MAC3761 New Exam Pack For 2022 With Formula Notes: Studywiz

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MAC3761


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COST‐VOLUME‐PROFIT ANALYSIS ‐ FORMULAE

1. Required selling price (i.e. sales price required to earn a predetermined profit)

The formula that you choose to use out of the following three (3) provided below will depend on the
information which you have been given to work with.

a. Total Sales – Total Variable Cost – Total Fixed Cost = Net Profit (before tax)
Re‐arrange this equation to give you:
Total Sales = Net profit (before tax) + Total Fixed Cost + Total Variable Cost
Therefore;
Sales per unit = Total Sales / No. units sold

OR

b. Total Sales – Total Variable Cost = Total Contribution Margin
Re‐arrange this equation to give you:
Total Sales = Total CM + Total VC
Therefore;
Sales per unit = Total Sales / No. units sold

c. Sales per unit = Contribution Margin per unit + Variable cost per unit

2. Break‐even sales (UNITS)

BEP (units) = Total Fixed Cost / Contribution Margin per unit

Contribution Margin per unit = Sales per unit – Variable Cost per unit

3. Break‐even sales ($)

BEP ($) = Total Fixed Cost / Contribution Margin Ratio

Contribution Margin ratio = Contribution Margin per unit / Sales per unit

Where; BEP = Break‐even point

4. Units sales required to earn target profit ($)

Target sales (units) = Total Fixed Cost + Target Net Profit (before tax) / CM per unit

Where; CM = Contribution Margin

5a. To include income taxes in the cost‐volume‐profit model you have to convert a before‐tax profit
into an after‐tax profit:
After‐tax profit = Before‐tax profit x (1 – Tax rate)

5b. To exclude income taxes from the cost‐volume‐profit model you have to convert an after‐tax
profit into a before‐tax profit (which will then enable you to use formula (4) above).
Before‐tax profit = After‐tax profit / (1 – Tax rate)

6. Margin of safety

= Projected or actual sales (units) ‐ Break‐even sales (units)

7. Margin of safety ratio (%)

= Margin of safety (units) / Projected or actual sales (units)
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Ratio Analysis
Liquidity Ratios
Current Ratio = (Current Assets/Current Liabilities)
Quick Ratio (Acid Test) = (Current Assets - Inventory)/Current Liabilities
Asset Management Ratios

Inventory Turnover* = (Cost of Goods Sold/Inventory)
Days Sales Outstanding = (Accounts Receivable)/(Sales/365))
Fixed Assets Turnover** = (Sales/Net Fixed Assets)
Total Assets Turnover = (Sales/Total Assets)
Debt Management Ratios

Total Debt to Total Assets = (Liabilities/Assets)
Times Interest Earned = (EBIT***/Interest)
Cash Coverage Ratio = (EBIT + Depreciation)/Interest
Profitability Ratios
Gross Profit Margin = (Sales – Cost of Goods Sold)/Sales
Operating Profit Margin = (Operating Income/Sales)
Net Profit Margin = (Net Income/Sales)
Return on Assets = (Net Income/Assets)
Return on Equity = (Net Income/Common Equity****)
Market Values
Price/Earnings Ratio = (Market Price/Earnings Per Share)
Market/Book Ratio = (Market Price/Book Value)
Dividend Yield = (Dividends per Share/Market Price)
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*Some analysts calculate the Inventory Turnover Ratio as Sales//Inventory
**Net Fixed Assets typically refers to Net Property, Plant and Equipment. If Property,
Plant and Equipment is not specifically identified on the balance sheet, just use
long-term assets.
***EBIT stands for Earnings Before Interest and Taxes (sometimes referred to as
operating income).
****Common Equity is also referred to as Owner’s Equity or Stockholders Equity
Earnings per share = Net Income/Shares Outstanding

