MAC4862 2023 TL 102 0 B Update

MAC4862/102/0/2023
NMA4862/102/0/2023
ZMA4862/102/0/2023
Tutorial Letter 102/0/2023

APPLIED MANAGEMENT
ACCOUNTING
MAC4862
NMA4862
ZMA4862
Year module
Department of Financial Intelligence

IMPORTANT INFORMATION
This tutorial letter contains important information

about your module.
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APPLIED MANAGEMENT ACCOUNTING
TUTORIAL LETTER 102 / 2023
TABLE OF CONTENTS PAGE
INTRODUCTION AND OVERVIEW 4
PART 1 – STRATEGY, RISK MANAGEMENT AND FINANCING 12
LEARNING UNIT 1 STRATEGY AND GOVERNANCE 13

LEARNING UNIT 1.1 STRATEGY AND GOVERNANCE 15
LEARNING UNIT 1.2 PUBLIC SECTOR 23
LEARNING UNIT 2 RISK MANAGEMENT 35

LEARNING UNIT 2.1 RISK MANAGEMENT 36
LEARNING UNIT 3 COST OF CAPITAL AND CAPITAL INVESTMENT

APPRAISAL 38
LEARNING UNIT 3.1 WEIGHTED AVERAGE COST OF CAPITAL 40
LEARNING UNIT 3.2 CAPITAL INVESTMENT APPRAISAL – ISSUES IN
INVESTMENT APPRAISAL 42
LEARNING UNIT 4 SOURCES AND FORMS OF FINANCE 52

LEARNING UNIT 4.1 SOURCES AND FORMS OF FINANCE AND THE
FINANCING DECION 54
LEARNING UNIT 5 DIVIDEND DECISION 60

LEARNING UNIT 5.1 DIVIDEND DECISION 61
LEARNING UNIT 6 MANAGEMENT OF WORKING CAPITAL 62

LEARNING UNIT 6.1 MANAGEMENT OF WORKING CAPITAL 63
LEARNING UNIT 7 TREASURY FUNCTION 65

LEARNING UNIT 7.1 THE TREASURY FUNCTION 67
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TABLE OF CONTENTS (CONTINUED) PAGE
PART 2 – FUNCTION OF FINANCIAL MANAGEMENT 71
LEARNING UNIT 8 ANALYSIS AND INTERPRETATION OF FINANCIAL AND

NON-FINANCIAL INFORMATION 72
LEARNING UNIT 8.1 ANALYSIS AND INTERPRETATION OF FINANCIAL AND
NON-FINANCIAL INFORMATION 73
LEARNING UNIT 9 BUSINESSES IN DIFFICULTY 76

LEARNING UNIT 9.1 BUSINESSES IN DIFFICULTY 77
LEARNING UNIT 10 VALUATIONS 78

LEARNING UNIT 10.1 VALUATIONS 80
PART 3 – MERGERS AND ACQUISITIONS AND BUSINESS PLANS 82
LEARNING UNIT 11 MERGERS AND ACQUISITIONS 83

LEARNING UNIT 11.1 VALUATION FOR PURPOSES OF M&As: SYNERGIES 85
LEARNING UNIT 11.2 OTHER CONSIDERATIONS 90
LEARNING UNIT 12 BUSINESS PLANS AND FINANCIAL PROPOSALS 96

LEARNING UNIT 12.1 BUSINESS PLANS AND FINANCIAL PROPOSALS 98
INTEGRATED SELF-ASSESSMENT 100
INTEGRATED QUESTION 1 100

INTEGRATED QUESTION 2 100
TEST 1 (2022) – MAC4862/NMA4862/ZMA4862 101

TEST 1 (2022) – SUGGESTED SOLUTION 105
TEST 2 (2022) – MAC4862/NMA4862/ZMA4862 111
TEST 2 (2022) – SUGGESTED SOLUTION 114
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INTRODUCTION AND OVERVIEW

This module is intended for students who are studying towards a Certificate in the Theory of Accounting
(CTA), a prerequisite for the professional qualification of Chartered Accountant (SA) (registered with
SAICA).
In response to, amongst others, the escalating complexity in the business environment, globalisation,
digital disruption, and increased stakeholder demands, SAICA has developed a new competency
framework i.e. the CA2025 competency framework. This framework comprises the following key
components:
Icon Elements of the professional competencies
Professional values and attitudes
Ethically responsible leaders fulfilling

their social mandate by using integrated
thinking to create sustainable value Enabling competencies (defined as
acumens)
Technical competencies in the value

creation process
(SAICA, 2021)
According to SAICA (2021) the objective of this framework is to ensure that CAs are able to integrate
all relevant competencies to provide quality deliverables on a wide range of inputs, activities and
outputs that lead to outcomes in an organisation’s value creation process.
Therefore in addition to Technical competencies, it is imperative for aspiring Chartered Accountants

to develop various Professional Values, Attitudes and Enabling competencies.
• Technical competencies
This module addresses competencies relating to Management Decision Making and Control; as well
as Strategy, Risk Management and Financial Management.
• Professional values and attitudes

These include acting with honesty, integrity, accountability and trustworthiness to demonstrate moral
and ethical behaviour in the business context and to protect the public interest. The SAICA competency
framework categorises these values and attitudes as follows:
o Ethics, values and attitudes

This competency area describes the ethical principles values and attitudes an individual must
apply and includes personal, business and professional ethics.
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o Citizenship, values and attitudes

Citizenship is most often used to indicate nationality and explain the rights and responsibilities
attached to “membership” of a nation state. This competency area includes personal,
professional and corporate citizenship.
o Lifelong learning, values and attitudes

Life-long learning refers to the process of self-initiated education aimed at self-development and
acquiring an adaptive mind set.
• Enabling Competencies
These refer to the essential skills that influence the ways that CAs work and think and the tools that
they use in the workplace. The SAICA competency framework categorises these competencies as
follows:
o Business acumen
The ability to make quick correct and/or focused strategic decisions and good judgements in a
business. This acumen comprises the business internal environment, business external
environment and innovation, creativity and curiosity.
o Decision-making acumen
This competency area refers to cognitive processes to decide on actions or between alternatives
and includes analytical / critical thinking, integrated thinking, problem-solving, judgement and
decision-making and professional scepticism
o Relational acumen
It is the ability to develop, maintain and adapt relationships and stakeholder networks to ensure
facilitation of required action; the delivery of relevant feedback and the development of relational
trust
o Digital acumen
This competency area refers to digital topics that influence ways of work and business decisions
and includes computational thinking, data knowledge and strategy, data analytics, new
developments and protocols, cyber security and user competencies.
While the above-mentioned professional values and attitudes and enabling competencies will be
covered in various modules throughout your undergraduate and postgraduate studies, it will also be
integrated into the content of this module. The purpose of this is to reinforce and integrate principles
previously learnt.
When any of the professional values and attitudes are incorporated into the tutorial letter, the following
icon will be displayed:
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When any of the enabling competencies are incorporated into the tutorial letter, the following icon will
be displayed:
This will assist you in identifying how the competency is of relevance and integrates into the learning
unit.
This module will provide authentic learning opportunities, which will include case studies and relevant
scenarios to enhance your understanding of the principles taught.
CTA MANAGEMNT ACCOUNTING
The parts and learning units in this tutorial letter build, to a large extent, upon prior knowledge obtained
in your undergraduate Management Accounting studies and in the post-graduate Advanced
Management Accounting module. It is therefore assumed that you have achieved the necessary prior
learning.
Management accounting, at a CTA level, focusses on the application of various principles and
techniques. This requires you to apply various higher order thinking skills, such as:
• Analysis and Evaluation
o Analysis: this involves examining (something) methodically and in detail, typically in order to
explain and interpret it.
o Evaluation: If you evaluate something, you consider/assess it in order to make a judgment or
form an opinion about it.
Analysing and evaluating information is referred to as critical thinking. According to Duron, Limbach, &
Waugh (2006:160). “Critical thinkers raise vital questions and problems, formulate them clearly, gather
and assess relevant information, use abstract ideas, think open-mindedly, and communicate effectively
with others.”
The analysis and evaluation of information are competencies addressed in various learning units such
and Strategy and Governance, Risk Management, Investment decision, Finance decision, Analysis of
financial and non-financial information etc.
• Integrated thinking
This is defined as a decision-making approach for complex problems based on finding new, creative
solutions rather than merely choosing the best solution from a list of alternatives. (SAICA, 2021).
• Creativity and innovation
Creativity is the production of a novel and appropriate response, product, or solution to an open-ended
task (Amabile, 2012:3). According to Sternberg (2003) creative thinking encompasses the ability to
create, invent, discover, explore, imagine and suppose. The componential theory of creativity highlights
the following five stages in the creativity process:
Stage 1: identifying the goal or problem

Stage 2: preparing for the process by gaining/gathering the knowledge, skills, and information
necessary to address the problem
Stage 3: generating ideas to solve the problem
Stage 4: evaluating each idea against the criteria of what was required
Stage 5: making decisions based on the evaluations performed in stage 4
(Amabile & Pratt, 2016)
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In addition to the above it is also important to effectively communicate your thoughts and ideas in a
clear, concise and professional manner. As a Chartered Accountant you would be required to prepare
various reports, memos and presentations. You would also be required to do presentations, chair
meetings and provide advice to clients, colleagues or staff. It is important for you to take into
consideration the purpose and audience of your communication as this will impact, amongst others,
medium of communication, the level of detail and degree of formality.
It should however be noted that there has been a drastic shift in the manner in which organisations are
communicating. Social media platforms have become a key instrument for corporate communication.
It is now a reality that social media is changing the way stakeholders and companies communicate as
it allows for quick and easy communication, with immense reach.
The very characteristics of speed, accessibility and ease of use however also make the use of social
media as a communication tool very risky. For example the improper disclosure of financial or other
information could affect a company’s stock price, similarly an inappropriate comment about another
company on a social media platform could for instance cause negative publicity and reputational
damage.
It is therefore important to plan all communications and to be respectful to your audience. The same
would apply to social media posts made in your personal capacity. You need to be mindful of the
manner in which you communicate, in your personal capacity, as this reflects on yourself, your
profession and the organisations you are affiliated with.
BIBLIOGRAPHY AND ADDITIONAL READING
Amabile, T.M. 2012. Componential theory of creativity. Harvard Business School.
Amabile, T.M and Pratt, M.G. 2016. The dynamic componential model of creativity and innovation in
organizations: Making progress, making meanings. Research in Organizational Behaviour, 36:157-183
Duron, R., Limbach, B., & Waugh, W. (2006). Critical thinking framework for any discipline. International
Journal of Teaching and Learning in Higher Education, 17(2), 160–166.
South African Institute of Chartered Accountants (SAICA). 2021. CASA: Competency framework.
Johannesburg: SAICA
Sternburg, R.J. 2003. Creative thinking in the classroom. Scandinavian Journal of Educational
Research, 47(3):325-338
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STRUCTURE OF THIS TUTORIAL LETTER
This tutorial letter is structured as three distinct parts, each containing a number of learning units. A
learning unit is the main study area within a part, and each learning unit is further divided into sub-
learning units. You will find the outcomes that you are required to achieve for each learning unit at the
beginning of each learning unit. Self-assessment activities are provided at the end of each learning
unit so that you can assess whether you have mastered the learning outcomes.
The parts of this tutorial letter are described below:
PART 1 – STRATEGY, RISK MANAGEMENT AND FINANCING (containing learning units 1–7)
PART 2 – FUNCTION OF FINANCIAL MANAGEMENT (containing learning units 8–10)
PART 3 – MERGERS AND ACQUISITIONS, AND BUSINESS PLANS

(containing learning units 11–12)
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CONTENT – THIS MODULE
The diagram below contains a schematic presentation of the content of this module.
MAC4862
Applied Management Accounting
Strategy, Risk Management and Financial

Management Finance Question Bank
Tutorial Letter 102 Tutorial Letter 103
PART 1 PART 2 PART 3
Learning units Learning units Learning units

1. Strategy and governance 8. Analysis and 11. Mergers and
2. Risk management interpretation of acquisitions
3. Cost of capital and capital financial and 12. Business
investment appraisal non-financial plans and
4. Sources and forms of finance information financial
5. Dividend decision 9. Businesses in proposals
6. Management of working capital difficulty
7. Treasury function 10. Valuations
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STUDY MATERIAL AND RESOURCES
Prescribed study material
Title Edition Authors Publisher ISBN number & notes

Management and Cost 1st Drury Cengage Bundled version including
Accounting in South (Andrew Student Manual:
Africa Ashwin) 9781473792180
Managerial Finance 9th FO Skae LexisNexis The E-book can also be
used: 9780 6390 09797
Important note:
This tutorial letter makes principal reference to the textbook Managerial Finance, 9th edition, and
Tutorial Letters 102 for Advanced Management Accounting (MAC/NMA/ZMA4861).
General information and CTA news
For general information and CTA news, please refer to the CTA Support Page, which can be accessed
from our CAS website landing page.
The short URL for this page is: www.unisa.ac.za/cas/cta
TESTS
The content of this tutorial letter will be assessed by means of two formative assessments, as follows:
Test 1 will cover predominately (but not exclusively) the content of Part 1 (learning units 1–7); and
Test 2 the content of Parts 1, 2 and 3 (learning units 1–12).
Please note that this content can be linked to Professional values and attitudes, particularly
those competencies that address personal ethics.
It is imperative that you display the highest degree of academic integrity when writing tests and exams.
This requires you to act honestly and demonstrate integrity, accountability and trustworthiness and
is linked to your personal value system/personal ethics. You should therefore avoid all forms of
plagiarism and cheating.
Plagiarism
This refers to the act of taking the words, ideas and thoughts of others and presenting them as your
own. It is a form of theft which involves several dishonest academic activities, such as the following:
• Cutting and pasting from any source without acknowledging the source.
• Not including or using incorrect references.
• Paraphrasing without acknowledging the original source of the information.
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Cheating
Cheating includes, but is not limited to, the following:
• Completing assessments on behalf of another student,

• Copying from another student during an assessment or allowing a student to copy from you.
• Using social media (e.g. WhatsApp, Telegram) or other platforms to disseminate assessment
information.
• Submitting corrupt or irrelevant files.
• Buying completed answers from “tutors” or internet sites (contract cheating).
STUDY PROGRAMME
A study programme has been published in Tutorial Letter CASALL301. Please utilise this to plan you
studies.
We recommend that you allocate your time according to the following approximate allocation:
Part Learning Learning unit

unit no.
1 1 Strategy and governance 4%

2 Risk management 4%
3 Cost of capital and capital investment appraisal 12%
4 Sources and forms of finance 9%
5 Dividend decision 4%
6 Management of working capital 6%
7 Treasury function 6%
2 8 Analysis and interpretation of financial and non-financial information 10%
9 Businesses in difficulty 7%
10 Valuations 11%
3 11 Mergers and acquisitions 8%
12 Business plans and financial proposals 8%
Integrated self-assessment 11%
Total 100%
Note
If you struggle with any learning unit, we strongly recommend that you allocate additional time – above
and beyond the above allocations.
CONCLUSION
This module will provide authentic learning opportunities, which will include case studies and relevant
scenarios to enable you to apply the principles taught.
We trust that the preceding Sections will assist you in approaching your studies (linked to this tutorial
letter) in a methodical manner and with a greater level of understanding.
We hope you enjoy this part of your studies!
Regards
Your Applied Management Accounting lecturers

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PART 1 – STRATEGY, RISK MANAGEMENT AND FINANCING
PURPOSE
The purpose of Part 1 is to reinforce and enhance your existing competencies related to
strategy, risk management and financing. Its purpose is further to assist you in applying your
knowledge to a scenario on an integrated basis.
The specific competencies referred to above relate to the development and evaluation of an
entity’s ability to make decisions and maximise its performance (including governance,
strategies, policies and resources). The competencies further relate to the management of
financial assets and the treasury function.
The purpose of the numerous activities and self-assessment activities included in this part is
also to enhance your professional values and attitudes and enabling acumens.
The diagram below contains a schematic presentation of the content of this part as well as later
parts.
Tutorial Letter 102
Part 1 Part 2 Part 3

3. Cost of capital and financial and non- 12. Business plans and
capital investment financial information financial proposals
appraisal 9. Businesses in
4. Sources and forms of difficulty
finance 10. Valuations
5. Dividend decision
6. Management of working
capital
7. Treasury function
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LEARNING UNIT 1 – STRATEGY AND GOVERNANCE
LEARNING OUTCOMES
After studying this learning unit, you should be able to apply your knowledge and skills achieved
through your prior learning (see below) to a scenario, on an integrated basis. In addition, after studying
this learning unit, you should be aware of and understand the public sector, including the applicable
legal system and legal framework
PRIOR LEARNING ASSUMED

In your undergraduate and Advanced Management Accounting studies you have already mastered the
learning outcomes indicated below. If you want to refresh your knowledge, please refer to your
undergraduate material, prescribed textbook and MAC4861 Tutorial Letter 102/2023 (available under
Additional Resources on myUnisa). For your convenience we also provide textbook references.
Learning outcome Managerial

Finance,
9th edition
• Explain concepts of mandate and business model in the context of an • Chapter 1 and 2
organisation. • MAC4861 TL102
• Critically review the appropriateness of an entity’s mission, vision,
strategies and strategic plan.
• Critically reflect upon the internal and external influences on an entity’s
strategy development.
• Evaluate an entity’s ability to manage organisational performance in
accordance with its strategies.
• Assess the alignment of management decisions with the entity’s vision,
mission, values and mandates.
• Evaluate the business model of the entity in the context of the entity’s
vision, mission, values, mandate and overall objective.
• Utilise analytical tools to assess the feasibility of strategies formulated.
• Discuss and critically review the strategic alignment of the financial
function.
• Evaluate relevant structural and governance issues, including
sustainability issues and integrated reporting matters.
• Reflect on the International Integrated Reporting Framework and its
reference to the various capitals within the organisation (financial,
manufactured, intellectual, human, social and human relationships and
natural).
INTRODUCTION
For an entity to be successful, it has to be guided by an overarching corporate strategy. In this regard,
the financial function could add more value through a process of strategic alignment. In dealing with
the ‘bigger picture’, it is also important to realise that a firm functions within a wider context and
therefore has to consider other stakeholders by means of appropriate corporate governance. The
content of this learning unit is intended to enhance your knowledge of corporate strategy.
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THIS LEARNING UNIT CONSISTS OF THE FOLLOWING SUB-LEARNING UNITS:
LEARNING UNITS TITLE
LEARNING UNIT 1.1 STRATEGY AND GOVERNANCE
LEARNING UNIT 1.2 PUBLIC SECTOR

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LEARNING UNIT 1.1 – STRATEGY AND GOVERNANCE
1. Introduction
The author Dale Littler points out that corporate strategy should address the fundamentals, ‘namely
the “what,” “why,” “how,” and “when” of the organization’ (2011: no page number). In addition, when
contemplating the ‘bigger picture’, it is important to temper ambitions by means of appropriate corporate
governance.
This learning unit is based on selected Sections of the following chapter in your prescribed textbook
(Managerial Finance, 9th edition):
• Chapter 1
• Chapter 2
2. Content
The purpose of the content below is to supplement the information in the textbook in areas where it is
considered necessary. It in no way replaces or can be considered to be a substitute for the textbook.
It therefore remains imperative that you work through the textbook in detail.
2.1. Strategy and business models
Please note that this content can be linked to Enabling competencies, particularly those
competencies that address business acumen and integrated thinking.
Based on the learning outcomes outlined above a large part of this learning unit focuses on the strategy
and business models of an organisation, including the internal and external factors that impact them.
This is closely aligned with the competencies relating to business acumen which addresses the
businesses internal and external environment.
In the past the primary goal of most businesses was related to the maximisation of shareholder wealth.
This was often linked to the increase in key financial measures such as profitability, cash flow and
market share. These measures are often driven by sales, operating costs and financing costs, further
emphasising the importance placed on financial indicators.
In recent years these traditional measures of business success have been questioned and often
criticised for amongst others, being short term and only considering the needs of shareholders and not
all stakeholders. Consequently, there has been a shift in the manner in which the success of a business
is being assessed, whereby emphasis is placed on value creation not only for the entity and its
shareholders, by means of financial returns, but for all stakeholders.
The mechanism which entities can utilise to meet their objective of creating value is a business model.
The business model is defined as an organisations system of transforming inputs through its business
activities into outputs and outcomes that aim to fulfil the organisations strategic purpose and create
value over the short, medium and long term (IIRC, 2013:25).
Based on the above definition the business model should include the six capitals in the form of inputs
and then in the form of the impact the company’s activities have on the capitals. Consideration of these
six capitals and their connectivity allows for an approach of integrated thinking, a concept emphasised
by both the King IV report and the International Integrated Reporting Council (IIRC). Integrated thinking
is defined as the active consideration by an organisation of the relationships between its various
operational and functional units and the capitals that the organisation uses or effects (IIRC, 2013:2).
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Furthermore, integrated thinking is also one of the enabling competencies in the SAICA framework.
In the context of this learning unit this could entail developing/evaluating an organisations strategy
taking into consideration a variety of factors including the internal (type of business, the 6 capitals,
business structure and design etc.) and external (political, economic, social, environmental etc.)
environment
2.2. Ethics and corporate governance
those competencies that address business and professional ethics.
According to King IV organisations should apply ethical principles and values to decision-making,
conduct and to the relationship between the organisation, its stakeholders and society. Ethical
considerations and implication should be factored into all decisions from developing the company’s
strategy and risk management philosophy to making investment, financing and dividend decisions. It
is important to formalise an ethical culture within an organisation. This can be done by, amongst others,
drafting and implementing a code of conduct, hosting ongoing ethics training and workshops for staff,
anonyms whistleblowing, initiating an Ethics committee etc.
Refer to the article below which highlights some practical ways in which ethical business practices can
be promoted in SME’s:
https://www.mbanews.com.au/8-tips-every-aspiring-sme-cfo-should-know-to-master-business-ethics/
The governing body of the entity – in the case of a company this will be the board of directors – is
accountable to the company and through the company to the stakeholders. Past corporate failures and
the separation of ownership and management of an entity are amongst the reasons that have created
the need for adequate and robust reporting. Such reporting will help to ensure that stakeholders are
provided with adequate information on the governance present within organisations. The governance
principles relating to stakeholder’s relations with entities are contained in the King Code of Corporate
Governance.
The King IV Code, which replaced earlier King Codes, was published in November 2016. The code
has been revised to, amongst others, bring it up to date with international governance codes and best
practice and increase compliance requirements and governance structures (KPMG, 2016). The
effective date of the implementation of King IV is financial years beginning 1 April 2017, with earlier
implementation encouraged.
The King IV Report defines corporate governance as ‘the exercise of ethical and effective leadership
by the governing body towards the achievement of the following governance outcomes: Ethical culture,
Good performance, Effective control, Legitimacy’ (IoD, 2016: 20).
King IV has introduced a change from the King III “apply or explain” basis to a “apply and explain” basis
for the application of the code. The code now contains 17 basic principles and the Institute of Directors
(“IoD”) lists the objectives of code as follows (IoD, 2016):
1. Promote corporate governance as integral to running an organisation (delivering governance

outcomes such as ethical culture, good performance, effective control & legitimacy)
2. Making the code accessible for a variety of sectors and organisations
3. Corporate governance as holistic and interrelated and implemented in an integrated manner
4. Encourage transparent and meaningful reporting
5. Present corporate governance with ethical consciousness and conduct
King IV, as previous codes, has its foundation in ethical and effective leadership. In addition,
supplementary schedules have been incorporated into the code, with the objective of giving
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consideration to the various sector types, including municipalities, non-profit organisations, retirement
funds, SMEs and state-owned entities (IoD, 2016). For purposes of this course only sector supplements
relating to SME’s is required to be studied, whereby a basic knowledge is required.
The following principles, as well as the recommended practices, as contained in King IV should be
studied:
• ethical leadership
• organisation values, ethics and culture
• responsible corporate citizenship
• strategy implementation, performance
• reports and disclosure
• role of the governing body
• composition of the governing body
• committees of the governing body
• performance evaluations
• delegation to management
• risk and opportunity governance
• technology and information governance
• compliance governance
• remuneration governance
• assurance (financial report related)
• stakeholder inclusive approach
• responsibilities of shareholders
Closely aligned with corporate sustainability and the King IV principles is the UN Global Compact
(UNGC) and the United Nations Sustainable Development Goals (SDG’s).
• UNGC
The UNGC is a corporate sustainability initiative that encourages companies to align their strategies
with the ten principles relating to human rights, labour, environment and anti-corruption. By
incorporating the ten principles of the UNGC into strategies, policies and procedures, and establishing
a culture of integrity, companies are not only upholding their basic responsibilities to people and planet
but also setting the stage for long-term success.
The following are the ten principles of the UNGC:
1. Businesses should support and respect the protection of internationally proclaimed human rights.
2. Make sure that they are not complicit in human rights abuses.
3. Businesses should uphold the freedom of association and the effective recognition of the right to
collective bargaining.
4. The elimination of all forms of forced and compulsory labour.
5. The effective abolition of child labour.
6. The elimination of discrimination in respect of employment and occupation.
7. Businesses should support a precautionary approach to environmental challenges.
8. Undertake initiatives to promote greater environmental responsibility.
9. Encourage the development and diffusion of environmentally friendly technologies.
10. Businesses should work against corruption in all its forms, including extortion and bribery
(United Nations Global Compact, no date)

