QUESTION $425$ MARKS

You have just received a R$4$ million sign$-$on bonus from your new employer following your completion

of your MBA from the best business school in Africa. You decided to invest R$500000$ of your bonus in

a T$-$bill that provides a return of $6\mathrm{.}5\%$ and would like to invest the remainder of your bonus in a private

company to enhance your returns. You came across a company called Excelon $($Pty$)$ Ltd $($the

company$),$ a renewable energy company. You are currently in negotiations with the current sole owner

of Excelon $($Pty$)$ Ltd to join in the investment of the company. The company$$s total assets amount to R$7$

million.

Excelon $($Pty$)$ Ltd$$s cash flow from operations before interest and taxes was R$1\mathrm{.}2$ million in the year just

ended, and it expects that this will grow by $5\%$ per year forever. To make this happen, the firm will have

to invest an amount equal to $20\%$ of pre$-$tax cash flow from operations before interest and taxes each

year in capital expenditure. Annual investment in net working capital for the next year is expected to be

R$84000.$ The South African corporate tax rate is $27\%.$ Depreciation was R$160000$ in the year just

ended and is expected to grow at the same rate as the operating cash flow. Excelon $($Pty$)$ Ltd has a

target debt ratio of $45\%$ and the required rate of return on the market is $18\%.$ The firm currently has

debt of R$4492000$ outstanding and the average borrowing rate on the outstanding debt amounts to

$11\%.$ The beta of a similar listed company as Excelon $($Pty$)$ Ltd amounts to $1\mathrm{.}4$ and the market risk

premium is $8\%.$

$4\mathrm{.}1$ Calculate the weighted average cost of capital of Excelon $($Pty$)$ Ltd $(7$ marks$)$

$4\mathrm{.}2$ Use the free cash flow approach to calculate the value of the firm and the firm$$s equity. $(11$ marks$)$

$4\mathrm{.}3$ Discuss the factors that you should consider prior to investing in Excelon $($Pty$)$ Ltd$.(7$ marks$)$