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Finance For Decision-Making Assignment

Assignment Task

This assignment covers the following outcomes:

Question 1 – Learning outcome 4: Critically analyse the fundamental financial decision-making theories and evaluate these for decision-making.

  • Time value of money.
  • Net present value (NPV).
  • Financial decisions for investing in projects.

Question 2 – Learning outcome 5: Evaluate the capital structure of organisations and the cost of capital.

  • Weighted Average Cost of Capital (WACC)

Question 3 – Learning outcome 4: Critically analyse the fundamental financial decision-making theories and evaluate these for decision-making.

  • Budgeting and budgetary control

Question 4 – Learning outcome 1: Develop a working understanding of how financial statements and reports are prepared and evaluate them in order to provide insightful interpretation.

  • Financial accounting concepts and principles

Question 1

Miles Morales Limited (MM) is a company listed on the Johannesburg Stock Exchange (JSE). MM is in the process of evaluating whether to invest in a new business venture. Below is all relevant information pertaining to the project:

  • The cost of the new project is R20
  • The revenue expected to be generated per annum is R12 This will increase in line with inflation from the end of year 1 of the project.
  • The variable costs are expected to be generated per annum is R6 million. These will increase in line with inflation from the end of year 1 of the
  • The fixed costs are made up of the following:
DescriptionAmount (R)
Head Office Allocation200 000
Depreciation100 000
Rental space (MM has capacity in their current warehouse)200 000
  • The project will be finance by way of a new loan for R20 million, repayable in 10 years’ Interest on the loan is 12% per annum compounded monthly. Instalments are payable at the end of each month.
  • After 5 years, this project will generate a pre-tax cash flow of R2.5 million into

Additional information:

  • The company’s tax rate is 27%. All costs are fully deductible and there is no wear and tear pertaining to this project.
  • All cashflows are earned evenly throughout the financial
  • The company uses a nominal WACC rate of 15%.
  • Inflation is expected to be 7.5%.

Required

Calculate the monthly repayments that will need to be made on the loan to finance the new project.

Calculate the terminal value of this project

Calculate the net present value of this project.

Question 2

Terracota Ltd (TL) is a company listed on the JSE. TL’s financial manager has requested you to assist in the preparation of the calculation of the weighted average cost of capital (WACC).

TL has three sources of finance:

1.) Ordinary shares

2.) Debentures

3.) Bank Loan with GTCD Bank Ltd.

Ordinary Shares

TL has 250 000 authorised shares, of which 50% have been issued to date. TL’s last listed price is R45 per share. TL has a Beta of 0.8. The expected return on the market is 15.5% and the risk free rate is 10.3%.

Debentures

TL has a current yield on its 10 000 listed debentures of 11.5%. The debentures will be redeemed at a par value of R100 per debenture and carry a 7.5% annual coupon rate.

Bank Loan

The loan with GTCD amounts to R10 million. There are 120 months left on the loan and the interest rate is 9.5% compounded monthly. A loan of the same amount and duration would attract an interest rate of 12.5% on the market.

Other Information

  • The coupons and interest on the loan are tax
  • The applicable tax rate is 27%.

Required

Calculate the cost of the debt that would be used in the WACC calculation.

Calculate the cost of equity that would be used in the WACC calculation

Calculate TL’s WACC rate

Question 3

QIN (Pty) Limited (QPL) is a small-medium sized company that specialises in the manufacturing of roof tiles that are used in the building industry. QPL is preparing its budget for the 2025 financial year. Below are the results for the year ended 31 December 2024:

Line Item2024R
Accounts Receivable150 000
Accounts Payable(35 000)
Bank45 000
  • Credit sales for the year are expected to be R3 500 000 (earned evenly) and debtors repay their debts as follows:
  • 5% immediately
  • 5% two months after the sale
  • 25% six months after the sale
  • 50% eight months after the sale
  • 10% nine months after the sale.

The balance of R150 000 will be received within the first month of 2025’s financial year.

  • All purchases are on credit, and the gross profit percentage for 2025 is expected to remain at 55%. Payments are made in the month following the The R35 000 relates to the previous months purchases.
  • The target cash balance is R10 000 per month for the 2025 financial year.

Required

Prepare the cash budget for the 2025 financial year. Your answer should include a month-by-month analysis of the cash flows

Question 4

Equity Traders SA (Pty) Ltd (ETSA) is a commodities and financial product trading company.

Below are transactions that ETSA has entered into for the current financial year ending 31 December 2024:

  • ETSA entered into a short position on 1 000 barrels of oil futures as a speculative trade on 5 December 2024. The future’s price is $810 per barrel and is a 3 month futures The spot price of oil at 31 December 2024 is $850 per barrel.
  • ETSA purchased a call option on 5 000 of NED Ltd’s shares, a JSE listed entity. The premium paid is R50 000 and the call price on the shares is R75 per share. The current market price per share at 31 December 2024 is R90 per
  • ETSA has taken a short position on contracts for difference (CFD’s) on the gold price on 1 December The contract price is $950 per tonne and 30 tonnes are what the CFD is based on. The gold price at 31 December 2024 is $1 000 per tonne. The margin deposit required for such trade is R100 000 which earns 12% per annum.
  • ETSA has purchased 2 bitcoins for $45 000 each on 15 December 2024. On 31 December, the quoted price for a bitcoin is $38

Additional Information

  • All effects of taxation can be
  • On 15 and 31 December 2024 the Rand:Dollar exchange rate is R18.75: $1 15:$1 respectively. The average rate for the month is R17.95 per dollar.

Required

Prepare the journal entries to account for the various transactions as at 31 December 2024.