Tugela Enterprises Case Study - Management Assignment Help

Assignment Task:

Task:

SECTION A (50 Marks)
ANSWER ALL THE QUESTIONS IN THIS SECTION
QUESTION ONE (25 Marks)
1.1 Tugela Enterprises currently has 10 million ordinary shares in issue, which are selling for R8 each. The firm's recent financial statements reported earnings per share (EPS) of R1.40, and a return on equity (ROE) of 17.50%. The firm currently pays out 57% of earnings as dividends. Tugela has two debt issues:

1st Issue: Seventy-five thousand (75 000), 8% semi-annual coupon bonds, with a yield to maturity of 9.32% and 10 years to maturity.
2nd Issue: Sixty thousand (60 000), 6% semi-annual coupon bonds, with a yield to maturity of 6.7% and 6 years to maturity.
The tax rate is 30%.
Required:
1.1.1 Calculate Tugela’s cost of equity. (2 Marks)
1.1.2 Calculate Tugela’s weighted average after-tax cost of debt. (5 Marks)
1.1.3 Calculate Tugela’s weighted average cost of capital (WACC). (8 Marks)
1.2 Prepare a report for the Board of Directors of Tugela Enterprises discussing issues that might influence a company’s capital structure strategy. (10 Marks)

QUESTION TWO (25 Marks)
2.1 Assume that you have set your heart on an apartment that is 5 minutes from the Port Elizabeth Beach and the price is R2 million. You have managed to obtain a 100% mortgage loan from the Standard bank at an interest rate of 7.2%, interest compounded monthly, which means that you will be charged a monthly interest rate of 0.6%. The term of the loan is 30 years. What is your monthly repayment on the mortgage loan? (3 Marks)

2.2 You wish to purchase an apartment in Durban which is situated in a tree line-lined avenue. The purchase price, with costs, is R710 000 and you are able to obtain a 100% mortgage loan from Nedbank at an interest rate of 6%, interest compounded monthly. The term of the loan is 20 years. Assume that property values are expected to rise at a rate of 9% per year (0.75% per month).You will be able to rent out the apartment after costs at a rate of R4000.00 per month for the first year. Interest and rent are payable at the beginning of each month.

Required:
2.2.1 What is the expected value of the apartment in 20 years’ time? (3 Marks)
2.2.2 What is the mortgage loan repayment at the beginning of each month? (3 Marks)
2.2.3 What is the net amount you have to pay in each month? (3 Marks)
2.3 You have purchased a Toyota Raider bakkie for E240 000.00 and you have obtained the car loan from FNB Bank for the total amount, which requires you to pay this amount over 5 years at an interest of 7.2%. If interest is compounded monthly, determine the monthly payment required over the 5 years if the first payment is due immediately. (3Marks)

2.4 Five years ago, Maxim Limited issued 20 year corporate bonds, with a coupon rate of 12% and a par value of E1000.00. Bonds issued by firms of similar risk and the same term to maturity, are currently trading on yields of 8% per annum. What is the value of each bond issued by Maxim? (2 Marks)

2.5 Big Five Construction has outstanding E1,000 face value 8% coupon bonds that make semi-annual payments, and have 14 years remaining to maturity. If the current price for these bonds is E987.24, what is the annualized yield to maturity? (2 Marks)

2.6 Mr Zulu deposits at the end of each year E2,000.00; E3,000.00; E4,000.00; E5,000.00 and E6,000.00 for five years respectively. What is his series of deposits at the end of five years assuming 6% compound interest? (3 Marks)

2.7 Metro Limited has issued bonds with a face value of E100 which pay a coupon rate of 6%. Coupon payments are payable semi-annually. The quoted yields on similar bonds are currently 8% per year. The maturity date is 10 years’ time. What is the value of each Metro bond? What is the bond’s annual effect interest yield? (3 Marks)

SECTION B (50 Marks)
ANSWER ANY TWO (2) QUESTIONS IN THIS SECTION
QUESTION THREE (25 Marks)
3.1 Assuming you are the financial advisor to Warren Buffet who is considering investing in one of the following three companies in the same industry. He considers them to be equal in all regards except for the differences described below. Warren has asked you for assistance to help him understand the effects of different working capital strategies adopted by each company. He has provided you with the following information as shown in Table 3.1.

