[Date]
FIN3701
EXAM
PACK 2023
QUESTIONS AND ANSWERS
[Author name]
[COMPANY NAME]
,Suggested Solutions: May/June
2019
QUESTION 1 (20 MARKS)
1.1)
Initial Investment Outlay for new machine
Existing Machine New Machine
Book Value = (350000-((350000/5) *4) =70 000 Installed Cost = R750 000
Loss = SP – BV = (R70 000 – R70 000) = 0
Tax Benefit = (0 X 0.28) = 0
Net Working Capital = 7000
Initial Investment
Installed Cost of proposed machine
Cost of proposed machine (R750 000)
+ Installation Costs (R20 000)
Total installed cost – New Machine
(Depreciable Value) (R770 000)
-After Tax Proceeds (Old)
Proceeds from sale of present machine R70 000
-Tax on sale of present machine 0
Total after tax proceeds – Old Machine R70 000
Change in net working-capital R7 000
Initial Investment R693 000
,Suggested Solutions: May/June
2019
1.2)
Current Machine New Machine Incremental
CF
Sales (18*6600) and R118 800 R130 062.24 R11 262.24
(16.56*7854)
-Variable Costs (@12%) (R14 256) (R15 607.47) (R1 351.47)
-Fixed Costs (0.15*Dpn) (R10 500) (R11 550) (R1 050)
EBDIT R94 044 R102 904.77 R8 860.77
-Depreciation R(70 000) (R77 000) (R7 000)
EBIT R24 044 R25 904.77 R1 860.77
-Tax @ 28% R(6 732.32) R(7 897.34) (R521.02)
NOPAT R17 311.68 R18 651.44 R1 339.76
+Depreciation R70 000 R77 000 R7 000
Cash Flow R87 311.68 R95 651.44 R8 339.75
1.3) TCF = Selling Price – Tax Liability = 70 000 – 0 = 70 000
1.4) CFo = -693 000
Cf1 = 8 339.75
Cf2 = 95 651.43
Cf3 = 95 651.43
Cf4 = 95 651.43
Cf5 = 95 651.43
Cf6 = 95 651.43
Cf7 = 95 651.43
Cf8 = 95 651.43
Cf9 = 95 651.43
Cf10 = 95 651.43 + 0 (TCF)-7000(change in WC)
I/Y = 10%
NPV = -187 336.43
The new project has a negative NPV, hence it is not advisable
QUESTION 2 (15 MARKS)
, Suggested Solutions: May/June
2019
2.1
Cost of Retained Earnings:
𝐷1 1.26(1.06)
𝑃0 = ⇒ 40 =
𝑟−𝑔 𝑟 − 0.06
40𝑟 − 2.4 = 1.3356
40𝑟 = 3.7356
𝑟 = 0.09339
∴ 𝒓 = 𝟗. 𝟑𝟒%
(It is not necessary to adjust the cost of retained earnings for flotation costs because by
retaining earnings, the firm “raises” equity capital without incurring these costs.
Cost of New Ordinary Shares:
𝐷1
𝑃0 − 𝐹𝑐 =
𝑟−𝑔
Making r the subject of the formula gives:
𝐷1 1.26(1.06)
𝑟= +𝑔 = + 0.06 = 𝟏𝟎. 𝟒𝟓%
𝑃0 − 𝐹𝑐 40 − 10
Cost of Preference shares:
𝐷1
𝑃0 =
𝑟−𝑔
Since the preference dividend does not grow, 𝑔 = 0
Long Term Debt:
FV=1000, PMT=0.1*1000=100, N=5, PV=-1200, P/YR=1, YTM=? 5.34%
After Tax Cost of Debt :
2.2
FIN3701
EXAM
PACK 2023
QUESTIONS AND ANSWERS
[Author name]
[COMPANY NAME]
,Suggested Solutions: May/June
2019
QUESTION 1 (20 MARKS)
1.1)
Initial Investment Outlay for new machine
Existing Machine New Machine
Book Value = (350000-((350000/5) *4) =70 000 Installed Cost = R750 000
Loss = SP – BV = (R70 000 – R70 000) = 0
Tax Benefit = (0 X 0.28) = 0
Net Working Capital = 7000
Initial Investment
Installed Cost of proposed machine
Cost of proposed machine (R750 000)
+ Installation Costs (R20 000)
Total installed cost – New Machine
(Depreciable Value) (R770 000)
-After Tax Proceeds (Old)
Proceeds from sale of present machine R70 000
-Tax on sale of present machine 0
Total after tax proceeds – Old Machine R70 000
Change in net working-capital R7 000
Initial Investment R693 000
,Suggested Solutions: May/June
2019
1.2)
Current Machine New Machine Incremental
CF
Sales (18*6600) and R118 800 R130 062.24 R11 262.24
(16.56*7854)
-Variable Costs (@12%) (R14 256) (R15 607.47) (R1 351.47)
-Fixed Costs (0.15*Dpn) (R10 500) (R11 550) (R1 050)
EBDIT R94 044 R102 904.77 R8 860.77
-Depreciation R(70 000) (R77 000) (R7 000)
EBIT R24 044 R25 904.77 R1 860.77
-Tax @ 28% R(6 732.32) R(7 897.34) (R521.02)
NOPAT R17 311.68 R18 651.44 R1 339.76
+Depreciation R70 000 R77 000 R7 000
Cash Flow R87 311.68 R95 651.44 R8 339.75
1.3) TCF = Selling Price – Tax Liability = 70 000 – 0 = 70 000
1.4) CFo = -693 000
Cf1 = 8 339.75
Cf2 = 95 651.43
Cf3 = 95 651.43
Cf4 = 95 651.43
Cf5 = 95 651.43
Cf6 = 95 651.43
Cf7 = 95 651.43
Cf8 = 95 651.43
Cf9 = 95 651.43
Cf10 = 95 651.43 + 0 (TCF)-7000(change in WC)
I/Y = 10%
NPV = -187 336.43
The new project has a negative NPV, hence it is not advisable
QUESTION 2 (15 MARKS)
, Suggested Solutions: May/June
2019
2.1
Cost of Retained Earnings:
𝐷1 1.26(1.06)
𝑃0 = ⇒ 40 =
𝑟−𝑔 𝑟 − 0.06
40𝑟 − 2.4 = 1.3356
40𝑟 = 3.7356
𝑟 = 0.09339
∴ 𝒓 = 𝟗. 𝟑𝟒%
(It is not necessary to adjust the cost of retained earnings for flotation costs because by
retaining earnings, the firm “raises” equity capital without incurring these costs.
Cost of New Ordinary Shares:
𝐷1
𝑃0 − 𝐹𝑐 =
𝑟−𝑔
Making r the subject of the formula gives:
𝐷1 1.26(1.06)
𝑟= +𝑔 = + 0.06 = 𝟏𝟎. 𝟒𝟓%
𝑃0 − 𝐹𝑐 40 − 10
Cost of Preference shares:
𝐷1
𝑃0 =
𝑟−𝑔
Since the preference dividend does not grow, 𝑔 = 0
Long Term Debt:
FV=1000, PMT=0.1*1000=100, N=5, PV=-1200, P/YR=1, YTM=? 5.34%
After Tax Cost of Debt :
2.2
