CORPORATE FINANCE (CF601)

Discussion Exercises
1. You are the Finance Manager of JKL Corporation, a Regional Oil
company with offices all over Eastern and Southern Africa. You have only
recently been promoted to the position, after an intensive IT course in South
Africa, where you learnt all about back-up systems necessary redundancy. You
have been invited to the Board meeting at Victoria Falls on the banks of the
mighty Zambezi river, to assist the MD do a good job of presenting the accounts
for the current year ending. You have been fiddling with your sophisticated
laptop after printing out all the financial documentation and accounts for the
Board. But then, it has ‘hung up’ beyond your capacity to wake it up. You will
need to take it to the technician in two days time, after the board meeting.

“No problem”, you reassure yourself. “I already have all the required printouts”.
As you are sitting on the veranda of your hotel-room, a strong wind blows most
of your printouts and accounts into the roaring Victoria Falls. Your heart skips a
few beats and you immediately rush to the washroom. When you come out from
there you zero in on a single strategy. You now frantically try to salvage the
dustbins in your hotel room for the data that made up some of your final
accounts.

Below is a list of the only details that you have managed to salvage from the
dustbins, some of them long emptied by the overzealous housekeeping and
grounds staff. It took you 45 good minutes to compile these sketchy details.

JKL CORP
Balance Sheet as at 30th April, 2004

Current Assets Current Liabilities

Cash xxxx Bank O/D xxxx

Debtors’ xxxx Creditors xxxx
Stocks xxxx Totals $120,000
Totals $240,000
6% Loan xxxx

jacksonkilimba@gmail.com Page 1
Fixed Assets Owners Equity

Equip/Build xxxx Capital xxxx

Other 20,000 Ret/Profit $30,000

JKL Corp P&L for the year ending 30th April 2004

Net Sales xxxx

Cost of Sales (xxx)
Gross Profits $281,800.
Administration Expenses (xxxx)
Net Operating Profit Before Tax xxxx
Interest Expense ($12,600)

Net Profit Before Tax xxxx

20% Taxes (xxxx)
Net After Tax Profits $56,000.
Dividends ($36,000)

Transferred to O/E $20,000.

Additional Information:

 You also remember that the current Ratio was 2 times.

 The item interest expense was in respect of the long-term loan.
 Stock turnover was 5 times.
 Debtors’ collection period was 61.877 days approximately.
 Acid Test Ratio was 1.5 times.
 Bank Overdraft was $50,000.
 Fixed asset turnover was 1.818125 times.
 Retained Earnings from the last period was $10,000.
 All sales are on credit terms. (Use a 360-day year)

Required:

(a) What actually went wrong? How could it have been prevented?
(b) What can you do now?

jacksonkilimba@gmail.com Page 2
Go ahead and fill in the gaps as accurately as you possibly can, and show the
MD that you were worth the invitation. (After all, you have also just recently
successfully completed the ESAMI financial analysis course in Harare). She is
by now aware that you have lost all the key pages of your financial accounts.
Your presentation is tomorrow morning at 9 a.m.
2. Using the data below, which the financial market staff of XYZ ltd. have
scouted out from the various lenders, complete the schedule provided below:
(all ‘costs’ are after tax):

Weight/ proportion of debt Cost of Cost of WAAC

capital debt equity

0.0 0 10% -----

0.1 6.0% 10.1% -----
0.2 6.1% 10.2% -----
0.3 6.5% 10.3% -----
0.4 7.0% 10.5% -----
0.5 8.9% 11.5% -----
0.6 10.0% 13% -----
0.7 12% 15% -----
0.8 14% 20% -----
0.9 18% 25% -----
1.0 20% 30% -----

Required: a) What is the weighted average cost of capital funds (WACC) at

each level of combination of debt and equity?
b) At what combination of debt capital and owners’ capital is the WACC
lowest?
c) Using graph paper, plot the cost of owners’ equity curve; the cost of debt
curve, the WACC curve.
d) For the given business, estimate the “optimal” capital structure. Explain its
significance to the finance manager.
Discussion question 3