Book Value = Owner’s Equity/Shares Outstanding
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Ratio Summary
Type Ratio Formula Significance
Liquidity Ratios
Working Capital Current Assets 3 Current Liabilities Amount of current assets left
over after paying liabilities
Current ratio Current Assets Test of debt-paying ability 3

Current Liabilities how much do we have
available for every $1 of
liabilities.
Acid-test (quick) Ratio Quick Assets (Cash + Marketable Test of immediate debt-
Securities + net receivables) paying ability 3 how much
Current Liabilities cash do we have available
immediately to pay debt
Cash flow liquidity ratio (Cash + Marketable securities + Test of short-term, debt
Cash flow from operating activities) paying ability
Current Liabilities
Accounts Receivable Net credit sales (or net sales) Test of quality of accounts
Turnover Average Accounts Receivable receivable 3 how many times
have we collected avg accts
**Avg Accounts Receivable is calculated as receivable
(beg. or last year9s accounts receivable +
current year end Accounts receivable) / 2
Days Sales Uncollected Accts Receivable, Net x 365 days How many days it takes to
Net Sales collect on accounts receivable
**Accts Receivable, Net means Accounts

Receivable 3 Allowance for doubtful or
uncollectible accounts.
Inventory Turnover Cost of Goods Sold Test of management

Average Inventory efficiency 3 how many times
we have sold avg. inventory
**Avg Inventory is calculated as (beg. or last
year9s inventory + current year end
inventory) / 2
Days Sales in Inventory Ending Inventory x 365 days How many days it takes to sell
Cost of Goods Sold inventory
Total Asset Turnover Net Sales How many times we have

Average Total Assets been able to sell the amount
equal to avg total assets.
**Avg Total Assets is calculated as (beg. or Tests whether the volume of
last year9s total assets + current year end business is adequate.
total assets) / 2
Equity (or Solvency) Ratios

Debt Ratio Total Liabilities How much we owe in
Total Assets liabilities for every $1 in
assets.
Adapted from <Accounting Principles: A Business Perspective, Financial Accounting (Chapters 9 3 18)= A Textbook Equity Open
College Textbook originally by Hermanson, Edwards, and Maher

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Equity (or Stockholder9s Total Equity How much equity we have for
Equity) Ratio Total Assets every $1 in assets.
Debt to Equity Ratio Total Liabilities How much we owe in

Total Equity liabilities for every $1 of
equity.
Stockholder9s Equity to Total Equity How much equity we have to
Debt Ratio Total Liabilities cover $1 in liabilities.
Profitability Ratios
Profit Margin Ratio Net Income How much NET income we
Net Sales generate from every dollar of
sales.
Gross Margin Ratio Net sales 3 Cost of goods sold How much gross profit is
Net Sales earned on every dollar of
sales (also known as markup)
Return on total assets Net Income How many times we have

Average Total Assets earned back average total
assets from net income.
**Avg Total Assets is calculated as (beg. or
last year9s total assets + current year end
total assets) / 2
Return on common Net Income 3 Preferred dividends How much net income was
stockholder9s equity Average common stockholder9s generated from every dollar of
equity common stock invested.
Basic Earnings per Share Net Income 3 Preferred Dividends How much net income
(EPS) Weighted Avg common shares generate on every share of
outstanding common stock
Market Prospects
Price-earnings ratio Market price per common share How much the market price is
Earnings per share for every dollar of earnings
per share
Dividend yield Annual cash dividends per share How much dividends you
Market price per share receive based on every dollar
of market price per share.
Adapted from <Accounting Principles: A Business Perspective, Financial Accounting (Chapters 9 3 18)= A Textbook Equity Open
College Textbook originally by Hermanson, Edwards, and Maher

