Exam (elaborations)
FIN3701 EXAM PACK 2023
- Course
- Institution
Latest exam pack questions and answers, perfect for exam preparations
[Show more]
1 review
By: Blommie • 1 year ago
Seller
Follow
inotes
Reviews received
Content preview
[Date]FIN3701
EXAM
PACK 2023
QUESTIONS AND ANSWERS
[Author name]
[COMPANY NAME]
,Suggested Solutions: May/June
2019
QUESTION 1 (20 MARKS)
1.1)
Initial Investment Outlay for new machine
Existing Machine New Machine
Book Value = (350000-((350000/5) *4) =70 000 Installed Cost = R750 000
Loss = SP – BV = (R70 000 – R70 000) = 0
Tax Benefit = (0 X 0.28) = 0
Net Working Capital = 7000
Initial Investment
Installed Cost of proposed machine
Cost of proposed machine (R750 000)
+ Installation Costs (R20 000)
Total installed cost – New Machine
(Depreciable Value) (R770 000)
-After Tax Proceeds (Old)
Proceeds from sale of present machine R70 000
-Tax on sale of present machine 0
Total after tax proceeds – Old Machine R70 000
Change in net working-capital R7 000
Initial Investment R693 000
,Suggested Solutions: May/June
2019
1.2)
Current Machine New Machine Incremental
CF
Sales (18*6600) and R118 800 R130 062.24 R11 262.24
(16.56*7854)
-Variable Costs (@12%) (R14 256) (R15 607.47) (R1 351.47)
-Fixed Costs (0.15*Dpn) (R10 500) (R11 550) (R1 050)
EBDIT R94 044 R102 904.77 R8 860.77
-Depreciation R(70 000) (R77 000) (R7 000)
EBIT R24 044 R25 904.77 R1 860.77
-Tax @ 28% R(6 732.32) R(7 897.34) (R521.02)
NOPAT R17 311.68 R18 651.44 R1 339.76
+Depreciation R70 000 R77 000 R7 000
Cash Flow R87 311.68 R95 651.44 R8 339.75
1.3) TCF = Selling Price – Tax Liability = 70 000 – 0 = 70 000
1.4) CFo = -693 000
Cf1 = 8 339.75
Cf2 = 95 651.43
Cf3 = 95 651.43
Cf4 = 95 651.43
Cf5 = 95 651.43
Cf6 = 95 651.43
Cf7 = 95 651.43
Cf8 = 95 651.43
Cf9 = 95 651.43
Cf10 = 95 651.43 + 0 (TCF)-7000(change in WC)
I/Y = 10%
NPV = -187 336.43
The new project has a negative NPV, hence it is not advisable
QUESTION 2 (15 MARKS)
, Suggested Solutions: May/June
2019
2.1
Cost of Retained Earnings:
𝐷1 1.26(1.06)
𝑃0 = ⇒ 40 =
𝑟−𝑔 𝑟 − 0.06
40𝑟 − 2.4 = 1.3356
40𝑟 = 3.7356
𝑟 = 0.09339
∴ 𝒓 = 𝟗. 𝟑𝟒%
(It is not necessary to adjust the cost of retained earnings for flotation costs because by
retaining earnings, the firm “raises” equity capital without incurring these costs.
Cost of New Ordinary Shares:
𝐷1
𝑃0 − 𝐹𝑐 =
𝑟−𝑔
Making r the subject of the formula gives:
𝐷1 1.26(1.06)
𝑟= +𝑔 = + 0.06 = 𝟏𝟎. 𝟒𝟓%
𝑃0 − 𝐹𝑐 40 − 10
Cost of Preference shares:
𝐷1
𝑃0 =
𝑟−𝑔
Since the preference dividend does not grow, 𝑔 = 0
Long Term Debt:
FV=1000, PMT=0.1*1000=100, N=5, PV=-1200, P/YR=1, YTM=? 5.34%
After Tax Cost of Debt :
2.2
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller inotes. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $2.50. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
83637 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now