MAC3702/202/2026 2 SOLUTION FOR ASSIGNMENT 02 SUGGESTED SOLUTION QUESTION 1; TECH-SAVVY

MAC3702/202/2021 Department of Management Accounting Tutorial Letter 202 MAC3702 APPLICATION OF FINANCIAL MANAGEMENT TECHNIQUES SEMESTER 1 & 2 The new blockchain coding infrastructure must be financed through a fresh issue of ordinary shares (R190 000); issue of preference shares (R360 000); top-up of the FNB Bank loan (R50 000) and a loan from Crypto Bank of R200 000. Notes For this question, students are required to work out how the R800 000 required will be financed. In order to do that students must first consider that after the additional finance is achieved, debt:equity ratio must be 1:1. Students must then choose and prioritize the instruments based on the cost of the instrument. (a) Target capital structure (50: 50) ✓✓. Given that the total capital after financing the new initiative is R2 820 000, the break-down of debt to equity is R1 410 000 debt and R1 410 000 equity. MAC3702/202/2021 3 (b) Long-term loans are utilized first because they have a lower after-tax cost (x) than the preference shares (15%). (cheaper than preference shares, therefore reducing WACC) (c) Balancing amount: R800 000 – R190 000 – R200 000 – R50 000 = R360 000 PART (b) (13 marks) Weighted average cost of capital (after purchase of new Block chain infrastructure) Capital structure Market values Portion of capital structure Cost of capital WACC Ordinary shares  7 690 000 0,85 20,07% 17,00% Preference shares  460 800 0,05 11,00% 0,56% Long-term loan – FNB  730 000 ✓ 0,08 12,00% 0,96% Long-term loan – Crypto 200 000 ✓ 0,02 13,32% 0,29% Total 9 080 800 1/100%✓ 18.81% ✓ Can also round to 19% (to be used in part (c) as the discount rate). ALTERNATIVE: Capital structure Market values Portion of capital structure Cost of capital WACC Ordinary shares  7 690 000 0,83 20,07% 17,32% Preference shares  654 545 0,07 11,00% 0,60% Long-term loan – FNB  730 000 ✓ 0,08 12,00% 0,73% Long-term loan – Crypto 200 000 ✓ 0,02 13,32% 0,23% Total 9 274 545 1/100%✓ 18.65% ✓ Can also round to 19% (to be used in part (c) as the discount rate).  Ordinary shares Market value: [(R500 000/80c) x R12] ✓ + (R190 000✓ new issue already at MV) = R7 690 000 MAC3702/202/2021 4 ?? = ?1 ?0−?? + g ?? = 1,16✓ 12−0,48✓ + 0,10 ✓ Ke = 20,07% fc = floating (issue) costs D1 = R1,16 (calculated below) g = 10% (calculated below) P0 = R12 fc = R12 x 4% = R0,48 ¤ Dividends: Average increase: (11,11% + 13,75% +4,4% +10,74%) /4 = 10% 2022 dividend: 105,2 x 1,10 = 115,7 = 116 cents  Preference shares Because the preference shares are non-redeemable, the Gordorn’s growth model is used to calculate the market value of the preference shares. ?? = 11% (given) Mv = (1200 ((prefs before new issue in part (a))+ 3600 (new issue)) R96 = 4800✓ x R96 ✓ = R460 800 ALTERNATIVE: Because the preference shares are non-redeemable, the Gordorn’s growth model is used to calculate the market value of the preference shares. D1 = (1200 ((prefs before new issue in part (a))+ 3600 (new issue)) * 15% * R100 = 4800*15%* R100 = R72 000