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• SDG’s
competencies that address business acumen
The SDG’s were developed at the United Nations Conference on Sustainable Development in Rio de
Janeiro in 2012. The objective was to produce a set of universal goals that meet the urgent
environmental, political and economic challenges facing our world.
These goals were adopted by all United Nations Member States in 2015 with the objective of ending
poverty, protecting the planet and ensuring that all people enjoy peace and prosperity by 2030.
The idea is to bring together the member states’ respective governments, businesses, media,
institutions of higher education, and local NGOs to improve the lives of the people in their country by
the year 2030. The government of each member state is required to set their own national targets
guided by the global level but taking the specific circumstance of their country into account. These
SDG’s are outlined below:
• Goal 1. End poverty in all its forms everywhere

• Goal 2. End hunger, achieve food security and improved nutrition and promote sustainable
agriculture
• Goal 3. Ensure healthy lives and promote well-being for all at all ages
• Goal 4. Ensure inclusive and equitable quality education and promote lifelong learning
opportunities for all
• Goal 5. Achieve gender equality and empower all women and girls
• Goal 6. Ensure availability and sustainable management of water and sanitation for all
• Goal 7. Ensure access to affordable, reliable, sustainable and modern energy for all
• Goal 8. Promote sustained, inclusive and sustainable economic growth, full and productive
employment and decent work for all
• Goal 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster
innovation
• Goal 10. Reduce inequality within and among countries
• Goal 11. Make cities and human settlements inclusive, safe, resilient and sustainable
• Goal 12. Ensure sustainable consumption and production patterns
• Goal 13. Take urgent action to combat climate change and its impacts
• Goal 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable
development
• Goal 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably
manage forests, combat desertification, and halt and reverse land degradation and halt
biodiversity loss
• Goal 16. Promote peaceful and inclusive societies for sustainable development, provide access to
justice for all and build effective, accountable and inclusive institutions at all levels
• Goal 17. Strengthen the means of implementation and revitalize the global partnership for
sustainable development
(United Nations, no date)

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In light of the above, as well as the current poor global social and environmental conditions,
organisations should also consider the United Nations SDG’s in developing their strategy and business
model. While the goals address various environmental, political and economic challenges, companies
should aim to incorporate those goals that are relevant/applicable, based on their specific context, into
their company strategy and business model.
For example Sasol has indicated in their 2019 integrated report that, in line with the SDG’s, they will
incorporate into their strategy: decent work and economic growth, responsible consumption and
production, climate action and partnerships for the goals (Sasol, 2019:3). Similarly Woolworths
indicated in their 2019 integrated report that they will incorporate into their strategy: supporting the
improvement of educational outcomes in schools, food security to improve access to food and healthy
nutrition, community resilience to build a thriving and healthy society, customer base and workforce in
the regions in which they operate and involvement of employees in community-based work so they,
too, can contribute to making a difference (Woolworths, 2019:147).
2.2.1. King IV and integrated reporting
Integrated reporting requires more than just mentioning sustainability information, but must be
integrated with other aspects of the business process and managed throughout the year. King IV has
therefore introduced the notion of integrated thinking and requires the governing body to oversee the
publication of the following, for access by stakeholders:
• corporate governance disclosures required in terms of King IV (see part 3: King IV Application
and disclosures)
• integrated reports
• annual financial statements and other external reports
An integrated report encompasses the following:
• an annual report
• statutory financial information and sustainability information
• sufficient information to record how the organisation has affected the economic life of the
community, both positively and negatively, and
• forward-looking information on how the board feels it can enhance the positive aspects and negate
the negative aspects
3. Activities
Activity 1.1.1
Answer Practice Question 2–4 in Managerial Finance (9th edition).
Feedback on Activity 1.1.1
Find the solution after the practice question in the textbook.
Activity 1.1.2
Answer Practice Question 2–5 in Managerial Finance (9th edition).

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4. Self-assessment questions
After working through all the relevant Sections in the textbook, guidance and activities provided by this
learning unit, you should now be able to attempt the following self-assessment questions.
QUESTION 1
Perform the Required part (b) of Question 15 (Legendary Foods Group Limited), which can be found
in TL103. The relevant Required part is repeated below. (At this point it is not necessary to attempt to
do other parts of the question; you should, however, take notice of the way in which all the various
parts integrate and relate to the scenario.)
REQUIRED MARKS
(b) Prepare a memorandum to the management of LFG which includes an analysis of
the Strengths, Weakness, Opportunities and Threats (SWOT analysis) of their
business. (8)
(Ignore the effects of the machine acquisition as well as the other potential
acquisitions).
Incorporate general knowledge of the relevant industry in your answer.
competencies that address business acumen as it requires considerations of factors impacting both
the internal and external business environment.
Solution to Question 1
Find the suggested solution to the relevant part in TL103
QUESTION 2 5 MARKS (8 MINUTES plus reading time)
Perform the Required part (c) of Question 7 (SATRNET), which can be found in TL 103. The relevant
Required parts are repeated below. (At this point it is not necessary to attempt to do other parts of the
question; you should, however, take notice of the way in which all the various parts integrate and relate
to the scenario.)
REQUIRED MARKS
(c) Assuming Selmor was to apply the principles of King IV, measure their compliance
against the ethical principles in the code. (5)
Find the suggested solution to the relevant parts in TL103

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Perform the Required part (f) of Question 4 (VMS), which can be found in TL 103. The relevant
Required parts are repeated below. (At this point it is not necessary to attempt to do other parts of the
to the scenario.)
REQUIRED MARKS
(f) Identify and explain ethical issues relating to VMS and propose possible measures
by the management of VMS to prevent, detect and correct these ethical issues to
remain an organization grounded in good corporate governance and ethical culture. (15)
those competencies that address business and professional ethics.
Find the suggested solution to the relevant parts in TL103
SUMMARY
Strategy and governance are very important topics that integrate with other learning units and
disciplines. A company needs a strategy to deploy resources and capabilities to achieve sustainable
value. Governance has the responsibility of approving the strategy as formulated by management. A
governing body should oversee and approve procedures and operational plans that give effect to such
strategies. Strategies must continuously be measured to assess if the agreed strategy has been
effective in achieving the stated objectives.
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Institute of Directors (IoD). 2016. King IV report on corporate governance for South Africa 2016.
Johannesburg: IoD.
International Integrated Reporting Council (IIRC). 2013. International integrated reporting framework.
London: IIRC.
Littler, D. 2011. Corporate strategy. [Online.] New York: Wiley-Blackwell. Available on a subscription
basis from: <http://www.blackwellreference.com> [Accessed 7 December 2011]
Sasol. 2019. Integrated report [online]. South Africa: Sasol. Available from:
https://www.sasol.com/sites/default/files/financial_reports/Sasol%20Integrated%20Report%202019_
0.pdf [Accessed 18 May 2020].
Skae, FO. 2023. Managerial Finance. 9th edition. LexisNexis: Johannesburg.
South African Institute of Chartered Accountants (SAICA). 2021. CASA: Competency framework.
Johannesburg: SAICA
United Nations Global Compact, no date. Ten Principles of the UN Global Compact [online.] United
Nations Global Compact. Available from: https://www.unglobalcompact.org/ . [Accessed on 7 July
2020]].
United Nations. No date. Sustainable Development Goals [online].United Nations. Available from:
https://www.un.org/sustainabledevelopment [Accessed 13 May 2020].
University of Queensland. 2022. 8 Tips Every Aspiring SME CFO Should Know To Master Business
Ethics. Available from: https://www.mbanews.com.au/8-tips-every-aspiring-sme-cfo-should-know-to-
master-business-ethics/ [Accessed 7 November 2022].
Woolworths. 2019. Integrated report [online]. South Africa: Woolworths. Available from:
https://www.woolworthsholdings.co.za/wpcontent/uploads/2019/09/WHL_INTEGRATED_ANNUAL_R
EPORT_2019.pdf [Accessed 18 May 2020].
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LEARNING UNIT 1.2 – PUBLIC SECTOR
1. Introduction
Since the public sector plays a pivotal role and has a major impact on the economy in South Africa,
and CAs (SA) play a prominent role and make a significant contribution to the public sector, it is
important for you to have a basic awareness and understanding of the public sector, including the
applicable legal system and legal framework.
The information provided within this tutorial letter provides you with a high-level overview of the key
public sector legislation and how this legislation impacts the various aspects of Management
Accounting (i.e. Strategy, Risk Management and Governance, Financial Management and
Management Decision Making and Control).
After working through this content, you should have an awareness and understanding of the high-level
principles relating to public entities. You are therefore not expected to know and apply the details.
Section 195(1)(b) of the Constitution states that public administration must be governed by democratic
values and principles, including the following:
✓ A high standard of professional ethics must be promoted and maintained.

✓ Efficient, economic and effective use of resources must be promoted.
✓ Public administration must be development-oriented.
✓ Services must be provided impartially, fairly, equitably and without bias.
✓ People’s needs must be responded to, and the public must be encouraged to participate in policy
making.
✓ Public administration must be accountable.
✓ Transparency must be fostered by providing the public with timely, accessible and accurate
information.
✓ Good human-resources management and career-development practices to maximise
human potential must be cultivated.
✓ Public administration must be broadly representative of the South African people.
2. Content
2.1. Public sector legislation
Legislation applicable to the public sector is very comprehensive. The notes included below therefore
provide you with a summary of public sector-enabling legislation necessary to understand the public
sector.
The Constitution of the Republic of South Africa
The Constitution provides for, as part of the Bill of Rights, access to information held by the state that
is required for the protection of any rights and the right to administrative action that is lawful,
reasonable and procedurally fair. The Constitution provides for the enacting of legislation to give effect
to these rights (Sections 32 and 33). Of particular importance to prospective CAs is chapter 13 of the
Constitution, relating to finance.
Section 213 requires that all money received by government be paid into a National Revenue Fund
that can only be used in terms of an appropriation by an Act of Parliament. The appropriation provides
for the equitable division of revenue raised by the three spheres of government and each province
receives an equitable share of that revenue. All money received by provincial government is paid into
a provincial revenue fund and the money can be withdrawn in terms of an appropriation by a provincial
act (Section 226).
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The Constitution also provides for national legislation to prescribe the form, timelines and content of
national, provincial and municipal budgets (Section 215). It further provides for the establishment of a
national treasury in each sphere of government that will introduce generally recognised accounting
practice, uniform expenditure classifications and treasury norms and standards (Section 216).
It requires procurement of goods and services in accordance with a system that is fair, equitable,
transparent, competitive and cost effective (Section 217).
The South African Reserve Bank is the central bank of the Republic and the primary objective of the
Bank is to protect the value of the currency in the interest of balances and sustainable economic growth
(Section 224).
Refer to the following link for more information:

https://www.gov.za/documents/constitution/constitution-republic-south-africa-1996-1
Different pieces of legislation were enacted as a result of the Constitution, some of which are described
below.
The Public Finance Management Act (PFMA)
The PFMA is a key instrument for reform of financial management in the public sector in South Africa
and gives effect to various Sections of the Constitution. The PFMA is positioned very high in the
statutory order, as clearly reflected in Section 3(3) that states ‘in the event of any inconsistency
between this Act and any other legislation, this Act prevails’.
The objective of the PFMA, as described in Section 2, is to secure transparency, accountability and
sound management of the revenue, expenditure, assets and liabilities of the institutions to which it
applies. The PFMA applies to departments, public entities, constitutional institutions, Parliament and
the provincial legislature (Section 3).

http://www.treasury.gov.za/legislation/PFMA/default.aspx
Treasury Regulations
National and provincial treasuries are key role players in the public finance management process
(PFMA, chapters 2 & 3). The National Treasury was established in accordance with the PFMA and is
responsible for financial and fiscal matters, including the budget preparation process, control over the
implementation of the national budget, monitoring the implementation of provincial budgets and
promoting and enforcing transparency and effective management. To perform these functions, the
National Treasury must prescribe norms and standards that are included in Treasury Regulations and
instructions.
Refer to the following links for more information:

http://www.treasury.gov.za/legislation/pfma/regulations/default.aspx
http://www.treasury.gov.za/legislation/pfma/TreasuryInstruction/default.aspx
The Municipal Finance Management Act (MFMA)
The MFMA is one of the important pieces of legislation relevant to local government. The objective of
the MFMA is described in Section 2 and is to secure sound and sustainable management of the fiscal
and financial affairs of municipalities and municipal entities by establishing norms and standards and
other requirements in the areas of fiscal and financial affairs, revenues, expenditures, assets and
liabilities, budgetary and financial planning, borrowing, handling of financial problems in municipalities
and supply chain management.
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A student who understands the PFMA should be able to make the transition to understanding the
MFMA with relative ease.
Refer to the following links for more information:
http://mfma.treasury.gov.za/MFMA/Legislation/Local%20Government%20-
%20Municipal%20Finance%20Management%20Act/Municipal%20Finance%20Management%20Act
%20(No.%2056%20of%202003).pdf
The Division of Revenue Act
The Division of Revenue Act is published every year in compliance with Section 214(1) of the
Constitution to provide for the equitable division of revenue raised nationally among the three spheres
of government. This includes the province’s equitable share of the provincial share of the provincial
revenue and other allocations to provinces, local government or municipalities from the national
government’s share of revenue.
The objective of the Act, as described in Section 2, is to promote predictability and certainty in respect
of all allocations to provinces and municipalities, in order that provinces and municipalities may plan
their budgets over a multi-year period and thereby promote better coordination between policy,
planning and budgeting. The objective also includes promoting transparency and accountability in the
resource allocation process by ensuring allocations are reflected in the budgets of provinces and
municipalities and the expenditure of conditional allocations is reported on by the receiving provincial
departments and municipalities.
http://www.treasury.gov.za/legislation/acts/2014/Division%20of%20Revenue%20Act,%202014%20(
Act%20No.%2010%20of%202014).pdf.
Key features of this Act include the following:
Procurement legislation
Section 76(4)(c) of the PFMA provides that National Treasury should determine a framework for an
appropriate procurement and provisioning system that is fair, equitable, transparent, competitive and
cost effective. National Treasury has issued various documents to give effect to this requirement.
The policy and strategy to guide uniformity in procurement reform processes in government provided
for devolving the responsibility and accountability for procurement-related functions to accounting
officers/authorities with the aim of promoting uniformity in the various spheres of government with
regard to the interpretation of government’s preferential procurement legislation.
The former procurement and provisioning practices in government were replaced by a supply chain
management function and a systematic competitive procedure for the appointment of consultants as
an integral part of financial management. The Supply Chain Management Framework was published
in 2003 as part of Treasury Regulations in terms of Section 76(4)(c) of the PFMA. Other relevant
legislation includes the Preferential Procurement Policy Framework Act, 2000 (Act 5 of 2000) and the
Preferential Procurement Regulations, 2001 that pertain to this Act.
http://www.treasury.gov.za/legislation/pfma/supplychain/Policy%20to%20Guide%20Uniformity%20in
%20Procurement%20Reform%20Processes%20in%20Government.pdf
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Public Audit Act (PAA)
The PAA Act is the key piece of legislation relevant to auditing and assurance in the public sector in
South Africa. Public sector auditors have an expanded mandate in that an audit includes the audit of
financial statements, compliance with laws and regulations, and the audit of performance against
predetermined objectives (Sections 20(2)(c) and 28(1)(c)).

http://www.agsa.co.za/About/Legislation.aspx
2.1.1. Impacts of legislation on Management Accounting
In addition to the above public sector legislation, you need to understand how the public sector-
enabling legislation impacts on the various aspects of Management Accounting (i.e. Strategy, Risk
Management and Governance, Financial Management and Management Decision Making and
Control). This is addressed in the Sections that follow.
2.1.1.1. Strategy, risk management and governance
Strategy
The public sector is bound by legislation and regulations resulting in many aspects of strategy, risk
management and governance components being included in legislative requirements. In the private
sector, achievement of the entity’s overall objectives involves the development and implementation of
strategies that take advantage of identified opportunities, while minimising the damage that risks can
do to the achievement of organisational goals. This process is informed by the competitive
environment, the availability of sustainable resources and the importance of stakeholder relationships.
Collectively, this is communicated through the integrated report.
This process is echoed in the public sector, although cognisance is taken of the fact that the formulation
of strategies is driven by the constitutional and legislative mandates as well as policy priorities of
government and is performance-driven rather than competitive-driven.
The mandate of public institutions needs to inform the strategic focus areas with the emphasis on
service delivery. Strategic objectives are set for the strategic focus areas and performance indicators
and targets are defined to enable measurement of performance. Public sector institutions are required
to prepare strategic plans and annual performance plans that incorporate strategic outcomes,
objectives, indicators and targets. Ultimately, the budgets of public institutions need to be aligned to
the strategic plans and strategic priorities of the particular institution so that the spending which takes
place allows the strategic objectives and strategic priorities to be addressed. Performance of
government is measured and monitored by the public and other stakeholders by way of actual against
planned performance and budgets.
The Treasury Regulations in Section 3.2 require that the internal audit function assist the accounting
officer in achieving the objectives of the institution by evaluating and developing recommendations for
the enhancement or improvement of processes through which the objectives are established, the
achievement of objectives is monitored, accountability is ensured and corporate values are preserved.
A very unique legislative requirement related to strategy within the public sector is the requirements to
report on pre-determined objectives and that the information being reported be subjected to an audit.
Treasury Regulations require that annual reports include information about the institution’s efficiency,
economy and effectiveness in delivering programmes and achieving its objectives and outcomes
against the measures and indicators set out in the strategic plan.
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Risk management
Risk management in the context of the public sector focuses on the importance of service delivery and
the identification and response to risks that could affect service delivery and compliance with laws and
regulations (given that the public sector is highly regulated). Public sectors should work against
corruption in all its forms, including extortion and bribery, which is in accordance with UNGC principle
10.
Key focus areas for risk management in the public sector include procurement (supply chain
management) and contract management due to high levels of tender fraud and corruption.
Detailed legislation and guidance in these areas include the PFMA Treasury Regulations 16A,
Preferential Procurement Policy Framework Act, Broad Based Black Economic Empowerment Act and
Supply Chain Management Regulations and related Practice Notes. Refer to the following links for
more information:
http://www.treasury.gov.za/legislation/pfma/supplychain/default.aspx
http://www.treasury.gov.za/legislation/pfma/practice%20notes/default.aspx
Another key risk area is the lack of performance or risks in terms of service delivery performance. The
Auditor-General issues a general report on the outcomes of the audits conducted every year after
completion of the audits. The general report includes reference to different risk areas, such as the
following:
✓ Quality of submitted financial statements

