cost)
After tax cost = rd(1-t) = 9.10(1 – 0.30) = 6.37%
After-tax cost of debt (Bank loan) = 10% (given)
Breaks in the weighted average cost of capital.
BP (debt) = 160 000/0.4 = 400 000
BP (equity) = 425 000/0.60 = 708 333
3