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HMS 1
FORMULA SHEET – MAC2602
QUESTION 1 - TIME VALUE OF MONEY (TVM)
1. SIMPLE INTERST: I=PxRxT ³ I = simple interest, P = principal, R = interest rate and T = time
2. COMPOUND INTERST: I = P(1+i) ³ I = compound interest, P = principal and i = interest rate
3. FUTURE VALUE (SINGLE PAYMENT – 1 PERIOD): FV = PV(1 + i) ³ FV = future value, PV = present value, i = interest rat
n
4. FUTURE VALUE (SINGLE PAYMENT – MULTIPLE PERIODS): FV = PV(1 + i) ³ FV = future value, PV = present
value, i = interest rate and n = Number of years/periods
5. FUTURE VALUE (ORDINARY ANNUITY): ³ I = Annuity amount or payment, i = Interest rate, n =

Number of years or periods
11. PERIODIC RATE:
6. FUTURE VALUE (ANNUITY DUE):
12. EFFECTIVE INTEREST RATE
7. PRESENT VALUE (SINGLE PAYMENT):
13. NOMINAL RATE
8. PRESENT VALUE (ORDINARY ANNUITY):
14. INTERPOLATION
9. PRESENT VALUE (PERPETUITY):

15. EXTRAPOLATION
10. PRESENT VALUE (ANNUITY DUE):

16. PERIODIC PAYMENT (PMT)

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HMS 2
QUESTION 2 – CAPITAL STRUCTURE AND COST OF CAPITAL
1. DEBT:EQUITY RATIO (D:E) (SIMPLIFIED)
2. DIVIDEND GROWTH MODEL (To determine the market value of the share)
where P0 = current market price of the share (current value of the share) at point 0 in time
D0 = current dividend (or earnings per share x payout ratio)
D1 = D0 x (1 + g) = the expected dividend per share for year 1 (after growth)
ke = the required rate of return (market discount rate or cost of ordinary equity/shares)
g = expected CONSTANT growth rate in earnings (and assuming a constant payout ratio,
therefore in dividends as well)
3. REQUIRED RATE OF RETURN
4. Capital Asset Pricing Model (CAPM)

Rf = risk-free rate
Rm = the market return (for all shares)
(Rm – Rf) = market risk premium
³ = the share’s beta coeffi cient, which measures the share’s
relative risk (return volatility)
5. WEIGHTED AVERAGE COST OF CAPITAL (MARKET VALUES)
a. Formula
ke = equity-holders’ current required rate of return (cost of equity)
kd = debt-holders’ current required rate of return (cost of debt after tax)
ve = market value of equity (weighting for ke )
vd = market value of debt (weighting for kd )
b. Table format

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HMS 3
QUESTION 3 – ANALYSIS IF FINANCIAL INFORMATION AND WORKING CAPITAL MANAGEMENT
GROWTH RATE
1. Profitability and performance

PROFIT MARGINS PERFORMANCE RATIOS
Gross profit Operating profit Net profit margin Return of equity Return on assets Asset turnover
margin margin (ROE) (ROA)
Operating
x Net profit x Net profit x EBIT Revenue
Gross profit x profit x 100 x 100
100 Revenue 100 Equity 100 Total assets Total assets
Revenue 100 Revenue
2. Liquidity
Current ratio Current assets:Current liabilities
Current assets less inventory:Current liabilities
Liquid asset ratio (or acid test or quick ratio)
Receivable days (debtors’ collection period)
Payable days (creditors’ payment period)
Inventory days
Inventory turnover ratio (times)
Receivable days + Inventory days - Payable days

Cash conversion cycle – days
Cash ratio
3. Solvency and financial/capital structure

Interest cover ratio
Debt to equity ratio Long-term interest bearing debt (including its current portion):Equity
Debt ratio (or gearing)
Total assets to total debt ratio
Financial leverage ROE:ROA Return on equity (ROE):Return on assets (ROA)
4. Financial market
Earnings per share
Dividend payout ratio
Dividend cover ratio
Price earnings ratio
Earnings yield
Dividend yield

