QUESTION $1(59$ marks$)$

Mr$.$ James Storm is an investment consultant employed at Standard Peak Ltd

$($Standard Peak$).$ Each investment consultant of Standard Peak is allocated their own

portfolio of existing and new clients. Accordingly, Mr James Storm has also been

assigned a portfolio of clients to assist.

The following clients allocated to Mr James Storms currently have queries and require

assistance:

CASE $1$: MRS JANE DOW

Mrs Jane Dow has been offered to purchase non$-$redeemable, non$-$cumulative

convertible preference shares with an issue price of R$85$ per share in Atom Ltd$.$ These

preference shares have a dividend rate of $4\mathrm{.}62\%$ per year, payable quarterly in

advance. The conversion date is $31$ July $2025,$ on which the preference shares may

be converted into ordinary shares of Atom Ltd at a $12\%$ discount to the prevailing

market price of the ordinary shares as on that date. Mrs Jane Dow will be converting

the preference shares to ordinary shares at that time. It is estimated that each ordinary

of Atom Ltd will be trading at R$57$ on $31$ July $2025.$ Furthermore, it is also estimated

that no dividend is to be paid when the second preference share dividend is meant to

be made but that the dividend payment will again resume thereafter. Similar

preference shares to the Atom Ltd preference shares currently have a market yield of

$8\%$ per year.

CASE $2$: MISS REGINA JACKSON

Miss Regina Jackson is interested in purchasing six $(6)$ GHH Ltd $3-$year R$100$

redeemable debentures at these debentures$$ current market value. The debentures

however have a call option attached to them, according to which GHH Ltd may redeem

all these debentures after two $(2)$ years. It is anticipated that GHH Ltd will exercise this

right. The debentures offer $143$ basis points above the Johannesburg Interbank

Average Rate $($JIBAR$).$ Currently, the $12-$month JIBAR yield is $8\mathrm{.}95\%.$ This yield is

however expected to change to $8\mathrm{.}82\%$ in one years$$ time. Similar debentures to these

GHH Ltd debentures offer a yield to maturity of $11\mathrm{.}77\%$ per annumCASE $3$: ACCELERATION LTD

Acceleration Ltd has $3$ million ordinary shares in issue. Each ordinary share is

reasonably valued at R$1120$ and each share will be receiving a dividend of R$55\mathrm{.}40$

within the next few days. Acceleration Ltd$$s business and resulting net profit after

taxation are expected to grow annually by $8\%.$ Acceleration Ltd intends to maintain

the annual dividend declared to shareholders in the same ratio to the net profit after

taxation, as it is currently.

CASE $4$: MR BLESSING KHOSI

Mr Blessing Khosi is contemplating purchasing non$-$redeemable, cumulative

preference shares in Beta$-$Delta Ltd$.$ He$,$ however, wants to establish a reasonable

price to pay for each preference share. According to research performed on BetaDelta Ltd and these preferences shares, the following events are anticipated:

$$ Each preference share will have an issue price of R$50$ attached to it$.$

$$ The preference dividend will be $11\mathrm{.}8\%$ per annum.

$$ The required rate of return for these preference shares is however $12\mathrm{.}1\%.$

$$ Beta$-$Delta Ltd is planning to undertake a large project in four years$$ time during

which Beta$-$Delta Ltd is to launch a new product line. To have sufficient finances

available to fund the product line launch, it is anticipated that Beta$-$Delta Ltd will

not pay dividends during the third and fourth year from today. In the fifth year,

Beta$-$Delta Ltd will again proceed with dividend payments.

REQUIRED:

$1\mathrm{.}1.$ Refer to CASE $1$: MRS JANE DOW. Assist Mr James Storm in determining the

value of each Atom Ltd preference share as on $30$ April $2024$ in order to inform

Mrs Jane Dow what a reasonable price for each preference share will be$,$

should she wish to purchase these preference shares on $30$ Apil $2024.$

Round to two decimals where applicable.

$(17$ marks$)1\mathrm{.}2.$ Refer to CASE $2$: MISS REGINA JACKSON. Assist Mr James Storms in

calculating the total purchase price that Miss Regina Jackson will have to pay

to acquire the six $(6)$ GHH Ltd redeemable debentures.

Round to two decimals where applicable.

$(11$ marks$)$

$1\mathrm{.}3.$ Refer to CASE $2$: MISS REGINA JACKSON. State the formal name given to

an interest rate that is dependent on a reference rate as its basis.

$(2$ marks$)$

$1\mathrm{.}4.$ Refer to CASE $3$: ACCELERATION LTD$.$ Calculate the rate required by each

ordinary shareholder of Acceleration Ltd$.$

$(5$ marks$)$

$1\mathrm{.}5.$ Refer to CASE $3$: ACCELERATION LTD$.$ Briefly explain, based on

Acceleration Ltd $$s ordinary shares only, whether Acceleration will be able to

list on the Johannesburg Stock Exchange $($JSE$)$ main board.

