FIN3701 Assignment 2
(COMPLETE ANSWERS)
Semester 2 2023 ()
DUE DATE 15 September
2023
+068 FOR MORE ASSISTANCE.
QUESTION 1 ANSWER
Cost of New Shares = Issue Price x Number of New Shares +
Transaction Costs
Also d1 over (po – f) + g in our case
d1 is dividend 1 which is 10
while (po �...
FIN3701 Assignment 2
(COMPLETE ANSWERS)
Semester 2 2023 (530469)
DUE DATE 15 September
2023
WHATSAPP +254740539068 FOR MORE ASSISTANCE.
QUESTION 1 ANSWER
Cost of New Shares = Issue Price x Number of New Shares +
Transaction Costs
Also d1 over (po – f) + g in our case
d1 is dividend 1 which is 10
while (po –f) is 87.3
g is 3%
10/87.3 is 11% lets add 3 % to get 0.1449 round off to get 0.145
In % form 14.5%
, QUESTION 1 [20 marks]
MediPharm Ltd has optimal capital structure weights of 40% debt and 60% equity.
MediPharm is in the 30% tax bracket and is evaluating four independent investment
proposals. PROJECT INITIAL INVESTMENT (R) INTERNAL RATE OF RETURN
(IRR) (%) A 100 000 17 B 200 000 15 C 125 000 14 D 100 000 11 MediPharm senior
financial analyst has gathered the following information: MediPharm can raise R150 000
through the sale of a R1 000 par value, 8% annual coupon rate and a ten-year debenture.
The debenture will be issued at 5% discount and R20 flotation cost per debenture.
Additional funds will be raised through the bank loan with an after-tax cost of 10%. R375
000 is available through retained earnings. Additional funds will be raised through the
issue of new ordinary shares. The company pays a regular dividend of R10, has a growth
rate of 3% and nets R87.30 after flotation costs. The flotation costs are calculated at 3% of
the par value (R90) of a share.:
1.1 Calculate the WACC associated with each range of financing/break-point. (18 marks)
To calculate the Weighted Average Cost of Capital (WACC), we need to determine the cost of
each component of the capital structure and their respective weights.
Debt Component:
The cost of debt can be calculated using the formula:
Given that the coupon rate is 8%, the tax rate is 30%, and the flotation cost is 5%, we can
substitute these values into the formula to calculate the cost of debt.
Cost of Debt = (8% * (1 - 30%)) / (1 - 5%) = 5.6%
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