jacksonkilimba@gmail.com Page 3
Why does the “cost of capital” equal the “required rate of return”, for a
commercial firm? Explain.
Discussion question 4
Explain the circumstances in which a new project or product could be evaluated
as to its viability, using only the marginal cost of capital funds.
Discussion question 5
“The cost of capital for the firm is influenced by the elements contributing to
the total pool of capital funds at any given time”. Do you agree? Explain.
Discussion question 6
Karumuna Enterprises Ltd; has an existing long term bond, $100 par value, for
which the interest charge is currently 10% p.a. The bond is presently selling in
the market for $85. The business wants to raise new funds by issuing a new
bond with a par value of $100. The market is willing to pay that price. The cost
of the new issue of bonds is 1% of the par value. The interest will have to be
attractive, and thus the new bond is paying 12.5%.
Required: Find the present cost, and marginal cost of debt for this business.
Explain/Discuss.
Discussion question 7:
ABC Company is considering raising new long term funds of 100m/= to
facilitate plant expansion and modernization. Presently it has the following
capital structure as reflected in its most recent balance sheet. A Long term loan
totalling 100m/= at 6% per year and owner’s equity reflecting 300m/= in paid
up capital and 100m/= in retained profits. Cost of equity capital has been
computed at 15% p.a. The options available to ABC are to either borrow long
term in the form of bonds with each bond having a par value of 100/= and
carrying an interest cost of 14% p.a. The cost of floating one bond averages 2/=.
Alternatively the company can float and sell new shares to raise the 100m/=, at
a total floatation cost of 4,000,000/=.
Required:
(a) What choice should the company take, all other things remaining
equal?
(b) What is the (i) current WACC and (ii) new WACC on the basis of the
selected choice?
(c) Which of the following potential projects and their respective annual
returns would be acceptable to ABC under the new conditions in (b)
above: (i) A=21%; (ii) B=17%; (iii) C=16.4%; and (iv) D=15.1%?
Introduction to Financial Tables

jacksonkilimba@gmail.com Page 4
8. You will receive $73.268 million five years from today. How much is it
worth today if the applicable interest rate were 10% p.a.?
9. If you had the option of receiving now $45.48 million, or an annual
instalment of $12.0 million at the end of each of the next five years. Which
option would you prefer, (applicable interest rate stable at 10% p.a.) all other
factors remaining equal? Why?
10. You decide to deposit now some $45.48 million into a bank accounting
earning compound interest at the rate of 10% p.a. How much will you be able to
withdraw at the end of year four, assuming no withdrawals or other deposits
were made into the account over the said period?
11. You are making an annual deposit of $12.0 million into a sinking fund,
beginning now and at the beginning of each of the next four years. How much
will you be able to withdraw at the end of year four/ beginning of year five, if
the fund were earning an interest rate of 10% compounded annually? Discuss
with your team mates.
Capital Budgeting and CBA:
12. General
(i) Differentiate between Investments appraisal and Capital Budgeting.
(ii) Intelligently estimate the internal rate of return of a project whose
operating and financial characteristics are as follows: Initial investment outlay
of $65,000; net after tax cash inflows of $18,000 per year. Project life span is 8
years.
(iii) What would your recommendation be if the firm’s cost of capital
were 12% p.a., and that the equipment was being considered for purchasing?
Why?
13. General:
Hamutemba Company is considering two mutually exclusive investments. The
projected cash flows for each are shown below:

Project 0 1 2 3
L -$90 10 39 90
M -$90 40 60 25

(i) Assuming that the cost of capital for both investments is 14%,
determine the Net Present Value (NPV) of each. Which should be
selected?
(ii) Assume that the cost of capital for both investments is now 18%,
determine their NPVs. Which should be selected? Explain why your
decision is altered.

jacksonkilimba@gmail.com Page 5
14. General Capital Budgeting Exercise
Kabumbu Corporation is planning to invest in a project whose net annual
financial cash inflows after tax are $20,000 per year. The investment will
require a capital outlay of $70,000, and will have a useful life of six years. It
will have no salvage/market value. The firms’ cost of capital is 12% p.a.
Kabumbu considers that a payback period of three years or less is most
appropriate, and an accounting rate of return of 30% as acceptable.
Required:
a) Determine the payback period for this project.
b) What is the accounting rate of return?
c) Determine the net present value (NPV) of this proposal.
d) What is the IRR of the proposed project? (Be approximate)
15. Personal Finance
You have two financing alternatives to buy a family property: a loan of $10,000
at 5% interest p.a. repayable in seven equal annual instalments of interest and
capital combined; or, another loan for the same amount at 8% interest p.a.,
repayable in twelve equal annual instalments of interest and capital combined.
Both suppliers of finance tell you that they are giving you the best deal, since
similar loans are available in the market at 10% interest p.a. You are aware that
your net annual financial surplus, after all necessary family expenses (school
fees, food, extended family commitments, etc ;) is
$1500 only. Which financing option is most suitable under these circumstances?
Discuss.
16. Choice of Outlays
You are buying a dry cleaning facility. Three options are presented to you: a) a
cash payment of $25,000 in full settlement; (b) a down payment of $9,000 now
and $6,000 every year end for the next five years; (c) a down payment of
$10,000, and thereafter, a payment of $5000 every year -
end, for five years. Assuming no taxes, and if the appropriate rate of discount
(your cost of capital) is 10% p.a., what would be your best choice, all things
being equal? Discuss.
References:
1. Introduction to Management Accounting: Horngren, C.T., G.L.Sundem,
and W.O. Stratton – Prentice-Hall 12th Ed. 2002
2. Financial Management – Eugene Brigham and Fred Weston – Prentice-
Hall International, any latest edition.