✓ Quality of submitted performance reports
✓ Supply chain management
✓ Financial health
✓ Human resource management
✓ Information technology
Refer to the Auditor-General website (http://www.agsa.co.za/) for more information about the identified
risk areas as part of the reporting on the outcomes of the audits completed each financial year.
Section 3.2 of the Treasury Regulations describes the requirements of internal control and the need
for the accounting officer to ensure that a risk assessment process is conducted regularly to identify
emerging risks. A risk management strategy, including a fraud prevention plan, must direct the work of
internal audit.
Governance
You should be aware of the governance structures within a public sector entity. There are different
governance structures in the public sector, and various layers of governance structures exist. Functions
of government can be divided into the legislative authority, the executive authority, and the
administrative authority, each of which is discussed below:
• The legislative authority
This is a legal political institution that makes, amends and repeals laws for the community. In South
Africa the legislative authority consists of the national sphere of government, vested in Parliament,
the provincial sphere of government vested in the provincial legislatures, and the local sphere of
government vested in municipal councils.
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• The executive authority
In South Africa this authority is entrusted to the president and the cabinet (Constitution of Republic of
South Africa, Section 85). Cabinet members are elected political representatives and members of
parliament. The president appoints one minister for each portfolio and decides on the membership of
the cabinet. The president can inter alia appoint and dismiss ministers and have various other functions
and authority described in Section 85, including to implement legislation, develop and implement
national policy, co-ordinate the functions of state departments, and prepare and initiate legislation.
• The administration authority
This consists of the various administrative institutions or departments that need to execute the policies
and decisions of the legislature and the executive authority. Administration also consists of all
accounting officers, the chief financial officers, financial officers, internal auditors and other officials.
The roles and responsibilities of the different role-players are described below.
a) The accounting officer
The accounting officer (Sections 36-43 of the PFMA) or the accounting authority (Sections 49-57
of the PFMA): Every department and every constitutional institution must have an accounting officer.
The accounting officer is the head of the department or the chief executive officer of a constitutional
institution. The appointment and roles and responsibilities of accounting officers are described in
Sections 36‒41 of the PFMA. The following are some of the general responsibilities:
✓ To ensure effective, efficient and transparent systems of financial and risk management and
internal control are in place and are maintained (Section 38(a)(i))
✓ To ensure a system of internal audit under the control and direction of the audit committee (Section
38(a)(ii))
✓ To ensure an appropriate procurement and provisioning system that is fair, equitable, transparent,
competitive and cost effective (Section 38(a)(iii))
✓ To ensure a system for properly evaluating all major capital projects prior to a final decision on the
project (Section 38(a)(iv))
✓ To ensure the effective, economical and transparent use of resources (Section 38 (b))
✓ To take effective steps to collect all money due and prevent unauthorised, irregular fruitless and
wasteful expenditure and losses resulting from criminal conduct and manage working capital
efficiently and economically (Section 38(c))
✓ To take responsibility for management, safeguarding and maintenance of assets (Section 38(d))
✓ To report to Treasury any unauthorised, irregular or fruitless and wasteful expenditure (Section
38(g))
✓ To take effective and appropriate disciplinary steps against any official that contravenes the PFMA,
commits an act that undermines the financial management and internal control system or make or
permit unauthorised, irregular or fruitless and wasteful expenditure (Section 38(h))
The accounting officer is also responsible for budgetary control, including reporting to the executive
authority any variances on the budget (Section 38).
The reporting responsibilities of the accounting officer include keeping full and proper records of the
financial affairs and preparing and submitting financial statements to the Auditor-General within two
months after the year-end. Within five months after the year-end, the annual report for departments
must be submitted to the relevant treasury and the executive authority and those of constitutional
institutions to Parliament. The annual report and audited financial statements must
• fairly present the state of affairs of the department, trading entity or constitution, its business, its
financial results and its performance against pre-determined objectives and its financial position
as at the end of the financial year, and
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• include particulars of any material losses through criminal conduct, and any unauthorised
expenditure, irregular expenditure and fruitless and wasteful expenditure and criminal or
disciplinary steps taken as a result thereof
Reporting also includes monthly reporting on revenue and expenditure with an explanation of any
material variances and corrective steps taken.
b) The accounting authority
This should consist of a board or controlling body, or the chief executive officer if no controlling body
exists, and other officials at public entities have similar responsibilities to those described for the
accounting officers and other officials.
c) Chief financial officer
Each institution must have a chief financial officer who is directly accountable to the accounting officer
and assists the accounting officer in discharging the duties related to effective financial management,
including budgetary management, operation of internal controls and timely production of financial
reports.
d) Other officials
The responsibilities of other officials are also legislated, contrary to the private sector, and are
described in Sections 44‒57of the PFMA. Some of these are as follows:
• To ensure the system of financial management and internal control is carried out in the area of
responsibility
• To be responsible for the effective, efficient and economical and transparent use of financial and
other resources within the area of responsibility
• To take effective and appropriate steps to prevent any unauthorised expenditure, irregular
expenditure and fruitless and wasteful expenditure, also with regard to the collection of revenue
• To be responsible for management, including the safeguarding of assets and the management of
the liabilities
e) Audit committee
Ultimately, those charged with governance need to account to various oversight bodies, including the
public accounts committees and the audit committees. Public sector audit committees are regulated
by national legislation including the PFMA, Treasury Regulations and the MFMA. The PFMA prescribes
the composition of the audit committee (with the focus on independence) and the frequency of meetings
(at least twice a year). The PFMA provides that Treasury may set additional regulations for audit
committees, their appointment and functioning. This is addressed in Treasury Regulation 3.1, in terms
of which an audit committee must operate in terms of a written terms of reference that needs to be
reviewed annually. Audit committees must review the following:
• the effectiveness of the internal control systems

• the effectiveness of the internal audit function
• the risk areas of the institution’s operations to be covered in the scope of external and internal
audits
• the adequacy, reliability and accuracy of the financial information provided to management
• any accounting and auditing concerns identified as a result of internal and external audits
• the institution’s compliance with legal and regulatory provisions
• the activities of the internal audit function
• its evaluation of the annual financial statements
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In the institution's annual report the audit committee must comment on the effectiveness of internal
control, the quality of the year’s management and monthly/quarterly reports. If a report from any source
implicates the accounting officer of fraud, corruption or gross negligence, the chairperson of the audit
committee must report this promptly to the relevant executive authority.
f) Internal audit
Another important component of governance is internal controls, including an internal audit function.
As indicated above, the accounting officer or the accounting authority is responsible to ensure that
there is an effective, efficient and transparent system of internal control. The internal audit function
must assist the accounting officer in this regard by evaluating the controls for effectiveness and
efficiency and developing recommendations for improvement.
According to Section 3.2 of the Treasury Regulations, the requirements of internal control and internal
audit include the following:
• The accounting officer must ensure a risk assessment is conducted regularly to identify emerging
risks. A risk management strategy, including a fraud prevention plan, must direct the work of
internal audit.
• An internal audit function must be established.
• The purpose, authority and responsibility of the internal audit function must be formally defined in
an internal audit charter.
• An internal audit must be conducted in accordance with the standards of the Institute of Internal
Auditors.
• The internal audit function must complete a rolling risk-based three-year strategic internal audit
plan and an annual internal plan for the first year, indicating the proposed scope of each audit, and
report quarterly to the audit committee on performance against the annual internal audit plan.
• The internal audit function must be independent of activities audited and report directly to the
accounting officer.
• The internal audit function must co-ordinate with other internal and external providers of assurance
to ensure proper coverage, but limit duplication.
• Controls subjected to evaluation should include the information systems environment, reliability
and integrity of financial and operational information and the effectiveness of operations,
safeguarding of assets and compliance with laws, regulations and control.
2.1.1.2. Financial management
Within government there has been a major focus on improving financial management. Treasury at a
national and provincial level has a critical role to play as part of the financial management process in
government as part of the responsibility to manage South Africa’s national government finances.
Supporting efficient and sustainable public financial management is fundamental to the promotion of
economic development, good governance, social progress and a rising standard of living for all South
Africans. Chapter 13 of the Constitution mandates the National Treasury to ensure transparency,
accountability and sound financial controls in the management of public finances.
The National Treasury’s legislative mandate is also described in chapter 2 of the PFMA, which
mandates the National Treasury to
• promote government’s fiscal policy framework

• coordinate macroeconomic policy and intergovernmental financial relations
• manage the budget preparation process
• facilitate the Division of Revenue Act, which provides for an equitable distribution of nationally
raised revenue between national, provincial and local government
• monitor the implementation of provincial budgets
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The following provides an overview of relevant sections in the PFMA and Treasury Regulations related
to financial management:
• Revenue collection, cash collection and cash management
Government revenue includes taxes, sales, transfers, fines, penalties and forfeits, interest, dividends
and rent on land, as well as transactions in financial assets and liabilities. The PFMA (Section 40)
requires the accounting officer to submit a report each month that include information on the actual
revenue and expenditure for the previous month and the amounts anticipated for that month. Within 15
days after month-end, a report is issued to Treasury and the executive authority on the information for
the month, with a projection of expected expenditure and revenue collection for the remainder of the
financial year; explanations on any material variances; and a summary of steps taken to ensure
projected expenditure and revenue remain within budget.
Section 7 of the Treasury Regulations describes the requirements for revenue management and
specifically to manage revenue efficiently and effectively by developing and implementing appropriate
processes to provide for identification, collection, recording, reconciliation and safeguarding of
information about revenue.
In terms of Section 7 of the PFMA, the National Treasury must prescribe a framework for cash
management and Section 15 of the Treasury Regulations include the frameworks for banking, cash
management and investments. As part of the control of the revenue funds, each treasury is responsible
for the effective and efficient management of its revenue fund and ensuring sufficient money is in the
revenue fund to meet the appropriated expenditure and cash flow requirements. All revenue received
by a department must be paid daily into its paymaster-general (bank) account. Appropriated funds
requested by departments from Treasury must be in accordance with approved cash flow
requirements. At the end of the financial year, the accounting officer must surrender any unexpended
voted money to the relevant treasury. Treasury Regulations also prescribe the general principles for
banking and cash management, as follows:
• collecting revenue when due and banking it promptly

• making payments no earlier than necessary
• avoiding prepayments for goods and services
• pursuing debtors to ensure amounts receivable are collected and banked promptly
• managing cash flow
• taking action to avoid locking up money, for example in unnecessarily high inventory levels
• performing daily bank reconciliations
• separating duties to minimise incidences of fraud
• Expenditure management
The PFMA requires that the accounting officer should ensure effective, efficient, economical and
transparent use of the resources of the institution and prevent unauthorised, irregular and fruitless and
wasteful expenditure and losses resulting from criminal conduct. The accounting officer is responsible
for ensuring that the expenditure is in accordance with the vote of the department and should report
under-collection of revenue, shortfalls in budgeted revenue and overspending to the relevant treasury
(Sections 38‒39).
Unauthorised expenditure includes overspending of the total amount appropriated per department or
expenditure not in accordance with its main purpose. If unauthorised expenditure is incurred,
parliament or the provincial legislature must authorise the expenditure, otherwise funding allocated in
future years need to be utilised for the unauthorised expenditure (Section 34 of the PFMA). Irregular
expenditure is expenditure, other than unauthorised expenditure, incurred in contravention of or not in
accordance with a requirement of any applicable legislation. Fruitless and wasteful expenditure is
expenditure that was made in vain that could have been avoided, had reasonable care been exercised.
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The accounting officer must exercise reasonable care to prevent and detect these types of expenditure.
Where such expenditure is incurred, the necessary reporting should take place and the amount must
be disclosed as a note to the annual financial statements of the institution.
Section 8 of the Treasury Regulations require that the accounting officer must ensure that internal
procedures and internal control measures are in place for payment approval and processing. The
controls should provide reasonable assurance that all expenditure is necessary, appropriate, paid
promptly and adequately recorded and reported. No amounts may be spent or committed without
obtaining the necessary approval. The Regulations also require all payments due to creditors to be
settled within 30 days from receipt of an invoice.
The PFMA further allocates responsibility to ensure a system for properly evaluating all major capital
projects prior to a final decision on the project to the accounting officer (Section 38).
At the centre of government’s development plan is the provision of economic infrastructure to support
growth. Government's planned expenditure on infrastructure is significant.
• Asset management
The PFMA allocates responsibility for the management, including the safeguarding and maintenance
of assets, to the accounting officer (Section 38). Treasury Regulations require that the accounting
officer should ensure proper control systems exist and that preventative mechanisms are in place to
eliminate theft, losses, wastage and misuse. Stock levels should be optimum and at an economical
level. Processes and procedures should be in place for the effective, efficient, economical and
transparent use of the assets (Section 10).
Treasury Regulations further require that the accounting officer take effective and appropriate steps to
collect money due timeously. Regulations also cover recovery of debts, writing off of debts and interest
payable on debts in Section 11.
• Liabilities
The PFMA allocates responsibility for the management of the liabilities to the accounting officer
(Section 38).
The PFMA includes specific requirements on borrowing within government and places a limitation of
the ability to enter into loan agreements without prior approval (Sections 66 and 71). With the exception
of entering into operating leases, the accounting officer of the department and other relevant staff can
be guilty of financial misconduct if financing agreements are entered into without the prior approval of
Treasury.
• Supply chain management
Extensive legislative requirements for supply chain management exist. The PFMA allocates
responsibility for ensuring an appropriate procurement and provisioning system that is fair, equitable,
transparent, competitive and cost effective to the accounting officer (Section 38).
Section 16 of the Treasury Regulations covers the requirements for supply chain management and
states that the accounting officer must develop and implement an effective and efficient supply chain
management system that must be consistent with the Preferential Procurement Policy Framework and
provide for at least the following:
• Demand management
• Acquisition management
• Logistics management
• Disposal management
• Risk management
• Regular assessment of supply chain performance
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The accounting officer must establish a separate supply chain management unit that can implement
the supply chain management system. The procurement of goods and services through quotations or
through the bidding process must be within the threshold value determined by National Treasury. The
supply chain management system must, in the case of procurement, provide for a bidding process that
includes
• the adjudication of bids through a bid adjudication committee

• the establishment, composition and functioning of bid specification, evaluation and adjudication
committees
• the selection of bid adjudication committee members
• the approval of bid evaluations and/or adjudication committee recommendations
The accounting officer must take reasonable steps to prevent abuse of the supply chain management
system and investigate any allegations against an official or other role player of corruption, improper
conduct or failure to comply with the supply chain management system.
2.1.1.3. Management decision making and control
As part of management decision making and control, budgeting and monitoring are key elements that
will inform decision making and control.
Section 214(1) of the Constitution requires that a Division of Revenue Act determine the equitable
division of nationally raised revenue between national government, the nine provinces and the
municipalities every year. This process takes into account the powers and functions assigned to each
sphere of government. The Intergovernmental Fiscal Relations Act, 1997 (Act 79 of 1997)) prescribes
the process for determining the equitable sharing and allocation of nationally raised revenue. Section
214 of the Constitution requires that the annual Division of Revenue Act be enacted after factors in
sub-sections (2)(a)‒(j) of the Constitution have been taken into account. These include national
interest, debt provision, the needs of national government, flexibility in responding to emergencies,
resource allocation for basic services and developmental needs, the fiscal capacity and efficiency of
provincial and local government, reduction of economic disparities, and promotion of stability and
predictability.
The national interest is encapsulated by governance goals that benefit the nation as a whole. The
National Development Plan, endorsed by cabinet in November 2012, sets out a long-term vision for
the country’s development and includes 14 priority outcomes. The Medium-Term Strategic Framework
(MTSF) is adopted by cabinet to give effect to the priority outcomes over the next five years. In the
Medium-Term Budget Policy Statement, the Minister of Finance outlines how the resources available
to government over the Medium-Term Expenditure Framework (MTEF) would be allocated to help
achieve these goals.
Provincial and local government equitable share allocations are based on estimates of nationally raised
revenue. If this revenue falls short of the estimates within a given year, the equitable shares of
provinces and local government will not be adjusted downwards. Allocations are assured (voted,
legislated and guaranteed) for the first year and are transferred according to a payment schedule. To
contribute to longer-term predictability and stability, estimates for a further two years are published with
the annual proposal for appropriations. More information on the budget can be obtained from National
Treasury’s website at
(http://www.treasury.gov.za/documents/national%20budget/2015/review/default.aspx).
Sections 26‒35 of the PFMA describe the budget requirements. Parliament and each provincial
legislature appropriate money for each financial year towards the requirements of the state and
provinces. The budget must contain estimates of all expected revenue to be raised during the financial
year, estimates of current expenditure per vote and per main division within the vote, estimates of
interest and repayment on loans, estimates of capital expenditure per vote and main divisions within
the vote for the financial and future years, proposals for financing any anticipated deficit and the
intentions regarding borrowing and other public liability that will increase public debt.
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In February of each year, the Finance Minister tables the national budget in parliament, at which the
Minister announces government’s spending, tax and borrowing. Once parliament approves the budget,
it is adopted and becomes parliament’s budget. The budget must include the projected revenue,
expenditure per vote and per main division and borrowing for the previous financial year, as well as
multi-year budget information.
The budget announces government spending for the next three financial years, that is, the years of the
MTEF. In contrast to the function-based process, the Appropriation Bill, tabled by the Minister of
Finance as part of the budget, is set out in terms of each budget vote. Generally, a vote specifies the
total amount of money appropriated to a national government department. Through the Appropriation
Bill the executive seeks Parliament’s approval and adoption of its national government spending plans
for the first year of the MTEF period. The abridged estimates of national expenditure publication is the
explanatory memorandum to the Appropriation Bill and contains detailed information regarding the
allocations to each national government vote.
Key performance indicators are included for each national government vote and entity, showing what
the institutions aim to achieve by spending their budget allocations in a particular manner. This
information provides Parliament and the public with the necessary tools to hold government
accountable against the 14 outcomes set out in the MTSF.
Each public institution is also required to compile a strategic plan (called an integrated development
plan in the case of municipalities) and an annual performance plan (called a service delivery budget
implementation plan in the case of municipalities) that include strategic outcomes, objectives, key
performance indicators and targets. The requirements for planning and budgeting are included in
Sections 5 and 6 of the Treasury Regulations.
These planning documents are used as a basis for monitoring performance through in-year reporting
(finance monthly and performance/non-financial quarterly) and annual reporting. This information
provides Parliament and the public with the necessary tools to hold government accountable against
the 14 outcomes set out in the MTSF and the objectives and targets set out in the plans.
3. Activities
Activity 1.2.1
Log on to the Discussion Forum and, together with your fellow students, identify the key enabling
legislation a public sector entity would need to implement.
The key enabling legislation on the public sector will be released on the Discussion Forum after
sufficient discussions among students have occurred.
SUMMARY
The information above has provided an understanding of the key public sector legislation and how this
impacts on the
• strategy, risk management and governance

• financial management
• management decision making and control of public sector organisations
Please refer to the study material of your other modules for the impacts on
• accounting and external reporting

• auditing and assurance
• taxation
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LEARNING UNIT 2 – RISK MANAGEMENT

LEARNING OUTCOMES
After studying this learning unit, you should be able to further apply your knowledge and skills achieved
through your prior learning (see below) to a scenario, on an integrated basis.

Learning outcome References
• Identify and evaluate opportunities and risks on an advanced level. • Chapter 3

• Critically assess risks (including IT risks) and how they are managed. • MAC4861 TL102
• Explain the critical components of an Enterprise Risk Management
(ERM) framework.
• Evaluate an entity’s risk management programme.
• Recommend courses of action to help manage risks.
• Apply your theoretical knowledge relating to risk management to a
given scenario, and provide value-added assessments and comments
in this regard.
INTRODUCTION
A rational investor should expect a higher return on a higher risk investment. It is thus imperative to not
only quantify risk accurately, but at the same time, to manage risk so that the uncompensated risks
can be minimised.
Your prior learning for this learning unit included a fair amount of theory. You can obtain a better
understanding of the theory by working through a sufficient number of questions/case studies. This
learning unit will assist you in this regard.
LEARNING UNIT 2.1 RISK MANAGEMENT

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LEARNING UNIT 2.1 – RISK MANAGEMENT
1. Introduction
We have already noted that risks are relevant in everybody's day-to-day lives. In the financial world,
one finds different types of risk. Risks can come from uncertainty, such as uncertainty from the future
rand/dollar exchange rates, possible project failures, possible legal liabilities, granting of credit,
accidents, possible natural disasters, possible fraud and error, and several other unknowns.
In the field of Management Accounting, the concepts of risk assessment and management are
pervasive. You have already encountered some of the related concepts before and will also encounter
others in later learning units. For example, in assessing risk, the concepts of probability and sensitivity
have already been considered earlier as part of decision-making techniques. Risk will also be
considered when evaluating investment and financing decisions. In learning unit 7 you will also be
reacquainted with hedging techniques, which indicate transactions that can lower or even eliminate
risk in certain areas.
2. Content
There is no additional content to be studied at this level. All content has already been addressed in
your prior learning. If you want to refresh your knowledge, please refer to the earlier section ‘Prior
learning assumed’.
The activity below, the self-assessment questions provided later in this learning unit, and the integrated
self-assessment at the end of this tutorial letter will help you to apply your knowledge.
3. Activities
Activity 2.1.1
Log onto the Discussion Forum and with your fellow students and identify some risks that may be
relevant to a South African entity manufacturing paper from tree pulp. Assume that the entity exports
to various clients in South America and Africa, and that the entity utilises 80% debt capital.
Feedback on this activity would be released on the Discussion Forum after sufficient discussions
have occurred among students.
Activity 2.1.2
Perform Practice Question 3-3 in Managerial Finance (9th edition).
After working through all the relevant sections in the textbook, guidance and activities provided by this
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QUESTION 1 (18 MARKS 27 MINUTES plus reading time)
Perform the Required part (a) of question 7 (STARNET), which can be found in TL103. The relevant
Required part is repeated below. (At this point it is not necessary to attempt the other parts of the
to the scenario.)
REQUIRED Marks
(a) List and discuss the significant risks faced by Starnet. Your answer should include
a discussion of the associated mitigating factors, which can be implemented.
Present your answer in the following format: (18)
Identification & discussion of risk Mitigating factor

10 marks 8 marks
Your answer should exclude the potential acquisition and investment options.
competencies that address decision making.
When answering the above question, you would need to think critically in that you would need to:
o Apply a questioning mind-set

o Analyse and evaluate the information provided to identify the risks
o Consider the implications of the risks
You would also need to problem solve to provide mitigations. This would require you to be creative
and innovative and consider various options.
Find the suggested solution to the relevant part in TL 103.
SUMMARY
Risk can be described as the probability that the actual outcome will be different from the expected
outcome. It is inevitable that risks will arise because the outcome of events cannot always be predicted
with accuracy and a certain degree of uncertainty always exists. Risk management entails minimising
the adverse effects, should the risk event occur.

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LEARNING UNIT 3 – COST OF CAPITAL AND CAPITAL INVESTMENT

APPRAISAL
LEARNING OUTCOMES
In addition, after studying this learning unit, you should be able to
• recommend ways in which project and investment appraisal could be approached differently with
the aim of sustainable value creation
• perform and evaluate a foreign investment decision
• quantify the effect of specific scenarios on the net present value and/or internal rate of return of a
proposed investment
• describe how Monte Carlo simulation could help measure the impact of risk on a proposed
investment

Learning outcome Reference

Managerial Finance
(9th edition):
✓ Describe the concept of risk vs return, including the underlying • Chapter 4

theory. • Chapter 5
✓ Integrate multiple sources of knowledge to determine the fair value • Chapter 6
of different types/forms of preference shares and debt, • Chapter 10
incorporating complications in discounted cash flow and relevant • MAC4861 TL102
income tax treatments.
✓ Analyse an entity’s cost of capital and capital structure.
✓ Calculate the weighted average cost of capital and its various
components.
✓ Assess the circumstances in which a project-specific cost of capital
will be utilised, including the calculation thereof.
✓ Differentiate between asset and equity betas, including the
calculation thereof.
✓ Perform and evaluate an investment decision on an advanced
level, utilising various capital budgeting techniques.
✓ Address complications of an investment decision, including dealing
with the effects of inflation, risks, taxation, capital rationing and
projects with different lifecycles.
✓ Evaluate the alternative of asset-specific finance.
✓ Perform sensitivity analysis upon an investment decision.
✓ Discuss the purpose and benefits of a post-investment audit.
✓ Recommend ways in which project and investment appraisal could
be approached differently with the aim of sustainable value
creation.
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INTRODUCTION
Capital investment appraisals are long-term decisions, where it will take several years to earn a return
on the capital investment made. The topic of capital investment appraisals integrates many other
management accounting topics (including strategy, cost of capital and relevant costing), and frequently
serves as the precursor to the financing decision. It further integrates with the subject of taxation.
The cost of capital is important as it directly affects the choice of investments. A too low cost of capital
could lead to the acceptance of investments earning insufficient returns; whereas a too high cost of
capital could lead to not accepting profitable investments.
Both cost of capital and capital investment appraisal have in the past frequently been examined in this
subject and also on the level of SAICA’s professional examinations. Thorough knowledge of these
learning units – on an advanced level – is therefore important.
LEARNING UNIT 3.1 WEIGHTED AVERAGE COST OF CAPITAL

LEARNING UNIT 3.2 CAPITAL INVESTMENT APPRAISAL
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LEARNING UNIT 3.1 – WEIGHTED AVERAGE COST OF CAPITAL
1. Introduction
The cost of capital is important, as it directly affects the investment decision and the choice of
investments. The weighted average cost of capital (WACC) is the dominant indicator of the cost of
capital of an entity and is determined based on a weighted average of other costs. Here, an entity’s
capital may consist of several forms of capital, including equity, preference shares and debt.
This learning unit is based on selected sections of the following chapters in your prescribed textbook
(Managerial Finance, 9th edition):
• Chapter 4: Capital structure and the cost of capital

• Chapter 5: Portfolio management and the Capital Asset Pricing Model
• Chapter 10: Valuations of preference shares and debt
2. Content
3. Activities
Activity 3.1.1
Attempt question 4.6 in Managerial Finance, 9th edition, without referring to the suggested solution.

