Volatile Movements in  Royal’s Share Price - Market Price of the Shares - Finance Assignment Help

Assignment Task :

Exchange rates

At 1 January 2022 the spot exchange rate is expected to be R1/P1.1 (that is R1=P1.1). The Pula is expected to weaken against the Rand. This is in line with the differential in the long term interest rates between the two countries over the life of the project. The interest rates are expected to remain stable at 0.5% per annum in South Africa and 1.5% per annum in Botswana for the foreseeable future.

Funding the project

The initial investment of P950 000 000 will be funded by a rights issue at the beginning of January 2022. The realisable value for the plant and equipment is estimated at P630 000 000. This amount will be repaid in full to South Africa. In December 2021 the Royal ltd announced a rights issue of 1 for 4 to fund the proposed P950 000 000 capital investment project. The proposal for the new Magazine was accepted a week ago. Royal ltd would like to proceed without delay. The company will temporarily reduce the dividend growth rates during the development stage of the project. 

Investment criteria

Criterion 1

T Royal ltd assesses international projects using the NPV criterion. A risk adjusted discount rate of 12% is used.

Criterion 2

The royal requires international projects to generate an accounting rate of return of at least 25% per year. ARR is defined as follows:

Average accounting profit before interest and taxes /average annual investment

Ignore taxes in your calculations

Required:

1. Discuss the reasons for the volatile movements in  Royal’s share price (no calculations required)  

2. Discuss the risks that should be considered by Royal in evaluating the project(show calculations where necessary)  

3. Determine the fair market price of the shares after acceptance of the project and after the rights issue  

4. Determine the impact of the project on Royal’s financial objectives 

5. Evaluate the project using the NPV criterion 

6. Evaluate the project using the ARR criterion 

Section B: Short Cases 

1. Suppose that an investor selects companies; A and B from the Johannesburg stock exchange. He observes that for the past ten years company A yielded an average investment return that is twice that of B. Explain whether this contradicts the efficient market hypothesis.                                

2. John is a sophomore (second year student) at the North West University business school. He has just finished lectures on investment management in his financial management module. He borrowed R500 000 from the bank and invested in a portfolio of equities listed on the Johannesburg stock exchange. He believes that his investment in the portfolio of shares should be actively managed otherwise he will suffer great losses. Explain whether his belief is justifiable according to the efficient market hypothesis                                                                                   

3. Are there any advantages that can be obtained from insider trading if the market is strong form efficient? Explain                                                       

4.  In South Africa the national lottery is run weekly. In this lottery the purchaser of a ticket selects six different numbers from 1 to 50 inclusive. If those same six numbers are then drawn randomly from a hat on live television, the ticket holder wins a share of a large cash sum equal in value to the total ticket sales. Explain whether the South African market for lottery tickets is weak form efficient.                

5. During the MBA study school at the North West University last summer, four students decided to form an investment club. They made the following proposals for the new equity investment for the club:

6. George proposes that they buy shares in South32 ltd because it has performed poorly during the past two years and so they are due for an upturn.

7. Grace wants to invest in Sibanye Gold ltd. There is a rumour that they have appointed the head of marketing. This new employee is believed to have had success at other companies. So Grace felt that this new employee will have a positive effect at Sibanye Gold ltd.

8. Tshepo believes in selecting shares at random. He recommended that they buy shares in FNB ltd.

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