Cover Page

Student’s
name Mikaeel Mohamed

Student
number 202105790

Name of
Campus Damelin Braamfontein

Year of Semester 1st

Study 3rd

Programme
BCom Accounting

Module Financial Management Module Code FMG310

Name

Lecturer Mr Temptation

Due date Date 30/04/2024

30/04/2024 submitted

1
Table of Contents

Cover Page ................................................................................................................ 1

Table of Contents ....................................................................................................... 2

Declaration by Student ............................................................................................... 3

Introduction ................................................................................................................ 3

Question 1 .................................................................................................................. 4

Continuation of Question 1 (c) .................................................................................... 5

Question 2 .................................................................................................................. 6

Question 3 .................................................................................................................. 7

Question 4 .................................................................................................................. 8

Conclusion ................................................................................................................. 9

References ............................................................................................................... 10

Plagiarism Check ..................................................................................................... 11

2
Declaration by Student

Introduction

The Gordon Growth Model, also known as the Dividend Discount Model (DDM), is a
method used to calculate the intrinsic value of a stock based on its dividends. It
assumes that dividends grow at a constant rate indefinitely. The Capital Asset Pricing
Model (CAPM) is a financial model used to determine the expected return on an
investment based on its risk. It helps investors understand the relationship between
risk and expected return. The Weighted Average Cost of Capital (WACC) is a financial
calculation that represents the average rate of return a company is expected to pay to
all its investors. Break-even is a point where total revenue equals total costs, resulting
in neither profit nor loss. In other words, it's the level of sales at which a business
covers all its expenses.

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 Question 1

a) Cost of ordinary shares for ABC Limited using the Gordan Constant Growth
Model:
In relation to (Thomas, 2023), the Gordan Constant Growth Model has the following
formula: Po = D1 ÷ Ke – g
D1 = D0 (1 + g)
P0 = Current Market Price
D0= Current Dividend
Ke= Shareholders Cost of Capital
G= Expected Annual Growth
D1 = 11 (1+0,12) = 12,32

Ke= [𝑑1⁄𝑃 ] + 𝑔
0
12,32
= [ 120 ] + 0,12 = 0,22

= 0,22 × 100 = 22%

 P0= 12,32 ÷ (0,22 – 0,12)
P0= R123,20
b) Cost of ordinary shares for ABC Limited using the Capital Asset Pricing Model:
In essence to (Russo, 2024), the Capital Asset Pricing Model contains the following
formula: Ke= Rf + B (Rm- Rf)
Ke= Cost of Equity Capital
Rf= Risk Free rate of return
B= Beta Factor
Rm= Return from Market as a whole
Answer: Ke= 10 + 1,5 (15 – 10)

= 17,5%

c) Shortfalls of the CAPM:

Deficiencies in the Capital Asset Pricing Model are evident and may contribute
negatively towards a company, in relation to (Nirmal Bang, 2024).
• Rates that are risk free tend to fluctuate frequently:
The rates used in the Capital Asset Pricing Model calculations, are derived by short
term government securities.

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 Continuation of Question 1 (c)

• A risk-free rate is not realistic:

Investors on a smaller scale such as individuals, will not be able to borrow at the same
rate as the governments, making assumptions of zero risk rates of return of
calculations are impossible. This implies that real returns could be abit less than what
the CAPM model Displays.
• It can be difficult to determine a beta:
A beta entails the security being invested and obtaining this bea value can be hard to
come by and is time consuming. Therefore, a proxy beta is used to increase the speed
of calculations but it brings an outcome that has reduced accuracy.

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 Question 2

a) The Weighted Average Cost of Capital (WACC) of Makhekhe (Pty) Ltd using the
mathematical formula:
In relation to (Indeed, 2023),the following formula has been derived in order to


calculate WACC: Equity ÷ (Debt + Equity) × Re  + Debt ÷ (Debt + Equity) × Rd
Re= Cost of Equity
Rd= Cost of Debt

Answer: (1 600 000 ÷ 2 400 000) × 0,20 + (800 000 ÷ 2 400 000) × 0,15 
= 0,1833 × 100
= 18,33%
b) The Weighted Average Cost of Capital (WACC) of Makhekhe (Pty) Ltd using the
WACC Table:
Type of Capital Amount Weighting Cost of Capital WACC

Ordinary 1 600 000 2) 66,67% 0,20 5) 13,33%

Shares

Debt 800 000 3) 33,33% 0,15 6) 5%

Total 1) 2 400 000 4) 100% WACC 7) 18,33%

Calculations:
1. 1 600 000 + 800 000= 2 400 000
2. (1 600 000 ÷ 2 400 000) × 100 = 66,66%
3. (800 000 ÷ 2 400 000) × 100 = 33,33%
4. 66,67% + 33,33% = 100%
5. 66,67% × 0,20 = 13,33%
6. 33,33% × 0,15 = 5%
7. 13,33% + 5% = 18,33%