Find the suggested solution after the question in the textbook.
Perform the Required part (a) of Question 12 (PIPER INDUSTRIALS LIMITED), which can be found in
TL 103. The relevant Required part is repeated below. (At this point it is not necessary to attempt the
other parts of the question; you should, however, take notice of the way in which all the various parts
integrate and relate to the scenario.)
REQUIRED Marks
(a) Calculate the actual Weighted Average Cost of Capital Piper Industrials Limited
(Piper), based on current market values, as at 31 December 2018. (14)
Refer to the suggested solution to this part in TL103
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SUMMARY
The purpose of WACC is to determine a company’s cost of capital by weighing each of the components
making up its capital structure. WACC should be based on the company’s target capital structure or
the market value of each of the components of capital.

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LEARNING UNIT 3.2 – CAPITAL INVESTMENT APPRAISAL
1. Introduction
Capital investment appraisals are long-term decisions, where it will take several years to earn a return
on the capital investment made.
Here, it is important to take cognisance of the similarities and differences between capital investment
appraisals and business valuations. When assessing a proposed capital investment using discounted
cash flow methods (e.g. projecting cash flows and calculating a net present value or internal rate of
return), a capital investment appraisal displays many similarities to a business valuation (using, for
example, an enterprise discounted cash flow model, based on free cash flow). From your prior
knowledge, you should recall that a capital investment appraisal frequently assesses a project over a
fixed term (e.g. 5 years), where end-of-period cash flows should be accounted for (e.g. the re-sell value
of a machine). In contrast, a business valuation frequently accounts for a continuing value using, for
example, the Gordon Growth Model.
An appropriate capital investment decision can only be made after considering several quantitative and
qualitative factors. Quantitative appraisal of a proposed capital investment usually requires forecasting
of investment-related and associated cash flows, which is then discounted at an appropriate risk-
adjusted discount rate based on WACC. This process is complicated further by various factors,
including the effects of inflation, relevant costs and revenues, taxation, capital rationing, projects with
different lifecycles and foreign investments.
Often in the past, capital investment appraisals were made by considering only economic aspects. In
these enlightened times, however, appraisers are starting to consider other issues as well with the
ultimate goal of sustainable value creation.
Please note that the above content can be linked to Enabling competencies, particularly those
competencies that address business acumen and decision making.
In making a capital investment decision, the following are some of the competencies that will be
applied:
• Analysis of costs and revenues in order to identify relevant costs

• Questioning the reliability of the forecasted information and challenge whether assumptions are
realistic
• Consideration of factors impacting the organisations internal and external environment
• Synthesising the results of the quantitative and qualitative analysis to decide on whether the
investment is viable
This learning unit is based on the following chapters in your prescribed textbook:
Managerial Finance – 9th edition:
• Chapter 6: The investment decision

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2. Content
2.1. Quantitative analysis of a local capital investment decision
In performing a quantitative appraisal of a proposed local investment, we usually calculate the net
present value (NPV) of the projected investment-related and associated cash flows (excluding finance-
related cash flows), by discounting the cash flows using an appropriate risk-adjusted discount rate.
Then, once all quantitative and qualitative factors have been considered, a capital investment decision
is made. These concepts are described in detail in the textbook.
Next, we consider additional considerations when contemplating the discount rate for foreign
investment.
2.2. Country risk
According to author, Luis Pereiro (2002), country risk represents the combined risk from the following
country-specific risk components (with examples in brackets):
• Currency risk and the risk resulting from inflation, including devaluation and volatility in the local
currency (think of the volatility of South African rand a few years ago and of the recent devaluation
in several emerging market currencies against benchmark currencies).
• The credit risk of the government, including the possibility of defaulting on international debt funding,
such as government bonds (think of the euro crisis, and recent changes in the perceived credit risk
of Greece and Portugal).
• Social or political problems (think of recent events in Syria and Egypt).
• Possibility of government expropriation and nationalisation of private assets (think of recent events
in Zimbabwe and Bolivia).
• Potential barriers to free capital flow in and out of the country (think of South Africa).
Pereiro (2002) adds that country risk is relevant where investment is not diversified geographically,
either through practical limitations, due to countries restraining investors from entering and exiting (for
example, South African exchange control partially restrains investors in this regard), or willingly, where
investors choose to invest only in a single country and therefore effectively choose not to diversify
geographically.
Next, we consider ways of adjusting for the effects of country risk as part of foreign investment
appraisal.
Although little consensus exists amongst experts as to the best technique to use for the adjustment of
country risk, numerous techniques have been described, with various levels of complexity. (Complex
techniques for the adjustment of country risk fall beyond the scope of the curriculum.)
We recommend that you study the techniques described in this section rather than section 6.9, entitled
“International capital budgeting”, as in the prescribed textbook.
In this section we discuss two basic techniques that are commonly used; both are based on the Capital
Asset Pricing Model. (This discussion is adapted from descriptions by Correia [2011], Pereiro, [2002]
and Damodaran [2009].)
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a) Technique 1
This technique allows for the adjustment of country risk in components: partially at the level of projected
cash flows and partially at the discount rate.
Apply the following steps in evaluating a foreign investment:
1. Estimate future cash flows in the foreign currency.

2. Convert to local currency (rand) using forecasted spot exchange rates for each year. (This step
accounts for the effect of currency risk and is similar to the one used in analysing foreign finance.
Refer to learning unit 4.2 in this regard.)
3. If available, add or deduct the incremental insurance premium (in rand, as obtained from Lloyds
of London, for example) to account for the difference in political risk, expropriation risk, etc. (If the
foreign country has a higher risk than South Africa then the incremental insurance premium should
be deducted; if a lower risk then the incremental premium should be added.)
4. Determine/obtain the discount rate for the investor company (in South Africa, based on rand) and
adjust for foreign country risk factors not incorporated in step 3.
5. Adjust the local discount rate (South African, based on rand) for the effect of improved
geographical diversification benefits, if any. (This may result in a lowering of the rate.)
6. Further adjust the local discount rate (South African) for undiversified investment-specific risks,
not accounted for as part of the forecasted cash flows.
7. Determine the net present value by discounting the cash flows (in rand) using the adjusted local
(South African) discount rate.
b) Technique 2
This technique allows for the adjustment of country risk mainly at the level of the discount rate, where
it incorporates a “country risk premium”.
Country risk premium
A country risk premium is the additional return required over a benchmark risk-free rate, due to the
effects of incremental country risk. A country risk premium is often calculated based on the spread of
a sovereign bond (belonging to the country of investment) over a benchmark bond (often taken as US
T-Bonds or German Bonds), both with the same monetary denomination (thus normally US dollars or
euro) and both with a similar maturity date close to the life expectancy of the proposed investment.
One way of determining this spread is to refer to the rating allocated to the country’s debt by one of the
rating agencies and then to refer to the published spreads relative to the US T-bond, for instance.
Tables 3.1 and 3.2 provide an indication of these bond-spreads. (Spreads are indicated in basis points;
100 basis points equals 1%. We do not provide a more recent representation because US corporate
bond spreads in recent times approached their widest on record due to the international financial crisis,
making later figures less representative.)
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Table 3.1: Yield spread over US T-bond by bond rating, May 2009 (Bloomberg)
The general meaning of credit rating opinions is summarised below:
AAA Extremely strong capacity to meet financial commitments; highest rating

AA Very strong capacity to meet financial commitments
A Strong capacity to meet financial commitments, but somewhat susceptible to
adverse economic conditions and changes in circumstances
BBB Adequate capacity to meet financial commitments, but more subject to adverse
economic conditions
BB Less vulnerable in the near term but faces major ongoing uncertainties to adverse
business, financial and economic conditions
B More vulnerable to adverse business, financial and economic conditions but
currently has the capacity to meet financial commitments
CCC Currently vulnerable and dependent on favourable business, financial and economic
conditions to meet financial commitments
CC Currently highly vulnerable
C Currently highly vulnerable obligations and other defined circumstances
D Payment default on financial commitments
Additional “+” or “-” ratings are sometimes indicated for finer classification.
Table 3.2. Meaning of credit rating opinions (Standard & Poor’s, 2018)
Steps in applying technique 2
Apply the following steps in evaluating a foreign investment using this technique:
1. Estimate future cash flows in the foreign currency.

2. Convert to a benchmark currency (US dollar or euro) using forecasted spot exchange rates for
each year.
3. Determine a risk-adjusted discount rate (US dollar or euro-based) as follows:
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WACCfi = (Kd x d%) + (Ke x e%)
Where:
WACCfi= The weighted average cost of capital for the proposed foreign investment
Ke = Cost of equity
Kd = After-tax rate of return on debt capital (sometimes increased by the after
tax country risk premium [Rc]
d% = The debt component in the target capital structure, or debt capital as a
percentage of the sum of the debt and ordinary equity capital (based on
market values)
e% = The equity component in the target capital structure, or ordinary equity
capital as a percentage of the sum of the debt and ordinary equity capital
(based on market values)
Calculation of Ke
This sum equals the (US dollar or euro-denominated) risk-free rate of the foreign country
Ke = (Rfg + Rc) + ß (MRP) + Ri
Where:
Rfg = Global risk-free rate (for example equal to the yield on a US T-bond or
German Bond with a maturity date close to the life expectancy of the
investment)
Rc = Country risk premium (for example calculated based on the spread of a
sovereign bond [belonging to the country of investment] over a benchmark
bond, both denominated in the same currency and both with the same
maturity date)
ß = Representative Beta coefficient
MRP = Representative equity market risk premium
Ri = Premium for undiversified investment-specific risks, not accounted for as
part of the forecasted cash flows
4. Determine the net present value by discounting the cash flows (in US dollar or euro) using the (US
dollar or euro) risk-adjusted discount rate.
5. Convert the net present value to rand using the current spot rate.
2.3. Scenario analysis
Traditional discounted cash flow techniques used to evaluate a proposed investment, attempting to
capture the effects of risk and uncertainty into a single figure – a single net present value (NPV) or
internal rate of return (IRR) for the investment. Yet these techniques incorporate several variables,
each subject to a degree of uncertainty. In consequence, by attempting to capture the effects of overall
risk and uncertainty into a single figure, these techniques do not fully highlight the potential effects
these may have. (Traditional discounted cash flow techniques are described in detail in the textbook).
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To help address this weakness, an appraiser can employ certain techniques that shed greater light on
the effects of risk and uncertainty. One such technique is scenario analysis. Scenario analysis is an
extension of sensitivity analysis performed on a capital investment appraisal. Firstly, a brief summary
of sensitivity analysis: Here we change a single variable in the analysis (whilst keeping the other
constant or independent) and note the outcome on the appraisal, such as the effect on the investment’s
net present value (NPV) or internal rate of return (IRR). We can also plot the results on a sensitivity
graph.
With scenario analysis we determine the outcome of an investment appraisal for different scenarios
(often on three levels, such as best-case, worst-case and intermediate-case scenarios). In contrast to
sensitivity analysis, here we have the luxury of assuming interdependence of variables. For example,
under a worst-case scenario, if we assume a smaller market share, we can also lower the expected
selling price of the product.
The principles taught within this learning unit can be applied in conjunction with the competencies
included within digital acumen. In preparing a capital budget, relevant cash flows are projected for a
specific period. It is sometimes easier to perform such calculations using Microsoft excel and this allows
for the inclusion of projections for a large number of years. It would also be much easier to perform
scenario or sensitivity analysis as the impact of any change can be determined immediately without
performing lengthy recalculations.
3. Activities
Activity 3.2.1
Determine the country risk premium of a proposed 10-year investment in Brazil, using the information
in Table 3.1. Assume that the credit rating of Brazil’s sovereign debt is rated at BBB.
The country risk premium of a proposed investment in Brazil is calculated as follows: A 10-year BBB
rated bond has a spread of 292 basis points compared to US T-bonds (per Table 3.2.1), or 2,92%,
which equals the Brazilian country risk premium over the US.
Activity 3.2.2
Attempt the following illustrative example and compare your answer to the suggested solution.
Foreign investment
Assume you are the financial manager of a large South African firm that is contemplating an investment
in Brazil.
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You have already gathered or estimated the following information:
• The investment has a life expectancy of 3 years.
• Forecasted net cash flows per annum: Million Million Million Million
Years from now 0 1 2 3
Forecasted net cash flows
(currency: Brazilian real) (4) 3 5 7
• Rates
1 USD 8.13 ZAR Spot

1 USD 1.83 BRL Spot
1 USD 2.10 BRL Forward rate (1 year)
1 USD 2.31 BRL Forward rate (2 years) - estimated
1 USD 2.49 BRL Forward rate (3 years) - estimated
Acronyms used:
USD = US dollar
BRL = Brazilian real
ZAR = South African rand
• Yield on a note with a maturity close to that of project life-expectation

US treasury note 1.2%
• International equity market risk premium 5.0%
• Brazilian bond spread relative to US treasury 2.9% (Based on credit ratings)
• Information specific to the Brazilian investment

o Beta coefficient (estimated) 2.0
o Undiversified investment-specific risk 5.0%
• Other information
o Value of international diversification (rand [million]) 1 (Estimated)
REQUIRED Marks
Perform a quantitative analysis of the proposed Brazilian investment to determine if the
investment will yield a positive net present value. (10)
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Investment in Brazil Marks

0 1 2 3
BRL (million) cash flows (4,00) 3,00 5,00 7,00
Forward exchange rates (USD1 = BRL_) 1,83 2,10 2,31 2,49
USD (million) cash flows (2,19) 1,43 2,16 2,81 (1)
Foreign discount rate

Ke = (Rfg + Rc) + ß (MRP) + Ri
= (1, 2%+2, 9%) [1] + 2(5%) [1] + 5%[1] Marks as indicated in square brackets, total: 3
= 19,1%
19,1% 1,000 0,840 0,705 0,592 (1)
Factors or calculator steps shown
Discounted values (USD

[million]) 2,20 (2,19) 1,20 1,53 1,66 (1)
Spot exchange rate (1USD =
ZAR_) 8,13
Converted to ZAR (million) 17,92 (1)

Value of international
diversification (ZAR [million]) 1,00 (1)
Net present value of Brazilian
investment (ZAR [million]) 18,92
Note: Figures may not total due to rounding.
Activity 3.2.3
Assume you are the financial manager of the company considering the two investments for which a
Monte Carlo Simulation was performed in Table 3.4.1. Further assume that the company has a
weighted average cost of capital equal to 9%, with enough funds only for a single investment.
Would you recommend Investment X or Y, given the following information?
1. The company is neither risk averse nor an extreme risk taker and aims to maximise expected
returns from investments.
2. The company is risk-averse and wants to avoid a loss-making investment where possible.
3. The company favours an investment with a greater possibility of becoming a “shooting star” (by
offering great returns).
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1. Investment Y. This investment has the higher expected internal rate of return (10, 3% per annum
vs 9,2%).
2. Investment X. The expected internal rates of return of the two investments do not differ
considerably (9,2% vs. 10,3%) and Investment X has half the chance of incurring a loss (1/20 vs
1/10 chance).
3. Investment X. The expected internal rates of return of the two investments do not differ
considerably (9,2% vs. 10,3%) and Investment X has double the chance of earning an exceptional
return of 30% per annum (1/50 vs 1/100 chance).
Perform the Required part (d) of Question 7 (STARNET), which can be found in TL103. The relevant
to the scenario.)
REQUIRED Marks
(d) (i) Evaluate the opportunity to manufacture Medware in-house using the net
present value method of investment appraisal.
Round all calculations to R’000. (15)
(ii) Assuming both Alternative 1 and 2 yield a positive net present value, explain
how you will compare the two alternatives to make a decision based on the
financial viability only. (You are not required to perform any calculations). (5)
(iii) Discuss the qualitative factors that Starnet should consider when deciding on
whether to manufacture Medware as opposed to outsourcing the manufacturing
to the Chinese supplier. (10)
QUESTION 2 45 MARKS (68 MINUTES)
Attempt question 6-6 in chapter 6 of Managerial Finance, 9th edition, without referring to the suggested
solution. Compare your answer to the suggested solution and establish reasons for differences.
Compare your answer to the suggested solution in the textbook and establish reasons for differences.
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SUMMARY
Capital investment appraisals are performed to determine if an investment opportunity should be

undertaken. There are several investment appraisals methods that can be utilised to quantitatively
assess an investment opportunity. It is, however, important to also consider qualitative factors when
assessing an investment opportunity
The growth in foreign investment over the past couple of decades is a natural result of the globalisation
of business. However, since foreign investment is more complex, its appraisal demands a greater level
of diligence and skill. When performing a quantitative analysis of a foreign investment, we can use a
few techniques to incorporate the effects of country risk (we described two such techniques in this
study unit).
Correia, C, Flynn, D, Uliana, E & Wormald, M. 2011. Financial Management. 7th edition. Juta & Co:
Cape Town.
Damodaran, A. 2009. Strategic Risk Taking: A Framework for Risk Management. New York:
Pearson Prentice Hall.
Hertz, DB. 1964. Risk analysis in capital investment. Harvard Business Review 42(1): 95–106.
Pereiro, LE. 2002. Valuation of companies in emerging markets. New York: John Wiley & Sons.
Skae, FO. 2023. Managerial Finance.9th edition. LexisNexis: Johannesburg.
Standard & Poor’s. 2018. S&P Global Ratings Definitions [Online.] New York: Standard & Poor’s.
Available from: < https://www.standardandpoors.com/en_US/web/guest/article/-
/view/sourceId/504352> [Accessed 5 July 2018].
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LEARNING UNIT 4 – SOURCES AND FORMS OF FINANCE AND

FINANCING DECISION
LEARNING OUTCOMES
After studying this learning unit, you should be able to
• further apply your knowledge and skills achieved through your prior learning (see below) to a
scenario, on an integrated basis
• detail the most prominent forms of foreign finance available to business entities in South Africa
and, for each, further detail the typical business users, sources of finance or investors, and
associated requirements
• determine the most appropriate form of finance for a South African business entity, given a specific
narrative, by performing appropriate calculations for various financing options (including foreign
finance) and consideration of other relevant factors


Finance,
9th edition
Sources and forms of finance
• Identify potential sources of funds on an intermediate level. • Chapter 7,

• Critically assess the suitability of different forms of finance to different types including
of business entities, different types of assets financed and different intended Appendix 1
purposes. • MAC4861
• Describe the role, characteristics, advantages and disadvantages of TL102
different sources of financing to an entity after considering its strategies and
objectives.
• Perform and evaluate a financing decision (incorporating the effect of tax,
including Section 24j of the Income Tax Act).
• Explain the terms “project finance”, “securitisation”, “asset securitisation”
and “syndication”.
• Apply common business vocabulary and terms in your discussions.
• Identifies the strengths and weaknesses of the financial proposal or
financing plans
• Review the alignment of a proposal or plan with strategic objectives.
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INTRODUCTION
Finance (funding) represents the lifeblood that enables a business to grow, expand, thrive, and
sometimes, merely survive. Raising finance is therefore a very important aspect for any business
enterprise. The aim of the financing decision is to decide on the best financing option for a proposed
investment – best not only in terms of cost (determined by calculating the net present cost or IRR), but
also in terms of fit (determined by considering various entity-specific factors).
LEARNING UNIT TITLE
LEARNING UNIT 4.1 SOURCES AND FORMS OF FINANCE AND THE FINANCING
DECISON
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LEARNING UNIT 4.1 – SOURCES AND FORMS OF FINANCE AND THE

FINANCING DECISON
1. Introduction
related to the decision-making acumen.
Raising finance is a very important aspect for any business enterprise. The present financial crisis has
not only restricted the access to finance for many business entities, but has placed renewed focus on
the risk of using excessive debt finance. For the new, smaller business it is often a case of using
whatever form of finance is available, at whatever cost. In contrast, a larger business – with a track
record – can often apply more of the knowledge and skills highlighted in this learning unit, to secure
the right form of finance, at the right time, and at the right cost. Under certain circumstances, foreign
finance will provide the right match to such a business enterprise.
When making the financing decision, you would need to think critically by:
• Applying a questioning mind-set

• Analysing and evaluating the information provided and considering the following factors regarding
the various sources of finance:
o suitability to the type of business and/or asset financed

o true cost
o impact on cash flow
o constraints associated with the form of finance, including the effect of debt covenants
o impact on the overall risk profile
o how it pairs with existing finance
o availability
• Recommending a source of finance based on the above analysis and evaluation
2. Content
2.1. Determining the most cost-effective form of finance
When comparing the cost of several viable financing options, it is important to compare like to like.
Therefore, a financial manager should attempt to compare the cost of different financing options where
these have similar conditions, security requirements and covenants. If the options are not directly
comparable in this way, these factors should be adjusted for in the calculation (which may involve a
great deal of subjective adjustment, which in turn, will reduce the reliability of the results).
In deciding on the most cost-effective form of finance, you should calculate for each viable finance
option the net present cost/ internal rate of return of the associated finance-related cash flows (including
the implications of taxation), using an appropriate risk-adjusted discount rate
This process is fairly simple when comparing, for example, different loan options denominated in rand.
However, foreign debt finance introduces further complications as foreign finance exposes a business
to the effect of foreign currency movements, which normally have an additional cash flow implication.
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We therefore have to incorporate the effect of expected foreign currency movements into the
discounted cash flow analysis.
Perform the Required part (e) of Question 7 (STARNET), which can be found in TL103. The relevant
to the scenario.)
REQUIRED Marks
(e) Advise Starnet regarding which financing option will be most cost effective for the
acquisition of the machinery to manufacture Medware.
Round all calculations to R’000. (13)
QUESTION 2
Construction and mining group
The management of a construction company that listed on the JSE recently approved the investment
in a R770 million mining fleet by a subsidiary company (Newco).
This investment will allow the group to enter the contract mining market.
The management has been in discussions with various parties regarding the financing of this fleet. The
company has received two proposals but has not yet made a final decision on which option to pursue.
Details of the proposals are as follows:
1. A loan by the group’s usual commercial bankers
The bank is prepared to advance a five-year loan of R770 million to Newco, secured by means of a
notarial bond over the fleet. The loan will bear interest at an effective annual rate of 8,65%. (This is
deemed to be Newco’s pre-tax cost of new debt.)
2. €70 million Eurobond
The second alternative is that Newco issue a €70 million Eurobond. The Eurobond will be secured by
means of a notarial bond over the fleet. The bond will have a fixed coupon of 5,65% per annum payable
annually in arrears. The Eurobond will be listed on various European bond exchanges. The bond will
be redeemable five years after issue at the par value of €70 million.
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Other market information:
• The current R: € exchange rate is 11,00 : 1,00.

• The 12 month forward R : € exchange rate published by a bank is 11,70 : 1,00.
• Recent data on government bonds are as follows:
Maturity date Latest yields

(years from now) South Africa Eurozone
2 years 6,3% 0,4%
3 years 6,5% 0,5%
4 years 6,8% 0,8%
5 years 7,0% 1,1%
You can assume that:
• Newco’s tax rate is 28% per annum.

