CTA PART TIME LEVEL 1 - APPLIED MANAGEMENT ACCOUNTING AND FINANCE - 2020 - TEST 2

PAPER 2: SCENARIO
QUESTION 1 100 Marks

All amounts are in ZWL$ unless stated otherwise

Background information

Moonbucks Corporation (hereafter referred to as

“Moonbucks”) is the premier roaster, marketer, and retailer
of specialty coffee in the world. Moonbucks was incorporated
in 1985 in Zimbabwe and operates in 78 countries. The
Moonbucks’ marketing team in Zimbabwe recently ran a poll
on its social media platforms for a week to investigate how
well Zimbabweans know its brand. The results revealed that its brand was not as popular as they
thought given its global status. Based on the findings, they decided to hold a seminar in Harare
to make the public gain a better understanding of Moonbucks and its operations. The Chief
Operations Manager, Mr Mafuke presented at this seminar and the following is an extract from
the speech he delivered.

Operations

“We purchase and roast high-quality coffees that we sell, along with handcrafted coffee, tea
and other beverages and a variety of high-quality food items through our company-operated
stores. We also license our trademarks through other channels such as licensed stores, grocery,
and food service accounts. Moonbucks also provides breakfast catering services under the La
Boulange brand.

Our objective is to maintain Moonbucks’ standing as one of the most recognized and respected
brands in the world. To achieve this, we are continuing the disciplined expansion of our global
store base, adding stores in both existing, developed markets such as Africa, and in newer,
higher growth markets such as China and the United States, as well as optimizing the mix of

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company-operated and licensed stores around the world. In addition, by leveraging the
experience gained through our traditional store model.

We continue to offer our consumers new coffee and other products in a variety of forms, across
new categories, diverse channels and alternative store formats. We also believe our Moonbucks
Global Social Impact strategy, commitments related to ethically sourcing high-quality coffee,
contributing positively to the communities we do business in and being an employer of choice
are contributors to our objective.

Trading environment

We operate in an increasingly competitive and rapidly

changing environment and we have seen it fit to use a cost-
plus pricing policy to price our products to ensure we have a
return for our investors in this challenging environment.
New factors emerge from time to time and it is not possible
to predict the impact of all these factors on our business, financial condition or results of
operations. As a retailer that is dependent upon consumer discretionary spending, our results
of operations are sensitive to changes in or uncertainty about macro-economic conditions.

The harsh macro-economic conditions in the Zimbabwean market have yielded high
unemployment rates and increased crime. The change in weather patterns have also not been
in favor of Moonbucks as we have experienced two consecutive droughts in the last 2 years and
the upcoming farming season’s success looks bleak as another drought has been forecasted.
Apart from competition from other market players who have priced their products at
unrealistically low prices, imitations have created a strong hand in tarnishing our image and
reducing our sales volumes.

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We have been dragged to courts over customers who would have fallen sick after consuming
our products thus we have tightened our quality checks. The following have also been persistent
in the market; increased fuel and energy costs, higher interest rates, inflation, reduced access
to credit, economic uncertainty and potential negative impacts relating to the foreign currency
exchange rates. Healthwise, the Coronavirus pandemic (COVID-19) has had a devastating
impact on world economies and we are still to investigate its impact on Moonbucks.

Our success depends substantially on the value of our brands and failure to preserve their value,
either through our actions or those of our business partners, could have a negative impact on
our financial results. We believe we have built an excellent reputation globally for the quality
of our products, for delivery of a consistently positive consumer experience and for our global
social impact programs. To continuously promote the Moonbucks brand, we believe we must
preserve, grow and leverage the value of our brands across all sales channels. Brand value is
based in part on consumer perceptions on a variety of subjective qualities.

We also source our coffee beans from a wide variety of domestic and international business
partners in our supply chain operations, and in certain cases such products are produced or
sourced by our licensees directly. Most of these suppliers have extended credit lines to us but
due to the recent economic hardships and the Zimbabwean country risk, our credit rating has
been downgraded from A to BB1. Suppliers have thus reduced the settlement period from 60
days to 35 days. As an entity we were also forced to reduce our current collection period of 90
days from our debtors by 80% of the percentage change of the credit settlement days. This
decision has since slowed down sales and inventory holding days have thus increased to 45
days.

