FIN3701 ASSESSMENT 2 SEM 2 OF 2025 EXPECTED SOLUTIONS

TUTORING FOR FAC,MAC,ECS,STA,DSC,TAX, FIN ,INVQMI,
BNU,MNG,MNB,BSM, CLA

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QUESTION 1 ; EMAIL:


1.1 Calculate the WACC associated with each range of financing/break-point.


Description Calculation Value


Cost of Debt (Debenture)


Par Value Given R 1,000


Annual Coupon (1) 8% x R1,000 R 80

R1,000 - (5%xR1,000) - R20
Net Proceeds (Nd) R 930
= R1,000 - R50 - R20


Before-tax Cost of Debt (kg) 1 P 0+ L000-030 8047
TramNy T IEE
T T 965 9.02%
Approximation


After-tax Cost of Debt ka(1=T) =9.02% x (1—0.30) 6.31%

Cost of Bank Loan Given (After-tax) 10.00%


Cost of Retained Earnings (Ke)


Flotation Cost (F) 3% x R90 R 2.70


Current Share Price _ P Net Proceeds + F = R87.30 + R2.70 R 90.00


Next Dividend | (D) Do(1+g)=R10 % (1+0.03) R 10.30

, Description Calculation Value

Ke> D _ 1030
P te€= 500 T 0.03 14.44%


Cost of New Equity Dy
Net Proceeds ' 8 1030 40,03 14.80%


Break Points (BP)

Amount _ R160,000
BP for Debt Weight 0.40 R 400,000

Amount _ R425,000
BP for RE Weight 0.60 R 708,333


WACC Ranges


Range 1 (0 to R400,000)



WACC
(Wa % kg) + (we x k) = (0.40 x 6.31%) + 1.19%
(0.60 x 14.44%)
Range 2 (R400,001 to R708,333)


WACC
(Wa % ka) + (e * ko) = (0.40 x 10.00%) + 12.66%
(0.60 x 14.44%)

Range 3 (R708,334 and above)


(Wa % kg) + (e % ko) = (0.40 x 10.00%) +
WACC 12.88%
(0.60 x 14.80%)


1.2 Investment Recommendation