• No other hedging instruments are available to Newco.
REQUIRED Marks
(a) Determine the most cost-effective form of finance to be used by Newco to finance the
fleet investment. (10)
(The example is based on the 2011 Qualifying Examination, Part 2, question 2: updated, adapted and
requirement changed [SAICA, 2011].)
Determination of net present cost (NPC) and internal rate of return (IRR) Marks
A loan by the group’s usual commercial bankers
As the loan’s effective annual rate of 8,65% per annum is equal to Newco’s pre-tax cost of new debt
(kd before tax), this rate will dictate the loan’s NPC and IRR. (NB: This is a specific condition with a
specific outcome).
kd of Newco = 8,65% x 0,72 = 6,228%. (1)

Therefore:
IRR/YR of this loan = 6,228%; and
NPC of this loan = (R770 000 000) (equal to the loan amount advanced, but negative)
Due to the lack of transaction fee and other complicating factors, a simplified calculation has been
shown in the suggested solution for the SA taxation effect.
Students should specifically refer to Tutorial Letter 102 of MAC4861 (available under Additional
Resources on myUnisa) to ensure they are up to date with the impact of Section 24J of the Income
Tax Act on the financing decision. In this regard, you should let the wording in the required section and
the number of allocated marks guide you towards using a “short” or “long” approach. The superior
approach, when there is a transaction fee involved, is the long approach as described in chapter 7 in
the prescribed textbook.
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Eurobond Year 0 1 2 3 4 5 Marks

Interest (EUR) 5.65% (3 955 000) (3 955 000) (3 955 000) (3 955 000) (3 955 000) (1)
SA taxation effect (28% on interest) (stated in EUR) 1 107 400 1 107 400 1 107 400 1 107 400 1 107 400 (1)
Redeem bond (EUR) (70 000 000) (1)
Finance-related cash flows (after tax) (EUR) 0 (2 847 600) (2 847 600) (2 847 600) (2 847 600) (72 847 600)
Forecast spot exchange rate (see below) 11,70 12,33 13,09 13,86 14,61
Finance-related cash flows (after tax) (ZAR) 0 (33 316 920) (35 110 908) (37 275 084) (39 467 736) (1 064 303 436) (1)
IRR/YR 10.16%C5 Calculator steps shown (1)

NPC, discounted at: 6.228% 1,0000 0,94137 0,88618 0,83422 0,78532 0,73927 (1)
Discount factors / calculator steps shown
NPC (911 379 616) 0 (31 363 595) (31 114 588) (31 095 792) (30 994 611) (786 811 030)
Note: your answers may differ due to rounding differences.
Determination of forecast spot exchange rate (ZAR/EUR):

Current spot rate (ZAR/EUR)0 = 11,00
Forward exchange rate (ZAR/EUR)1 11,70 not available not available not available not available (1)
Based on relative interest rates (ZAR/EUR)t 12,33C1 13,09C2 13,86C3 14,61C4
Increase in exchange rate 6,4% 5,4% 6,2% 5,9% 5,4%
(11,70-11,00) (12,33-11,70)
Example calculation 11,00 11,70
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Conclusion Marks
The loan by the group’s usual commercial bankers will represent the most cost
effective form of finance, as it has the lower NPC (compare its NPC of –
R770 000 000 to – R911 379 616 of the Eurobond) and the lower IRR (compare (1)
6,228% to 10,16%).
Calculations
Calculation 1 – 4 based on:
(ZAR/EUR)t = (ZAR/EUR)0 x (1+rt)t

(1+rFt)t
C1
(ZAR/EUR)2 = 11,00 x (1+6,3%)2)/(1+0,4%)2 = 12,33 (1)
C2
(ZAR/EUR)3 = 11,00 x (1+6,5%)3)/(1+0,5%)3 = 13,09 (1)
C3
(ZAR/EUR)4 = 11,00 x (1+6,8%)4)/(1+0,8%)4 = 13,86 (1)
C4
(ZAR/EUR)5 = 11,00 x (1+7,0%)5)/(1+1,1%)5 = 14,61 (1)
Calculation 5: Calculator steps (e.g. HP10bII) -
1 P/YR
CF0 CF1 CF2 CF3 CF4 CF5

770 000 000 (33 316 920) (35 110 908) (37 275 084) (39 467 736) (1 064 303 436)
IRR/YR = 10,16%
Available marks 13
Maximum marks 10
Focus notes
• The effect of changes in foreign exchange (or associated hedging costs) often has a significant
impact on the NPC/IRR of a financing option.
• When determining the forecast spot exchange rates, we make use firstly of published forward
exchange rates and, where this is not available, we use the effect of relative interest rates applying
the International Fisher Effect, as shown.
• A simple reasonability check to the forecast spot exchange rates is to compare the difference
between the interest rates in the two currency zones for a specific year to the increase in the forecast
exchange rate for that year; these two percentages should be comparable, but not necessarily equal
to one another. (For example, the difference in the yield percentages for year 5 is 5,9%
[7,0% - 1,1%], the increase in the forecast exchange rate for year 5 is 5,4%.)
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SUMMARY
Should the investment appraisal process reveal that the investment opportunity should be undertaken,
the company must decide on the method of funding. There are several types/forms of finance available
and consideration should be given to factors such as cost, impact on capital structure, risk profile,
impact on business, cash flow matching, dilution of control, time frame, etc.
Foreign finance is increasingly important to the larger business entity, especially firms earning foreign
income and those with operations in other countries. However, when contemplating the use of foreign
finance, it is important that a business consider not only the related benefits (e.g. natural hedging
opportunities and diversification of the sources of finance), but also the additional risks (e.g. foreign
exchange exposure).
Multitude forms of foreign finance exist, including foreign currency denominated loans, notes and
bonds. These, in turn, can be obtained from several sources, including foreign banks, institutions and
other investors. Foreign finance is more complex as several additional requirements have to be met
and considered.
Emery, DR, Finnerty, JD & Stowe, JD. 2007. Corporate Financial Management. 3rd edition. New
Jersey: Pearson Education.
Levinson, M. 2006. Guide to Financial Markets.4th Edition. London: The Economist.
London Stock Exchange (LSE). No date. A practical guide to listing debt in London. London: London
Stock Exchange.
Pereiro, LE. 2002. Valuation of companies in emerging markets. New York: John Wiley & Sons.
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PART 1 LEARNING UNIT 5 – DIVIDEND DECISION
LEARNING OUTCOMES
through your prior learning (see below) to a scenario, on an integrated basis, as well as incorporate
tax considerations.

Learning outcome Managerial Finance,

9th edition
• Identify factors affecting the dividend decision. • Chapter 14

• Explain, at an intermediate level, the relevance and irrelevance theories • MAC4861 TL102
and its impact on dividend decisions.
• Identify and discuss the different methods and forms (including
alternative forms) that an entity may choose in paying dividends, on an
intermediate level.
• Discuss the various factors to be considered before declaring a
dividend/setting a dividend policy, on an intermediate level.
• Evaluate the dividend decision, on an intermediate level.
• Recommend, on an intermediate level, the most appropriate method to
distribute profits.
INTRODUCTION
Surprisingly, successful companies display widely divergent dividend policies. Some companies
choose to pay strong, consistent dividends whilst others choose to not pay any dividends at all. This
may lead one to predict that dividend policy is irrelevant. Yet, statutory requirements, shareholder
preferences and the effect of taxation make this a more complex matter. Besides, regardless of the
policy, you can never please everyone: somewhere, somehow there is likely to be a disgruntled person
in the form of a shareholder, an employee, a director, or… (you can fill in the blank).
This learning unit refers to inter alia some of the different methods and forms of dividends, and factors
to be considered before setting a dividend policy.
LEARNING UNIT TITLE
LEARNING UNIT 5.1 DIVIDEND DECISION

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LEARNING UNIT 5.1 – DIVIDEND DECISION
1. Introduction
The subject of this learning unit has already been introduced as part of the introduction above.
This learning unit is based on the following chapter in your prescribed textbook (Managerial Finance,
9th edition):
• Chapter 14: The dividend decision
2. Content
learning assumed’. The activity below, the self-assessment questions provided later in this learning
unit, and the integrated self-assessment at the end of this tutorial letter will help you to apply your
knowledge.
Perform the Required part (f) of Question 15 (LEGENDARY FOODS GROUP LIMITED), which can be
found in TL 103. The relevant Required part is repeated below. (At this point it is not necessary to
attempt the other parts of the question; you should, however, take notice of the way in which all the
various parts integrate and relate to the scenario.)
REQUIRED Marks
(f) (i) Based on LFG’s 2014 dividend pay-out ratio, calculate the shareholders’
anticipated dividend per share for the 2015 financial year. (3)
(ii) Discuss the potential reaction of the shareholders of LFG should the Group (5)
decide not to declare a dividend in respect of the 2015 financial year.
Refer to the suggested solution to this part in TL 103
SUMMARY
Dividends are a distribution of the company’s earnings to its shareholders. Shareholder returns can be
in the form of both capital gains, in the form of share price appreciation, or dividend returns. Directors
are therefore faced with the decision to retain earnings for capital investment purposes or to pay
dividends. This is referred to as the dividend decision.

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LEARNING UNIT 6 – MANAGEMENT OF WORKING CAPITAL
LEARNING OUTCOMES


9th edition
• Analyse an entity’s accounts receivable, inventories, accounts payable • Chapter 9

and total working capital, and suggest improvements. • MAC4861 TL102
• Calculate and evaluate the effect of changes in credit terms/policy.
• Analyse the entity’s financing of working capital and suggest
improvements.
• Discuss the role of IT systems (incl Enterprise Resource Planning
(ERP) and Customer Relationship Management (CRM) systems) in
working capital management.
• Assess an entity’s cash management and make recommendations for
improvement (you may exclude the Baumol and Miller-Orr models.)
INTRODUCTION
Working capital management involves the management of current assets and current liabilities with the
aim of maintaining these at efficient levels. But what do we mean by efficient levels? To paraphrase a
fairy tale, these levels are not too low, not too high, but just right. Why is this important? Maintaining
levels of working capital that are too high are expensive (it may generate insufficient returns) and it
may negatively affect the entity’s cash flow; levels that are too low may result in lost opportunities. This
learning unit is concerned with the range of skills required to manage working capital, including ways
in which it could be financed.
LEARNING UNIT TITLE
LEARNING UNIT 6.1 MANAGEMENT OF WORKING CAPITAL

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LEARNING UNIT 6.1 – MANAGEMENT OF WORKING CAPITAL
1. Introduction
This learning unit is based on selected sections of the following chapters in your prescribed textbook
(Managerial Finance, 9th edition): Chapter 9: Working capital management.
2. Content
After working through all the relevant sections in the textbook, guidance and activities provided by
this learning unit, you should now be able to attempt the following self-assessment questions.
Perform the Required part (g) of Question 4 (VOLUME-MART STORES LTD), which can be found in
TL 103. The relevant Required part is repeated below. (At this point it is not necessary to attempt the
other parts of the question; you should, however, take notice of the way in which all the various parts
integrate and relate to the scenario.)
REQUIRED Marks
(g) Perform relevant analysis to advise VMS whether the proposed change in the
accounts receivables policy will be profitable (Assume the 2019 mark-up percentage
is maintained). (12)
Your analysis should be limited to the effects of the change in policy only and you
should assume a 360-day year for all your calculations.
Refer to the suggested solution to this part in TL103.
QUESTION 2 40 Marks (60 minutes)
solution.

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solution.
Refer to the suggested solution in the textbook
solution.
Refer to the suggested solution in the textbook
SUMMARY
Working capital management involves the management of current assets and current liabilities. A
working capital policy entails determining how much should be invested in each of the working capital
assets (inventories, accounts receivables and cash) and how this will be funded.

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LEARNING UNIT 7 – TREASURY FUNCTION
LEARNING OUTCOMES


Finance,
9th edition
• Discuss the role of the treasury function. • Chapter 15

• Explain the workings of foreign exchange and interest rates. • Chapter 16
• Identify risks related to foreign exchange and interest rates. • MAC4861
• Identify and discuss hedging techniques and risk management. TL102
• Analyse various derivative instruments that are available to mitigate risks
• Develop and evaluates risk management policies related to financial risk,
at a basic level.
• Monitor risk exposure, taking into account changes within the entity and
within the economy, and recommend changes to risk management
policies.
• Identify the need for and evaluate the usefulness of derivatives (including
forward and future contracts, swaps, put and call options).
• Set up different hedges and calculate the cost thereof (at an intermediate
level).
• Suggest appropriate derivative instruments to manage the risk.
• Make use of the Black Scholes model to value options.
• Distinguish between the use of derivatives for purposes of hedging and
speculation.
INTRODUCTION
The corporate treasury function fulfils multiple, important roles within most organisations. (In smaller
entities, the function may be interwoven with the other duties of the financial manager.) The treasury
function is concerned with managing the entity’s payments, receipts and cash to make sure that the
entity has sufficient liquidity to meet its obligations, whilst simultaneously managing currency, interest
rate and other financial risk. To fulfil these roles effectively requires a proper understanding of several
areas, including the functioning of foreign exchange markets and currency risk, as well as interest rates
and interest rate risk.
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LEARNING UNIT TITLE
LEARNING UNIT 7.1 THE TREASURY FUNCTION

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LEARNING UNIT 7.1 – THE TREASURY FUNCTION
1. Introduction
This learning unit is based on the following chapters in your prescribed textbook (Managerial Finance,
9th edition):
• Chapter 15: The functioning of the foreign exchange markets and currency risk
• Chapter 16*: Interest rates and interest rate risk
*Please note that you are not required to be able to do detailed calculations relating to interest rate
swaps, caps, floors and collars.
2. Content
2.1. Risk management
The risk-management process involves identifying exposures to potential losses, measuring these
exposures, and the development of mitigation plans designed to manage, eliminate, or reduce risk to
an acceptable level. After risk management methods have been implemented, risk managers must
examine the risk management program to ensure that it continues to be adequate and effective. They
should periodically scan the environment to see whether the situation has changed in a way that affects
the nature or impact of the risk. The risk may have changed sufficiently so that the current mitigation
has become ineffective and needs to be scrapped in favour of a different one. On the other hand, the
risk may have diminished in a way that allows resources devoted to it to be redirected.
2.2. Black Scholes Model (option pricing model)
The Black Scholes Model is a mathematical formula designed to price a call option as a function of the
following variables:
• Share price (S)

• Exercise price (E)
• Time to expiration (t)
• Standard deviation of return on share ()
• Risk-free interest rate (R)
The Black Scholes formula is:
C = S x N (d1) – E x 𝑒−𝑅𝑡 x N (d2)
Where:
[ln (S/E) + (R +  /2)x t]

2
d1 =
( x √t )
d2= d1 - ( x √t )
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And where:
C = current option value

S = current share price
N (d) = the probability that a random draw from a standard normal distribution will be less than
(d).
E = exercise price
e = 2,71828 - the base of the natural log function
R = risk-free interest rate
t = time to maturity, in years
In = natural logarithm function
 = annualised standard deviation of the rate of return on the underlying asset
Please note that you may be required to perform a basic calculation utilising the Black Scholes Model
when all input variables are provided. The formula will be provided to you in tests or exams.
The following table summarises the impact that an increase in each of the variables has on the option
price:
Increase to this variable Option price

Share price Higher
Strike price Lower
Time to expiration Higher
Standard deviation of return on share Higher
Risk-free interest rate Higher
3. Activities
Activity 7.1.1
Let’s assume you would like to know the value of an option, with an exercise price of R80, to purchase
one share in company A. The current price of the shares is R70, and the option expires in three months.
Assuming that the share pays no dividends, the standard deviation of the shares returns is 60% per
year, and the risk-free rate is 8% per year.
Required: Calculate that the value of the option.
2
d1 = [ln (70/80) + (0.08+ 0.6 /2)x 3/12]
(0.6x√0.25)
= (-0.13 + 0.07)/0.3
= -0.2
d2 = -0.2 - (0.6x√.25 )
= -0.5
N (-0.20) = 0.4207*
N (-0.50) = 0.3085*
*Value is obtained from cumulative normal distribution table.
Thus, the value of the call option is:

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C = 70 x .4207 – 80 x 2.71828−0.0.8 (0.25) x 0.3085

= 29.45- 80 x 0.98 x 0.3085
= R 5.26
* Values are obtained from a cumulative normal distribution table, which will be provided in tests and
exams.
Activity 7.1.2
Attempt question 15-5 in chapter 15 in Managerial Finance, 9th edition, without referring to the
suggested solution.
Activity 7.1.3
suggested solution.
Activity 7.1.4
suggested solution.
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Perform the Required part (f) of Question 7 (Medico Group), which can be found in TL 103. The relevant
to the scenario.)
REQUIRED Marks
(f) Explain using supporting calculations how the call option can be used to hedge
against exchange rate movements for the purchase of the machine (under part 5 of
the scenario). (9)
SUMMARY
This learning unit explains the functioning of interest rates and exchange rates and the risk that arises
therefrom. Various strategies for managing these risks are explored including natural hedges and
derivative instruments.

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PART 2 – FUNCTION OF FINANCIAL MANAGEMENT

PURPOSE
The purpose of Part 2 is to reinforce and enhance your existing competencies related to the
function of financial management, and to assist you in applying your knowledge to a scenario
on an integrated basis.
The specific competencies referred to above relate to the analysis of the entity’s financial
situation, advisory services to a financially troubled business, and estimating the value of a
business.
This part also develops and applies specific professional values and attitudes and enabling
competencies outlined in the Introduction section of this Tutorial Letter.
The diagram below contains a schematic presentation of the content of this part, as well as earlier
and later parts.
Tutorial Letter 102

3. Cost of capital and capital financial and non- 12. Business plans and
investment appraisal financial information financial proposals
4. Sources and forms of 9. Businesses in
finance difficulty
5. Dividend decision 10. Valuations
capital
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LEARNING UNIT 8 – ANALYSIS AND INTERPRETATION OF FINANCIAL

AND NON-FINANCIAL INFORMATION
LEARNING OUTCOMES


9th edition
• Clearly distinguish between the different objectives and areas of • Chapter 8
analysis (including the ratios/calculations suitable to the different • MAC4861 TL102
areas).
• Perform financial analysis, interpret results and draw conclusions as
to an entity’s present and future financial situation (at an advanced
level).
• Analyse and interpret non-financial information.
• Identify and incorporate the influence of the entity’s competitive,
economic, social, political and internal environment upon your
results.
• Integrate your knowledge of sustainability, and environmental,
social and governance factors as part of your analysis.
INTRODUCTION
Analysis and interpretation of information are important functions of financial management. These
tasks are essential as they form the basis for a better understanding – an understanding that could
then be used for several purposes. Perhaps unsurprisingly, the traditional focus of these endeavours
was on financial information; however, these days, non-financial information is starting to assume more
weight – specifically, where this relates to matters of sustainability, and environmental, social and
governance factors.
LEARNING UNIT 8.1 ANALYSIS AND INTERPRETATION OF FINANCIAL AND NON-

FINANCIAL INFORMATION
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LEARNING UNIT 8.1 – ANALYSIS AND INTERPRETATION OF FINANCIAL AND

NON-FINANCIAL INFORMATION
1. Introduction
In this learning unit we further explore an important function of financial management, which involves
the analysis and interpretation of financial and non-financial information.
At an applied management accounting level, students should not expect too many marks solely for
being able to calculate a ratio. More important is to understand and interpret the ratio, trend and cash
flows, which are supported by possible and credible reasons for unexpected variances. A discussion
of an entity’s financial position must be logical and structured and should add value and should not
only indicate an increase or decrease in the ratio.
9th edition):
• Chapter 8: Analysis of financial and non-financial information
2. Content
related to the decision-making acumen
Financial information is analysed, in part, to assess both business and financial risk. This includes:
• Calculation and comparison of ratios within the entity over time and within the
industry/similar entities
This would require critical thinking in that you would need to source and synthesize the relevant
information from the entities financial statements and/or other reports
It is also important to apply professional scepticism in determining the integrity and reliability of
the information.
• Discussion of and conclusion on the calculated ratios
This would require critical and integrated thinking in that you would need to evaluate the ratio in
the context of the business and its environment, with a questioning mind set. This would entail
considering, amongst others, the following:
o Has the ratio changed over time?

o What are the possible causes for the change?
o What are the implications of the change i.e. how will the company’s performance impact its
ability to create value for stakeholders?
o Does the change make sense considering the businesses internal and external environment?
o How do the ratios correlate with one another, is there a visible trend or pattern?
o How does the change compare to the industry/competitors
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• Recommendations for improvement
This would require problem solving techniques in that you would need to be creative and
innovative in determining courses of action the company could pursue in order to improve
performance
The wider scope of this topic also requires analysis and interpretation of non-financial information,
including information on sustainability, and environmental, social and governance matters. This also
links to the content of Learning unit 1 where the importance of governance and non-financial measures
of success was discussed and addresses the competencies link to business acumen.
3. Self-assessment question
QUESTION 1
Attempt self-assessment question 1 in chapter 8 of Managerial Finance, 9th edition, without referring
to the suggested solution.
QUESTION 2
Attempt self-assessment question 2 in chapter 8 of Managerial Finance, 9th edition, without referring
to the suggested solution.
solution.

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SUMMARY
Financial statement analysis can be divided into five major categories: Profitability, Capital structure
and solvency, liquidity, return on invested capital and financial market ratios. Many these categories
have been already discussed in previous learning units and therefore the knowledge acquired in those
learning units are essential in mastering this learning unit.

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LEARNING UNIT 9 – BUSINESSES IN DIFFICULTY
LEARNING OUTCOMES


Finance,
9th edition
• Identify tools that can be utilised to measure performance of an organisation. • Chapter 13

• Identify and advise financially-troubled businesses (at a basic knowledge • MAC4861
level). TL102
• Identify the tax implications of the possible courses of action.
• Suggest appropriate means of refinancing a business.
• Prepare a preliminary analysis of the sources of financial difficulty, the severity
of the situation and the potential for the success or failure of the recovery
plans.
• Use the business rescue principles as set out in the Companies Act.
• Integrate your knowledge of business performance measurement tools and
ways of business restructuring (at a basic level), in attempting an integrated
question.
INTRODUCTION
Business entities may find themselves in financial distress for a multitude of reasons. One of the
functions of financial management is to assist these businesses, in the form of sound advice and with
assistance in using the appropriate tools at their disposal. Here, businesses could
restructure/reorganise themselves within the guidelines of the Companies Act; they could enter into
voluntary liquidation; or restructure by means of divestiture, or an absorption or amalgamation with
another entity.
Restructuring in the form of disinvestment may help with dealing with financial distress, but may also
form part of a strategy of ‘best-practice parenting’. According to this strategy, holding companies should
display a superior means of ‘parenting’ the subsidiary and, if not possible, it should then consider
divesting. Here, the level of ‘difficulty’ in which the subsidiary finds itself necessitates a broader
reading.
LEARNING UNIT 9.1 BUSINESSES IN DIFFICULTY

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LEARNING UNIT 9.1 – BUSINESSES IN DIFFICULTY
1. Introduction
This learning unit is based on the following chapter in your prescribed textbook (Managerial Finance,
9th edition):
• Chapter 13: Financial distress
2. Content
The activity below and the integrated self-assessment at the end of this tutorial letter will help you to
apply your knowledge.
3. Self-assessment question
suggested solution.
SUMMARY
This learning unit focuses on measuring the performance of businesses with the intention of identifying
financially troubled businesses. Possible courses of action for such business (liquidation,
reorganisation, etc.) is also explored.

