# 9053

**Questionone: 10 Marks **

- What is meant by each of each of the following statements?

a. “The present value of the future cash flows expected from an investment project is R30,000,000”. (2)

b. “The net present value (NPV) of an investment project is R10,000,000”. (2)

c. “A project’s cost of capital is 10 percent”. (2)

1.2. What are managerial options embedded in an investment projects? Give some examples. (4)**Question Two: 20 Marks **

On March 22, 2017, Woodlands paid annual dividend of R2.50 per share. Because Woodlands’ financial prospects are particularly bright, investors believe that the company will increase its dividend by 20 percent per year for the next four years. After that, Woodlands will increase the dividend at a modest annual rate of 4 percent. Investors require a 16 percent return on Woodlands stock, and Woodlands always make its dividend payment on March 22 each year.**Required: ****6.1.** What is the price of Woodlands stock on March 23, 2017? [2]**6.2**. What is the price of Woodlands stock on March 23, 2018? [2]**6.3.** Calculate the percentage change in price of Woodlands stock from March 23, 2017, to March 23, 2018. [2]**6.4**. For an investor who bought Woodlands stock on March 23, 2017, received a dividend on March 22, 2018, and sold the stock on March 23, 2018, what was the total rate of return on the investment? How much of this return came from the dividend, and how much came from the capital gain? [4]**6.5.** What is the price of Woodlands stock on March 23, 2021? [3]**6.6**. What is the price of Woodlands stock on March 23, 2022? [3]**6.7.** For an investor who bought Woodlands stock on March 23, 2021, received a dividend on March 22, 2022, and sold the stock on March 23, 2022, what was the total rate of return on the investment? How much of this return came from the dividend, and how much came the capital gains? Comment on the differences between your answers to this question and your answers in part (6.4).**Question three: 15 Marks **

Kebla is evaluating the viability of going public but is unsure of a fair price for the company. The company would like to make its estimate of the company’s common stock and data has been collected to perform the valuation using the free cash flow valuation model.

The company’s weighted average cost of capital is 12 percent and it has R1,600,000 of debt at market value and R600,000 of preferred stock at its assumed market value. The estimated free cash flows over the next five years, 2019 through 2023, are given below. It is envisaged that the free cash flow will grow at 4 percent annually for the foreseeable future beyond 2023. Year (t) Free Cash Flow (FCF) 2019 230 000 2020 270 000 2021 300 000 2022 350 000 2023 400 000

**Required: **

7.1. Estimate the value of Kebla’s entire company using the free cash flow approach. [5]

7.2. Using your finding in 7.1 along with data provided above, determine Kebla’s common stock value. [5]

7.3. If the company plans to issue 240,000 share of common stock, what is it estimated value per share? [5]

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