ONLY SUBMIT ONLINE OTHERWISE YOUR ASSIGNMENT WILL NOT BE MARKED QUESTION 1 (35 marks, 63 minutes) Tech-Savvy Lim (TL) is a technology innovation company based in Cape Town The company focuses on developing choragical solutions which are key to making modern wors more produce TSL sed on the Johannesburg Stock Exchange and has several branches across the SADC regen During 2020 TSL dentified several areas where blockchain technology can be used to in the health property, education supply chain and other sector Blockchain is a system of conting information in a way that makes it difficult or more to change, hack, or cheat the systems essentially a dgtl ledger of transactions that is duplicated and distributed on the entire computer systems on the blockchain Any change made in the ledger has to be accepted by all the other nors across the network, making it virtually imposible for fraudulent transactions to be effected TSL has received support and interest from the government of South Africa by way of a grant from the Technology Innovation Agency for the research and development of a pilot solution for the Department of Health for the recording of patient information Following the success of the pilot project TSL has pitched the adoption of the blockchain shogy a several potential users and received very positive feedback. TSL plans to set up a blockchain development uit in order to deliver on the blockchain revenue stream The following information was sourced from the integrated annual report of TSL Extract from the statement of financial position at 31 May 2021 Rand 500 000 Equity and Liabilities Ordinary shares (80 cents cach) Retained income Shareholders' capital and reserves 15% Preference shares (R100 sach) Long term loan - FNB Bank (16.67%) Total equity and liabilities 720 000 1 220 000 120 000 680 000 2 020 000 Additional information 1 Ordinary share dividends declared and paid in the previous five (5) years were as follows: Year Dividend per share 2017 72 cents 2018 80 cents 2019 91 cents 2020 95 cents 2021 105,2 cents The TSL Board intends to maintain the average growth in dividends. 2 3 4. The market price for ordinary shares is currently R12 per share and that of preference shares is R6 per share. New issues will have no effect on these prices, although ordinary share issuecos TSL aims to maintain a debt: equity ratio of 1:1 going forward (based on book values). To service the new blockchain technology clients TSL is planning to buy new high tech coding infrastructure at a cost of R800 000 at the start of the new financial year. The company will use this infrastructure for 5 years and then scrap it for R50 000 The following options are available to finance the new initiative 5 MAC 3702 Assignment 2: 2021 New ordinary shares can be issued (retained earnings cannot be used). A maximum of 4 000 additional 15% preference shares of R100 each can be issued A loan from Crypto Bank of R200 000 at prime + 800 basis points A top-up loan from FNB Bank of R50 000 at the same rate as the existing loan, which is considered to approximate the fair market interest rate. The loans can only be taken at the total amounts as made available by the banks The South African Income Tax Act stipulates a company tax rate of 28% and an allowance on new coding infrastructure of 20% per annum. The prime lending rate is currently 10,5% and is expected to stay unchanged for the foreseeable future. The required rate of return on preference shares s 6 11% REQUIRED (a) Determine how the new coding infrastructure should be financed, considering the funding options available to TSL as well as the current capital structure on 31 May 2021 using book values. For this part, assume preference share are redeemable and therefore categorised as debt (Calculations 10 marks, corriments 2 marks) (12) assume are (b) Calculate the weighted average cost of capital of TSL based on market values after the financing of the new project. For this part preference shares non- redeemable [Round rand amounts to the nearest cent and other numbers to the nearest two decimal places) (13) (c) Assuming the information below determine how long in years) it will take TSL to recover its innial capital investment in the new infrastructure using the discounted payback method. (5) Description Net cash-flows Year o 2021 (800 000) Year 1 2022 491 200 Year 2 2023 491 200 Year 3 2024 491 200 Year 4 2025 491 200 Year 5 2026 0 (d) Discuss qualitative factors that should be taken into account by the Board of TSL before deciding to buy the new coding infrastructure, as well as advantages for TSL of venturning into the development of Blockchain technology 135) QUESTION 1 TOTAL