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LEARNING UNIT 10 – VALUATIONS
LEARNING OUTCOMES
In addition, after studying this learning unit, you should be able to
• use a range of skills to perform, and professionally present, business and equity valuations using
a model based on EVA®/MVA


Finance,
9th edition
• Perform a valuation of convertible securities • Chapter 11:
• Explain the complexities and uncertainties underlying the various • MAC4861
valuation approaches, methodologies, methods and models suitable to TL102
business and equity valuations.
• Use a range of skills to perform, and professionally present, advanced
business and equity valuations using the following valuation
methodologies/methods/models: (1) price of recent investment, (2) net
assets, (3) earnings multiples (several), (4) market price multiples, (5)
Gordon Dividend Growth Model, and (6) models based on free cash flow.
• Discuss the various considerations and recommend ways in which an
entrepreneur could prepare for the sale of his/her business.
• Identify the critical assumptions and facts that underlie the valuation
estimate.
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INTRODUCTION
Valuations are not only fascinating, but pervasive: they incorporate several principles that you studied
in preceding learning units and further serve as a springboard of knowledge to later learning units. In
order to master the learning outcomes of this learning unit, you will thus require a strong foundation in
your prior learning and the preceding learning units included in this tutorial letter, including, but not
limited to the cost of capital, capital investment appraisal and sources and forms of financing. In turn,
this learning unit on valuations will serve as an introduction to further, more advanced learning units,
such as those on mergers and acquisitions.
As a chartered accountant you may one day perform professional valuations, but even if you don’t,
your skill set will still demand a good understanding of valuation principles.
In this learning unit you will learn a couple of new methods/models of valuation, but mainly, you will be
dealing with more complex valuations. In short, you will be enhancing and applying your prior learning.
LEARNING UNIT 10.1 VALUATIONS

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LEARNING UNIT 10.1 - VALUATIONS
1. Introduction
A successful Applied Management Accounting student is required to display advanced knowledge of

and engagement in the topic of Management Accounting. In addition to this demanding requirement,
you will also have to show that you are able to apply your knowledge to complex scenarios (as implied
by the title of the course).
2. Content
The content within this learning unit builds on the concepts introduced in your prior studies and in the
preceding learning units of this tutorial letter. Some new concepts and valuation models (i.e.
EVA®/MVA.) will also be learnt.
This learning unit is based mainly on the following chapter in your prescribed textbook (Managerial
Finance, 9th edition):
• Chapter 11 – Business and equity valuations
To help you track your overall progress, be advised that combined revision of prior learning and new
study required for this learning unit will be based on all subsections of this chapter (Appendix 2 of
chapter 11 is for noting only, but the valuation outlines in Appendix 1 of chapter 11 may be very helpful).
3. Activity
Activity 10.1.1.
Perform the Required for the example included in section 11.6.5.3 in the Managerial Finance (9th
edition) textbook, using Microsoft excel to perform the valuation
This Activity requires the application of competencies relating to Digital acumen.
Perform the Required parts of practice question 11-2 in the Managerial Finance (9th edition) textbook.
Perform the Required parts of practice question 11-3 in the Managerial Finance (9th edition) textbook.
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Perform the Required part (b) of Question 17 (UKUZWA LTD TRADING), which can be found in TL
103. The relevant Required part is repeated below. (At this point it is not necessary to attempt the other
parts of the question; you should, however, take notice of the way in which all the various parts integrate
and relate to the scenario.)
REQUIRED Marks
(b)
Calculate the fair market value of a 51% shareholding in UMA as at 28 February 2019. (16)
Utilise the P/E multiple method of valuation
SUMMARY
This learning unit explains the concept of business valuations and outlines various methods and
models available to perform such valuations. It integrates the knowledge gained from many of the
previous learning units (cost of capital, financing decisions and working capital) and is the building
block for the next learning unit.
Skae, FO. 2023 Managerial Finance 9th edition. LexisNexis: Johannesburg.

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PART 3 – MERGERS AND ACQUISITIONS AND BUSINESS PLANS
PURPOSE
The purpose of Part 3 is to reinforce and enhance your existing competencies related to the
evaluation of mergers and acquisitions, and the development of business plans/proposals.
In addition, its purpose is to assist you in applying your knowledge to a scenario on an
integrated basis.
This part also develops and applies specific professional values and attitudes and enabling
competencies outlined in the Introduction section of this Tutorial Letter.
The diagram below contains a schematic presentation of the content of this part as well as earlier
parts.
Tutorial Letter 102

3. Cost of capital and financial and non- 12. Business plans
capital investment financial information and financial
appraisal 9. Businesses in difficulty proposals
4. Sources and forms of 10. Valuations
finance
5. Dividend decision
capital
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LEARNING UNIT 11 – MERGERS AND ACQUISITIONS (M&As)
LEARNING OUTCOMES
Additional Resources on myUnisa). It is also essential to have mastered the outcomes of learning
unit 10 (Valuations) before attempting this learning unit.

Finance,
9th edition
• Analyse the risks and financial implications of a merger, acquisition, • Chapter 12

proposed start-up, strategic alliance, or divestiture, including • MAC4861
TL 102
• the strategic context
• behavioural implications
• legal implications
• pricing considerations
• impact of synergy
• financing considerations
• management buy-outs
• Black Economic Empowerment (BEE)
• post-acquisition review
• industry regulation
• environmental, social and governance implications
• Based on the analysis, suggest
• the form of the transaction

• financing options and terms
• due diligence procedures
• systems, information, confidentiality and disclosure
requirements
• conflict of interest issues
• key risks and rewards
• Use a range of skills to perform advanced valuations for purposes of

mergers & acquisitions (M&As), using various valuation
methodologies/methods/models and incorporating the effect of synergies.
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INTRODUCTION
The business of mergers and acquisitions is an unforgiving business, whereby massive amounts of
money are either spent or lost.
As a chartered accountant you may well be involved in these transactions, in some capacity or another.
This learning unit therefore conveys important concepts that will lay the necessary groundwork in your
studies but possibly also in your future area of specialism.
LEARNING UNIT 11.1 VALUATION FOR PURPOSES OF M&As: SYNERGIES
LEARNING UNIT 11.2 OTHER CONSIDERATIONS

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LEARNING UNIT 11.1 – VALUATION FOR PURPOSES OF M&As: SYNERGIES

1. Introduction
Valuation for purposes of M&As builds to a large extent on the concepts already addressed in the
learning unit on Valuations (learning unit 10). It incorporates an extraordinary phenomenon with a
combined effect greater than the sum of the parts – a synergy effect.
9th edition):
• Chapter 11
• Chapter 12
2. Content
o Valuation of for purposes of M&A: Synergies
Business and equity valuations form a very important part of M&As. In this area you would draw heavily
from the range of specialist skills mastered in the topic of valuations (learning unit 17). In performing a
valuation for purposes of M&As, you may represent either the acquirer, or the target, or otherwise, act
as an independent appraiser.
As a result, you may have to determine (1) a minimum price of the target (normally to be considered
by the target organisation), (2) a maximum price of the target (payable by the acquirer without them
destroying value by overpaying), or (3) a fair value of the target (normally acting as an independent
appraiser).
Here, the following guidelines apply:
• When determining a minimum value of the target organisation, all synergies are usually
disregarded.
• When determining a maximum value, all synergies that could exist in general (also with other
acquirers) and specific synergies that may exist between the target and the acquirer are usually
quantified and included in the maximum price.
• Finally, if determining a fair value of the target organisation, only synergies that could exist in
general (also with other acquirers) are quantified and included in the fair value – unique synergies
are disregarded here. The reason for this is because competition between different bidders will
create a market for the synergies that are achievable by more than one potential bidder.
Note
We could quantify synergies using a number of valuation methodologies, methods or models. However,
we normally value synergy using a discounted cash flow method.
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3. Activities
Activity 11.1.1
Bidder Ltd (“Bidder”) is seeking accelerated growth through the acquisition of compatible, external
business organisations.
In this regard, a committee of Bidder, tasked with identifying suitable candidates for acquisition, has
suggested the purchase of Target Ltd (“Target”) – a company in a different, but compatible industry.
In case of a takeover of Target by Bidder, the following specific synergies and related costs are
expected:
• 50 employees of Target would immediately be made redundant at an after-tax retrenchment cost

of R1,2 million.
• Annual post-tax wage savings are expected to be R750 000 (at current prices). Future wage
increases would have grown at double the inflation rate for next year and at a rate equal to inflation
for years thereafter.
• Some land and buildings of Target would be sold for R800 000 (after tax) and do not need to be
replaced (the combined entity will have sufficient office space).
• Fixed advertising and distribution cost savings of R150 000 (before tax) would be saved in the next
year and for each year thereafter.
• Legal and other acquisition-related cost at present value are expected to amount to R3 million
(after tax).
The following additional information is available:
• The weighted average cost of capital of Target has been estimated at 18%.
• The income tax rate is 28%.
• The current rate of inflation is 5% per annum and is expected to remain at approximately this level
in the foreseeable future.
• Unless otherwise mentioned, all fixed expenses will grow by inflation only.
• The intrinsic equity value of Target has been estimated at R20 million (this value was determined
using an income approach and excludes all possible synergies).
• If a company, other than Bidder, were to acquire Target, it is expected that only 40% of the net
synergy benefit will be realised.
Required Marks
(a) Calculate the value of all specific synergies, after associated costs, between Bidder (10)
and Target, based on available information.
(b) Determine a minimum selling price that Target may consider. (1)
(c) Determine a maximum bid price that Bidder may offer. (1)
(d) Determine the fair value of Target (2)
(e) Critically discuss reasons why Bidder should consider offering less than the (5)
maximum bid price (determined in part (c)) for Target and recommend a more
suitable bid price.
(Source: UNISA, TOE408W, test 3 [2011] – updated, truncated and adjusted)
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Part (a) Present value of synergies and related cost

Year 0 Year 1 Marks
Wage savings and associated cost R R
• Employees – retrenchment costN1 (1 200 000) (1)

• Wage savings for Year 1 (R750 000 x 825 000 (1)
(1+ (2 x 5%))
• Wage savings for years after Year 1:
Apply the Gordon Growth ModelN2
P0 = Cf1/(WACC-g), adjusted for the appropriate
year:
P1 = Cf2/(WACC-g)
= R825 000 aboveN3 x (1,00 + 0,05) 6 663 462 (2)
(18% – 5%) (1)
Land and buildingsN1 800 000 (1)
Advertising and distribution
Apply the Gordon Growth Model

P0 = Cf1/(WACC-g)
= R150 000N4 x (1 – 28%) 830 769 (1)
(18% – 5%) (1)
Legal and other costN1 (3 000 000) (1)
Totals (2 569 231) 7 488 462
Discount factors (for a rate of 18%) 1,000 0,847 (1)

(Mark awarded for using discount factors or financial
calculator – calculations shown)
Discounted values (2 569 231) 6 342 727
Total present value of specific synergies, after 3 773 496

associated costs
(Figures may not total correctly due to rounding.)
Notes
N1
This figure is already after-tax and already a present value.
N2
We can apply the Gordon Growth Model only where constant growth is expected (in this case:
inflation growth only, from Year 2).
N3
This figure is already after-tax.
N4
We do not increase the R150 000 by inflation here as it already represents the saving in one
year’s time.
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Part (b) Minimum selling price
This will equal the intrinsic value of Target (excluding all possible synergies): R20 million. (1)
Part (c) Maximum bid price
This will equal the intrinsic value of Target plus the value of all specific synergies (net of associated
cost): (R20 000 000 + R3 773 496, calculated in part (a)) = R23 773 496. (1)
Part (d) Fair market value of Target
This will equal the intrinsic value of Target plus the net value of synergies obtainable by more than one
potential acquirer: (R20 000 000 + (3 773 496 x 40%)) = R21 509 398. (2)
Part (e) Critical discussion
Bidder should seriously consider offering less than the maximum bid price (R23 773 496) for Target,
for the following reasons:
• The nearest other bidder is likely to offer no more than the fair market value: R21 509 398
(determined in part (d)), since no synergies above the 40%-level would be available to it. (1)
• The specific synergies between Bidder and Target relate mainly to the reduction in duplicated
facilities and staff. (1)
• Since Bidder will contribute to this benefit (for example, through use of its facilities or staff by the
combined entity), the specific synergy benefit should be shared. (1)
• If Bidder pays the maximum price of R23 773 496 (determined in part (c)), including the full price
of all net synergies, it would be paying for the full synergy benefit (to Target’s shareholders) and
none of the specific synergy benefits would accrue to its shareholders (Bidder's existing
shareholders). (1)
Recommend a suitable bid price
The eventual bid price will be a matter of negotiation, but it is recommended that Bidder bids less than
the maximum price (R23 773 496 from part (c)), closer to the minimum price (R20 million from part (b)),
likely to end up close to the fair market value (R21 509 398 from part (d)). (1)
(Source: UNISA, TOE408W – adapted)
Perform the Required parts (b) of Question 7 (STARNET), which can be found in TL 103. The relevant
Required part is repeated below.
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REQUIRED Marks
(b) (i) Discuss the conditions that should be met to obtain a reliable valuation of
Selmor utilising the free cash flow model of valuation. (4)
(ii) Calculate the minimum value that Starnet should pay for the 100% equity
shareholding in Selmor (if a free cash flow method of valuation is used).
(12)
Round all calculations to R’000.
(iii) Discuss how the value of specific and general synergies should be calculated
and taken into account when performing a valuation of Selmor (You are not (6)
required to perform any calculations).

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LEARNING UNIT 11.2 – OTHER CONSIDERATIONS

1. Introduction
Befitting the complicated nature of M&A, these transactions normally involve numerous specialists,
at great expense. As a chartered accountant, you may assist in this process and therefore also require
a good working knowledge of some of the other M&A considerations. In this learning unit, we will
address some of these, including funding considerations, Black Economic Empowerment (BBBEE)
considerations, post-acquisition reviews, and due diligence investigations.
9th edition):
• Chapter 12
2. Content
The purpose of the content below is to supplement the information in the textbook in areas where it
is considered necessary. It in no way replaces or can be considered to be a substitute for the textbook.
2.1. The form of the transaction
Expansion can occur in various different forms, some of which are discussed below:
Expansion through franchising
Franchising refers to the process whereby the franchisor grants the franchisee the right to distribute
its products or services in return for a franchise fee and a percentage of monthly sales. This results
in the following risks and rewards:
▪ The expansion is funded by an external party.

▪ The franchisee has a direct interest in the business and is thus more likely to work harder and be
more motivated than an employee.
▪ The costs involved in developing a franchise are high.
▪ It is not easy to terminate a franchise.
Purchase shares in another company
This process is initiated with an offer by the acquiring firm. Should the shareholder accept the offer,
the shareholder will exchange his or her shares for cash and or securities. This results in the following
risks and rewards:
▪ Offeror can deal directly with the shareholders.

▪ Control can be obtained by purchasing less than 100%.
▪ No shareholders’ meeting required if total control is not the objective.
▪ Existing leases and contracts stay in place.
▪ Employment contracts need not change.
▪ If the assets of the target are encumbered as security, consent by the holders of the security is
not required.
▪ There may be stamp duty implications.
▪ The acquiring company becomes exposed to the risks of the company.
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Purchase the assets of another company
A company may choose to expand by purchasing the assets of another company rather than
purchasing shares in that company. This results in the following risks and rewards:
▪ The Companies Act prohibits a company from giving financial assistance to a buyer of its shares.
However, if an asset is purchased, the asset itself may be used as security for the loan.
▪ Marketable securities tax and stamp duties are not payable.
▪ If assets are bought as a going concern, no VAT is payable.
▪ Interest on a loan to purchase assets would normally be tax deductible.
▪ Transfer duty on the assets purchased is payable and can be costly.
▪ Disposal of a major asset requires approval by ordinary resolution.
Joint ventures
This is when two or more companies make an agreement to do business in one specific area. They
share resources to pursue a common goal. This results in the following risks and rewards:
▪ It is an easy way to enter new markets.

▪ They have access to better resources and expertise.
▪ Dissolution of a joint venture (JV) is simple.
▪ Costs to establish a joint venture is low.
▪ Failure of clear communication between management can result in many disputes.
▪ Objectives of parties to the joint venture are not always in line with one another resulting in
conflict.
▪ Different cultures and management styles usually becomes problematic.
Alliance
A strategic alliance is the sharing of resources for the benefit of all partners. It differs from a joint
venture with regard to formality and permanence of the agreement. A joint venture is a legal
relationship between the parties and usually results in the formation of a new business, whereas a
strategic alliance entails an agreement (which is usually not legally binding) to combine resources
and information in order to achieve a specific goal. The risks and rewards of an alliance are as follows:
▪ It is not time consuming.

▪ It is not very capital intensive.
▪ Breaking the alliance is much easier than a JV.
▪ There is a risk of sharing too much information, resulting in an alliance partner becoming a
competitor.
▪ Failure to clearly define the roles and responsibilities of each partner can be detrimental.
2.2. Funding considerations
The manner in which M&A transactions are funded is an important consideration as it could affect
market sentiment and, in some cases, even the success or failure of the deal. There are a number of
factors that need to be considered when making this decision; these are detailed within the following
subsection in Managerial Finance (9th edition):
Chapter Subsection
12 12.4 Funding for mergers and acquisitions
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2.3. Industry regulation
Companies that are controlled in terms of the Banks Act, the Long-Term Insurance Act and the Short-
Term Insurance Act need approvals, respectively, from the Minister of Finance or the Registrar of
Banks, the Registrar of Non-Banking Financial Institutions, i.e. the Executive Officer of the Financial
Services Board (FSB) for any change in control in such companies.
Approval is needed from the Department of Mineral Resources for a change of control in any
companies that hold mining or prospecting rights. In certain industries, such as mining, one of the
factors that is taken into account in granting approval for a change of control is the level of
shareholding by previously disadvantaged South Africans in the target, post-acquisition.
Other industries also have industry-specific regulations and statutes such as the telecommunications
industry and the gambling industry, where approval may be required for a change of control.
2.4. BEE transactions
Over the past decade or so, BEE credentials have become an increasingly large motivation for
business entities to engage in a merger or acquisition transaction, since it directly affects ownership.
Broad-Based Black Economic Empowerment (B-BBEE) is driven by both legislation and regulation,
in the form of the B-BBEE Act, No 53 of 2003, which empowers the Minister of Trade and Industry to
issue Codes of Good Practice, and publish Transformation Charters. The process of B-BBEE works
in collaboration with other acts and regulations, including those in the areas of Employment Equity
and Preferential Procurement.
The Codes of Good Practice prescribe a Generic Scorecard with certain targets and weights.
However, there are also Transformation Charters, which consider particular industries and their
unique activities and circumstances (normally resulting in a slightly different permutation of targets
and weights when compared to the Generic Scorecard).
The Generic Scorecard considers the ownership of an entity as an important area, but since its goal
is to promote broad-based empowerment, it has a much wider scope. As the Generic Scorecard also
forms the basis of most other Charters, it is important for you to know the different criteria. As
indicated below, the Generic Scorecard has five elements, each allocated a certain weighting
(indicated in brackets below). The Scorecard includes bonus points, so it is possible to achieve more
than 100 points.
1. Ownership (25)
2. Management control (19)
3. Skills development (20)
4. Enterprise and supplier development (40)
5. Social-economic development (5)
(DTI, 2019)
Business entities have to be assessed annually by an accredited Verification Agency, which issues a
B-BBEE verification certificate indicating the scorecard information and assessment result in the form
of a contributor-rating. Depending on the score, an entity will be rated from a Non-Compliant
Contributor (the lowest rating), to a Level Eight Contributor (just above the lowest rating), all the way
up to a Level One Contributor (the highest rating for entities achieving more than 100 points) (DTI,
2019)
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Many large South African companies aim to achieve the requirements relating to ownership by
disposing of a large proportion of their shares to black shareholders. The problem with such
transactions is that often financing becomes an issue, as the black shareholders do not have sufficient
funds to pay for these shares and thus a number of creative arrangements are developed to assist in
financing these BEE transactions.
2.5. Post-acquisition review
Although conducting a formal post-acquisition review is not always performed, it is a vital stage within
the merger/acquisition process. This review not only enables an assessment of the transactions
success (allowing them to take any corrective action, if possible); it can also improve the strategy and
execution of later merger/acquisition transactions.
As a result, companies engaging in merger/acquisition transactions will do well by developing such

teams to conduct such reviews. Team members should have a good understanding of the company,
the objectives/goals of the merger or acquisition as well as the risks pertaining to the transaction.
As part of this process, such a team – often referred to as a post-acquisition review team – can compare
certain key indicators before and after an acquisition. These indicators include
(a) return on assets

(b) profitability
(c) earnings per share
(d) price-earnings ratio
2.6. Due diligence investigations
A due diligence investigation refers to a detailed examination of the target company prior to the merger
or acquisition. The aim of such investigations is to verify/audit, amongst others, the financial, legal and
operational information of the target company so as to ensure that the acquiring company makes an
informed decision.
These procedures are usually carried out by a special team who have experience in this field, and
consist of employees of the acquiring company and some experts if necessary. The results of such
procedures could lead to a change in the terms of the proposed merger or acquisition, or even a
cancellation of the transaction.
2.7. Systems, information, confidentiality and disclosure requirements
The compatibility of the information and computer systems between the two companies should be
considered as a part of the due diligence procedures.
The due diligence process will give the acquiring company access to detailed financial and other
business information relating to the target company. A confidentiality agreement is normally signed in
order to protect the interests of the target company.
The information that is required to be made public in relation to a merger or acquisition is regulated by
the JSE Listings Requirements (for listed entities) and the Companies Act (which includes the Takeover
Regulations).
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Disclosure of the following is normally required:
✓ consideration payable
✓ the asset that is being acquired
✓ special dealings (arrangements)
✓ the effect on listing
✓ conditions and timing
2.8. Conflict of interest issues (managers' vs shareholders')
When entering into a negotiation for a potential merger/acquisition transaction, managers may
experience a conflict of interest between acting in their own best interest and acting in the interest of
the shareholders (which is their responsibility). This usually occurs when, for example the manager
sees the merger/acquisition transaction as an opportunity to advance his/her career (by being involved
in a larger corporation or an industry which he/she may have an interest in). The transaction may not
necessarily maximise shareholder wealth, but management will pursue the opportunity in order to
benefit themselves. It should be noted that such unethical motivation for a merger/acquisition is one of
the key reasons for failed transactions and it is contrary to principle 10 of the UNGC principles which
requires management to work against corruption. For this reason, amongst others, the pre- and post-
acquisition reviews are important procedures for consideration.
Perform the Required part (c) of Question 17 (UKUZWA LTD TRADING), which can be found in TL
103. The relevant Required part is repeated below.
REQUIRED Marks
(c) Discuss the factors that could possibly limit UKU and UMA from realising post-
merger synergies. (5)
SUMMARY
In this learning unit we elaborate on the previous learning unit by set by considering different values
for a target entity and the synergy effect. We also highlight additional complexities of relating to
mergers and acquisitions.
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Ansoff, IH. 1965. Corporate Strategy. New York: McGraw-Hill.
Bowman Gilfillan. 2013. Getting the Deal Through: Mergers and Acquisitions. This document is
available from: http://www.bowman.co.za/FileBrowser/ArticleDocuments/Getting-the-Deal-Through-
MergersandAcquisitions.pdf London: Law Business Research Ltd Research
Correia, C, Uliana, DFE & Wormald, M. 2011. Financial Management. 7th edition. Juta & Company:
Cape Town.
Department of Trade and Industry (DTI). 2019. Codes of Good Practice On Broad Based Black
Economic Empowerment. Available from: <https://www.bbbeecommission.co.za/wp-
content/uploads/2019/06/42496_31-5_Amended-Statement-000-300-and-400.pdf> (accessed
11 September 2019). DTI: Pretoria
Ltd
Sirower, ML & Sahni, S. 2006. Avoiding the “synergy trap”: practical guidance on M&A decisions for
CEOs and boards. Journal of Applied Corporate Finance 18(3):83–95.
Skae, FO. 2017. Managerial Finance. 9th edition. LexisNexis: Johannesburg:

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LEARNING UNIT 12 – BUSINESS PLANS AND FINANCIAL PROPOSALS
LEARNING OUTCOMES
After studying this learning unit, you should be able to further apply your knowledge and skills
achieved through your prior learning (see below) to a scenario, on an integrated basis.

