FTX3044F 2015 Tutorial 2

Due: Week beginning 2 March 2015

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Question 1
Define the following concepts:
Introduction (this is in the context of equity issuing)
Offer for sale
Offer for subscription
Rights offer
Capitalization offer
(5 x 2 marks)
Introduction is a method of bringing securities to listing when a company does not need
to raise capital and its spread of shareholders already complies with the conditions for
listing. An introduction is the cheapest and quickest method because there is no offer to
the public and a minimum of formalities.
Offer for sale is an invitation to the public to purchase the shares of existing
shareholders.
Offer for subscription is an invitation to the public to subscribe to shares that are not yet
in issue (i.e. the company gets additional capital in the process).
Rights offer is an offer by a company to existing shareholders to subscribe for further
shares in the company in proportion to their current holdings.
Capitalization offer is an issue of fully paid shares capitalized from a companys reserves
to existing shareholders of the company in proportion to their existing holdings.
Question 2
You have a firm opinion on the future movement of company X Limiteds share price (R10
per share); it is going up. You thus want to leverage the R100 000 you have available to
invest as much as possible. Your broker has given you two options:
1. Margin trading: Initial margin requirement is 40% with a maintenance margin of 20%; or
2. CFD: A contract-for-difference on X Limiteds shares where the broker will pay you for
any increase in the share price of X Limited above the current price and you will pay the
broker for any decrease in the share price below the current price. The cost of this
agreement is R5 per contract per share.
REQUIRED:
a) Which option will you choose and why?
You want to maximise your returns on an increase in the share price of X
1. Pays off if X increases as well as 2.
With 1. your total exposure is to 100000/0.4/10 = 25000 shares
With 2. Your total exposure is to 100000/5 = 20000 shares
Choose 1.

(3 marks)

b) Given that you are going to trade on margin, what is the maximum number of
shares that you will be able to buy?
(2 marks)
100000/0.4=250000/10=25000 shares
c) At what share price will you receive a margin call?

(3 marks)

You will only receive a margin call if the price of X drops.

x = unknown share price
(25000.x 150000)/25000.x = 20%
X = 7.5 per share
d) Given that the answer to c) was R8 per share and that the initial margin must be
restored, what would be the amount of the margin call?
(3 marks)
((8.25000 150000) + x)/8.25000 = 40%
X = R30000
e) Given your answer to b), a lending rate from your broker equal to 9% and a share
price of X Limited of R18.50 per share after three months when you closed the
transaction, what is your annual return?
(4 marks)
Return:
18.5 x 25000
Interest:
150000 x 9% x 3/12
Less loan capital

462500
3375
150000
309125

Investment = R100 000

Thus ROI = 309125/100000 *12/3 *100 = 1236.5%

Question 3
What are the implications of last weeks budget speech for the South African share
market? Discuss.
(5 marks)
Personal taxes were increased implying less spending power for consumers implying retail
shares under pressure.
The positive was that the budget was a pragmatic attempt to balance spending and
income and should contribute towards positive sentiment from international investors
towards SA.
Total: 30 marks

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