1
Credit rating is an evaluation of the credit risk of a debtor, predicting their ability to pay back and rate of default.
They use letter designations such as A, B, C etc. and higher grades represent a lower probability of default. A has
low default rate while BB has a high default rate

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Opportunities

Santa College

Despite the economic challenges, Moonbucks has always been on an expansion drive to increase
its market share. The Zimbabwean marketing team of the La Boulange brand has been
approached by Santa College in Penhalonga, Mutare to be their sole catering service provider for
the boarding school during the National Athletics competition expected to run for one week (7
days). The management accountant has provided the following information in relation to this
contract:

1. Santa College has estimated that on average it will need to serve breakfast to 500
students daily for the one week.
2. As Moonbucks will have to set up a facility at Santa College, it is necessary to invest in
some new special equipment that has the capacity to produce coffee for 500 people every
day of the week. The following equipment will be purchased immediately with a useful
life of 5 years and no residual value.
a. Automatic Drip Coffee Makers that costs $150,000.
b. A High-Quality Espresso Machine that costs $50,000.
3. $15,000 will be required to purchase consumables such as milk, water, coffee and
confectionary items like scones, bread, etc. for the week.
4. Moonbucks will need to hire 5 new chefs and waiters respectively. The chefs will be paid
$200 per hour whilst the waiters will be paid of $80 per hour. As they are new personnel,
it will take them 1.5 hours to prepare and serve the breakfast at an 80% efficiency level.
Moonbucks’ Human Capital strategy is to ensure each worker goes for training every 6
months. Moonbucks incurs $10,000 per each training held. Due to the repetitive nature
of the work and the trainings, it is expected that the laborers will have a 90% learning
curve for the duration of the contract.
5. A security team needs to be engaged for the one week. Moonbucks has an option to
outsource security services from Securico, a highly reputable security company within
Zimbabwe. Securico will provide 24-hour security with 1 guard on the day shift and

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PAPER 2: SCENARIO
another guard on the night shift at a total weekly cost of $2,500 and as they are ISO
certified, they have quality guarantee and insurance in the event of a mishap. Moonbucks’
second alternative is to use its two permanent guards who will rotate amongst each other
for the one week. Moonbucks pays $2,000 per guard per month.

The industrial coffee grinder dilemma

As Moonbucks has already set structures and mastered the coffee grinding systems, they have
several industrial coffee grinders already in place in most of its facilities. A new industrial coffee
grinder with a 5-year useful life costs $50,000. Delivery and installation costs will be $15,000. As
it will be a new machine, the costs of service are minimal and insignificant for the first 3 years of
use but will become constant at $2,000 per year till the lapse of its life span. The grinder can be
disposed at a value of $10,000 at the end of its useful life.

Moonbucks has another coffee grinding machine with an 8-year useful life that it has been using
in Nyanga for the past 3 years that it is considering transferring to the Harare branch as the
Nyanga branch has 2 grinders but operating at a 20% capacity. The transferring will result in an
outflow of $15,000 for the transportation. The current 3 grinder operators will have to be
retrenched as the costs of transferring them and their families is too significant as opposed to
retrenchment costs of $10,000 per each operator. They were currently earning a salary of $1,200
each per month. The servicing pattern is the same with that of a new grinder. The allocated Head
office costs for this grinder was $3,500 annually. It was also consuming 7,300kWh of electricity
annually and the current cost of electricity is $1.03 per kWh which is expected to increase by 25%
next year. The current contribution of this grinder was accurately calculated as $38,000 annually.
The inflation rate is expected to be 10% per annum for the next five years.

Management is unsure whether they should get a new coffee grinder for the Harare branch or
to transfer the grinder from the Nyanga branch.

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PAPER 2: SCENARIO
Potential investor
An investor, Clover Tea has been impressed with Moonbucks as they have managed to build a
good reputation for themselves and they appear to be on a growth trajectory. The shares of
Moonbucks are currently trading at $42 cum-div per share and Clover Tea is interested in
negotiating a merger deal with Moonbucks and would like to know its value per share should
they want to put an offer for Moonbucks’ shares. The financial manager gathered the following
information on Moonbucks, and he gave his accountant to use and perform a relative valuation:

MOONBUCKS CORPORATION
INCOME STATEMENT FOR THE YEAR ENDED/ENDING 31 DECEMBER
Notes 2018 2019 2020
AUDITED AUDITED FORECAST
$’000 $’000 $’000
Revenue 1 49,495 52,100 70,400
Cost of Sales (25,235) (24,890) (33,440)
Gross Profit 24,260 27,210 36,960
Other Income 2 675 740 1,050
Operating Expenses 3 (13,545) (15,170) (17,445)
Operating profit 11,390 12,780 20,565
Investment Income 4 250 250 250
Finance Costs 5 (2,480) (2,360) (2,140)
Profit before tax 9,160 10,700 18,775
Tax (2,656) (3,104) (5,445)
Profit for the year 6,504 7,596 13,330

