BEC524 Individual Assignment (DETAILED ANSWERS) 2023 - DUE: 5 October 2023 100% TRUSTED workings, explanations and solutions. For assistance call or us on +/ 2/ 5/ 4 /7 /7 /9 /5 /4 /0 /1 /3 /2 .
Question 1 (30 Marks)
You have been called upon to advise a client with regard to an investment of R...
FIN4801 Assignment 5 Full Solutions 2024 ;100 % TRUSTED workings, Expert Solved, Explanations and Solutions.
FIN4801 Assignment 5 Full Solutions 2024 ;100 % TRUSTED workings, Expert Solved, Explanations and Solutions.
FIN4801 Assignment 5 Full Solutions 2024 ;100 % TRUSTED workings, Expert Solved, Explanations and Solutions.
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BEC524
INDIVIDUAL ASSIGNMENT
, UNIVERSITY OF FORT HARE
ADVANCED FINANCIAL
MANAGEMENT
BEC524/BEC524E
INDIVIDUAL ASSIGNMENT
MARKS: 100
DUE DATE: OCTOBER 5
2023
Question 1 (30 Marks)
You have been called upon to advise a client with regard to an investment of R100 000 in
shares in the industrial sector of the JSE. You have gathered data and assigned probabilities
to expected returns under four possible market conditions. The following probabilities have
been assigned to two individual shares, and to a unit trust. The unit trust is widely diversified
portfolio with a beta of 1.
Market Probability Expected Expected Expected
condition Return Aruntex Return Boumet Return CD Trust
(%) (%) (%)
Poor 0.2 -10 10 -5
Moderate 0.3 5 10 15
Good 0.4 30 15 25
Exceptional 0.1 45 20 35
You may assume that despite the small number of readings, the distributions all have the
characteristics of a normal distribution. In addition, you may assume that borrowing and
lending is possible at the risk-free rate of 10%.
Required:
(a) Find the expected return, standard deviation, and co-efficient of variation for each of
Aruntex and Boumet. (10)
(b) Find the correlation co-efficient for the returns from Aruntex and Boumet. (5)
(c) Calculate the beta of Boumet. (5)
(d) If your client borrowed R70 000 and invested R170 000 in a certificate of deposit Trust,
calculate the expected return and the total risk of the investment. (5)
(e) If your client invested R20 000 in Aruntex and R80 000 in Boumet, calculate the
expected return and total risk of the portfolio. (5)
Question 2 (10 Marks)
Studies have indicated that a firm’s annual financial statements are an important source of
information for making equity investment decisions. Yet, other studies indicate that share
prices do not react significantly to the publication of the annual financial statements. How
would you reconcile these results with each other and with the Efficient Market Hypothesis?
(10)
, Question 3 (20 Marks)
OPM is a private equity company that invests in established small to medium unlisted
companies that have growth potential within the agricultural and industrial sectors. OPM was
required to undertake valuations of its investments as of 31 May 2014. OPM owns a controlling
interest in Crescent Chickens (Pty) Ltd, which supplies poultry products to its customers
throughout the country. Its customers are major food retailers and fast food chains and the
company has a 2% market share. As part of the valuation process, OPM is required to
determine the WACC of Crescent Chickens (Pty) Ltd and the following information is relevant:
• The current yield on the R186 long term government bond is 7.8% per annum, while
short term government treasury bills are yielding 4.9% per annum.
• The prime overdraft rate is presently 8.5% per annum.
• The average historic market risk premium for the South African equity market is 5.5%
per annum.
• Current information applicable to listed poultry producers and the wider agricultural
sector is presented below:
Variable Average value of all listed Average agricultural
poultry producers sector value
Leveraged beta 1.58 1.31
Unleveraged beta 1.26 1.02
Debt-Equity ratio 35% 40%
Earnings before interest, 5.5 6.7
taxation, depreciation and
amortization (EBITDA)
multiple
Mr. Henry Kopman (a manager at OPM) believes the most appropriate way to lever and
unlever betas is to use the following Hamada formula:
BU=BL/ [1 + (1 – T) (D/E)]
Where: BU= unlevered beta
BL= levered beta
T= taxation rate
D=market value of debt
E=market value of equity
The corporate tax rate is 28% interest on long term borrowings is payable at a variable rate
linked to the prime overdraft rate. The interest rate payable is set at 250 basis points (2.5%)
above the prime overdraft rate. OPM’s target long term debt-equity ratio for Cresent Chickens
is 25% and is based on market values.
Required:
Determine the weighted average cost of capital (WACC) that should be employed to discount
the future operating cash flows of Crescent Chickens (Pty) Ltd. (20)
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