Desklib Online Library for Study Material with Solved Assignments

MODULE 8
Assignment 8
© 2017 Van Schaik. All Rights Reserved (not authorised for
commercial use).

Name:
1. Instructions and guidelines (Read
carefully)
Instructions
1. Insert your name and surname in the space provided above, as well as
in the file name. Save the file as: First name Surname
Assignment 8 – e.g. Lilly Smith Assignment 8. NB!
Please ensure
that you use the name that appears in your student profile on the
Online Campus (OLC).
2 Write all your answers in this document. There is an instruction that
says, “Start writing here” under each question. Please type your
answer there.
3 Submit your assignment in Microsoft Word only. No other file types
will be accepted.
4 Do not delete the plagiarism declaration or the assignment
instructions and guidelines. They must remain on your assignment
when you submit.
PLEASE NOTE: Plagiarism cases will be penalised according to the
Head Tutor’s and GetSmarter's discretion.
IMPORTANT NOTICE: Please ensure that you have checked your course
calendar for the due date for this assignment. This calendar is available on
the OLC and has also been sent to you by your Course Coach.
Guidelines
1 There are seven pages and three questions in this assignment.
2 Make sure that you have carefully read and fully understood the
questions before answering them. Answer the questions fully but
concisely and as directly as possible. Follow all specific instructions for
individual questions (e. g. “list”, “in point form”).
3 Answer all questions in your own words. Do not copy any text from the
notes, readings or other sources. The assignment must be your
own work only.
Plagiarism declaration:
1. I know that plagiarism is wrong. Plagiarism is to use
Tel: [phone] | Fax: [phone]
Website: www.getsmarter.com | Email: [e-mail]
© 2017 UCT / GetSmarter All Rights Reserved (not authorised for commercial use)
Page 2 of 11

another’s work and pretend that it is one’s own.
2. This assignment is my own work.
3. I have not allowed, and will not allow, anyone to copy my
work with the intention of passing it off as his or her own work.
4. I acknowledge that copying someone else’s assignment (or
part of it) is wrong, and declare that my assignments are my
own work.
2. Mark allocation
Each question receives a mark allocation. However, you will only receive a
final percentage mark and will not be given individual marks for each
question. The mark allocation is there to show you the weighting and
length of each question.
Question 1: Capital structure 10
Question 2: Profitability 15
Question 3: Accepting or rejecting a project 25
TOTAL 50
3. Assignment questions
Assignment instructions
Complete the entire assignment in this document. Make sure you have
read Modules 1 to 8 before completing this assignment.
Financial calculators are not allowed for this assignment. Make sure that
you show all your working when calculations are required.
Question 1
A company’s current capital structure is made up of long-term debt,
preference shares and ordinary shares, in the respective proportions of
20:30:50. The interest charged on the long-term debt is 10%. The
preference shareholders demand a return of 12% on their investment. The
ordinary shareholders have a required return of 18%.
1.1 What is the company’s weighted average cost of capital?
Start writing here:
Tel: [phone] | Fax: [phone]
Website: www.getsmarter.com | Email: [e-mail]
© 2017 UCT / GetSmarter All Rights Reserved (not authorised for commercial use)
Page 3 of 11

1.2 What are two other terms that are used interchangeably with the term
“cost of capital”? (Max. 2 lines)
Start writing here:
1. Cost of capital is known as the hurdle rate, which an organisation
expects to earn at the time of investing in a project (Batra and
Verma 2017).
2. Another term used interchangeably with the cost of capital is the
required rate of return, which is expected by an investor to
accomplish through investment in a project (Robb and Robinson
2014).
1.3 Should the company look at the option of increasing the amount of
debt that it carries? In brief point form, explain why, or why not. (Max 4
lines)
Start writing here:
According to the provided information, the organisation has only
20% debt in its capital structure, while the majority of the capital structure
is funded by ordinary shares and preference shares. In this context, it is
noteworthy to mention that the financing cost is lower in debt compared
to shares (Wnuk-Pel 2014). This is because debt includes principal and
interest payment for fixed period, while in case of equity, once a stake in
the organisation would lead to pay a portion of profit to the equity holder
forever. Therefore, by increasing debt, the organisation could minimise its
weighted average cost of capital (Facci and Xu 2015).
Question 2
Fantastical Dreamers CC has come up with a new product, called TGTSSB
(aka The Greatest Thing Since Sliced Bread), and are trying to decide
whether to put it into production. Their production manager has calculated
that it would cost R500,000 to set up the production line to start making
Tel: [phone] | Fax: [phone]
Website: www.getsmarter.com | Email: [e-mail]
© 2017 UCT / GetSmarter All Rights Reserved (not authorised for commercial use)
Page 4 of 11