MAC3702 – Assignment 2 (Semester 1 : 2026)
QUESTION 1
QUESTION 1: URBANKICK SPORTS LIMITED
(a) EXPECTED OPERATING PROFIT FOR 2025
Existing business expected operating profit:
= (1 600 000 × 0.20) + (1 700 000 × 0.30) + (1 800 000 × 0.40) + (2 000 000 × 0.10)
= 320 000 + 510 000 + 720 000 + 200 000
= R1 750 000
Expected production of Nova X9:
= (9 000 × 0.30) + (12 500 × 0.40) + (15 000 × 0.20) + (18 500 × 0.10)
= 2 700 + 5 000 + 3 000 + 1 850
= 12 550 pairs
Selling price = R880 per pair
Expected revenue = 12 550 × 880 = R11 044 000
Variable cost per pair = 480 + 220 + 55 = R755
Contribution per pair = 880 − 755 = R125
Total contribution = 12 550 × 125 = R1 568 750
Less fixed costs = R450 000
Expected operating profit from Nova X9 = R1 118 750
TOTAL EXPECTED OPERATING PROFIT = 1 750 000 + 1 118 750 = R2 868 750
(b) FINANCING OF THE MACHINE
Funds required:
Machine cost = R900 000
Working capital = R100 000
Total funding required = R1 000 000
Current capital structure (book values):
Equity = 1 220 000
Debt = 120 000 + 680 000 = 800 000
, Debt : Equity = 0.66 : 1
Target debt : equity = 1 : 1
Required funding split:
Debt = R500 000
Equity = R500 000
Available debt sources:
Bousaam Bank loan = R250 000 @ (10.25% + 2.5%) = 12.75%
Top-up Hatsa loan = R80 000 @ 13%
Total loan debt = R330 000
Remaining debt required = R170 000
→ Preference shares (R100 each) = 1 700 shares
Equity funding:
Remaining amount funded by ordinary share issue.
DISCUSSION:
Debt is cheaper due to tax deductibility of interest.
Excessive debt increases financial risk.
Ordinary shares dilute ownership and control.
(c) WACC (AFTER FINANCING)
Cost of ordinary equity (Gordon Growth Model):
Average growth rate in dividends ≈ 9%
D1 = 110c × 1.09 = 119.9c
Ke = (1.) + 0.09 = 17.56%
Cost of preference shares:
Kp = = 15.31%
Cost of debt (after tax):
Hatsa: 13% × (1 − 0.27) = 9.49%
Bousaam: 12.75% × (1 − 0.27) = 9.31%
Average Kd ≈ 9.38%
Weights (post financing):
Equity = 1 720 000
Preference shares = 290 000
Debt = 1 130 000
Total capital = 3 140 000
QUESTION 1
QUESTION 1: URBANKICK SPORTS LIMITED
(a) EXPECTED OPERATING PROFIT FOR 2025
Existing business expected operating profit:
= (1 600 000 × 0.20) + (1 700 000 × 0.30) + (1 800 000 × 0.40) + (2 000 000 × 0.10)
= 320 000 + 510 000 + 720 000 + 200 000
= R1 750 000
Expected production of Nova X9:
= (9 000 × 0.30) + (12 500 × 0.40) + (15 000 × 0.20) + (18 500 × 0.10)
= 2 700 + 5 000 + 3 000 + 1 850
= 12 550 pairs
Selling price = R880 per pair
Expected revenue = 12 550 × 880 = R11 044 000
Variable cost per pair = 480 + 220 + 55 = R755
Contribution per pair = 880 − 755 = R125
Total contribution = 12 550 × 125 = R1 568 750
Less fixed costs = R450 000
Expected operating profit from Nova X9 = R1 118 750
TOTAL EXPECTED OPERATING PROFIT = 1 750 000 + 1 118 750 = R2 868 750
(b) FINANCING OF THE MACHINE
Funds required:
Machine cost = R900 000
Working capital = R100 000
Total funding required = R1 000 000
Current capital structure (book values):
Equity = 1 220 000
Debt = 120 000 + 680 000 = 800 000
, Debt : Equity = 0.66 : 1
Target debt : equity = 1 : 1
Required funding split:
Debt = R500 000
Equity = R500 000
Available debt sources:
Bousaam Bank loan = R250 000 @ (10.25% + 2.5%) = 12.75%
Top-up Hatsa loan = R80 000 @ 13%
Total loan debt = R330 000
Remaining debt required = R170 000
→ Preference shares (R100 each) = 1 700 shares
Equity funding:
Remaining amount funded by ordinary share issue.
DISCUSSION:
Debt is cheaper due to tax deductibility of interest.
Excessive debt increases financial risk.
Ordinary shares dilute ownership and control.
(c) WACC (AFTER FINANCING)
Cost of ordinary equity (Gordon Growth Model):
Average growth rate in dividends ≈ 9%
D1 = 110c × 1.09 = 119.9c
Ke = (1.) + 0.09 = 17.56%
Cost of preference shares:
Kp = = 15.31%
Cost of debt (after tax):
Hatsa: 13% × (1 − 0.27) = 9.49%
Bousaam: 12.75% × (1 − 0.27) = 9.31%
Average Kd ≈ 9.38%
Weights (post financing):
Equity = 1 720 000
Preference shares = 290 000
Debt = 1 130 000
Total capital = 3 140 000