jacksonkilimba@gmail.com Page 6
 INTEREST RATE FACTORS FOR FINANCIAL MATHEMATICS
(FINANCIAL TABLES)
Table 1: Present Value Interest Factors (PVIF):
(One Monetary Unit at ‘i’% for ‘n’ years/periods)

PVIF = 1/(1+ “i”)n

Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13%

“n”
0 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693
4 0.961 0.924 0.889 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543

6 0.942 0.888 0.838 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0,547 0.513 0.482 0.452 0.425
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376
9 0.912 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295

11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160

16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111
19 0.828 0.686 0.570 0.475 0.396 0.331 0.276 0.232 0.194 0.164 0.138 0.116 0.098
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104 0.087
24 0.788 0.622 0.492 0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.082 0.066 0.053
25 0.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059 0.047

30 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.026
40 0.672 0.453 0.307 0.208 0.142 0.097 0.067 0.046 0.032 0.022 0.015 0.011 0.008
50 0.608 0.372 0.228 0.141 0.087 0.054 0.034 0.021 0.013 0.009 0.005 0.003 0.002
60 0.550 0.305 0.170 0.095 0.054 0.030 0.017 0.010 0.006 0.003 0.002 0.001 0.011

jacksonkilimba@gmail.com Page 7
Period 14% 15% 16% 17% 18% 19% 20% 24% 28% 32% 36% 40%
“n”
0 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
1 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.806 0.781 0.758 0.735 0.714
2 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.650 0.610 0.574 0.541 0.510
3 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.524 0.477 0.435 0.398 0.364
4 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.423 0.373 0.329 0.292 0.260
5 0.519 0.497 0.476 0.456 0.437 0.419 0.402 0.341 0.291 0.250 0.215 0.186

6 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.275 0.227 0.189 0.158 0.133
7 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.222 0.178 0.143 0.116 0.095
8 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.179 0.139 0.108 0.085 0.068
9 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.144 0.108 0.082 0.063 0.048
10 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.116 0.085 0.062 0.046 0.035

11 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.094 0.066 0.047 0.034 0.025
12 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.076 0.052 0.036 0.025 0.018
13 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.061 0.040 0.027 0.018 0.013
14 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.049 0.032 0.021 0.014 0.009
15 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.040 0.025 0.016 0.010 0.006

16 0.123 0.107 0.093 0.081 0.071 0.062 0.054 0.032 0.019 0.012 0.007 0.005
17 0.108 0.093 0.080 0.069 0.060 0.052 0.045 0.026 0.015 0.009 0.005 0.003
18 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.021 0.012 0.007 0.004 0.002
19 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.017 0.009 0.005 0.003 0.002
20 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.014 0.007 0.004 0.002 0.001
24 0.043 0.035 0.028 0.023 0.19 0.015 0.013 0.006 0.003 0.001 0.001 0.000
25 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.005 0.002 0.001 0.000 0.000

30 0.020 0.015 0.012 0.009 0.007 0.005 0.004 0.002 0.001 0.000 0.000 0.000
40 0.005 0.004 0.003 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000
50 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
60 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

jacksonkilimba@gmail.com Page 8
Table 2 Present Value of an Annuity Interest Factor (PVAIF):
(For one monetary unit)
PVAIF = (1- (1/(1+”i”)n)/”i”

Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13%

“n”
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.883
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668
3 2.941 2.884 2.629 2.775 2.723 2.673 2.624 2.557 2.531 2.487 2.444 2.402 2.361
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517

6 5.795 5.601 5.417 5.242 5.076 4.917 4.766 4.623 4.486 4.355 4.231 4.111 3.998
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 5.426