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Notes:

1. Included in 2019 revenue was profit on disposal of a motor vehicle that had been involved
in an accident to the tune of $2,525,000.
2. Other income is from:
a. A premise that Moonbucks owns and rents out for residential purposes. The rental
income is $25,000 per annum. Similar properties in the market fetch a rental
income of $30,000, which estimates 5% of the property’s value.
b. $2,000 interest income from a once-off loan issued to a director whose house was
burnt by fire early 2019. The loan is redeemable in 4 years at par value of $25,000.
A market-related interest rate is 10%.
3. Operating expenses includes depreciation of $3,000 per annum.
4. Investment income is from an investment in 500 10% non-redeemable debentures with
a par value of $5 each that were issued by Funders Bank. Similar debentures have a
market yield of 12%.
5. Finance costs are from a provision from dismantling the coffee grinders used in their
operations.

Valuation of Moonbucks

The junior accountant of Clover Tea prepared and submitted the following relative valuation for
the Finance Manager of Clover Tea to review. The forward PE ratio of Moonbucks for 2020 was
confirmed by the Finance Manager of Moonbucks to be 13.

Calculation of Maintainable Earnings

2018 2019 2020

Revenue 49,495 52,100 70,400
Cost of Sales (25,235) (24,890) (33,440)
Other Income 675 740 1,050
Operating Expenses (13,545) (15,170) (17,445)

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Add back Depreciation (not a cashflow) 3,000 3,000 3,000
Investment Income 250 250 250
Finance Costs (2,480) (2,360) (2,140)
Maintainable Earnings before tax 9,160 10,700 18,775
Tax (not a real cashflow) 0 0 0
Maintainable Earnings 9,160 10,700 18,775
Total Maintainable Earnings (9,160 + 10,700 + 38,635
18,775)

The following information was obtained from the ZSE:

Index name Top 10 ZSEINDX ZSEMNGX All Share

Description This index focuses This index focuses This index focuses This index
on the ZSE’s top on all industrial on all mining focuses on all
10 counters only companies listed companies listed the companies
on the ZSE on the ZSE listed on the ZSE
Average PE 18 14 16 12
ratio

Value of Moonbucks

Value of Operations (38,635 x 12) 463,620.00

Investment in Debentures (500 x 2.5) 1,250.00

Rental Income (25,000 x 1.05) 26,250.00

Finance Cost (ignore as it is part of WACC) 0.00

Total Value of Moonbucks 491,120.00

Number of ordinary shares 10,000

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Value per share 49.11

Coffee sourcing opportunity

Due to the global outbreak of the COVID-19 disease which was first discovered in Wuhan, China,
prices of coffee have dropped due to a decrease in world demand. China is one of the biggest
quality coffee bean producers globally and currently has excess and cheaper coffee beans due
to the COVID-19 outbreak. Moonbucks’ Chief Executive Officer, Mr Gore Regonzo CA (Z), has
decided on sourcing the coffee beans from China and maximise on the cheaper prices. He drafted
a proposal for this opportunity and presented it during their monthly board meeting. When asked
about the quality of the coffee beans, he said it is not a thing to worry about as based on his
research from the internet the suppliers of the coffee beans adhere to Chinese quality standards
and whether the quality is maintained or not, Moonbucks coffee will still be bought because of
its good coffee reputation in the market..

Extract of the Statement of Financial Position of Moonbucks Corporation as at 31 December

2019

Notes $
Equity and Liabilities
Equity
10,000 Ordinary Shares @ $10 each 1 100,000
Preference Shares 2 341,900
Liabilities
Debentures 3 25,000
Bank Overdraft 4 100,000

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Notes

1. Moonbucks expects to maintain a steady increase in earnings and dividends of 8% each

year for the foreseeable future. The current dividend is $2.00 per share and the
company’s share price is currently at $42 cum-div.
2. The preference shares, which are recorded at book value were issued at a price of $100
each. The preference shares are currently priced at $118 cum-div and offer a fixed non-
cumulative dividend at a rate of 12% per year. The preference shares are non-
redeemable.
3. This is a five-year redeemable debenture that was issued by Moonbucks at the beginning
of FY2016. The cost of the debenture is 10%, which is the same as the market rate. There
is no option for renewal for such debentures.
4. With the nature of operations of Moonbucks, bank overdraft is regarded as an important
source of funding thus have negotiated an overdraft facility with a market value of
$120,000 at a market interest rate of 20%.
5. The target capital structure of Moonbucks is 60% debt and 40% equity.

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