It is important to realise that this learning unit relies heavily on the learning outcomes achieved in prior
learning units, including the function of financial management, strategy, risk management, sources of
finance, valuations, and the treasury function. It is thus important that you have achieved the necessary
learning outcomes before attempting this learning unit.

9th Edition
• Explain the purpose and audience of a business plan/proposal in
their preparation, on a basic level. • Chapter 2:
• Develop new business plans and financial proposals. Sections 2.7 to 2.9
• Analyse existing business plans and financial proposals. • MAC4861 TL102
• In preparing business plans and financial proposals, identify and
address
o the business strategy and strategic plan

o strengths and weakness of the plan
o the resources needed
o sources of financing
o anticipated costs and recoveries (including its calculation)
o all assumptions made
• Critically review all assumptions made.

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INTRODUCTION
The idea for a start-up business entity often sees the light on the back of a napkin. Likewise, new
growth ideas for an existing business are often born through informal discussion. But ideas are useless
unless put into action. A business plan represents the detailed, long-term roadmap whereby these
ideas could be implemented. Put differently, a business plan is a plan of where a business idea wants
to go and how it is planning to get there. It is a sales document, selling ideas to potential debt and
equity investors. It can be used at various stages of the organisation’s life. The document can also be
used as a planning and control instrument by the involved parties.
A related but separate document is the financial proposal. A financial proposal is not the same as a
business plan; it is a request for money based upon your business plan. As a finance professional you
may well one day be instrumental in the compilation of these important documents.
LEARNING UNIT 12.1 BUSINESS PLANS AND FINANCIAL PROPOSALS

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LEARNING UNIT 12.1 – BUSINESS PLANS AND FINANCIAL PROPOSALS
1. Introduction
A business plan represents the detailed, long-term roadmap whereby new business ideas could be
implemented. Put differently, a business plan is a plan of where a business idea wants to go and how
it is planning to get there. It is a sales document, selling ideas to potential debt and equity investors. It
can be used at various stages of the organisation’s life. The document can also be used as a planning
and control instrument by the involved parties.
A related but separate document is the financial proposal. A financial proposal is not the same as a
business plan; it is a request for money based upon a business plan. As a finance professional, you
may well one day be instrumental in the compilation of these important documents; it is thus important
for you to understand the content of these documents and the processes involved.
The content of this learning unit incorporates various competencies relating to business, decision
making and relational acumens.
When developing or refining a business plan it is imperative that the organisation’s internal (such as
type of business, business structure, business model etc.) and external (environmental, political,
economic etc.) environment be considered. Information from various sources would need to be
gathered and integrated in order to develop a holistic plan. Furthermore ideas and plans should be
creative and innovative.
It is also important for the business plan to be communicated in an effective manner, taking into
consideration the intended audience. Should the business plan be intended for potential investors such
as a financial institution, the plan should be formal and detailed. The plan could also be in the form of
a presentation, which makes use of more graphs and tables to illustrate financial information.
2. Content
This learning unit brings together knowledge of several different areas, which is drawn upon in
compiling a new business plan/financial proposal, or in analysing these documents. According to ABSA
bank a business plan should include the following:
• Business details: this would include the name and address of the business
• Business overview: a description of the business
• Business operations: the product or services that the business provides
• Business environment: factors impacting the business e.g.: sales, customers, legislation etc.
• Sales projections: detailed sales projections
• Debtors: describe the company’s credit policy
• Creditors/Suppliers: company’s policy for dealing with suppliers
• Competitors: identification of competitors and strategy for dealing with competitors
• Financial review: this will include financial reports
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3. Activities
Activity 12.1.1
Visit http://www.bplans.com and work through and compare the business plans of the following
industries:
• Clothing and Fashion

• Finance and Investing
• Technology
SUMMARY
This learning unit focuses on what a business plan entails and the factors that need to be considered
when developing or reviewing such a plan.
ABSA Bank. No date. Business plans. This document is available from:

https://www.absa.co.za/business/starting-my-business/setting-up-my-business/drafting-a-business-
plan/
BPlans. No date. Find your business plans. This document is available from:
https://www.bplans.com/sample-business-plans/

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INTEGRATED SELF-ASSESSMENT
After studying the learning units covered in this tutorial letter, the next important step is to practise the
application of the acquired knowledge on an integrated level. You can use the integrated questions in
this part as self-assessment.
We strongly recommend that you attempt these questions under simulated examination conditions.
Then, after completion, compare your answer to the suggested solution and establish reasons for
differences. (If necessary, revisit the learning units in this tutorial letter, your prior study material and/or
Managerial Finance, 9th edition.)
Remember to make notes summarising the reasons for your mistake(s). Further indicate on a summary
sheet of questions performed during the year, whether you need to revisit some of these questions, or
Sections of the questions, later.
Now attempt the following integrated questions as well as the tests of 2022, as presented below.
Integrated question 1
Perform question 1 in the TL 103 (CAPE FOODS LIMITED).
Solution to integrated question 1
Find the solution in TL 103
Integrated question 2
Perform question 5 in TL 103 (AFRICA SUN LIMITED).
Solution to integrated question 2
Find the solution in TL 103

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TEST 1: 2022 40 MARKS
Background
Find 4 you (Pty) Ltd (F4U) is a South African company that provides a wide range of goods and
services. The company was founded by Mr Bheki Didiza in 1995, when he identified a gap in the market
whereby smaller communities required easier access to products and services they did not previously
have easy access to. Mr Didiza, an elected ward councillor at the time, identified this gap after
municipal meetings held within his municipal district.
One of Mr Didiza’s life goals has been to positively contribute to society and he has consequently
strived for F4U to be a good corporate citizen. Through various initiatives he has created jobs and
training programs within F4U. In 2012, Mr. Didiza resigned as ward councillor to focus all his attention
on F4U. He did however agree to support various school governing bodies on a voluntary basis. F4U
has won many tenders to supply schools with various items such as tables, chairs, books, toilets,
sporting goods etc.
Financial Information
F4U is currently experiencing some financial difficulties. Due to the COVID-19 pandemic, many schools
have closed and budgets have been reduced and amended by the Department of Education. F4U has
incurred a net loss in both 2021 and 2022 but Mr Didiza is confident that the company will achieve a
positive taxable income from 2023 onwards. Below are extracts of the financial statements of F4U:
Statement of Financial Position of F4U as at 28 February 2022
Notes 2022 2021

Assets ‘000 ‘000
Non-Current Assets 4 782 4 651

Property & Equipment 1 4 782 4 651
Current assets 1 691 1 458

Trade and other receivables 2 346 367
Inventories 3 1 103 1 043
Cash and cash equivalents 4 242 48
Total assets 6 473 6 109

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Notes 2022 2021

Equity and Liabilities ‘000 ‘000
Equity (142) 532

Share capital 1 1
Retained earnings (143) 531
Non-current liabilities 5 799 4 563

Shareholder loans 5 2 200 2 900
COVID loan 6 1 640
Long term loan 7 1 959 1 663
Current liabilities 816 1 014

Trade payables 656 553
Bank overdraft 160 461
Total equity and liabilities 6 473 6 109
Notes:
1. F4U acquired a building in 2005 which was converted into office and factory space. Since then
F4U uses the building as their registered office. Every year the property is adjusted to its fair
value based on Mr Didiza’s estimation. Also included in this value is machinery and delivery
vehicles acquired by F4U when needed for various projects they have undertaken over the years.
Mr Didiza believes the total fair value of the machinery and vehicles is estimated at R2 500 000.
Most of the machines are not currently used.
2. F4U has a strict credit policy and most of the receivables consists of staff loans.
3. F4U follows a just in time (JIT) inventory management system. Most of the inventory consists of
chairs and tables that did not meet the specifications of a school tender. F4U are planning to
donate the inventory to a school that is in desperate need of furniture.
4. Mr Didiza keeps this cash in his personal safe for safety.
5. All of the shareholders are also directors of F4U. According to F4U’s policy, shareholder loans
are provided in the same proportion as the shareholding and no repayments can be made on
these loans in years that F4U have made a net loss. However in 2021, based on the challenging
economic environment the minority shareholders demanded some form of repayment of the
loans.
6. This loan relates to a loan granted to eligible businesses to assist them during the COVID-19
pandemic and is guaranteed by government. Funds borrowed from this scheme, through the
banking industry, can be used for operational expenses, such as salaries, rent and lease
agreements and contracts with suppliers. F4U used R700 000 of the loan to pay back
shareholder loans as a result of the pressure the minority shareholders were placing on the
company. The loan carries interest at the prime interest rate and is repayable in a balloon
payment in February 2025.
7. This relates to the long-term revolving loan with F4U’s bank, SNB, which carries interest at the
prime interest rate. As part of an agreement made with SNB, to provide F4U with some relief
during the current challenging economic climate, no repayments were required during 2022 and
interest payments would commence in 2023.
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Investment opportunity: School masks project

At one of the school governing body meetings, Mr. Didiza heard that schools will be mandated to
provide pupils with branded masks, bearing the school logo. Mr Didiza is of the opinion that F4U could
obtain the tender to supply masks to 15 schools, with an average of 1200 pupils per school, as these
schools have had business relations with F4U in the past. Mr Didiza asked the Finance team to obtain
information with regards to supplying masks to the identified schools. The following information was
obtained:
• The masks can be sold for R45 each in the first year and a price increase of 8% per year is
anticipated.
• The process of assembling the masks would require an assembly factory for which a run-down
factory was identified. This factory could be leased for R120 000 per annum for a 3-year lease
term after which F4U would hand over the property to the lessor. The factory would require
improvements and adaptions prior to the commencement of assembly. Such improvements
would cost F4U approximately R80 000. The improvements would be deductible for tax
purposes in year 1.
• F4U would need 5 industrial sewing machines at a cost of R10 000 each. SARS allows a two-
year wear and tear allowance on similar machines.
• Ms Kubayi, one of the directors of F4U, has some graphic design experience and has offered
to design the logo/brand for each school at no charge to F4U. Should F4U outsource the
branding design, it would cost at least R3 000 per school.
• Each mask requires 0,04 square metres of fabric per layer. Per the Departments regulations,
each mask needs two layers of fabric. F4U is considering acquiring the fabric from Textile
Universe (Pty) Ltd (TU). TU can supply the required fabric for each school at R200 per square
meter. This price only applies if F4U buys more than 4 000 square meters at once. Should F4U
order less than 4 000 square meters, this would result in a price of R300 per square meter. Mr
Didiza always takes up any discount offered, regardless of the consequences. TU has a strict
policy that requires 50% to be paid when the order is placed with the remainder payable at the
end of year one.
• Strings for the masks can be purchased for R500 per 1 000 strings, in year one. Each mask
only requires one string.
• Working capital requirements relating to this project are anticipated to amount to 2% of
expected annual sales. Working capital will be recovered at the end of the project.
• The assembling of the masks would require three workers. These workers will need to be
trained in sewing, at a cost of R10 000 per worker. F4U plans on using current employees that
would otherwise have been retrenched. The retrenchment would have cost F4U three times
each of their monthly salaries. The three workers are currently permanently employed at a
salary of R6 000 per month.
• F4U would deliver the masks at all 15 schools, this would cost F4U R1 000 (in year one) per
delivery per school.
• Should F4U be successful in obtaining the tender, Mr Didiza would obtain a R1 000 monthly
salary from each school to supervise the project.
• As a result of the project, other costs will increase by R11 429 (in current monetary terms) per
year.
• The tender is applicable for three years and F4U would have to supply a new mask to each
learner every year.
Other information
• Current inflation rate is 5% per annum.
• The shareholders of F4U require a 10% return on their shares.
• Assume a corporate taxation rate of 27% and tax is payable in the financial year in which cash
flows occur.
• The yield on a 5-year RSA bond is 9% per annum
• F4U strives to achieve an optimal debt to firm value ratio of 40%.
• The current prime interest rate is 7%.
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REQUIRED MARKS
Sub- Total
total
(a) (i) Identify the appropriate discount rate to be used for the evaluation of
the investment opportunity (masks tender) and motivate your choice. 3
(ii) Calculate the discount rate as identified in a(i) above 2
Communication skills – logical argument 1 6
(b) Advise F4U whether they should accept the school masks project . Utilise 19
the Net Present Value Method of capital appraisal.
You may assume F4U will have taxable income in excess of R 20 000 in 2023.
Communication skills – presentation and layout 1 20
(c) Discuss the factors that F4U should consider before accepting TU’s volume
discount offer for the fabric needed for the mask tender. 8 8
(d) Evaluate F4U’s compliance and commitment to being a good corporate

citizen. 6 6
TOTAL 40
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TEST 1 – SUGGESTED SOLUTION (2022)
(a) Identify the appropriate discount rate to be used for the evaluation of the investment opportunity
(masks tender) and motivate your choice.
Calculate the discount rate as identified above
MAX 4
Logical argument (1)

• The appropriate discount rate should be the required return that reflects the
investment opportunity risk (1)
• The discount rate to be used is F4U’s target Weighted Average Cost of Capital (1)
(WACC) + additional risk (from tender supplying to manufacturing).
• This ensures that all projects of equal business risk are evaluated on an (1)
equal basis without prejudice to the method of finance.
• It reflects the desired capital structure that F4U strives to meet
o as it represents the optimal capital structure for optimal cost of capital | (1)
optimal financial risk and
o The average return required by all the providers of long-term capital (1)
Long term source of finance Weight Cost WACC

Debt 40% 5.11% 2.04%
Equity 60% 10.00% 6.00%
8.04% 2r/w
MAX 2
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b) Advise F4U whether or not they should invest in the masks tender or not. Utilise the Net
Present Value Method of capital appraisal.
Communication mark (layout) (1)
0 1 2 3
Revenue (calc 1) 810 000 874 800 944 784 1(r/w)
Lease improvements (80 000) 0.5(r/w)
Factory lease (fixed over term, no (120 000) (120 000) (120 000) 1(r/w)
adjustment for inflation)
Sewing machines (50 000) 1(r/w)
Logo design (lower cost) 0 0.5(r/w)
Fabric (calc 2) (432 000) (432 000) 1(c)
Strings (calc 3) (9 000) (9 450) (9 923) 1(r/w)
Working capital (R810k x 2%) (16 200) (1 280) (1 416) 1r(/w)
Working capital recoupment
(calc 4) 18 896 1r(/w)
Training (R10k x 3 workers) (30 000) 0.5(r/w)
Retrenchment costs saved
(3 months x R6000 x 3 emp) 54 000 1r(/w)
Labour (calc 5) (226 800) (238 140) (250 047) 1r(/w)
Mr Didiza supervisor (irrelevant) 0.5(r/w)
Transport (R1 000 x 15 schools) (15 000) (15 750) (16 538) 1r(/w)
Other costs ( x 1.05) (12 000) (12 600) (13 230) 1(r/w)
Cash flows before tax (6 080) 477 444 553 942
Tax (refer tax calc) 139 806 (122 542) (144 463)
Total cashflows (554 200) 133 726 354 902 409 479
WACC 8.04% 0.5(c)

NPV R196 558 0.5(c)
Accept project 0.5(c)
Tax calculation
Cashflows excluding working (4 800) 478 860 535 046 0.5(c)
capital
Wear & tear (sewing machine) (25 000) (25 000) 1(r/w)
Improvements (80 000) 0.5(c)
Training (30 000) 0.5(c)
Retrenchment saving 54 000 0.5(c)
50% Fabric deposit (432 000) 0.5(c)
Taxable income (517 800) 453 860 535 046
Tax at 27% 139 806 (122 542) (144 463) 1(c)
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Alternative Tax calc 1 assumes:

1. Project tax losses are not ring-fenced
2. Taxable income generated by F4U is not sufficient (after offsetting company
assessed loss balance) to offset the project tax losses as per Section 20 of Income Tax
Act during the 2023 tax year but will be sufficient after year 2023.
2022 2023 2024 2025

Cashflows excluding working
(4,800) 478,860 535,046
capital
Wear & tear (sewing machine) (25,000) (25,000)
Improvements (80,000)
Training (30,000)
Retrenchment saving 54,000
50% Fabric deposit (432,000)
Project Taxable income | (Tax
(517,800) 453,860 535,046
Loss)
Offset: Assessed loss utilised 16,000 (501,800) 0
Loss) after assessed loss (501,800) (47,940) 535,046
utilization
(Tax charge) | Tax benefit 4,320 12,944 (144,462)
Project assessed tax loss 2022 2023 2024 2025

Opening balance 0 (501,800) 0
Current tax period Project tax loss (517,800) 0 0
Total assessed loss utilised 16,000 501,800 0
Utilised by project 0 453,860
Utilised by company 16,000 47,940 0
Project tax loss balance rolled
forward (501,800) 0 0
16 000 = 20 000 * 80% limit

4 320 = 16 000 * 27%
Alternative Tax calc 2 assumes:
1. Project tax losses are ring-fenced
2022 2023 2024 2025
Cashflows excluding working
(4,800) 478,860 535,046
capital
Wear & tear (sewing machine) (25,000) (25,000)
Improvements (80,000)
Training (30,000)
Retrenchment saving 54,000
50% Fabric deposit (432,000)
(517,800) 453,860 535,046
Loss)
Offset: Assessed loss utilised 0 (453,860) (63,940)
Project Taxable income | (Tax (517,800) 0 471,106
Loss) after assessed loss
(Tax charge) | Tax benefit 0 0 (127,199)
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Project assessed tax loss 2022 2023 2024 2025

Opening balance 0 (517,800) (63,940)
Current tax period Project tax loss (517,800) 0 0
Assessed loss utilised by project 0 453,860 63,940
Project tax loss balance rolled
forward (517,800) (63,940) 0
Calculations
1. Revenue
No. of masks 15 x 1 200 = 18 000
2023 R810 000 (18 000 x R45)

2024 R874 800 (R810 000 x 1.08)
2025 R944 784 (R874 800 x 1.08)
2. Fabric
Number of masks per year (1200 pupils x 15 schools) 18 000

Square fabric meters per year (18 000 x 0,04m2 x 2 layers) 1440m2 0.5(r/w)
Total Square fabric meters required (1440 x 3 years) 4 320m2 0.5(r/w)
Price per square fabric meter (4 320m2 x R200) R864 000 1(c)
50% deposit required R432 000
3. Strings
2023 R9 000 (18 000/1000 x R500)

2024 R9 450 (18 000/1000 x R500 x 1.05)
2025 R9 923 (18 000/1000 x R500 x 1.05 x 1.05)
4. Working capital calculation
2022 2023 2024 2025

0 1 2 3
Working capital level (Revenue*2%) 16 200 17 480 18 896
Changes in working capital level (16 200) (1 280) (1 416) 18 896
5. Labour
2023 R226 800 (3 x R6000 x 12 x 1.05)

2024 R238 140 (R226 800 x 1.05)
2025 R250 047 (R238 140 x 1.05)
MAX 20
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c) Discuss the factors that F4U should consider before accepting TU’s volume discount
offer.
• The volume discount is substantial at 50% (R200-R300 / 200). (1)
• Should F4U take up the discount, this would require them to acquire all the fabric
required for the 3-year term upfront contradicting the JIT inventory system used (1)
by F4U.
• This is a substantial investment made (R864 000) by F4U, should the tender get
cancelled or amended this can lead to big financial losses for F4U. (1)
• TU requires a 50% deposit to be made. Does F4U have the necessary

finance/capital to make the deposit? (1)
• Does F4U have enough storage for the fabric as the company operates on a Just-
In-Time system? (1)
• Can the fabric get damaged if it is stored for 3 years? Will it require special
storage or treatment? (1)
• Would there be additional wastage, since the workers have such a “large”
stockpile available? (1)
• Very high trust is placed on one single supplier (TU), is the supplier reliable
and trustworthy? (1)
• F4U should consider looking at other potential suppliers who could be

offering better | cheaper supplies. (1)
• Is there alternative use for the fabric | resale, should the school mask tender be
cancelled, can F4U make masks for the general public? (1)
• Sustainability of demand in general. Should masks not be mandatory anymore

