This question paper consists of five (5) pages PLUS Appendix A page (i).

This is an OPEN-BOOK examination.

Student number:

Examination Centre:

INSTRUCTIONS TO CANDIDATES:
Answer ALL the questions.
Please use the examination answer book supplied.

THIS EXAMINATION PAPER MUST BE RETURNED WITH THE EXAMINATION SCRIPT.

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QUESTION 1

(10 marks)

Is the share index an appropriate representation of the market? Please discuss.

QUESTION 2

(15 marks)

Ndlovu (Pty) Limited's required rate of return is 10%. The company is considering the purchase of
three machines, as indicated below. Consider each machine independently.
Required:

2.1

Machine A will cost R75 000 and have a life of 15 years. Its salvage value will be
R3 000, and cost savings are projected at R10 500 per year.
Compute the machine's net present value.

2.2

(5)

How much will Ndlovu (Pty) Limited be willing to pay for Machine B if the machine promises
annual cash inflows of R15 000 per year for 8 years?

2.3

(4)

Machine C has a projected life of 10 years. What is the machine's internal rate of return if it
costs R90 000 and will save R18 000 annually in cash operating costs? Would you recommend
purchase? Explain.

(6)

QUESTION 3

(10 marks)

Gamma Limited is contemplating using a certain amount of its profits to either pay a cash dividend of
R4 per share or to repurchase some of its ordinary shares. For the current year the enterprise has
distributable profits of R8 000 000, and 1 000 000 ordinary shares are issued.

The par value of these shares is R120. Should the enterprise decide to repurchase shares, it will have
to pay the current market price of R136 per share.

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Required:

3.1 Calculate the current earnings per share?

(2)

3.2 If the enterprise decides to rather repurchase shares, how many ordinary shares can it buy-back
with the profit allocated for dividends?

(4)

3.3 What will the earnings per share be after such a repurchase?

QUESTION 4

(4)

(25 marks)

Malan Limited is a company quoted on the main JSE Securities Exchange SA.
MALAN LIMITED: BALANCE SHEET AT 30 JUNE 2012

Rm

Rm

Fixed Assets

300

Current assets

280

Stocks

70

Debtors

120

Cash
Creditors (amounts falling due within one year)

90
(400)

Creditors (amounts falling due after more than one year)

(50)

Net Assets

130

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Other information
MALAN LIMITEDS TRADING HISTORY
Year-end

EPS (cents)

Dividend per
share (cents)

2012

20

10

2011

18

9.5

2010

17

2009

16

2008

13

2007

12

2006

10

5.5

2005

10

Malan Ltd has demonstrated an equity beta of 1.2 and this may be used as the appropriate adjustment
to the risk premium on the average share. The risk-free rate of return on RSA Treasury bills is 6.5%
and the risk premium for equities over risk-free securities has averaged 5% per annum.
The average annual growth in Malans earnings and dividends over the last few years is likely to
persist.

Shares in issue: 1 000 million. There have been no new issues of shares in the past eight (8) years.
Required:

4.1

Calculate a net asset value for each of Malans shares after adjusting the balance sheet
for the following:

Tangible assets are worth R350m more than shown in the balance sheet;

25% of the debtors figure will never be collected; and

In your judgement Malans directors have overestimated the stock value by R30m.

4.2

Briefly describe two circumstances where NAVs became very important for company valuation.

(6)

(5)

4.3

Use a dividend valuation model to calculate the value of one share in Malan Ltd. Assume that
future dividend growth will be the same as the average rate for recent years.

(6)
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4.4

Calculate the weighted average cost of capital (WACC) for Malan Ltd on the assumption that
the share price calculated in question 4.3 is the market share price and the entry creditors
(amount falling due after more than one year) consists entirely of a debenture issued at a total
par value of R50m.

The debenture will pay a coupon of 8 cent in one year, followed by a similar coupon in two
years from now. A final coupon will be paid in three years upon redemption of the debenture at
par value. The debenture is currently trading in the secondary market at R96.50 per R100
nominal.

For the purpose of calculating the weighted average cost of capital the tax rate may be
assumed to be 30 per cent.

QUESTION 5

(8)

(40 marks)

Given the data in the five year review of OANDO (attached), calculate the value per share. Test
whether the difference in share price between SA and Nigeria is significant. 31 July 2013 was 0.0617
South African Rand = 1 Naira. The share trades at 12.90 Naira in Nigeria and at R0.73 on the JSE.

SEE MBL2 APPENDIX A

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