INV3701 Assignment 2 Semester 2 2023

INV3701 Assignment

• Semester 2

2023

ASSIGNMENT

QUESTION 1

• Which one of the following statements is most likely correct?

• Valuation is the estimation of the value of a firm’s tangible assets.
• Mispricing is the departure of market price from the estimated intrinsic value.
• Going concern value of a company is its value if it were dissolved and its assets sold individually.

Mispricing is the departure of the market price from the estimated intrinsic value.

Refer to pages 2–5.

QUESTION 2

• Calculate the total capital charge.

1. R192 000

2. R300 000

3. R492 000

For questions 2 to 4, refer to pages 464–467.

Calculation:

EBIT 735 000

Less: Interest expense (a) (320 000)

Pre-tax income 415 000

Less: Income tax expense (b) (166 000)

Net income 249 000

Calculations:

a. Debt : Equity

2 : 1

Debt = Total Assets × ⅔

= 6 000 000 × ⅔

= 4 000 000

Interest Expense = Debt × Cost of Debt

= 4 000 000 × 8%

= 320 000

• Income Tax Expense = Pre – Tax Income × Tax Rate

= 415 000 × 40%

= 166 000

Equity Charge a. 192 000

Plus: After-tax debt charge b. 300 000

Total Capital Charge 492 000