PROJECT ACCOUNTING ASSIGNMENT
Question 1: WACC
Sivuyile Construction is financed by R100 million long-term debt, R20 million preferred shares and 5 million issued ordinary shares. The firm can raise debt by selling R1000 par value, 10% coupon rate (paid semi-annually), 10 year bonds at a discount of R50 and has to pay R20 in floatation cost. It can also sell 9% preferred shares with a par value of R100 at a discount of 10% on par value and has to pay R7 per share in floatation cost. Sivuyile's ordinary shares have a beta of 1.5, trades at R30 each, and a dividend of R5 per share has just been paid. The risk free rate is currently 8% while the total market return for the past amounts to 15%. The company's tax rate is 30%. Calculate Sivuyile's weighted average cost of capital (WACC).
Question 2: Capital Structure
Ntombi Consulting is presently reviewing its capital structure and the following two capital structures are presently under consideration. Structure A is made up of 60% debt ratio and ordinary shares for the balance. It is expected that the ordinary shareholders required rate of return will be 20%. Structure B is made up of 10% preferred shares, 20% debt and ordinary shares for the balance. It is expected that the ordinary shareholders' required rate of return will be 25%.
The following information is supplied:
- The total assets for each of the two capital structures are R4 million. The required rate of return 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 000
At a R450 000 EBIT level, which capital structure will you chose if you want to
a. Maximize earnings per share?
b. Maximize share price
Question 3: Capital Budgeting
You are tasked to perform an analysis of the manufacturing plant and to present your recommendation on whether the company should open the new plant or not. If the new plant is opened, it will cost R500 million today and the expected cash flows are shown in the table below. The company's required rate of return is 12%
|
Year
|
Cash Flow
|
|
0
|
-500 000 000
|
|
1
|
60 000 000
|
|
2
|
90 000 000
|
|
3
|
170 000 000
|
|
4
|
230 000 000
|
|
5
|
205 000 000
|
|
6
|
140 000 000
|
|
7
|
110 000 000
|
|
8
|
70 000 000
|
|
9
|
-80 000 000
|
Required:
a. Calculate the payback period, modified payback period and net present value of the proposed plan.
b. Based on your analysis, should the company open the new plant?
Question 4: Capital Budgeting
Assume that Thabile Engineering is planning to add new machinery to its current plant. There are 2 machines under consideration with cash flows as follows in Rand:
|
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Machine A
|
-5000
|
500
|
1000
|
1000
|
1800
|
2800
|
1000
|
|
Machine B
|
-5500
|
500
|
1500
|
1800
|
1800
|
1500
|
1500
|
Calculate 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
Primrose manufacturing has an old machine that is 2 years old and which it would like to replace with a brand new one that will cost the company R160 000. The new machine requires R4 000 shipping costs and R2 000 installation costs. The economic life of the new machine is 3 years with tax allowable depreciation of R75 000 for the first 2 years. If the new machine is acquired, the inventory will increase by R13 000, accounts receivable by R9 000 and accounts payable by R15 000. The new machine will result in sales revenue of R120 000 and cash operating costs of R23 000.
The current machine was purchased for R75 000 and is expected to last for 3 more years after which it will be worthless. The current machine provides sales revenue of R100 000 and cash operating 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 and R16 600 respectively. The corporate tax rate is 30%.
Required:
a. Calculate the initial investment associated with the proposed replacement decision.
b. Calculate the incremental operating cash flows of the proposed replacement decision.
c. Calculate the terminal cash flow associated with the proposed replacement decision.
d. Calculate the NPV of the replacement project assuming a discount rate of 6% per annum.
e. Use the computed NPV results an discuss the decision to accept or reject the project.