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HMS 4
QUESTION 4 – CAPITAL INVESTMENT AND CAPITAL BUDGETING
1. PAYBACK PERIOD
Years before break-even year = number of years that the cumulative cash outlay is still negative
Remaining cost to cover = capital outlay (investment) less cash recovered in years before the break-even year or cumulative negative cash outlay at
the start of the breakeven year
Cash flow during the break-even year = cash flow during the year in which break-even takes place
Cash flows = operational cash flows AFTER tax
2. ACCOUNTING RATE OF RETURN (ARR)
Average net profit after taxation = the average annual profit after taxation for the whole period (life of the project/asset)
Average investment = the average of the original investment cost (outlay) and any residual value at the end of its useful life (usually Rnil). (This is
equal to the cost of the investment ÷ 2 if depreciation is levied on the straight-line basis!)
3. NET PRESENT VALUE (NPV)

n = number of periods (life of the project)
t = specific period
k = discount rate (= WACC ± risk adjustment, if any)
Ct = net cash flow for period t
I = initial capital investment at period 0 (note, this is not a figure “1”, but “I” for “Investment”)
4. INTERNAL RATE OF RETURN (IRR)
r = internal rate of return

n = number of periods (life of the project)
t = specific period
Ct= net cash flow for period t
I = capital investment at period 0
5. PROFITABILITY INDEX

UNIVERSITY EXAMINATIONS
June 2021
MAC3761
Management Accounting III
100 Marks
Duration 3 Hours
This paper consists of 12 pages (including this page).
Instructions:
1. This assessment consists of two independent questions.
2. All questions must be answered, and all calculations must be shown.
3. For hand-written answer files, you must not write with a pencil or a red pen. Only use a
black pen.
4. You can only upload a PDF document on myUnisa as your answer file.
5. It is your responsibility that once uploaded, you must view your answer file and ensure that
it is correct, complete (no missing pages), legible, it can open, not of poor image quality, not
password protected, and not corrupted.
6. Your attention is brought to the announcement posted on MAC3761 myUnisa site titled
“Cheating in MAC3761 assessments”, as well as the plagiarism declaration in the TL101.
PROPOSED TIMETABLE Marks Minutes
Question 1: Overhead allocation; Cost-volume-profit (CVP) analysis;

55 99
Joint and by-product costing; Ethics; and Discussion.
Question 2: Capital structure and cost of capital; Sources and forms of
45 81
finance; Working capital and Discussion.
Converting your answers to a PDF file and successfully uploading your
one PDF file. You must successfully upload your PDF file on myUnisa
before 12:45 South African time, 21 June 2021. The submission platform 60
will automatically close at 13:00 (21 June 2021, South African time) and
no submission can be made henceforth.
100 240
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MAC3761
June 2021
QUESTION 1 (55 marks; 99 minutes)
Phalaborwa Pharmaceutics Enterprise (“PPE”) is a medium-sized company founded in 2020

in the wake of the COVID-19 outbreak. The company started operating on 1 April 2020. PPE
specialises in the production of masks, gloves, safety goggles, safety shoes and protective
gowns. These five products are produced from its 6 840m2 rented factory compound, 15
kilometres outside Phalaborwa city centre. The factory has five divisions from which each of
the company’s five products have a production line that is separate and distinct from one other,
except for shared services which include material receiving, warehousing, water and
electricity. The company’s Head Office, located in the city centre, is responsible for
administration, financing, shared services and marketing functions of the business. PPE uses
the absorption costing system and accounts for inventory using the first-in-first-out (FIFO)
method.
PPE has been quite successful in capturing interest and preference of doing business with
several strategic government entities and has invested significantly in promoting its business
to these entities. Monthly monetary payments made by the company to these entities and their
managers together with free samples have helped to promote the company brand. The
company already has orders in the pipeline to supply its products from the five divisions to
different government entities.
Each production line (hereafter referred to “division”) is headed by a divisional manager who
is responsible for all the operational decisions of the division, provided that these decisions
are in the best interest of the company as a whole. To ensure that this is realised, the executive
management requires each division to report a gross profit margin and net profit before tax of
at least 12,75% and R8,5 million, respectively for the 2020 financial year (allocated fixed
factory overheads in Schedule A below are taken into account when determining the division’s
gross profit margin and net profit before tax). If these targets are met, then the divisional
manager is entitled to 0,2% of total sales of their division as a bonus, and their respective
division is to receive a fixed bonus of R2 million for the relevant reporting period, to be shared
among the division’s employees.
The company’s first year of operation was uneventful, except for a minor electricity supply
fault. This led to the water and electricity bill for April being slightly lower than average as a
result of the electricity meter not working for some days. It is said that the incident could not
be reported on time as this happened during level 5 of the lockdown and one of the
experienced electricians on site was able to ensure that the electricity supply was not
disrupted.
A. FACTORY OVERHEADS SCHEDULE FOR THE 2020 FINANCIAL YEAR (PPE)
1. The company’s factory overheads have not been allocated. They are allocated to the five
divisions as per below activities:
Factory overhead items Activity 2020 Actual

