Question 1 1.1 What is their profit margin?

Profit margin Net profit after tax Sales R 73,500 R 2,159,155 3.4%

100 100

1.2 Calculate their total assests to turnover Total assets to turnover Revenue Total assets R 2,159,155 R 560,000 3.86%

1.3 Calculate their ROE (Using the Du Pont identity) Return on Equity

ROE =

NPAT Sales 73500 2159155 0.034041095 0.22

Sales NA 2159155 84000 25.70422619

1.4 Three-Step DuPont To avoid mistaken assumptions, a more in-depth knowledge of ROE is needed, DuPont analysis shows the causes of shifts in the number. The three-step equation breaks up ROE into three very important components: ROE = (Net profit margin)* (Asset Turnover) * (Equity multiplier) These components include:

Operating efficiency - as measured by profit margin. Asset use efficiency - as measured by total asset turnover. Financial leverage - as measured by the equity multiplier. The Three-Step DuPont Calculation

The three-step equation breaks up ROE into three very important components: ROE = (Net profit margin)* (Asset Turnover) * (Equity multiplier) These components include:

Operating efficiency - as measured by profit margin. Asset use efficiency - as measured by total asset turnover. Financial leverage - as measured by the equity multiplier. The Three-Step DuPont Calculation Taking the ROE equation: ROE = net income / shareholder's equity and multiplying the equation by (sales / sales), we get:

ROE = (net income / sales) * (sales / shareholder's equity)

We now have ROE broken into two components, the first is net profit margin, and the second is the equity turnover ratio. Now by multiplying in (assets / assets), we end up with the three-step DuPont identity:

ROE = (net income / sales) * (sales / assets) * (assets / shareholder's equity)

This equation for ROE, breaks it into three widely used and studied components:

ROE = (Net profit margin)* (Asset Turnover) * (Equity multiplier)

ROE is broken down into net profit margin (how much profit the company gets out of its revenues), asset turnover (how effectively the company makes use of its assets), and equity multiplier (a measure of how much the company is leveraged). The usefulness should now be clearer. If a company's ROE goes up due to an increase in the net profit margin or asset turnover, this is a very positive sign for the company. However, if the equity multiplier is the source of the rise, and the company was already appropriately leveraged, this is simply making things more risky. If the company is getting over leveraged, the stock might deserve more of a discount, despite the rise in ROE . The company could be under-leveraged as well. In this case it could be positive, and show that the company is managing itself better. (Learn to take a deeper look at a company's profitability with the help of profit-margin ratios in The Bottom

Question 2 2.1 What is the dividend yeild for each of these four shares? Dividend yield Dividend yield

= =

Dividends Market value Dividends Shareholders required return - growth

Maket Value

Share A Maket Value

= =
R 99.00

Year 1 4.5(1.10) (0.15 - 0.10)

Dividend yield

= =
5%

4,95 R 99

Share B Maket Value

= =
R 30.00

Year 1 4.5(1 ) (0.15 - 0.00)

Dividend yield

= =
15%

R 4.50 R 30

Share C Maket Value

= =
R 21.38

Year 1 4.5(0.95) (0.15 - (- 0.05))

Dividend yield

= =
20% Year 2 R 6.48

R 4.28 R 21.38

Share D Dividend Growth

Current R 4.50

Year 1 R 5.40

Maket Value

= =
R 271.00

Year 3 R 7.26 Year 3 (7.26*1.12) (0.15 - 0.12)

Dividend yield

= =
3%

R 8.13 R 271

2.2 What is the expected capital gains yields Capital gains yield

= = =

(P1 - P0) P0 R99-R90 R 90

Share A

10%

Share B

= =

R30-R30 R 30

0% R21.38 -R22.50 R 22.50

Share C

= =

-5% R271-R150 R 150

Share D

= =

80.7%

2.3 Discuss the relationship amoung the various returns that you have calculated for each of these returns

1. Under constant growth, both dividends and price grow at the same rate g, and hence the dividend yield and the capital gains yield remain constant over time. 2. The relationship between dividends and capital gains yield is that dividends is one of the major determinants of equity value. 3. Both are components of stock returns. 4. The dividend yield on a company stock is the company's total annual dividend payments divided by its market capitalization, or the dividend per share, divided by the price per share 5. The price appreciation component of a security's (such as a common stock) total return. For stock holdings, the capital gains yield will be the change in price divided by the original (purchase) price.

