Question 1 (16 Marks)
You have recently been appointed as the Financial Manager’s Assistant of Jay Ltd and you were provided with the following information for project Joint.
| Year | Net cash flows |
| 1 | 110 219 |
| 2 | 124 488 |
| 3 | 119 112 |
| 4 | 127 512 |
| 5 | 131 712 |
The initial investment amount to R365 457 and cost of capital (required rate of return) of 16%.
Required;
a) Calculate the net present value (NPV) and the profitability index (PI) of the project Joint. (12 marks)
| Year | Net cash flows | PVIF | PV |
b) Evaluate the project using the NPV and PI, and recommend whether to accept or reject the project. Also indicate the effect of the project to the shareholders.
Question 2 [12 Marks]
You have been presented with following information from Kim Ltd.
| Source of Capital | Book Value | Market Value | Before-tax cost |
| Long-term debts | 14 976 000 | 9 360 000 | 9% |
| Preference shares | 149 760 | 224 640 | 14% |
| Ordinary shares | 3 931 200 | 11 232 000 | 18% |
| Total |
Fair Play Company has an average tax rate of 28%
Required:
a) Calculate the WACC based on the book value weights. (10 marks) (Present your answer in a tabular form as shown below)
| Type of Capital | Book Value | Weight | Cost (%) | Weighted cost (%) |
b) Compare the book value and market value method of calculating the WACC above.
Question 3 [16 Marks]
You have recently been appointed as the cost manager at Bolts. Bolts buys and sells a standard type of Cool Juice.
The details for the year ended 31 December 2022 are as follow: 1 January 2022
Opening inventory of 1 404 Cool Juice at R93.60 each. 30 September 2022
Purchased 468 Cool Juice at R150 each. 30 November 2022
Purchased 585 Cool Juice at R 144 each.
During the financial year ended 31 December 2022, 600 Cool Juice were sold at R140.40 each.
Required:
a) Calculate the value of the closing stock using the FIFO method.
b) Calculate the gross profit using the weighted average method.
Question 4 (6 marks)
a) (4 marks)
ABC LTD’s’s ordinary shares are currently selling for R218.40 per share, with a current dividend (Do) of R12.88 per share. The firm’s dividends have been growing at an annual rate of 9.36% and this rate is expected to continue in the future. To sell new shares to raise more finance, ABC LTD’s shares will have to be offered at a discount of R4.80 per share and flotation costs are expected to amount to R6.50 per share.
Required:
Calculate the cost of new ordinary shares for the ABC LTD’s. Show all calculations.
b) (2 marks)
The current market price of James Ltd ordinary share is R39, the expected dividend (D1) is R2.50 and the expected growth rate in dividends is 13% p.a.
Required;
Use the Gordon model to estimate the cost of James Ltd.’s ordinary shares.
Answers to Above Questions on Financial Management
Answer 1:
The calculation of the net present value (NPV) and the profitability index (PI) of the project Joint is performed as follows:
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