FIN3701 Assignment 2 Semester 1 - DUE 24 April 2024
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Course
FIN3701 - Financial Management (FIN3701)
Institution
University Of South Africa
Book
Financial Management
FIN3701 Assignment 2 Semester 1 2024 (Unique nr. 505104) - DUE 24 April 2024 ;100 % TRUSTED workings, explanations and solutions. For assistance call or W.h.a.t.s.a.p.p us on ...(.+.2.5.4.7.7.9.5.4.0.1.3.2)...........
QUESTION 1 [10 marks] Bonga currently has a portfolio of ordinary shares represe...
Bonga currently has a portfolio of ordinary shares representing several different companies.
Bonga considers it to be a well-balanced investment portfolio, but he wants to reduce the
overall risk of the portfolio a bit more by including ordinary shares from Titan Mining
Corporation.
The following information on Titan Mining Corporation is available:
For the period 2017 to 2020, the company paid the following dividends per year
respectively: R3,14; R3,55; R3,89; and R3,95.
The 2021 dividend is expected to increase by the average growth rate of the dividends
between 2017 and 2020, and the dividend will increase by 10% per year indefinitely from
2022 onwards. Bonga requires a return of 15% on his investment portfolio and is not
prepared to pay more than R52,00 per ordinary share of Titan Mining Corporation.
REQUIRED:
1.1 Calculate the current price of Titan Mining Corporation’s ordinary share. (8 marks)
1.2 Should Bonga purchase Titan Mining Corporation shares to include in his investment
portfolio? Provide reasons for your answer. (2 marks)
KINDLY NOTE THAT THERE ARE TWO COMPULSORY ASSIGNMENTS FOR THE FIRST
SEMESTER.
, QUESTION 2 15 MARKS
The power systems company Raging Volts is currently 70% equity financed and aims to
raise R2 million to fund a set of attractive investment opportunities. Debt financing may be
obtained at an after-tax cost of 16%.
The company’s management wants to introduce 40% debt in the capital structure while
keeping the cost of each financing source together with its market value the same. Ordinary
shares are currently selling for R30 per share.
The company paid a dividend (Do) of R1,50 per share in the previous financial year and had
a growth rate of 7% over the past few years. It is expected that this growth rate will be
maintained in future. The company’s tax rate is 29%. The market value of power systems
company Volts is R2 000 000.
REQUIRED:
1.1 Calculate the component costs associated with capital investment financing. (3 marks)
2.2 Calculate the weighted average cost of capital (WACC), the break-point of equity and
the break-point of debt under the current structure. (4 marks)
2.3 Calculate the WACC, the break-point of equity and the break-point of debt under the
proposed structure. (4 marks)
2.4 Calculate the number of shares under the current structure. (2 marks)
2.5 Calculate the number of shares under the proposed structure. (2 mark)
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