FIN3701
ASSIGNMENT 2 SEMESTER 2 2025
UNIQUE NO. 148229
DUE DATE: 18 SEPTEMBER 2025
,9.5 The assessments
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.
Answer the following questions and submit your assignment at https://my.unisa.ac.za.
QUESTION 1 [20 marks]
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.
, FIN3701/101/2/2023
REQUIRED:
1.1 Calculate the WACC associated with each range of financing/break-point. (18 marks)
1.2 In which project do you recommend that the company invest its funds? Motivate your choice.
(2 marks)
QUESTION 2 [6 marks]
A leading chemical company would like to invest in a new chemical plant in South Africa at the
cost of R7,5 million and a new plastic factory in Botswana at the cost of R2,5 million. The company
has a target capital structure of 75% equity and 25% debt. It is estimated that the before-tax cost
of future debt is 21%, while the cost of future equity is 10%. Additional information regarding the
two investments is given below:
Chemical plant Plastic factory
Internal rate of return (IRR) = 9.5% Internal rate of return (IRR) = 9%
Intended financing method: equity Intended financing method: debt
REQUIRED:
2.1 Advise the chief financial officer (CFO) of the company about which investment(s) should be
undertaken (if any). Assume a 29% tax rate. (10 marks)
QUESTION 3 [20 marks]
Homo Ltd is an all-equity financed company with 10 000 outstanding ordinary shares, each valued
at the market price of R25. The company has decided to modify its capital structure to capture the
tax benefits of debt. The plan is to have a target debt ratio of 30%. The company pays 60% of its
earnings as dividends and is subject to a 28% tax rate. The expected sales are R530 000, fixed
costs are estimated at R250 000 and variable costs are estimated at 30% of sales.
Details of the pursued capital structures are as follows:
• Capital structure A at 30% debt ratio
Homo Ltd will acquire debt at a before-tax cost of debt of 11.75%.
REQUIRED:
3.1 Which capital structure would you advise the company to choose if its objective is to
maximise earnings per share (EPS)? (7 marks)
3.2 Calculate the weighted average cost of capital (WACC) for both 40% and 50% debt
structures. (10 marks)
3.3 Which capital structure would you advise the company to choose if the aim is to maximise
shareholder wealth? (3 Marks)
[TOTAL: 50]
ASSIGNMENT 2 SEMESTER 2 2025
UNIQUE NO. 148229
DUE DATE: 18 SEPTEMBER 2025
,9.5 The assessments
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.
Answer the following questions and submit your assignment at https://my.unisa.ac.za.
QUESTION 1 [20 marks]
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.
, FIN3701/101/2/2023
REQUIRED:
1.1 Calculate the WACC associated with each range of financing/break-point. (18 marks)
1.2 In which project do you recommend that the company invest its funds? Motivate your choice.
(2 marks)
QUESTION 2 [6 marks]
A leading chemical company would like to invest in a new chemical plant in South Africa at the
cost of R7,5 million and a new plastic factory in Botswana at the cost of R2,5 million. The company
has a target capital structure of 75% equity and 25% debt. It is estimated that the before-tax cost
of future debt is 21%, while the cost of future equity is 10%. Additional information regarding the
two investments is given below:
Chemical plant Plastic factory
Internal rate of return (IRR) = 9.5% Internal rate of return (IRR) = 9%
Intended financing method: equity Intended financing method: debt
REQUIRED:
2.1 Advise the chief financial officer (CFO) of the company about which investment(s) should be
undertaken (if any). Assume a 29% tax rate. (10 marks)
QUESTION 3 [20 marks]
Homo Ltd is an all-equity financed company with 10 000 outstanding ordinary shares, each valued
at the market price of R25. The company has decided to modify its capital structure to capture the
tax benefits of debt. The plan is to have a target debt ratio of 30%. The company pays 60% of its
earnings as dividends and is subject to a 28% tax rate. The expected sales are R530 000, fixed
costs are estimated at R250 000 and variable costs are estimated at 30% of sales.
Details of the pursued capital structures are as follows:
• Capital structure A at 30% debt ratio
Homo Ltd will acquire debt at a before-tax cost of debt of 11.75%.
REQUIRED:
3.1 Which capital structure would you advise the company to choose if its objective is to
maximise earnings per share (EPS)? (7 marks)
3.2 Calculate the weighted average cost of capital (WACC) for both 40% and 50% debt
structures. (10 marks)
3.3 Which capital structure would you advise the company to choose if the aim is to maximise
shareholder wealth? (3 Marks)
[TOTAL: 50]