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 Question 3

a) Expected return of stock:

(0,10 × 50%) + (0,20 × 30%) +(0,45 × 10%)+(0,15 × 10%)+(0,10 × -20%)
= 0,12 × 100
= 12%
b) Variance of Stock:
• Super Boom: 10% - 12% = -2%
• Boom: 20% - 12%= 8%
• Normal: 45% - 12%= 33%
• Recession: 15% - 12%= 3%
• Severe Recession: 10% - 12%= -2%

• Super Boom: (−2%)2= 1⁄2 500

• Boom: (8%)2= 4⁄625

• Normal: (33%)2 = 1089⁄10 000

• Recession: (3%)2= 9⁄10 000

• Severe Recession: (−2%)2= 1⁄2 500

• Super Boom: 1⁄2 500 × 10%= 1⁄25 000

• Boom: 4⁄625 × 20%= 4⁄3125

• Normal: 1089⁄10000 × 45%= 0,049

• Recession: 9⁄10000 × 15%= 27⁄200 000

• Severe Recession: 1⁄2 500 × 10%= 1⁄25 000

 1⁄25 000 + 4⁄3125 + 0,049 + 27⁄200 000 + 1⁄25 000

= 0,050495
= 0,05 (Nearest two decimal place)
 Stock Variance = 0,0505 × 100= 5%

c) Standard Deviation= √0,05= 0,2247= 0,23 × 100= 23%

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 Question 4

I. Break Even Point in Units:

In relation to (MITCHELL, 2023), break even point refres to the production level where
total expenses equate to total sales or income.
Formula: Fixed Costs ÷ (Unit sale price – Unit variable cost)
Unit sale price= 2 400 000 ÷ 15 000 = 160
Unit variable cost= 1 020 000 ÷ 15 000= 68
Answer: 580 000 ÷ (160 – 68) = 6 304,35 Units
Break Even Point in Value:
6 304,35 × 160= R1 008 696
II. Degree of Operating Leverage:
Formula: Contribution Margin ÷ Net Operating Income
Answer: 1 380 000 ÷ 800 000= 1,73
III. Degree of Financia Leverage:
Formula: Earnings before interest and tax ÷ Earnings before tax
Answer: 800 000 ÷ 520 000= 1,5384
Rounded off two decimal places: 1,54.
IV. Degree of Combined Leverage:
Formula: Degree of Operating Leverage + Degree of Financial Leverage
Answer: 1,73 + 1,54 = 3,27

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Conclusion

In conclusion, the calculations and analyses provided cover various financial aspects
including the cost of equity, weighted average cost of capital, expected return of stock,
break-even point, and leverage measures. These calculations are essential for
understanding the financial health and performance of a company. They help in
making informed decisions regarding investment, financing, and operational
strategies. These financial calculations provide valuable insights for stakeholders,
enabling them to assess the company's profitability, risk, and efficiency.

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References

Indeed, 2023. How To Calculate WACC (Weighted Average Cost of Capital). [Online]
Available at: https://www.indeed.com/career-advice/career-development/how-to-
calculate-
wacc#:~:text=You%20can%20calculate%20WACC%20by,D%20%3D%20debt%20m
arket%20value
[Accessed 22 04 2024].

MITCHELL, C., 2023. Breakeven Point: Definition, Examples, and How to Calculate.
[Online]
Available at: https://www.investopedia.com/terms/b/breakevenpoint.asp
[Accessed 23 04 2024].

Nirmal Bang, 2024. Capital Asset Pricing Model (CAPM): All You Need To Know.
[Online]
Available at: https://www.nirmalbang.com/knowledge-center/capital-asset-pricing-
model.html#:~:text=The%20major%20drawback%20of%20CAPM%20is%20it%20is
%20difficult%20to,value%20for%20beta%20is%20used.
[Accessed 23 04 2024].

Russo, K., 2024. What Is the Capital Asset Pricing Model (CAPM)? An Expert Guide.
[Online]
Available at: https://www.netsuite.com/portal/resource/articles/financial-
management/capital-asset-pricing-model-
capm.shtml#:~:text=The%20pieces%20of%20the%20CAPM,Ra%20being%20the%2
0expected%20return.
[Accessed 23 04 2024].

Thomas, K., 2023. Gordon Growth Model | Formula & Examples. [Online]
Available at: https://study.com/academy/lesson/the-gordon-growth-model-formula-
examples.html#:~:text=The%20Gordon%20Growth%20Model%20equation,not%20a
lways%20be%20the%20case.
[Accessed 23 04 2024].

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Plagiarism Check

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