FIN3701 Assignment 2 (DETAILED ANSWERS) Semester 1 2026 - DISTINCTION GUARANTEED

FIN3701 Assignment 2 (DETAILED ANSWERS) Semester 1 2026 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references.. Oreatli Company’s optimal capital structure consists of 30% debt and 70% equity. The interest rate on its debt is a constant 12%, while the cost of ordinary share funding from retained earnings is 15%. The company’s marginal tax rate is 28%. Oreatli has identified the following investment opportunities: • Project A: cost = R70 000; IRR = 16,5% • Project B: cost = R70 000; IRR = 15,2% • Project C: cost = R40 000; IRR = 12,4% • Project D: cost = R60 000; IRR = 10,1% Oreatli has R120 000 in available earnings. REQUIRED: 1.1 Calculate Oreatli Company’s weighted average cost of capital (WACC). (3) 1.2 Based on its WACC and the amount of retained earnings available, which projects should Oreatli Company undertake? (6) 1.3 Assuming Oreatli Company follows a residual dividend policy, calculate the amount of dividends it will pay and determine its retention ratio. Panjo Ltd reported earnings available to ordinary shareholders of R4 200 000 for the year ended last year. From these earnings, the company paid a dividend of R1,26 per ordinary share on its 1 000 000 ordinary shares in issue. The company’s capital structure consists of 40% debt, 10% preference shares and 50% ordinary shares. Income and capital gains are taxed at a rate of 29%. REQUIRED: 2.1 Calculate the company’s cost of retained earnings if the market price of the ordinary shares is R40 and dividends are expected to grow at a constant rate of 6% per year for the foreseeable future. (3 marks) 2.2 Panjo Ltd can issue preference shares with a dividend of R2,00 per share at a market price of R25,00 per share. Flotation costs are expected to amount to R3,00 per share. Calculate Panjo’s cost of preference share financing. (3 marks) 2.3 Calculate the company’s cost of new ordinary share financing, assuming that underpricing and flotation costs on new ordinary shares amount to R7,00 per share. (3 marks) 2.4 Panjo Ltd can issue five-year bonds with a par value of R1 000 and a coupon rate of 10%, which can be sold for R1 200 each. Flotation costs are expected to amount to R25,00 per bond. Calculate Panjo’s cost of debt financing. (7 marks) 2.5 Determine the maximum amount that Panjo Ltd can invest in new projects before it is required to issue new ordinary shares. (6 marks) 2.6 Calculate the WACC for the maximum level of investment that Panjo Ltd can undertake in new projects before issuing new ordinary shares.