QUESTION $5(20$ Marks$)$

Note: Where discount factors are required use only the present value tables provided in APPENDICES

$1$ and $2$ that appear after the formula sheet.

$5\mathrm{.}1$

REQUIRED

Study the information provided below and calculate the following:

$5\mathrm{.}1\mathrm{.}1$ Payback Period $($expressed in years, months and days$).(3$ marks$)$

$5\mathrm{.}1\mathrm{.}2$ Internal Rate of Return $($expressed to two decimal places$).$ Your answer must include

two net present value calculations $($using consecutive rates$/$percentages$)$ and

interpolation. $(5$ marks$)$

$5\mathrm{.}1\mathrm{.}3$ Net Present Value if the equipment has a salvage value of R$80000.($Show the

calculations of the present values as well as the net present value.$)(4$ marks$)$

INFORMATION

Market research conducted by Kauai Ltd revealed great potential for a new energy drink. To produce the

product would require R$1100000$ in new equipment. The equipment is expected to have a useful five years.

Revenues from sale of the energy drink are estimated at R$800000$ per year and cash operating expenses

are estimated at R$480000$ per year. The cost of capital is $15\%.$

$5\mathrm{.}2$

REQUIRED

Use the Gordon Growth Model to estimate the cost of the ordinary shares $($expressed as a percentage to two

decimal places$)$ from the information provided below.

$(4$ marks$)$

INFORMATION

The market value of a Fitch Limited ordinary share is R$60.$ The dividend at the end of the previous year was

R$9$ and the expected growth rate in dividends is $10\%$ p$.$a$.$

$5\mathrm{.}3$

REQUIRED

Use the information provided below to calculate the weighted average cost of capital $($expressed as a

percentage to two decimal places$).$

$(4$ marks$)$

INFORMATION

The optimal capital share of Yoko Limited is $60\%$ ordinary share, $30\%$ preference share and $10\%$ debt

financing. The pretax costs of capital for ordinary shares, preference shares and debt are $19\%,16\%$ and

$20\%$ respectively. The tax rate is $27\%$