ONLY SUBMIT ONLINE OTHERWISE YOUR ASSIGNMENT WILL NOT BE MARKED QUESTION 1 (35 marks, 63 minutes) Tech-Savvy Lim (TL) is a technology innovation company based in Cape Town The company focuses on developing choragical solutions which are key to making modern wors more produce TSL sed on the Johannesburg Stock Exchange and has several branches across the SADC regen During 2020 TSL dentified several areas where blockchain technology can be used to in the health property, education supply chain and other sector Blockchain is a system of conting information in a way that makes it difficult or more to change, hack, or cheat the systems essentially a dgtl ledger of transactions that is duplicated and distributed on the entire computer systems on the blockchain Any change made in the ledger has to be accepted by all the other nors across the network, making it virtually imposible for fraudulent transactions to be effected TSL has received support and interest from the government of South Africa by way of a grant from the Technology Innovation Agency for the research and development of a pilot solution for the Department of Health for the recording of patient information Following the success of the pilot project TSL has pitched the adoption of the blockchain shogy a several potential users and received very positive feedback. TSL plans to set up a blockchain development uit in order to deliver on the blockchain revenue stream The following information was sourced from the integrated annual report of TSL Extract from the statement of financial position at 31 May 2021 Rand 500 000 Equity and Liabilities Ordinary shares (80 cents cach) Retained income Shareholders' capital and reserves 15% Preference shares (R100 sach) Long term loan - FNB Bank (16.67%) Total equity and liabilities 720 000 1 220 000 120 000 680 000 2 020 000 Additional information 1 Ordinary share dividends declared and paid in the previous five (5) years were as follows: Year Dividend per share 2017 72 cents 2018 80 cents 2019 91 cents 2020 95 cents 2021 105,2 cents The TSL Board intends to maintain the average growth in dividends. 2 3 4. The market price for ordinary shares is currently R12 per share and that of preference shares is R6 per share. New issues will have no effect on these prices, although ordinary share issuecos TSL aims to maintain a debt: equity ratio of 1:1 going forward (based on book values). To service the new blockchain technology clients TSL is planning to buy new high tech coding infrastructure at a cost of R800 000 at the start of the new financial year. The company will use this infrastructure for 5 years and then scrap it for R50 000 The following options are available to finance the new initiative 5 MAC 3702 Assignment 2: 2021 New ordinary shares can be issued (retained earnings cannot be used). A maximum of 4 000 additional 15% preference shares of R100 each can be issued A loan from Crypto Bank of R200 000 at prime + 800 basis points A top-up loan from FNB Bank of R50 000 at the same rate as the existing loan, which is considered to approximate the fair market interest rate. The loans can only be taken at the total amounts as made available by the banks The South African Income Tax Act stipulates a company tax rate of 28% and an allowance on new coding infrastructure of 20% per annum. The prime lending rate is currently 10,5% and is expected to stay unchanged for the foreseeable future. The required rate of return on preference shares s 6 11% REQUIRED (a) Determine how the new coding infrastructure should be financed, considering the funding options available to TSL as well as the current capital structure on 31 May 2021 using book values. For this part, assume preference share are redeemable and therefore categorised as debt (Calculations 10 marks, corriments 2 marks) (12) assume are (b) Calculate the weighted average cost of capital of TSL based on market values after the financing of the new project. For this part preference shares non- redeemable [Round rand amounts to the nearest cent and other numbers to the nearest two decimal places) (13) (c) Assuming the information below determine how long in years) it will take TSL to recover its innial capital investment in the new infrastructure using the discounted payback method. (5) Description Net cash-flows Year o 2021 (800 000) Year 1 2022 491 200 Year 2 2023 491 200 Year 3 2024 491 200 Year 4 2025 491 200 Year 5 2026 0 (d) Discuss qualitative factors that should be taken into account by the Board of TSL before deciding to buy the new coding infrastructure, as well as advantages for TSL of venturning into the development of Blockchain technology 135) QUESTION 1 TOTAL