Question $318$ Marks

Stock X has a $10\%$ expected return, a beta coefficient of $0\mathrm{.}9,$ and a $35\%$ standard deviation of expected

returns. Stock Y has a $12\mathrm{.}5\%$ expected return, a beta coefficient of $1\mathrm{.}2,$ and a $25\%$ standard deviation.

The risk$-$free rate is $6\%,$ and the market risk premium is $5\%.$

Required:

$3\mathrm{.}1.$ Calculate each stock$$s coefficient of variation. $(2)$

$3\mathrm{.}2.$ Which stock is riskier for a diversified investor? $(3)$

$3\mathrm{.}3.$ Calculate each stock$$s required rate of return. $(2)$

$3\mathrm{.}4.$ On the basis of the two stocks$$ expected and required returns, which stock would be more

attractive to a diversified investor? $(4)$

$3\mathrm{.}5.$ Calculate the required return of a portfolio with R$7,500$ invested in Stock X and R$2,500$ invested

in Stock Y$.(4)$

$3\mathrm{.}6.$ If the market risk premium increased to $6\%,$ which of the two stocks would have the larger

increase in its required return? $(3)$

Question $415$ Marks

Apilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Company. Vaccaro is

a publicly traded company, and its current beta is $1\mathrm{.}30.$ Vaccaro has been barely profitable, so it has

paid an average of only $20\%$ in taxes during the last several years. In addition, it uses little debt, having

a debt ratio of just $25\%.$

If the acquisition were made, Apilado would operate Vaccaro as a separate, wholly owned subsidiary.

Apilado would pay taxes on a consolidated basis, and the tax rate would therefore increase to $35\%.$

Apilado also would increase the debt capitalization in the Vaccaro subsidiary to $40\%$ of assets, which

would increase its beta to $1\mathrm{.}47.$ Apilado$$s acquisition department estimates that Vaccaro, if acquired,

would produce the following cash flows to Apilado$$s shareholders $($in millions of rands$)$:

Year Cash Flows

$1$ R$1\mathrm{.}30$

$2$ R$1\mathrm{.}50$

$3$ R$1\mathrm{.}75$

$4$ R$2\mathrm{.}00$

$5$ and beyond Constant growth at $6\%$

These cash flows include all acquisition effects. Apilado$$s cost of equity is $14\%,$ its beta is $1\mathrm{.}0,$ and its

cost of debt is $10\%.$ The risk$-$free rate is $8\%.$

Required:

$4\mathrm{.}1.$ What discount rate should be used to discount the estimated cash flows? $($Hint: Use Apilado$$s rs

to determine the market risk premium.$)(5)$

MBA$5903$

MAY$/$JUNE $2022$ SPECIAL EXAMINATION

$6$

$4\mathrm{.}2.$ What is the rand value of Vaccaro to Apilado? $(4)$

$4\mathrm{.}3.$ Vaccaro has $1\mathrm{.}2$ million common shares outstanding. What is the maximum price per share that

Apilado should offer for Vaccaro? If the tender offer is accepted at this price, what will happen to

Apilado$$s stock price? $(6)$

Question $56$ Marks

$012345$

Stream A R$0$ R$100$ R$400$ R$400$ R$400$ R$300$

Stream B R$0$ R$300$ R$400$ R$400$ R$400$ R$100$

Required:

$5\mathrm{.}1.$ Find the present values of the following cash flow streams at an $12\%$ discount rate. $(4)$

$5\mathrm{.}2.$ What are the PVs of the streams at a $0\%$ discount rate? $(2)$

Question $613$ Marks

Consider a project that requires an initial outlay of R$35000$ and results in a single cash inflow of R$56$

$367\mathrm{.}50$ after five years.

Required:

$6\mathrm{.}1.$ If the cost of capital is $8\%,$ what are the project's NPV and PI$?$ Is the project acceptable under

each of these techniques? $(5)$

$6\mathrm{.}2.$ What is the project's NPV and PI if the cost of capital is $12\%?$ Is the project acceptable under

that condition? $(5)$

$6\mathrm{.}3.$ What is the project's payback period? Does payback make much sense for this project? Why?

$(3)$

Question $718$ Marks

The Wall Company has $142500$ ordinary shares outstanding that are currently selling at R$28\mathrm{.}63.$ It has

$4530$ bonds outstanding that will not mature for $20$ years. They were issued at a par value of R$1000$

paying a coupon rate of $6\%.$ Comparable bonds now yield $9\%.$ Wall$$s R$100$ par value preferred stock

was issued at $8\%$ and is now yielding $11\%$; $7,500$ shares are outstanding.

Required:

Develop Wall$$s market value based capital structure.