Question 1: WACC (20)Sivuyile Construction is financed by R100 million long-ter

Question 1: WACC (20)Sivuyile Construction is financed by R100 million long-term debt, R20 million preferredshares and 5 million issued ordinary shares. The firm can raise debt by selling R1000 parvalue, 10% coupon rate (paid semi-annually), 10 year bonds at a discount of R50 and has topay R20 in floatation cost. It can also sell 9% preferred shares with a par value of R100 at adiscount of 10% on par value and has to pay R7 per share in floatation cost. Sivuyile’sordinary shares have a beta of 1.5, trades at R30 each, and a dividend of R5 per share has justbeen paid. The risk free rate is currently 8% while the total market return for the past amountsto 15%. The company’s tax rate is 30%. Calculate Sivuyile’s weighted average cost of capital(WACC)Note:I = annual coupon rateNd = net proceeds from the sale of debt (bond)n = number of years to a bond’s maturityQuestion 2: Capital Structure (20)Ntombi Consulting is presently reviewing its capital structure and the following two capitalstructures are presently under consideration. Structure A is made up of 60% debt ratio andordinary shares for the balance. It is expected that the ordinary shareholders required rate ofreturn will be 20%. Structure B is made up of 10% preferred shares, 20% debt and ordinaryshares for the balance. It is expected that the ordinary shareholders’ required rate of returnwill be 25%.The following information is supplied: The total assets for each of the two capital structures are R4 million. The required rate ofreturn on the preferred shares is 10% The par value of the ordinary shares is R25 per share The interest rate on all loans is 12% The company tax rate is 30% Assume an EBIT level of R450 000At a R450 000 EBIT level, which capital structure will you chose if you want toa. Maximize earnings per share?b. Maximize share priceQuestion 3: Capital Budgeting (20)You are tasked to perform an analysis of the manufacturing plant and to present yourrecommendation on whether the company should open the new plant or not. If the new plantis opened, it will cost R500 million today and the expected cash flows are shown in the tablebelow. The company’s required rate of return is 12%Year Cash Flow0 -500 000 0001 60 000 0002 90 000 0003 170 000 0004 230 000 0005 205 000 0006 140 000 0007 110 000 0008 70 000 0009 -80 000 000Required:a. Calculate the payback period, modified payback period and net present value of theproposed plan.b. Based on your analysis, should the company open the new plant?Question 4: Capital Budgeting (15)Assume that Thabile Engineering is planning to add new machinery to its current plant. Thereare 2 machines under consideration with cash flows as follows in Rand:0 1 2 3 4 5 6Machine A -5000 500 1000 1000 1800 2800 1000Machine B -5500 500 1500 1800 1800 1500 1500Calculate the NPV for each machine and decide which machine Thabile should invest in.Thabile’s cost of capital is 12%.Question 5: Capital Budgeting – Replacement (25)Primrose manufacturing has an old machine that is 2 years old and which it would like toreplace with a brand new one that will cost the company R160 000. The new machinerequires R4 000 shipping costs and R2 000 installation costs. The economic life of the newmachine is 3 years with tax allowable depreciation of R75 000 for the first 2 years. If the newmachine is acquired, the inventory will increase by R13 000, accounts receivable by R9 000and accounts payable by R15 000. The new machine will result in sales revenue of R120 000and cash operating costs of R23 000.The current machine was purchased for R75 000 and is expected to last for 3 more years afterwhich it will be worthless. The current machine provides sales revenue of R100 000 and cashoperating cost of R20 000. Its current market value is R25 000.The expected resale value of the old and new machine in 3 years’ time would be R14 000 andR16 600 respectively. The corporate tax rate is 30%Required:a. Calculate the initial investment associated with the proposed replacement decisionb. Calculate the incremental operating cash flows of the proposed replacement decisionc. Calculate the terminal cash flow associated with the proposed replacement decisiond. Calculate the NPV of the replacement project assuming a discount rate of 6% perannume. Use the computed NPV results an discuss the decision to accept or reject the projectTotal [100]

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