GROUP ASSIGNMENT 3 DUE DATE: 14 APRIL 2023

Question 1
a) Below are the partial statements of financial position for Moyo Ltd for the past
five years:

Table 1: Partial statements of financial position

Assets ($ Millions) 2021 2020 2019 2018 2017
Cash and cash equivalents 39 29 27 19 16
Short-term marketable securities 1 7 7 6 4
Accounts receivable 44 31 47 67 79
Inventory 15 25 36 25 27
Non-Current Assets, Net 1 2 6 9 8
Total Assets 100 104 113 126 134

Perform a horizontal common-size analysis and comment. [8]

b) Dejong Ltd obtained a loan of R2 000 000 from Best Bank Ltd on 1 April 2020
at a fixed market related interest rate of 12% per year. Interest on the loan is
payable bi-annually on 30 September and 31 March and the loan capital is
repayable in one payment on 31 March 2023.
On 1 April 2021, one year after the loan was obtained, Dejong Ltd expects a
decrease in market interest rates. As the loan was obtained at a fixed interest
rate, Dejong Ltd will not benefit from any future decreases in market interest
rates.
In order to take advantage of any future decreases in interest rates, Dejong Ltd
decides to enter into an interest rate swap in terms of which it will receive
interest at a fixed rate and pay a variable rate. On 1 April 2021 Dejong Ltd
enters into the interest rate swap for two years with Friendly Bank Ltd for a R2
000 000 notional amount in terms of which Dejong Ltd will receive interest at a
fixed rate of 11.5% per year and pay interest at JIBAR + 3% bi-annually on 30
September and 31 March (JIBAR is the Johannesburg Interbank Agreed Rate).
The variable interest rate on the interest rate swap is pre-fixed, post-paid which
means that the variable interest rate will be fixed for each six-month period at
the beginning of that six-month period and interest will be paid at the end
thereof.

Table 2: Market Interest rates

Market interest rates JIBAR JIBAR+3%
1 April 2021 7.50% 10.5%
1 October 2021 7% 10%

Fair value of the loan

 Table 3 shows the fair value of the loan on 30 September 2021 and 31 March
2022.

Table 3: Fair value of the loan

Fair Value
30 September 2021 2 020 185
31 March 2022 2 018 460

Assume that the total movement in the fair value of the loan relates to a change
in JIBAR (all other risks such as credit risk are excluded).

Table 4 shows the fair value of the interest rate swap (AFTER settlement
of the swap)

Table 4: Fair value of the interest rate swap

1 April 2021 -
30 September 2021 24 635 (favourable)
31 March 2022 23 317 (favourable)

Dejong Ltd has elected to apply hedge accounting from 1 April 2021 and the
hedge meets all the hedging criteria. Dejong Ltd designated the interest rate
swap as the hedging instrument and the changes in the fair value of the loan
as a result of changes in JIBAR as the hedged item. You may assume that the
hedge was 100% effective over the period of the swap agreement. The financial
year end of Dejong Ltd is 31 March. Ignore any tax implications.

Required
Provide the journal entries for Dejong Ltd for the financial year ended 31 March
2022. [14]
Question 2
A credit analyst is evaluating the solvency of Moyo Ltd based on financial
statements for the year ended 31 March 2022. The following data are gathered
from the company’s 2022 annual report:

Table 5: Extract of annual report

$ 000 $ 000 $ 000
2022 2021 2020
Total Assets 710 009 663 170 559 688
Short Term Debt 18 530 15 688 19 976
Long Term Debt 336 770 306 970 277 458
Total Liabilities 534 067 480 818 441 269
Total Equity 175 942 182 352 118 419
a) Calculate the company’s financial leverage ratio for 2022 and 2021. [4]

b) Interpret the financial leverage ratio calculated in Part a). [3]

c) Calculate the following ratios for the three years:

i. debt-to-assets. [3]
ii. debt-to-capital. [3]
iii. debt-to-equity. [3]

d) Using c) above, comment on any discernable trend over the three years. [4]

e) Explain any four limitations of using ratios in financial analysis to Moyo Ltd. [8]