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Basic Finance and Business Economics


Assignment Details:

  • words: 3500




Alpha Construction, a Bulawayo based construction firm, is reviewing its projects for the third quarter 2019, and current investigations have gathered the following data.


i. The firm is in the 35% marginal tax bracket.


ii. Debt: The firm can raise an unlimited amount of debt, by selling $1000, 9%, 10 year semi-annual coupon bonds. Similar bonds pay an interest higher than Alpha Construction’s bonds, to counter this; the Investment Banker has recommended a discount of 3% on par value. The firm will also pay floatation costs of 2% per bond.


iii. Preferred Stock: Alpha Construction can sell 10% preferred stock at its $100 per share par value. The total costs of issuing and selling the preferred stock is expected to be 4% of par value and an unlimited amount of stock can be sold under these terms.


iv. Common Stock: The firm’s stock is currently selling for $70 per share. The firm recently paid a cash dividend of $5 per share. The firm’s dividends have been growing at a constant annual rate of 5%, and are expected to continue in the future. The stock will be underpriced by $4.00 per share and floatation costs are expected to amount to $3.00 per share. The firm can sell an unlimited amount of new common stock under these terms.


v. Retained Earnings: In measuring this cost, the management of Alpha Construction ignores the tax bracket or brokerage fees of owners. Currently retained earnings are at $200,000 and are expected to grow at a constant rate of 5% per annum, once these retained earnings are exhausted, the firm will issue new common stock as a form of common stock equity financing.


vi. Capital structure: The firm’s target capital structure is as follows:


Source of Finance Weight %
Long term debt 35
Preferred stock 15
Common equity 50
Total 100


vii. Investment Opportunities


Initial investment ($) Free Cash Flow ($)
NUST Shopping Complex 6 000 000 Year 1: 500 000

Year 2: 400 000

Year 3: 1 200 000

Year 4: 400 000

Year 5: 400 000

Choppies Shopping Complex 4 000 000 Year 1: 1 000 000

Year 2: 2 500 000

Year 3: 1 000 000

Year 4: 2 000 000

Year 5: 2 000 000

ZINWA Complex 3 000 000 Year 1: 300 000

Year 2: 500 000

Year 3: 200 000

Year 4: 200 000

Year 5: 1 000 000

Private College 1 000 000 Year 1:  40 000

Year 2:  20 000

Year 3:  10 000

Year 4:  20 000

Year 5:  20 000


As financial consultant from the Zimbabwe Institute of Management, you have been assigned to advise the management of Alpha Construction, on their financial strategy for the third quarter 2019 in terms of the following:


a) Calculate the specific cost of each source of financing (debt, preferred stock and common equity).


b) Determine the weighted average cost of capital (WACC) associated with this level of financing


c) Explain fully, which, if any, of the available investments you would recommend the firm to accept




a) A survey indicated that chocolate is Zimbabweans’ favourite ice cream flavour. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream.


i. A severe drought in the Mashonaland causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream.


ii. A new report by the Zimbabwe Medical Association reveals that chocolate does, in fact, have significant health benefits.


iii. The discovery of cheaper synthetic vanilla flavouring lowers the price of vanilla ice cream.


iv. New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream.


b) Over the past years, tuition fees at most institutions of higher learning have increased by more than 80%. At the same time, enrolment has also been increasing. Does this demonstrate that the Law of Demand is false? Explain why or why not. Use graphs.


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