11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 5.687
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5.918
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.982 6.628 6.302
15 13.865 12.849 11.939 11.118 10.38 9.712 9.108 8.559 8.060 7.606 7.191 6.611 6.462

16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.312 7.824 7.379 6.974 6.604
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 7.549 7.120 6.729
18 16.398 14.992 13.754 12.659 11.690 10.828 10.060 9.372 8.756 8.201 7.702 7.250 6.840
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.366 6.938
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.128 8.514 7.963 7.469 7.025
24 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.53 9.707 8.985 8.348 7.784 7.283
25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.68 9.823 9.077 8.422 7.843 7.330

30 25.808 22.397 19.600 17.292 15.373 13.765 12.409 11.26 10.27 9.427 8.694 8.055 7.496
40 32.835 27.355 23.115 19.793 17.159 15.046 13.332 11.93 10.76 9.779 8.951 8.244 7.634
50 39.196 31.424 25.730 21.482 18.256 15.762 13.801 12.23 10.96 9.915 9.042 8.304 7.675
60 44.955 34.761 27.676 22.623 18.929 16.161 14.039 12.38 11.05 9.967 9.074 8.324 7.687

jacksonkilimba@gmail.com Page 9
Period 14% 15% 16% 17% 18% 19% 20% 24% 28% 32% 36% 40%
“n”
1 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.806 0.781 0.758 0.735 0.714
2 1.647 1.626 1.605 1.585 1.566 1.547 1.528 1.457 1.392 1.332 1.276 1.224
3 2.322 2.283 2.246 2.210 2.174 2.140 2.106 1.981 1.868 1.766 1.674 1.589
4 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.404 2.241 2.096 1.966 1.849
5 3.433 3.352 3.274 3.199 3.127 3.058 2.991 2.745 2.532 2.345 2.181 2.035

6 3.889 3.784 3.685 3.589 3.498 3.410 3.326 3.020 2.759 2.534 2.399 2.168
7 4.288 4.160 4.039 3.922 3.812 3.706 3.605 3.242 2.937 2.678 2.455 2.263
8 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.421 3.076 2.786 2.540 2.331
9 4.946 4.772 4.607 4.451 4.303 4.163 4.031 3.566 3.184 2.868 2.603 2.379
10 5.216 5.019 4.833 4.659 4.494 4.339 4.193 3.682 3.269 2.930 2.650 2.414

11 5.453 5.234 5.029 4.836 4.656 4.486 4.327 3.776 3.335 2.978 2.683 2.438
12 5.660 5.421 5.197 4.988 4.793 4.611 4.439 3.851 3.387 3.013 2.708 2.456
13 5.842 5.583 5.342 5.118 4.910 4.715 4.533 3.912 3.427 3.040 2.727 2.469
14 6.002 5.724 5.468 5.229 5.008 4.802 4.611 3.962 3.459 3.061 2.740 2.478
15 6.142 5.847 5.575 5.324 5.092 4.876 4.675 4.001 3.843 3.076 2.750 2.484

16 6.265 5.954 5.669 5.405 5.162 4.938 4.730 4.033 3.503 3.088 2.758 2.489
17 6.373 6.047 5.749 5.475 5.222 4.990 4.775 4.059 3.518 3.097 2.763 2.492
18 6.467 6.128 5.818 5.534 5.273 5.033 4.812 4.080 3.529 3.104 2.767 2.494
19 6.550 6.198 5.877 5.584 5.316 5.070 4.844 4.097 3.539 3.109 2.770 2.496
20 6.623 6.259 5.929 5.628 5.353 5.101 4.870 4.110 3.546 3.113 2.772 2.497
24 6.835 6.434 6.073 5.746 5.451 5.182 4.937 4.143 3.562 3.121 2.776 2.499
25 6.873 6.464 6.097 5.766 5.467 5.195 4.948 4.147 3.564 3.122 2.776 2.499

30 7.003 6.566 6.177 5.829 5.517 5.235 4.979 4.160 3.569 3.124 2.778 2.500
40 7.105 6.642 6.233 5.871 5.548 5.258 4.997 4.166 3.571 3.125 2.778 2.500
50 7.133 6.661 6.246 5.880 5.554 5.262 4.999 4.167 3.571 3.125 2.778 2.500
60 7.140 6.665 6.249 5.882 5.555 5.263 5.000 4.167 3.571 3.125 2.778 2.500

jacksonkilimba@gmail.com Page 10