Question 1

3.55
Growth rate from 2017 to 2018: 𝐺1= −1
3.14

𝐺1= 0.130573

3.89
Growth rate from 2018 to 2019 𝑔2 = −1
3.55

𝑔2 = 0.095775

3.95
Growth from 2019 to 2020 𝑔3 = −1
3.89

𝑔3 = 0.015424

0.130573+0.095775+0.015424
Average growth = 3

= 0.007949959

= 0.08

Dividend in 2021: D1 = 3.95 (1+ 0.08)

= 4.27

Dividend in 2022 D2 =4.27 (1 + 0.1)

= 4.697

Present Value of perpetual Dividends (2022 to infinity)

4.697
Present Value =
0.15−0.1

= 93.94

Total present values of cash flows in the year 2021 = 93.94 + 4.27

= 98.21

98.21
Share price (P0) = (1+0.15)1

= R 85.40
1.2 The current market price of Titan Mining Corporation is more than R52.00. It is therefore
overvalued based on Bonga’s expectations and should not be included in his portfolio.

Question 2

𝐷1
2.1 Component Cost 𝑘𝑒 = +𝑔
𝑃0

1.50 (1+0.07)
𝑘𝑒 = + 0.07
30

𝑘𝑒 = 0.1235

Cost of Equity 𝑘𝑒 = 12.35%

The after-tax cost of debt 𝑘𝑑 = 16%

Weighted Average Cost of Capital (WACC) = 0.7 × 0.1235 + 0.3 × 0.16

= 0.13445

= 13.45%

𝐸𝑞𝑢𝑖𝑡𝑦
The breakpoint of Equity = 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦

2 000 000 ×0.7

= $2 000 000-00

𝐷𝑒𝑏𝑡
The breakpoint of Debt = 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝐷𝑒𝑏𝑡

2000000×0.3
The breakpoint of Debt = 0.3

= 2 000 000-00

2.3 WACC = 0.6 × 0.1235 + 0.4 × 0.16

= 0.1381

= 13.81%
 2 000 000
Breakpoint of Equity = 0.6

= 3 333 333. 33

2 000 000
Breakpoint of Debt = 0.4

= 5 000 000

2000000×0.7
2.4 Number of shares based on the current capital structure = 30

= 46 667 shares

2000000×0.6
2.5 Number of shares under the proposed capital structure = 30

= 40 000 shares

Question 3

3.1 Current

R
Sales 530 000
Fixed Costs (250 000)
Variable costs (159 000)
EBIT 121 000
Tax @ 28% (33 880)
Earnings 87 120

Earnings per share based on the firm’s current capital structure

𝑇𝑜𝑡𝑎𝑙 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
Earnings per share = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠

87120
= 10 000

Earnings per share = R 8.712 per share

R
Sales 530 000
Fixed Costs (250 000)
Variable costs (159 000)
EBIT 121 000
Interest (30%×250 000×11.75%) (8 813)
Earnings before Tax 112 188
Tax @ 28% (31 413)
Earnings for the year 80 775

Capital Structure

Equity 175 000

Debt 75 0000

Total Capital Structure 250 000

175 000
Number of shares in the proposed capital structure = 25

= 7000

Earnings per share = R 11.54

The company should incorporate debt to maximize earnings per share. So the target debt ratio
of 30% maximizes the company’s earnings per share.

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

8.712
= 25

= 0.34848

Current Capital Structure: WACC = 100% × 0.3485

= 34.85%
Proposed capital structure

After tax-cost of debt 𝐾𝑑 = 𝑟𝑑 (1 − 𝑡)

0.1175(1 − 0.28)

= 0.0846

11.54
The cost of equity = 25

= 0.4616

WACC = 0.3 × 0.0846 + 0.7 × 0.4616

= 0.3485

= 34.85%

3.3 In order to maximize the value of the firm, the firm should opt for the financing mix that
minimizes the weighted average cost of capital. The incorporation of debt into the capital
structure reduces the cost of financing since raising debt is cheaper as compared to equity
capital. Moreover, interest on debt is tax-deductible. However, debt increases the riskiness of
the firm’s cash flows and shareholders demand a higher return on equity to compensate for the
additional risk. Given the above calculations, the firm would be indifferent between an all-
equity financing mix and a mixture of debt and equity.

Question 4

1 600 000
EPS – 2020 = 600 000

= R 2.67

EPS- 2021 = 2.67(1+ 0.05)1

= 2.80

EPS- 2022 = 2.67 (1+0.05)2

= 2.94
EPS – 2023 = 2.67 (1+ 0.05)3

= 3.09

EPS – 2024 = 2.67 (1+ 0.05)4

= 3.24

Silver Enterprises

200 000
Current Earnings per Share = 100 000

= R2.00

EPS – 2021 = 2.00 (1 + 0.1)1

= R2.20

EPS – 2022 = 2.00 (1 + 0.1)2

= R2.42

EPS – 2023 = 2.00 (1 + 0.1)3

= R2.66

EPS – 2024 = 2.00 (1 + 0.1)4

= R2.93

1600000+200000
4.3 Post Merger Earnings per Share = 100000
600000+
1.1

=R 2.61

2021 EPS = R2.86

2022 EPS = R3.15

2023EPS = R3.47

2024 EPS = R3.81

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