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Assignment Task
 

QUESTION ONE - The directors of Lidiya Limited have appointed you as their financial consultant. They are considering new investment projects and need you to calculate the cost of capital for the company.

The present capital structure is as follows:
Two million ordinary shares with a par value of 75 cents per share. These shares are currently trading at R4.50 per share and the latest dividend paid is 30 cents. An average dividend growth of 13% is maintained.
 One and a half million 14% R3.00 preference shares, with a market value of R5.00 per share.
 R2 000 000 non-distributable reserves.
-to-maturity is 6%, and
 R900 000 13% bank loan.

Additional information:
The company has a beta of 1.7, a risk-free rate of 5% and enjoys a premium of 8%.
The company's tax rate is 30%.

Required:
1 Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of equity. (20)
2 Calculate the adjusted weighted average cost of capital, using the Capital Asset Pricing Model as the cost of equity. (5)

QUESTION TWO
The following cash flow statement of Amo Limited is presented to you:
Amo Limited
Cash flow statement for the year ended 31 June 2020
R
Cash flow from operating activities (255 000)
Operating loss (280 000)
Adjustments
Depreciation 100 000
Profit before working capital changes ( 180 000)
Working capital changes 55 000
Increase in inventory (200 000)
Increase in receivables (175 000) 

Required:

1 Explain why depreciation was included in computing the cash flow from operating activities.

2 Calculate the following:

2.1 net increase/decrease in payables

2.2 net increase/decrease in cash for the year

2.3 cash balance on 1 July 2019

3 Based on the cash flow informa Refer to at least five (5) items appearing on the cash flow statement within your discussion.

4 The long term loan was increased during the financial year. Explain whether or not this was a wise decision clearly stating your reasons.

5 Comment on the dividend policy of the company.

6 Suggest two ways in which the company can improve its liquidity.

 

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  • Posted on : July 22nd, 2019

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