notes
Depreciation and machine service costs (i) R36 125 500
Rent, rates, water, and electricity (ii) R18 766 438
Safety and wellness costs (iii) R5 037 442
Ordering and material handling costs (iv) R1 238 546
Cafeteria, development, and teambuilding costs (v) R840 750
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MAC3761
June 2021
QUESTION 1 (continued)
(i) The divisions recorded a total of 7 890 000 machine hours of which 2 827 000 relate
to the Masks Division.
(ii) The Masks Division occupies and utilises 2 022m2 of the company’s total factory floor
space.
(iii) Safety and wellness costs relate to health and safety activities. For the period ending
31 December 2020, the company clocked a total of 1 247 hours on health and safety
activities. The Masks Division logged 30,72 property maintenance days for the 2020
financial year. Each daily shift consists of 12 hours.
(iv) 23 cents of each rand incurred in ordering and handling materials is attributed to the
Masks Division.
(v) The Masks Division had 214 staff throughout the 2020 financial year. The company’s
total staff complement of the 2020 financial year is expected to increase by 17% to 702
for the 2021 financial year.
2. The above factory overheads do not include the divisions’ specific fixed overheads and
the Head Office’s allocated fixed overheads. These are always reflected separately in the
divisions’ respective management accounts.
B. MASKS DIVISION’S 2020 PERFORMANCE AND FORECAST FOR 2021
Baba Ndou, the business manager of the Masks Division, has presented the actual
management accounts below as recorded and reported in his division to the executive
management of PPE. He is confident that his division will meet the new target of R18 million
in operating profit set for the full 2021 financial year, leading to his division qualifying for
bonuses. The extract from the Masks Division’s actual management accounts and its notes
and additional information for the 9 months ended 31 December 2020 are presented below in
Schedules C and D:
C. MASKS DIVISION – MANAGEMENT ACCOUNTS FOR THE 2020 FINANCIAL YEAR

