Question 5 (20 Marks)

4.1 REQUIRED Read the information and answer the following question. Using the market value weights, calculate the weighted average cost of capital (WACC) for Makhubela Ltd (14 Marks)

INFORMATION

Makhubela Ltd is a company that manufactures and sells welcome mats through a network of retail outlets. The marketing manager Ms Sophie Makhubela is concerned about a decrease in sales for the past two years. The project management team has determined that the company needs an online presence and now require to raise capital for distribution purposes to create a high-quality online store and develop warehouses.

The company requires R200 million in capital for its expansion plans, which will be raised as per the guidelines from the capital expenditure department. The company can obtain capital as follows:

5 000, ten year, R10 000 par value, 15% annual coupon (paid at the end of each year), bonds can be issued at R9 000 per bond and YTM is 17.16%

Bank loan of R9 million with annual interest of 12% (payable in 8 years time)

400 000 non-redeemable preference shares with an issue price of R100, are currently priced at R115 (no flotation cost) and the preference shares offer a fixed dividend rate of 12% per year.

2 million ordinary shares can be issued at the current market price of R50 per share (Ignore issuance or transaction cost) Additional Information

The companys equity beta is currently 1.3 and 10-year Treasury bonds are currently yielding 8%.

The equity risk premium is estimated to be 5%. Market Value equal to target capita structure Current tax rate is 28 %.

5.2 Discuss ANY 6 basic principles of Project Financing (6 Marks)

Question 6 (20 Marks)

6.1 REQUIRED Illustrate how the knowledge and experience of project cost management process could have helped avoid the failure of the Modderfontein New City project (8 Marks)

6.2 State and explain ANY Three (3) reasons that could have led to project overrun or cost estimates rendered off target at Modderfontein New City project. (6 Marks)

Information

Five years ago, Modderfontein New City project was announced in South Africa. Billed as a game changer, it was meant to alter the urban footprint of Johannesburg, Africas richest city, forever.

Zendai, a Chinese developer, bought a 1600-hectare site north-east of Johannesburg for the development, dubbed as the New York of Africa. Early plans showed it was to include 55,000 housing units, 1,468,000 m² of office space and all the necessary amenities for a single large-scale urban district. The cost estimate was set at R84 billion.

The developers believed that Modderfontein could function as a global business hub and would become Johannesburgs main commercial centre, replacing Sandton. The project would also strengthen relations with Asian corporate interests.

But, despite the release of futuristic computer-generated images which led to significant publicity for the project dismally failed due to lack of proper project cost management. Another developer has since begun construction on a much scaled-down project but the project was never completed due to project overruns and now has faded away from the public consciousness.

https://www.concretetrends.co.za/projects/what-a-failed-johannesburg-project-tells-us-about-megacities-in-africa/#.YDLl4OgzY2w

6.3 Many projects fail due to failure to structure a project finance deal. Discus ANY Three (3) challenges faced by project companies when attempting to get funding from sponsors. (6 Marks)