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Question $2(40$ marks$)$

For this question assume the current date is $31$ January $2023.$

Konvert Limited is listed on an international stock exchange. It has issued share capital of

$2\mathrm{.}75$ million ordinary shares. Most of the shares are held by large financial institutions. The

company currently has an $10\%$ overdraft of R$120$m million. The company has no other

borrowings.

The company$$s statement of profit and loss for the year ended $31$ January $2023$ was

summarised as follows:

R$\text{'}000$

Operating profit $33000$

Interest paid $12000$

Profit before taxation $21000$

Taxation $5880$

Profit after taxation $15120$

Ordinary dividend paid $5040$

Retained profit for the year $10080$

The company is now considering accepting a major new project which would commence on

$31$ January $2024$ i$.$e$.$ one year from now. The project is a high$-$risk investment and the

before and after anticipated results relating to this new project are as follows:

Before After

Annual growth rate of earnings and total dividends in

perpetuity $4\%9\%$

Required overall return by equity shareholders each year $10\%13\mathrm{.}5\%$

Payment of dividends $31$ January $31$ January

The project would be financed by a $1-$for$-11$ rights issue, at an issue price of R$25$ on

$31$ January $2024.$

One of the directors is concerned about the impact of the project on the overall risk of the

company. She is also concerned about the impact of the project on earnings per share. In

particular, she is concerned that if the earnings per share falls, the share price may be

adversely affected.

b As far as the information permits, evaluate the potential impact, based

on the expectations provided in the scenario, of the new project on the

following at the respective dates $($SECTION A and SECTION B$)$ listed

as follows:

SECTION A: $31$ January $2024$

i$.$ EPS $$ merely discuss the likely impact. No calculations are

required.

ii$.$ The value of the company

iii. The risk profile of the company

SECTION B: $31$ January $2025$

iv$.$ The percentage change, in comparison to the previous year, in

earnings per share $($EPS$)$ of the company

Show any relevant calculations to support your arguments

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