$(3$ marks$)$

$1\mathrm{.}6.$ Refer to CASE $3$: ACCELERATION LTD$.$ State the term used for the required

rate of return of equity holders, such as Acceleration Ltd $$s ordinary

shareholders.

$(2$ marks$)$

$1\mathrm{.}7.$ Refer to CASE $4$: MR BLESSING KHOSI. Assist Mr James Storm in

determining a reasonable price that Mr Blessing Khosi should be willing to pay

for each Beta$-$Delta Ltd preference share if the shares are purchased today.

$(14$ marks$)$

$1\mathrm{.}8.$ Assume that one long$-$term debt instrument $($Debt $1)$ has a credit rating of $$B$$

according to both Standards & Poor$$s $($S&P$)$ as well as Moody$$sAnother long$-$term debt instrument $($Debt $2)$ has a credit rating of $$BBB$$

according to S&P and $$Baa$$ according to Moody$$s$.$

Seperately for Debt $1$ and Debt $2,$ interpret the meaning of each debt

instrument$$s rating and explain the difference between the credit ratings.

Interpretation $3$ marks

Explanation on the difference $2$ marksQUESTION $2(41$ marks$)$

Youth $($Pty$)$ Ltd $($Youth$)$ is a dermatological practice in Cape Town$$s Central Business

District. The entity employs specialised, well$-$trained dermatologists, and the majority

of its client base is middle to high$-$income earners. Currently, Youth is considering

introducing a new product range to be sold in its practice. The entity is deciding

between two product ranges, $$Bright$$ and $$Elastic$.$

While Bright will be an affordable skincare range, Elastic will be more expensive but

offers more benefits to the user as it has more proteins and minerals. Consequently,

choosing Elastic as the product range to be introduced is riskier, whilst it is known that

Bright will be bought by customers. Elastic may not be as successful amongst the

customers due to the higher price. However, should Elastic succeed, the returns to

Youth will be higher due to the higher selling price and consequential profit.

In order to perform an evaluation of which product range to choose, Youth has

conducted research on the probability of each product range$$s success and the returns

they will receive in each of the various outcomes.

PRODUCT LINE: BRIGHT

A sensitivity analysis and market research have been conducted which delivered the

following results: Should the Bright product line fail, a loss of $14\mathrm{.}8\%$ will be

experienced. The chance of this product line failing is $8\mathrm{.}6\%.$ However, should it be

successful above average a $56\mathrm{.}1\%$ return will be obtained and, if highly successful, a

$68\mathrm{.}2\%$ return. The chances of these are $57\mathrm{.}2\%$ and $24\mathrm{.}2\%$ respectively. In the case of

the Bright product line achieving average success, a $51\mathrm{.}5\%$ return will still be obtained.

PRODUCT LINE: ELASTIC

The sensitivity analysis and market research for this product line indicated the

following: Should this product be successful above average, a $77\mathrm{.}4\%$ return will be

received. The chance of this is $33\mathrm{.}6\%.$ If the product line is only average in this success

a $59\mathrm{.}8\%$ return will be generated of which the chance is $30\mathrm{.}1\%.$ In the extreme cases

of a failure or a high success, the outcomes will be a loss of $19\%$ and a return of $80\mathrm{.}5\%$

respectively. A $21\mathrm{.}2\%$ probability can be assigned to the first and $15\mathrm{.}1\%$ to the latter$\mathrm{.}2\mathrm{.}1.$ Calculate the return that Youth $($Pty$)$ Ltd could expect from the Bright product

line and Elastic product line, respectively.

$(8$ marks$)$

$2\mathrm{.}2.$ Calculate the risk that Youth $($Pty$)$ Ltd can expect from the Bright product line

and Elastic product line, respectively.

$(21$ marks$)$

$2\mathrm{.}3.$ The directors of Youth $($Pty$)$ Ltd pointed out that the research indicated that the

Elastic product line will generate a return of $59\mathrm{.}8\%$ even if it only achieves an

average success, whereas the Bright product line will only generate a $51\mathrm{.}5\%$

return if the same outcome prevails.

Advise the directors of Youth $($Pty$)$ Ltd as to what the chances are of the Bright

product line generating a return of $59\mathrm{.}8\%$

$(6$ marks$)$

$2\mathrm{.}4.$ Indicate the range in which the Elastic product line$$s return could be expected

to fall within, should the directors require to know with $99\mathrm{.}7\%$ accuracy what the

actual return will be$.$

Assume the Elastic product line$$s variance was calculated as $16\%$ and the

expected return as $53\mathrm{.}5\%$