RISK MANAGEMENT AND POLICY (HBUM 426)

DUE DATE : 10 OCTOBER 2017

ASSIGNMENT 1

QUESTION 1

The Directors of Kudiwa Industries have appointed you as their financial

consultant. They are seeking new project investments and require you to
calculate the present cost of capital of the company.

The capital structure is listed below:

2 million ordinary shares with a par value of 50 cents each, currently trading
at $4 per share. The company has a beta () of 1.3, the risk free (Rf) rate is
8% and the return on the market (Rm) is 18%.

1.5 million 13%, $2 preference shares, with a market value of $2.5 per share.

$3 million 11%, debentures due in 5 years and the current yield-to-maturity

is 8%.

$800 000 16%, bank loan, due in December 2019.

Additional information:

The dividend growth of 12% per annum was maintained for the past 4 years.

The latest dividend paid was 80 cents per share.

Assume a company tax rate of 30%.

Required:

Calculate the weighted average cost of capital. Use the Capital Asset Pricing
Model to calculate the cost of equity. (22 marks)

Calculate the cost of equity, using the Gordon Growth Model. (3 marks)
ASSIGNMENT 2 QUESTION 1

To maximise share price, the financial manager must learn to assess risk and
return.

In the light of the above statement, outline and explain the different that any
organisation can be exposed to. (15 marks)

Describe cash dividend payments and the role of dividend reinvestment plan
in an organisation. (10)
GROUP ASSIGNMENT

QUESTION 1

Kudiwa (Ltd), South Africa, is a specialist manufacturer of security doors and

gates. In seeking to expand its operations, it has the opportunity to acquire a
French subsidiary company, Lyon Guard, or set up a new division in its home
market.

The relevant figures for these two options are:

Set up new division at home Rand

Cost of setting up premises 40 000 000

Cost of machinery 18 000 000

Annual sales 25 000 000

Annual variable cost 7 000 000

Additional head office expenses 1 000 000

Existing head office expenses 800 000

Depreciation: machinery 10% on cost annually 4 000 000

Acquisition Euro

Acquire shares from existing shareholders 14 000 000

Annual sales 8 000 000

Annual variable costs 4 000 000

Annual fixed costs 1 000 000

Consultant fees 500 000

Additional information:

The project is expected to last for 10 years.

Kudiwa (Ltd), current cost of capital is 12%.

The French inflation is expected to be below the South African inflation by 1% per year,
throughout the life of this investment.
The current exchange spot rate is R14 to the Euro ().
Required:

Make all necessary calculations for the two options. (22 marks)
Advise Ballard (Ltd) on the viability of these two opportunities. (3 marks)