(end of lockdown | end of corona virus), can F4U make school clothing for the
schools from the fabric? (1)
• With such a large investment, would there not be some form of vendor | supplier
due diligence performed: inspecting quality, compatibility etc. (1)
• Possible additional costs due to buying in bulk such as: storage, transport and
holding costs (1)
• TUs return policy: can returns be made for stock no longer required? (1)
• Will interest be charged on the outstanding balance / will discounts be

granted for early payment of the outstanding balance (1)
• Is TU open to negotiation of trading terms for the masks? E.g. discounts,

payment terms, piecemeal collection of fabric per project production requirements (1)
MAX 8
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(d) Evaluate F4U’s compliance and commitment to be a good corporate citizen.
those competencies that address personal, business and professional ethics.
(i)
• F4U was founded in the community for the community. The community is/was better
off due to the founding of F4U as they now have access to products and services they
didn’t have before. (Mr Didiza positively contributes and is active in his community) (1)
• F4U provides employment as well as training programs. Unemployment in SA is

rapidly increasing, and this will assist in addressing this challenge. (1)
• Donating inventory to a school in need is a good initiative by F4U as schools are

under financial pressure in RSA. (1)
• Fair value adjustment made every year by Mr Didiza on property. This should be
performed by an independent valuator as Mr Didiza may not have the necessary
skills and experience and this could lead to erroneous financial
information/manipulated financial information/ Accounting mistreatment. (1)
• Providing staff loans. The pandemic has had a negative financial impact on many
and F4U providing financial assistance is indicative of social responsibility. (1)
• Paying back shareholder loans, despite making a loss. This is against policy and
does not appear to be ethical. (1)
• Using COVID loan to pay back shareholders. This goes against the terms and
conditions of the loan, as it should be used for operational expenses, and could result
in legal action. (1)
• It could be perceived that Mr. Didiza wins the school tenders as a result of his
position as ward councillor or member of governing bodies (1)
• Mr Didiza keeps F4U’s cash in his personal safe, the separation of his personal
funds and the company’s cash could be questionable. (1)
• No plan / investment planned for the safe and environmentally friendly disposal
of masks produced by F4U, to ensure minimum negative impact on the environment
and society. (1)
• Conclusion: Even though F4U and MR Didiza have good initiatives and are
commitment towards social responsibility, they have not complied with some of the
requirements of being a good corporate citizen. (1)
MAX 6
111
MAC/ZMA/NMA4862/102
TEST 2: 2022 40 MARKS
Background information
VastShells Ltd (VSL) is a multi-divisional entity founded in 1958 and is currently listed on the
Johannesburg Stock Exchange (JSE). VSL has a 31 March financial year and comprises of three
divisions namely:
1. Consumer Brands: This division manufactures and sells branded food products to the South
African market through retail outlets. It’s product range includes canned foods, spreads, snacks
and beverages. During the 2022 financial year, the division had to recall one of its canned food
products after receiving numerous complaints from consumers experiencing nausea and
vomiting after consuming the said product.
2. Automotive: The division operates in the motor industry selling cars to the business and
individuals’ markets. It has 83 dealerships in South Africa and 3 dealerships in Namibia.
3. Clothing and apparel: This division operates a chain of retail clothing stores in South Africa,
offering a range of clothing, shoes and accessories. These merchandises are sourced from the
manufacturing capital of the World, China.
Financial information
VSL has recently appointed a new Chief Financial Officer (CFO), Mr. Jane, a qualified CA(SA) with ten
years’ experience. The previous CFO resigned as he relocated to Canada. Mr. Jane undertook an
exercise to analyse the profitability of the Consumer brands division. Below is an extract of his analysis
for the period ending 31 March:
Movements
2021 to 2020 to
Consumer Brands Division 2022 2021 2020 2022 2021
Revenue (R’000) 8 136 7 756 7 566 4,90% 2,51%
Gross profit margin (%) 27,0% 29,0% 30,0% -6,90% -3,33%
Number of sales transactions (#) 57 296 57 029 47 585 0,47% 19,85%
Basket: Revenue per transaction
(R) 142 136 159 4,41% -14,47%
Strategic Initiatives
The board of directors of VSL is considering the following two strategic initiatives to improve
performance:
Initiative 1: Automotive Division sales and marketing strategy

The Automotive division is managed by Steve Sithole (CEO). Mr. Sithole is considering developing a
new sales and marketing strategy that would involve partnering with a social media influencer to
achieve three key objectives (i) improve sales (ii) effective marketing and (iii) customer satisfaction.
The selection of the social media influencer that the division will partner with, will be made via a
streamlined application process. The Tech- Manager, Mrs Zane, will advertise the position on various
social media platforms and the advert will include an application link that will allow interested applicants
to apply formally. Some of the information required from applicants include name, identity numbers,
home address or postal address, and tagged viewership on Instagram and/or YouTube per annum.
Mrs Zane will import each of the applicants’ data into an excel spreadsheet for presentation to the
selection committee.
Mrs Zane’s teenage daughter, overheard her mum discussing the Automotive division’s new strategy
with her colleagues, while working from home, and asked her mum if she could look at the applicant’s
data as this information can assist her with a school Economic and Management Sciences project.
112
MAC/ZMA/NMA4862/102
Initiative 2: Clothing and Apparel’s Division acquisition strategy
The Financial Manager of this division has identified FastTrack (Pty) Ltd (FastTrack) for potential
acquisition. FastTrack is a clothing manufacturing company based in KwaZulu Natal. The company is
family-owned and focuses on cut and sew apparel manufacturing customising garments from raw
fabric.
The following represents FastTrack’s forecasted net profit for the period ended 31 March:
Notes Forecast
2023 2024 2025
R’000 R’000 R’000
Net profit after tax 5 945 6 041 7 314
Notes:
• Machines replacement: FastTrack is embracing new technology and 4IR development,

consequently they are planning on replacing 50 of its, fully depreciated, manual machines with
automatic machines. The change is expected to take place in the 2024 financial year and the
automatic machines will be rented at a fixed annual fee of R5,25 million. The manual machines
disposal values and costs are negligible. The impact of the change will be a reduction of employee
costs by R7,5 million per annum. Additionally, replacing the machines will result in retrenchment
costs of R2,5 million, which are fully tax deductible in the tax year incurred. The relevant discussion
with unions and the bargaining council is in progress. None of the manual machines replacement
related transactions are accounted for in the above forecasted net profit.
• Depreciation: The following represents the forecast depreciation charge correctly accounted for in
the estimation of profit for the year:
2023 2024 2025

Details
R’000 R’000 R’000
Depreciation 2 732 3 483 5 718
• FastTrack’s depreciation charge approximates the wear and tear allowance provided by SARS.
• FastTrack’s finance costs relate to a long-term loan of R30 million obtained on 1 April 2017 from
GnB commercial bank. The interest rate on the loan is 2% above the Johannesburg InterBank
Lending Rate (JIBAR) and has been correctly accounted for in the estimation of profit for the year
forecasts. Interest quotes recently received from other banks, for a similar loan, were approximately
1,75% above the JIBAR. Interest on this loan is calculated and compounded annually in arrears,
then capitalised into the outstanding loan balance. The loan is repayable in a single bullet payment
on 31 March 2025. FastTrack does not have short-term loans or surplus cash. The interest to be
incurred on the loan will be deductible for taxation purposes in terms of Section 24J of the Income
Tax Act.
• FastTrack’s target debt to equity ratio is 63%.
• FastTrack earned revenue of R13 767 000 in 2022 and revenue is expected to grow at 10% per
annum. Working capital requirements are expected to amount to 8% of the expected revenue.
• FastTrack’s cost of equity approximates 15% per annum.
• FastTrack anticipates free cash flows to grow at a constant rate of 3,35% per annum after 2025.
Additional information:
• The inflation rate is 4,48%.

• The South African corporate income tax rate is 27,00% and is expected to remain for the
foreseeable future.
• The Johannesburg Inter-Bank Lending Rate (JIBAR) is 4,20%
113
MAC/ZMA/NMA4862/102
REQUIRED MARKS
Sub- Total
total
(a) Prepare a memorandum to the CFO in which you evaluate the Consumer
Brands division’s trading performance.
7
You are not required to perform any calculations
Communication: layout and presentation 1 8
(b) (i) Calculate the value of 85% equity shareholding in FastTrack as at
31 March 2022, using a free cash flow method of valuation. 18
Round all calculations to R’000.
(ii) Discuss the key strategic considerations to be made, by the executive

management of VSL, prior to acquiring FastTrack. 7
Communication: logical argument 1 26

(c) (i) Discuss whether it would be appropriate for Mrs Zane to share the data
gathered on the social media influencers with her daughter. 3
(ii) Advise Mrs Zane regarding the measures that could be implemented to
ensure that the social media influencers data is collected and stored in
a secure manner. 3 6
TOTAL 40
114
MAC/ZMA/NMA4862/102
TEST 2 – SUGGESTED SOLUTION (2022)
QUESTION 1 part (a)
Prepare a memorandum to the CFO in which you evaluate the Consumer Brands division’s trading
performance.
MEMORANDUM
To : Mr Jane
Date : Today’s date
From : CA(SA)
Re : Evaluation of Consumer Brands Division’s performance
2021 Performance: 2020 to 2021 Movements

1. Revenue improved for the consumer brands (½)
2. The improvement is however below the inflation rate, which means revenue is decreasing in
real terms (½)
3. The division’s performance improved even though one of the products was recalled. (1)
4. Revenue improvement in 2021 could be due to greater number of sales transactions, even
though customers are buying less (more customers but lower basket in 2021) compared to 2020.
(1)
5. The higher transactions could be due to the consumer brands division (selling food), being
allowed to operate under all levels of lockdown restrictions. (1)
6. The higher transactions may also be due to more attractive | cheaper pricing compared to
competitors/ a low mark-up is charged. (1)
7. More customers purchased, but the sales baskets are lower (those customers spent less in
the stores than in 2020) as shown by decrease in average basket and increase in sales
transactions. (1)
8. the low increase in revenue could be due to the depressed economy, and decreased
consumer spending during this period as shown by lower basket values. (1)
9. There was also a small deterioration in gross profit percentage. (½)
10. The gross profit margin percentage decline is higher than the increases in revenue, thus
resulting in rand terms declining gross profit margin (less Rand gross profit generated each year).
(½)
11. This could be attributed to the increase in cost of goods sold, potentially caused by the
scarcity of raw materials (higher demand lower supply) during lockdown (1)
2022 Performance: 2021 to 2022 Movements

12. It seems that the division’s performance is starting to improve in 2022. (½)
13. This could be attributed to easing of the lockdown restrictions and the recovery of the South
African economy commencing (1)
14. The revenue improvement is above | almost equal inflation (i.e. increase in real terms) (½)
15. 2022 revenue improvement is driven by bigger baskets purchased by customers, even though
sales transactions increased lower. (1)
16. The improvements in 2022 could have been hindered by the product recall (1)
17. Which could also be the reason for the deterioration in the gross profit percentage (½)
18. The gross profit margin percentage decline is higher than the increases in revenue, thus
resulting in rand terms declining gross profit margin (less Rand gross profit generated each year).
(½)
19. i.e. costs increased as a result of the product recall and this could not be passed onto the
consumer (1)
MAX 8
115
MAC/ZMA/NMA4862/102
Alternative Presentation: Trading key elements
Revenue performance
1. Revenue overall has improved in both years (Rand increase in 2022 and 2021) 1
2. 2022 revenue improvement is real (above |almost equal inflation, thus increase in real ½
terms),
3. but 2021 lower than inflation (decrease in real terms). ½
4. Revenue improvement in 2021 could be due to greater number of sales transactions,
even though customers are buying less (more customers but lower basket in 2021) 1
compared to 2020.
5. The higher transactions could be due to the food sector, in which Consumer brands
division operates, being allowed to operate during all lockdown levels (though under 1
restrictions).
6. The higher transactions may also be due to more attractive | cheaper pricing 1
compared to competitors.
7. * The low increase in revenue could be due to the depressed economy, and
decreased consumer spending during this lockdown period as shown by the lower 1
basket values.
8. More customers purchased, but the sales baskets are lower (those customers spent
less in the stores than in 2020) as shown by decrease in average basket and increase in 1
sales transactions.
9. 2022 revenue improvement is driven by bigger baskets purchased by customers, 1
even though sales transactions increased lower.
10. * This could be attributed to easing of the lockdown restrictions and the start of the 1
recovery of the South African economy in 2022
11. * The 2022 product recall had negative impact on the revenue performance. 1
Gross profit performance

12. The gross profit margin has deteriorated in both years (depicts a declining trend). 1
13. The gross profit margin percentage decline is higher than the increases in
revenue, thus resulting in rand terms declining gross profit margin (less Rand gross 1
profit generated each year).
14. The decline in 2021 could be due to increase in production | input costs (raw
material and conversion costs), due to lockdown restrictions effects on production of 1
raw materials availability.
15. The increase in production costs could not be passed onto consumers, thus 1
resulting in lower profit margins.
Maximum 8
O
116
MAC/ZMA/NMA4862/102
QUESTION 1 part (b)i
(i) Calculate the value of 85% of equity shareholding in FastTrack as at 31 March 2022, using a
free cash flow method of valuation.
2023 2024 2025

1 2 3
R’000 R’000 R’000
Net profit after tax 5 945 6 041 7 314
Depreciation (non-cash) 2 732 3 483 5 718 1 r/w
Finance costs (after-tax) 1 834 1 948 2 069
Finance costs (non-operating / financing 2 513 2 668 2 834
W1
cash flows) ½C
Tax on finance costs (679) (720) (765) ½ C
(110) (122) (133) 1r/w
Working capital (conversion of W2 1C
accrual profit to cash profit)
Retrenchment costs (After tax) (1 825) 1 r/w
Retrenchment costs (relevant future cost) ½ r/w (2 500) Alternative
Tax@27% ½ r/w 675 Solution
Employee cost reduction (after tax) 5 475 5 475 1 r/w
Employee cost reduction (relevant future
½ r/w 7 500 7 500 Alternative
benefit)
Solution
Tax@27% ½ r/w (2 025) (2 025)
Machine rentals (after tax) (3 833) (3 833) 1 r/w
Replacement of machines – rental ½ r/w (5 250) (5 250) Alternative
Tax@27% ½ r/w 1 417 1 417 Solution
Free cash flow 10 401 11 167 16 610

Continuing value W3 229 191 1C
Free cash flow with terminal value 10 401 11 167 245 801
Required Return: WACC (W4) 10,84% ½C
NPV (Operating enterprise value) 198 980 ½C
Additional investment | Excess Cash 0
Total enterprise value 198 980
Adjusted for
Market Value of debt (40 748) ½ C
158 232
Marketability discount (5%) (7 911) ½C
Equity value enterprise value 150 320
85% ½C
85% equity value 127 772
117
MAC/ZMA/NMA4862/102
Workings:
W1 - Market value of the loan:
PV: 30 000
N: 8
I: 6.2%
Comp FV: 48 542 (2 r/w)
1 2 3
Period
2023 2024 2025
Bullet payment (48 542) ½c

Tax benefit on interest 679 720 765 1c
S24J – Accrual Amount (Interest period) 2 513 2 668 2 834 1r/w
Pre-tax yield to maturity (B) 6,2% 6,2% 6,2%
Adjusted initial amount (C) / Opening bal. 40 527
Adjusted initial amount (C) 43 040
Adjusted initial amount (C) 45 708
Net cash flows (after tax) 679 720 (47 777)
Discount rate (4,2%+1,75%) X 0,73 4,34% 1r/w
Market Value (40 748) ½c
Workings: W2 – Working Capital:
0 1 2 3
Period
2022 2023 2024 2025
Revenue (R’000) 13 767

Increase each year by 10% (R’000) X1,1 15 144 16 658 18 324
Working Capital 8% 8% 8% 8%
1 101 1 211 1 333 1 466
Movement (110) (122) (133)
Working 3: Continuing Value
Terminal Value = FCF X (1 + g)
(WACC – g)
= (16 610*1.0335) ½ r/w
(10,84%- 3,35%) ½C
= 229 191
118
MAC/ZMA/NMA4862/102
Working 4: WACC
W4.1 Debt portion:
𝑫𝒆𝒃𝒕𝑬𝒒𝒖𝒊𝒕𝒚𝑹𝒂𝒕𝒊𝒐 𝟔𝟑%
𝑫𝒆𝒃𝒕𝑹𝒂𝒕𝒊𝒐 = = = 𝟑𝟗%
𝟏 + 𝑫𝒆𝒃𝒕𝑬𝒒𝒖𝒊𝒕𝒚𝑹𝒂𝒕𝒊𝒐 𝟏 + 𝟔𝟑%
½ r/w
Instrument Weight Cost WACC
Equity: Ordinary shares 61% 15,00% 9,15%

Debt: Loan (W4.1) 39% 4,34% 1,69%
100% 10,84% ½C
MAX 18
ALTERNATIVE
2023 2024 2025

1 2 3
R’000 R’000 R’000
Net profit 5 945 6 041 7 314
Depreciation 2 732 3 483 5 718 1 r/w
Finance costs W1 2 513 2 668 2 834 ½c
(110) (122) (133) 1r/w
W2
Working capital 1C
Retrenchment costs (2 500) ½ r/w
Employee cost reduction 7 500 7 500 ½ r/w
Replacement of machines – rental (5 250) (5 250) ½r/w
11 080 11 820 17 983
½C
(679) (653) (1 373)
Tax@27%
Free cash flow 10 401 11 167 16 610
TAXATION
2023 2024 2025

1 2 3
R’000 R’000 R’000
Finance costs 2 513 2 668 2 834 ½ r/w
Retrenchment costs (2 500) ½ r/w
Employee cost reduction 7 500 7 500 ½ r/w
Replacement of machines - rental (5 250) (5 250) ½ r/w
Taxable income 2 513 2 418 5 084
Tax @27% 679 653 1 373
119
MAC/ZMA/NMA4862/102
QUESTION 1 part (b)ii
Discuss the key strategic considerations to be made, by the executive management of VSL, prior
to acquiring FastTrack.
Marker Note: Logical argument (1)
1. Synergy and goal-congruence: Are there synergies to be realised from the acquisition 1
2. Strategic objectives: Is the acquisition aligned with VSL’s strategy? 1
3. Integration of FastTrack into the VSL structure, culture, and values (Change
management): How will FastTrack be integrated into the VSL structure, culture and
corporate values in order to strive towards achieving VSL strategic objectives. 1
4. Scalability / Expandability of the business: Can this customization business be scaled

up / expanded nationally or will it be limited to the KZN province due to reliance on key
tailors / location of business clientele? 1
5. Optimality of current operation / future cost transformation to optimise the
business: Is the current business model and business operating optimal or are there
inefficiencies, such as hired family members to provide them with jobs, that will need to be 1
reduced soon to operate optimally?
6. Continuity: reliance on the family tailors / owners:
Can the business be taken over and be run independently by VSL or will there still be
reliance on the family tailors / designers to continue operating (Will they lose clients should
they change tailors)? Will clients be lost due to their need to interact directly with the
owners as a key quality service experience and how can this loss of customers be priced
into the valuation / negotiation?
\\\
1
7. Current employees: How will the current tailors / designers be incentives to stay to
maintain clientele / Restraint of trade to prevent key former employees from leaving with
current clients to open another similar business?
8. Other potential acquisitions on the market: Consideration of other potential acquisitions 1
that may be more profitable / more aligned to VSL strategically than FastTrack.
9. Deal structure to ensure value for the money paid for the acquisition (deferred
performance linked acquisition payment):
The deal should ideally be structured to include contingent payments / deferred payment
that is linked to the future performance of FastTrack to ensure the business continues to
be profitable / the price paid matches the value received from the business based on future
cash flows generated. 1
10. Financing: Target debt-equity: How will the business acquisition be financed / the effect
of the purchase financing on the current capital structure towards the target capital
structure. 1
11. Payment options: How will the acquisition payment be made; cash, share exchange or 1
combination of cash and share exchange.
12. Dealing with minority shareholding: Will the minority (15%) be acquired in the future?
Can the call options be negotiated and structured to limit the purchase price for the
remaining 15%? 1
13. Due diligence: Proper due diligence (legal, operational, financial) should be performed in
order to verify the forecast information truthfulness and accuracy, and to identify and deal
with key challenges and risks. 1
MAX 8
120
MAC/ZMA/NMA4862/102
Part c
(i) Discuss whether it would be appropriate for Mrs Zane to share the data gathered on social
media influencers with her daughter.
(ii) Advise Mrs Zane regarding the measures that could be implemented to ensure that the social
media influencers data is collected and stored in a secure manner.
those competencies that address personal, business and professional ethics.
(i)
1. The data collected constitute personal information as described under the POPI Act,
which VSL should protect to maintain the privacy of the applicants for which data is
1
collected.
2. Such an action may have negative legal, financial and reputational implications for Mrs
Zane and VSL.
3. Conclusion: The sharing of the social media influencer’s personal information with
her daughter would be unethical and illegal as it does not protect the privacy of the
1
influencers.
MAX 3
(ii)
4. The link provided should be secured (protected by a website server firewall | hosted from
website that has security certificate), and 1
5. Only authorised personnel (password authenticated) should be able to access the

applicants’ data via the link / website/ restricted access 1
6. VSL should assure potential applicants that the collected data will not be shared with
any other party without obtaining their consent. 1
7. Mrs Zane must ensure the excel worksheet with the data is password protected. 1
8. The password created should use best practices for example, have at least eight
characters with a mixture of upper and lower cases, including symbols. 1
9. That spreadsheet should only be shared with authorised personnel who have signed
confidentiality agreements and compliance with POPI Act. 1
10. Confidential and private information could be replaced with codes (e.g. applicant
number | code) to protect private and confidential information/ gathered information to be
1
encrypted.
11. Proper data storage procedures should be maintained to ensure that the personal
applicants’ information is stored / deleted safely after the completion of the selection
1
processes.
MAX 3
TOTAL MAX 6

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MAC4862/102/0/2023

Tutorial Letter 102/0/2023

Department of Financial Intelligence

This tutorial letter contains important information

APPLIED MANAGEMENT ACCOUNTING

TUTORIAL LETTER 102 / 2023

TABLE OF CONTENTS PAGE

INTRODUCTION AND OVERVIEW 4

PART 1 – STRATEGY, RISK MANAGEMENT AND FINANCING 12

LEARNING UNIT 1 STRATEGY AND GOVERNANCE 13

LEARNING UNIT 2 RISK MANAGEMENT 35

LEARNING UNIT 3 COST OF CAPITAL AND CAPITAL INVESTMENT

LEARNING UNIT 4 SOURCES AND FORMS OF FINANCE 52

LEARNING UNIT 5 DIVIDEND DECISION 60

LEARNING UNIT 6 MANAGEMENT OF WORKING CAPITAL 62

LEARNING UNIT 7 TREASURY FUNCTION 65

TABLE OF CONTENTS (CONTINUED) PAGE

PART 2 – FUNCTION OF FINANCIAL MANAGEMENT 71

LEARNING UNIT 8 ANALYSIS AND INTERPRETATION OF FINANCIAL AND

LEARNING UNIT 9 BUSINESSES IN DIFFICULTY 76

LEARNING UNIT 10 VALUATIONS 78

PART 3 – MERGERS AND ACQUISITIONS AND BUSINESS PLANS 82

LEARNING UNIT 11 MERGERS AND ACQUISITIONS 83

LEARNING UNIT 12 BUSINESS PLANS AND FINANCIAL PROPOSALS 96

INTEGRATED SELF-ASSESSMENT 100

INTEGRATED QUESTION 1 100

TEST 1 (2022) – MAC4862/NMA4862/ZMA4862 101

INTRODUCTION AND OVERVIEW

Icon Elements of the professional competencies

Professional values and attitudes

Ethically responsible leaders fulfilling

Technical competencies in the value

Therefore in addition to Technical competencies, it is imperative for aspiring Chartered Accountants

• Professional values and attitudes

o Ethics, values and attitudes

o Citizenship, values and attitudes

o Lifelong learning, values and attitudes

CTA MANAGEMNT ACCOUNTING

• Analysis and Evaluation

• Creativity and innovation

Stage 1: identifying the goal or problem

BIBLIOGRAPHY AND ADDITIONAL READING

Amabile, T.M. 2012. Componential theory of creativity. Harvard Business School.

STRUCTURE OF THIS TUTORIAL LETTER

The parts of this tutorial letter are described below:

PART 2 – FUNCTION OF FINANCIAL MANAGEMENT (containing learning units 8–10)

PART 3 – MERGERS AND ACQUISITIONS, AND BUSINESS PLANS

CONTENT – THIS MODULE

Strategy, Risk Management and Financial

Tutorial Letter 102 Tutorial Letter 103

PART 1 PART 2 PART 3

Learning units Learning units Learning units

STUDY MATERIAL AND RESOURCES

Prescribed study material

Title Edition Authors Publisher ISBN number & notes

General information and CTA news

Cheating includes, but is not limited to, the following:

• Completing assessments on behalf of another student,

Part Learning Learning unit

1 1 Strategy and governance 4%

We hope you enjoy this part of your studies!

Your Applied Management Accounting lecturers

PART 1 – STRATEGY, RISK MANAGEMENT AND FINANCING