As growth increases from year ti year like in the case for share D, so to does the dividend and capital gains yield increase

As growth decreases from year ti year like in the case for share C, so to does the dividend and capital gains yield decrease As growth remains constant from year to year like in the case for share B, so to does the dividend and capital gains yield remain unchanged

Question 3 3.1 What are the value of Ambani to Jay-Balan? Earnings per share

Eps

Earnings after tax Number of shares Ambani

= =
Price per share

R 570,000.00 500000

R 1.14

Pps

PE Ratio x EPS Ambani

= =
Dividends per share

8 X 1.14

R 9.12

Dps

Dividends Number of share Ambani

= =

R 270,000.00 500000

R 0.54

Required return

D1 Po

Ambani (0.59 X 1.045) R 9.12 11.3% Envisaged return: Price of Ambani using new growth Do X New Growth Current return - New Growth

4.5%

= = =
Value of Ambani

0.54 X 1.075 11.3 - 7.5 0.58 0.038 R 15.26 No of shares X PPS

= =
Question 3.2

500,000 X R15.26 R 7,630,000.00

R7630000 - (500000*R9.12)

R 3,070,000.00

Question 3.3 NPV = R7630000 - (500000 X R19)

-R 1,870,000.00

Question 3.4 Earnings of Ambani PE Ratio Maximum price (Earnings X PE ) Question 3.5 NPV @ 110000 shares

R 570,000.00 8 R 4,560,000.00 Market value of Jay Balan + Ambani Issued shares in Jay Balan + New Shares (11 X R2200,000) + (R7630,000) 1100000 + 110,000 R 31,830,000.00 1210000 R 26.31

= = = =

R26.31 x 110,000

=
Question 3.6

R 2,894,100.00

The better acquisition model would be the offer to give 110,000 Jay balan shares in exchange for the Ambani shares The reason why this way is better is that the cost is far more less then the cash purchase of the shares

Question 4 4.1 Discuss any 3 reasons for leasing assets rather than owning them.
1. 2. 3. 4. The asset will be obsolete before it is fully depreciated from an accounting standpoint. When the current year capital budget is not large enough to support the purchase of the asset. When the time period for using the asset is shorter than the asset's useful life and your organization doesn't want the burden of reselling the asset. When purchasing the asset would require extensive record keeping and asset management and your organization does not have sufficient record keeping or asset management resources. When your organization needs to demonstrate a stronger financial position to its customers, prospects, potential and current investors, creditors, and others. Unlike leasing, financing a purchase shows debt on the balance sheet. Too much debt is unattractive to the aforementioned constituencies. There's usually a tax benefit associated with leasing where you get to deduct the full lease payment immediately.

5.

6.

4.2.1

Determine the present value of cash flows associated with each alternative The purchase option Details Yrs Cash flow 13% Purchase Now -R 600,000.00 1 License cost 1 to 4 -R 10,000.00 2.9745 Maintenace cost 1 -R 5,000.00 0.885 2 -R 5,000.00 0.7831 3 -R 9,000.00 0.6931 4 -R 20,000.00 0.6133 Sale 4 R 90,000.00 0.6133

The Leasing option Details Deposit Annual payments Deposit Refund

Yrs Now 1 to 4 4

Cash flow -R 80,000.00 -R 120,000.00 R 80,000.00

13% 1 2.9745 0.6133

4.2.2

The option I would recommend is the lease option The reason why I would recommend the lease option are as follows - The cash flows from The lease option are lesser than The purchase option - The cash saving is R213,516.40 - There are no annual maintenance cost of license cost associated with the lease option - There are lesser operating cost with the lease option

NA Equity 84000 339394 0.247499956

ROE is needed, DuPont

nt components: y multiplier)

er. r.

nt components: y multiplier)

er. r.

older's equity and

older's equity)

he first is net profit ow by multiplying in p DuPont identity:

ssets) * (assets /

used and studied

rnover) * (Equity

company gets out of its use of its assets), and equity The usefulness should now

margin or asset turnover, ty multiplier is the source of this is simply making things might deserve more of a r-leveraged as well. In this ng itself better. (Learn to take margin ratios in The Bottom

D1 MV D0 (1 + g) KE - g

Current R 4.50 (0.15 - 0.10)

R 90.00 R 4.50 R 90

5%

Current R 4.50 (0.15 - 0.10)

R 30.00 R 4.50 R 30

15%

Current R 4.50 (0.15 - (- 0.05))

R 22.50 R 4.50 22.50

20%

= = = =
3% R 150.00

Current R 4.50 (0.15 - 0.12)

R 4.50 R 150

ulated for each of these returns

e grow at the same rate g, and eld remain constant over time. gains yield is that dividends is

company's total annual dividend r the dividend per share, divided

(such as a common stock) total d will be the change in price

D, so to does the dividend

C, so to does the dividend

or share B, so to does the dividend

of Jay Balan + Ambani n Jay Balan + New Shares

0,000) + (R7630,000) 000 + 110,000

1,830,000.00 1210000

cash purchase of the shares

accounting standpoint. pport the purchase of the

sset's useful life and your

ord keeping and asset record keeping or asset

financial position to its tors, and others. Unlike heet. Too much debt is

ou get to deduct the full

PV of cash flows -R 600,000.00 -R 29,745.00 -R 4,425.00 -R 3,915.50 -R 6,237.90 -R 12,266.00 R 55,197.00 -R 601,392.40

PV of cash flows -R 80,000.00 -R 356,940.00 R 49,064.00 -R 387,876.00

ted with the lease option