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Question 1 [30] - Chapter 4 P11 Pg 11-13 Two companies, Wheels Ltd and Drive (Pty) Ltd, are entities within the transport industry. They are competitors specialising in providing car rental services. Both companies are exposed to the same business risk and both were all-equity- financed companies. In 2020, Wheels Ltd expanded its fleet and financed the expansion using debt finance. Equity Foot Refers to The companies have the following capital structures: De do not owercare Drive (Pty) Wheels Ltd hacer) of we wrece provide Ltd The worden went owner 3 000 000 Book value of equity 3 500 000 runds obtained from ine OWOCO word Market value of equity 4 000 000 8 000 000 the son of the > org 2 000 000 De tre eta Book value of debt Or Cat provide a po 3 14 2 000 000 Market value of debt pouple od dock cam on Issued shares 9 000 000 8 000 000 800 000 Current dividends 650 000 Cost of equity capital (k.) 12% 14% Additional information: The tax rate is 28%. The current market cost of debt is 13%. nosies to read The market value of one share in Wheels Ltd is R1.00. We of Required: 7.1. In your opinion, did the business risk profile of Wheels Ltd change when it acquired debt finance? Provide reasons for your answer. The reasons must very clearly specify the causes for the business risk changing or remaining unchanged. (4) + - Page 132 OPTIB of 1.2 Use the information provided to calculate the weighted average cost of or capital (WCC) for both companies. WC ['de toit) (8 1.3. Based on the results of 1.2, are the companies' capital structures aligned to the traditional or the Miller and Modigliani capital structure theory? Provide reasons for your answer. (4) re of company B 1.4. Basing their concerns on the Miller and Modigliani approach, Wheels Ltd's shareholders are of the opinion that they are not adequately compensated anymore for business risk compared with Drive's shareholders. They 19117-119 requested your assistance with the calculations needed to prove their concerns that they are not adequately compensated for holding shares in Wheels Ltd. Use a shareholder holding one share in Wheels Ltd and willing to purchase one Driver share as the basis for your calculations. Show all calculations and round off all calculations to the nearest rand. (14) 4 Question 1 [30] - Chapter 4 P11 Pg 11-13 Two companies, Wheels Ltd and Drive (Pty) Ltd, are entities within the transport industry. They are competitors specialising in providing car rental services. Both companies are exposed to the same business risk and both were all-equity- financed companies. In 2020, Wheels Ltd expanded its fleet and financed the expansion using debt finance. Equity Foot Refers to The companies have the following capital structures: De do not owercare Drive (Pty) Wheels Ltd hacer) of we wrece provide Ltd The worden went owner 3 000 000 Book value of equity 3 500 000 runds obtained from ine OWOCO word Market value of equity 4 000 000 8 000 000 the son of the > org 2 000 000 De tre eta Book value of debt Or Cat provide a po 3 14 2 000 000 Market value of debt pouple od dock cam on Issued shares 9 000 000 8 000 000 800 000 Current dividends 650 000 Cost of equity capital (k.) 12% 14% Additional information: The tax rate is 28%. The current market cost of debt is 13%. nosies to read The market value of one share in Wheels Ltd is R1.00. We of Required: 7.1. In your opinion, did the business risk profile of Wheels Ltd change when it acquired debt finance? Provide reasons for your answer. The reasons must very clearly specify the causes for the business risk changing or remaining unchanged. (4) + - Page 132 OPTIB of 1.2 Use the information provided to calculate the weighted average cost of or capital (WCC) for both companies. WC ['de toit) (8 1.3. Based on the results of 1.2, are the companies' capital structures aligned to the traditional or the Miller and Modigliani capital structure theory? Provide reasons for your answer. (4) re of company B 1.4. Basing their concerns on the Miller and Modigliani approach, Wheels Ltd's shareholders are of the opinion that they are not adequately compensated anymore for business risk compared with Drive's shareholders. They 19117-119 requested your assistance with the calculations needed to prove their concerns that they are not adequately compensated for holding shares in Wheels Ltd. Use a shareholder holding one share in Wheels Ltd and willing to purchase one Driver share as the basis for your calculations. Show all calculations and round off all calculations to the nearest rand. (14) 4