**Financial Management Assignment Solutions by Finance Experts**

Assignment Details:-

- Number of Words: 7000
- Citation/Referencing Style: Harvard

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**SECTION A**

**Answer ALL the questions in this section.**

**QUESTION ONE**

Baker Limited, South Africa, is a specialist manufacturer of hydraulic pumps. In seeking to expand its operations, it could acquire a French subsidiary company, Hydro Limited, or set up a new division in its home market.

The relevant figures for these two options are: | |

Set up new division at home |
Rand |

Cost of setting up premises | 19 540 000 |

Cost of machinery | 8 400 000 |

Annual sales | 107 500 000 |

Annual variable cost | 26 040 000 |

Additional head office expenses | 2 150 000 |

Existing head office expenses | 1 120 000 |

Depreciation: machinery 10% on cost annually | 840 000 |

Acquisition |
Euro |

Acquire shares from existing shareholders | 24 000 000 |

Redundancy costs | 4 500 000 |

Annual Sales | 36 000 000 |

Annual variable costs | 16 000 000 |

Annual fixed costs | 10 000 000 |

Consultants fees | 760 000 |

Additional information: | |

– The project is expected to last for 9 years. | |

– Bakers Limited, current cost of capital is 9%. |

– The French inflation is expected to be below the South African inflation by 2% per year, throughout the life of this investment.

– The current exchange spot rate is R21.40 to the Euro (€).

1.1 Compute the necessary calculations and advise Bakers Traders Limited if it is worth investing in neither, in one or both of these two opportunities.

**QUESTION TWO**

** **

DD Traders uses a combination of shares and debt in their capital structure. The details are given below:

There are 3 000 000 R1.50 ordinary shares in issue and the current market price is R2.75 per share. The latest dividend paid was 44 cents and a 4.5% average growth for the past 3 years was maintained.

The company has 1 100 000 R1.50, 4% preference shares with a market price of R1.90 per share.

DD Traders has a public traded debt with a face value of R6 000 000. The coupon rate of the debenture is 4% and the current yield to maturity of 8%. The debenture has 3 years to maturity.

They also have a bank overdraft of R2 000 000 due in 2 years’ time and interest is charged at 8% per annum.

**Additional Information:**

- DD Traders has a beta of 5, a risk-free rate of 7.9% and a return on the market of 16.45%.
- Company tax rate is 30%.

2.1 Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of equity.

2.2 Calculate the cost of equity, using the Capital Asset Pricing Model.

**QUESTION THREE**

** **

Shares Will and Smith have the following historical returns:

Year |
Share Will Returns (%) |
Share Smith Returns (%) |

2016 | -2 | -1.5 |

2017 | 3 | -2.8 |

2018 | 19.45 | 21.39 |

2019 | 39.63 | 45.78 |

2020 | 18.33 | 9.81 |

2021 | 34.00 | 31.90 |

2022 | 10 | 11 |

3.1 Calculate which of the two shares had the most volatile returns over the seven -year period.

**QUESTION FOUR**

Zayn Transporters has determined that a new specialised delivery truck needs to be purchased. The truck will generate a positive net present value NPV of R920 000, calculated using the company’s WACC of 20%.

The truck can be leased from the manufacturer. The lease agreement requires:

- 5 annual payments of R720 536, with the first payment due on the delivery of the vehicle.
- Service costs amount to R22 500 p.a.
- The lessee will exercise its option to purchase the truck at the end of the leasing period for R28 000.

**The truck can also be purchased at:**

- a cost of R3 600 000, inclusive of a 4-year maintenance contract with the manufacturer.
- The R3 600 000 can be borrowed at an after-tax rate of 12% per annum.
- However, Zayn Transporters decides to rather purchase the truck in cash.
- The vehicle can be depreciated using the straight-line method over the same period.
- The truck will be sold at its scrap value of R52 000 at the end of the period.

Assume a current corporate tax rate of 28% and the after tax cost of debt is 12%.

4.1 Determine the after-tax cash flows and the net present value of the cash outflows under each alternative.

4.2 Briefly indicate which alternative should be recommended.