Statement of Financial Position Willdale Bricks Ltd

Beta Bricks Ltd

Golden
Bricks
R million R million R million
Non-current assets 100 100 100
Current Assets 250 325 400
350 425 500
Equity 150 200 250
Long-term loan – 10% interest rate 50 100 150
Current liabilities 150 125 100
350 425 500

Table 3.1
In each case, Warren expects earnings before interest and tax to be 10% of sales. Under normal trading conditions he would expect annual sales to be twice the present level of current assets. Tax rate is 30%
3.1.1 Advise Warrant Buffet which company will provide the best return on equity. (5 Marks)
3.1.2 Discuss what other matters, including risk, Warren should consider when comparing them working capital strategies. (10 Marks)
3.2 The most appropriate pattern of financing working capital is to match the length of the financing terms to the length of the current asset terms. Critically discuss the validity of the statement and the difficulty in achieving such an objective. (10 Marks)

QUESTION FOUR (25 Marks)
The following firms are listed on the Johannesburg Stock Exchange (JSE) and operate in the financial services sector. Assuming you are the Chief Investment Officer (CIO) at a leading investment firm and have determined the amount of surplus cash for the year, after the investment generated by each firm and the dividend paid for the year as shown in Table 4.1. The average return on equity for the last 5 years is reported below and this is sustainable for the foreseeable future.

R million R million Surplus Cash for the Year

Dividends paid in the Year

ROE Beta
ABSA Bank Limited 60 40 8 0.80
Barclays Africa Group Limited 65 17 18 1.30
Blue Financial Services Limited -20 10 4 1.25
First Rand Limited 25 17 2 0.90
RMB Holdings Limited -10 13 16 1.05
Table 4.1
The risk-free rate of return is 7% and the average return on the market was 12%.

Required:
4.1 As an institutional investor, what influence would you try to exert on management regarding the dividend? (Motivate your decisions to influence management with relevant calculations) (10 Marks)
4.2 With the aid of relevant examples critically discuss ANY FIVE (5) factors affecting dividend policy under the following headings; (15 Marks)
4.2.1 legal constraints (3 Marks)
4.2.2 growth prospects (3 Marks)
4.2.3 dividends payments (interim and final) (3 Marks)
4.2.4 market consideration (3 Marks)
4.2.5 the clientele effect (3 Marks)
4.2.6 signalling (3 Marks)
4.2.7 agency considerations (3 Marks)

QUESTION FIVE (25 Marks)
ETHICAL DILEMMA - CHANCES ARE WHAT THEY DON’T KNOW WON’T HURT THEM!

Futuristic Electronic Technologies (FET) recently released a new advanced electronic micro system to be used by financial institutions, large corporations, and governments to process and store financial data, such as taxes and automatic payroll payments. Even though FET developed the technology used in the creation of the product, FET’s competitors are expected to possess similar technology soon. To beat the competition to the market, FET introduced its new micro system a little earlier than originally planned. In fact, laboratory testing had not been fully completed before the product reached the market. The tests are complete now, and the final results suggest the micro system might be flawed with respect to how some data are retrieved and processed. The tests are not conclusive, though, and even if additional testing proves that a flaw does exist, according to FET, it is of minuscule importance because the problem seems to occur for only one out of 100 million retrieval and processing attempts. The financial ramifications associated with the flaw are unknown at this time.

Required:
5.1 What should you do? Should you encourage FET to recall the micro system until further testing is completed? Or can you suggest another course of action? Critically discuss the various options and their implication on the financial strategy of FET. (15 Marks)
5.2 The Board of Directors of Triple K Limited is comparing two different capital structures: an all-equity plan and a levered plan. Under the all-equity plan, Triple K would have 10 000 000 shares in issue. Under the levered plan, there would be 5 000 000 shares and 10% perpetual debt worth R200 million. The tax rate is 25%.
Required:
5.2.1 Calculate what the profit before interest and tax (PBIT) would have to be for Triple K to have the same earnings per share (EPS) under each capital structure (break-even PBIT), and calculate this EPS.

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