How often Cost of capital, WACC and capital structure is asked

Where it was asked

• May/Jun 202230 marks
• May/Jun 201835 marks
• May/Jun 201527 marks

The questions

1. May/Jun 2022, Q1.62 marks · multiple choice

   Five statements about secondary market transactions in the capital markets are given: (1) very few transactions in the capital market are secondary market transactions and they do not generate cash flow for the organisation; (2) the securities of an organisation are made more attractive to other investors in an active secondary market, thereby increasing the price of the securities; (3) a secondary market transaction is created when a holder of an organisation's securities sells these securities to another investor; (4) the management of an organisation should be aware of secondary market transactions and the organisation's share price as their compensation is often linked to the share price of the organisation; (5) the level of the organisation's share price in the secondary market will determine how much can be raised by future issues of shares. Identify which combination of these statements are TRUE.

2. May/Jun 2022, Q1.72 marks · multiple choice

   Select the ONE statement that is FALSE regarding debt financing.

3. May/Jun 2022, Q1.82 marks · multiple choice

   PCP (Pty) Ltd bought a machine from Masks (Pty) Ltd. Masks granted a loan to PCP, and a contract was signed between the two parties stipulating the conditions, interest rate, instalment amount, payment frequency and the period of the agreement. Identify what form of finance this represents.

4. May/Jun 2022, Q2(a)4 marks

   The following extract is taken from the statement of financial position of OPTIMUM Ltd: ordinary share capital R40 000 000; debentures at 13% per annum R2 500 000; non-distributable reserves R1 600 000; long-term loan R4 000 000; retained income R5 400 000. Additional information provided: the ordinary shares have a nominal (par) value of R20 each, while the current market value per share is R45; the most recent dividend paid to shareholders was R4,60 per share and the expected future growth rate in dividends is 7% per annum; the debentures have a face value of R2 500 000 and will be redeemed after eight years at face value; the long-term loan agreement specifies that interest is charged at 9% per annum, while the current JIBAR rate applicable to similar loans is 11% (stated after tax at OPTIMUM Ltd's tax rate); and the current company tax rate is 28%. For all calculations in this question, students must set their calculators to four decimal places and round final answers to two decimal places, showing all formulas used and detailed workings. For OPTIMUM Ltd, clearly identify which of the listed items of funding represent equity and which represent debt, and then calculate the company's capital structure, presenting the capital structure you have calculated in the correct format.

5. May/Jun 2022, Q2(b)2 marks

   The following extract is taken from the statement of financial position of OPTIMUM Ltd: ordinary share capital R40 000 000; debentures at 13% per annum R2 500 000; non-distributable reserves R1 600 000; long-term loan R4 000 000; retained income R5 400 000. Additional information provided: the ordinary shares have a nominal (par) value of R20 each, while the current market value per share is R45; the most recent dividend paid to shareholders was R4,60 per share and the expected future growth rate in dividends is 7% per annum; the debentures have a face value of R2 500 000 and will be redeemed after eight years at face value; the long-term loan agreement specifies that interest is charged at 9% per annum, while the current JIBAR rate applicable to similar loans is 11% (stated after tax at OPTIMUM Ltd's tax rate); and the current company tax rate is 28%. For all calculations in this question, students must set their calculators to four decimal places and round final answers to two decimal places, showing all formulas used and detailed workings. Using the information given for OPTIMUM Ltd (ordinary shares with a nominal value of R20 and a current market value of R45 per share, R40 000 000 in ordinary share capital), calculate the market value of equity.