SECTION A [100 MARKS]
Answer ALL the questions in this section.

QUESTION ONE

Shares Ronaldo and Messi have the following historical returns:

Year Share Ronaldo Returns (%) Share Messi Returns (%)

2016 -4 -3

2017 -8 -6

2018 17.45 19.39

2019 36.62 43.79

2020 16.33 7.81

2021 32.00 29.30

1.1 Calculate which of the two shares had the most volatile returns over the five-year period. (25 marks)

QUESTION TWO

Cadbury Limited uses a combination of shares and debt in their capital structure.

The details are given below: –

There are 5 million R3.20 ordinary shares in issue and the current market price is R4.90 per share. The latest dividend paid

was 53 cents and a 8% average growth for the past six years were maintained. The company has 2 750 000 R2.50, 9%

preference shares with a market price of R3.80 per share. Cadbury Limited has a public traded debt with a face value of R3

million. The coupon rate of the debenture is 8% and the current yield to maturity of 11%. The debenture has 7 years to

maturity. They also have a bank overdraft of R2million due in 4 years’ time and interest is charged at 16% per annum.

Cadbury Limited has a beta of 2.3, a risk-free rate of 6% and a return on the market of 16%. The company tax rate is 30%.

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

cost of equity

2.1 (22 marks)

2.2 Calculate the cost of equity, using the Capital Asset Pricing Model (3 marks)

QUESTION THREE

Martin Corp. is in the process of negotiating the acquisition of Links Limited. The management estimates that the

acquisition will result in economies of scale and the additional benefits will amount to R18 500 000.

The following information is available for the two companies:

Martin Corp.:

The earnings per share and dividends per share are R2.38 and R2.05 respectively. A 8% growth rate is maintained and the

number of issued shared are 7 500 000 with a market price of R32 per share.

Links Limited:

The earnings per share and dividends per share are R1.50 and 95 cents respectively. A 5% growth rate is maintained and

the number of issued shared are 2 200 000 with a market price of R12 per share.

3.1 Calculate the exchange ratio based on market values (3 marks)

3.2 Calculate the exchange ratio based on earnings per share (3 marks)

3.3 Calculate the post-acquisition earnings per share, based on 3.2 (8 marks)

3.4 Calculate the benefits, if any, to the companies (4 marks)

Assume that Martin Corp. agree to a one-for-one exchange of shares, calculate the expected postacquisition earnings per share

3.5 (3 marks)

Assuming a post-acquisition Price/Earnings Ratio (P/E) of 17, calculate the expected postacquisition market price and compare it to next year’s expected price without the acquisition.

Should Martin Corp. acquire Links Limited? Why? (Use earnings per share derived from 3.3)

3.6 (4 marks)

QUESTION FOUR

Stonefield Carriers has determined that a new specialised delivery truck must be obtained. The truck will generate a

positive NPV of R500 000, calculated using the company’s WACC of 20%.

The truck can be leased from the manufacturer. The lease agreement required 5 annual payments of R520 000, with the

first payment due on the delivery of the vehicle. The lessee is required to pay R50 000 at the end of year two for a

mandatory service required on the truck. The lessee will also exercise the option to purchase the truck for R150 000 upon

termination of the lease at the end of the period.

The truck can also be purchased at a cost of R2 800 000 in cash, Annual maintenance costs total R100 000. The vehicle

can be depreciated straight-line over the same period and will have a scrap value of R150 000 at the end of the 4 years.

The current corporate tax rate is 28% and the after- tax cost of debt is 16%.

4.1 Determine the after-tax cash flows and the net present value of the cash outflows under each (23 marks)

alternative

4.2 Which alternative would you recommend? Why? (2 marks)