AND ADDITIONAL INFORMATION FOR THE 2021 FINANCIAL YEAR
Details Note 2020 Actual
Sales 1 R83 252 205
Direct material purchases 2 R20 875 828
Other direct material transfer from Safety Shoes Division 3 R4 611 840
Direct labour costs 4 R14 000 400
Indirect labour costs 5 R9 470 000
Head office allocated administrative overheads 6 R2 128 423
Total administration and selling costs 7 R1 886 600
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MAC3761
June 2021
D. NOTES AND ADDITIONAL INFORMATION
1. For the 9-month period ending 31 December 2020, the Masks Division produced and sold
a total of ninety million masks. The unit selling price is expected to increase by 12% for
the 2021 financial year as the company expects increase in global demand of masks.
2. All direct material purchased were issued to production.
3. This material relates to straps bought from the Safety Shoes Division (which already
manufactures straps and laces for the shoes manufactured by the division). These straps
are then used as ear loops for the masks. There were no straps on hand at the end of the
2020 financial year.
4. For the 2020 period, the Masks Division labourers were remunerated at an hourly rate of
R18, just slightly below the national minimum wage gazetted of R20,76 due to the fact that
the company is fairly new and had to invest heavily in the plant at the beginning of the
year. For 2021, PPE plans to increase this to R25 per labourer, per hour.
5. Indirect labour costs relate to fixed salaries of supervisors and foreman who are working
on the factory floor to make sure that production processes run accordingly.
6. These costs are determined by the Head Office and although they are correctly allocated
to the divisions of PPE, they bear no direct relationship with the underlying products’
volume.
7. Lowest number of masks sold was recorded in April due to poor advertising campaign, but
the month of September saw the highest number of units sold (probably as the government
relaxed the lockdown restrictions). There were 4,5 million masks sold in April and 10,5
million masks sold in September. Total administration and selling costs were R150 025
and R296 455 for April and September, respectively. Both the unit variable costs and total
fixed costs for the 2021 financial year will remain as that of the 2020 financial year.
8. There are no expected changes in material costs and overheads for the 2021 financial
year, except for any changes evident above.
9. Unless indicated otherwise, assume all income and expenses are incurred evenly
throughout the reporting period.
E. ACQUISITION OF ALOETISER (PTY) LTD
PPE has started exploring ways of diversifying its business for the purpose of long-term
viability, especially in the post-Covid19 era. PPE has embarked on discussions with Aloetiser
(Pty) Ltd (“Aloetiser”) for a possible acquisition of Aloetiser’s operations. The owners of
Aloetiser are emigrating to Canada soon and are desperately in need of a buyer to take over
their entire Gqeberha-based operations in the Eastern Cape. For the year ended 31 March
2021, the owners of Aloetiser claimed to have made an actual net profit of R22m. The
projections are that this reported net profit will likely increase by 20% for the 2022 financial
year. Aloetiser uses a direct costing system and accounts for inventory using the weighted
average method. As part of PPE’s investment strategy, PPE will consider buying Aloetiser’s
operations if Aloetiser has for the recent financial period, reported a contribution margin ratio
of 0,4 for each product.
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MAC3761
June 2021
Aloetiser uses aloe vera leaves bought from local farmers and then put these through the
production process, where a gel is squeezed from the leaves to generate aloe vera gel. This
aloe vera gel is then further processed to make hand sanitisers after alcohol and other
ingredients have been added. The squeezed aloe vera leaves are boiled and sifted through
during the process to produce aloe vera liquid. This aloe vera liquid, after adding some
chemicals, is then sold to cosmetics manufacturers which use it to make facial and other skin
products. The residual aloe vera leaves left after these processes are then scrapped and sold
to Left Aloe Limited, the only pharmaceutical company which uses it in the manufacturing of a
special medicine. The following has been extracted from the production cost schedule of
Aloetiser (Pty) Ltd for the year ended 31 March 2021:
1. PRODUCTION COSTS SCHEDULE EXTRACT FOR THE 2021 FINANCIAL YEAR:

Details Note R
Inventory: 01 April 2020 – hand sanitisers 2.1 1 494 491
Inventory: 01 April 2020 – aloe vera liquid 2.1 1 873 109
Variable manufacturing costs 2.2 13 682 817
Fixed manufacturing overheads 2.3 3 261 955
Alcohol and other ingredient costs – hand sanitisers 2.4 923 187
Chemical processing costs – aloe vera liquid (per litre) 2.5 1,20
Disposal costs – residual aloe vera leaves 2.6 76 543
2. NOTES AND ADDITIONAL INFORMATION

2.1. Inventory on hand (both opening and closing) relates to completed units of hand
sanitisers and aloe vera liquid. There were 500 kilolitres of hand sanitisers and 820
kilolitres of aloe vera liquid. There was no residual aloe vera leaves on hand on 31 March
2021.
2.2. These manufacturing costs relate to the joint manufacturing process of extracting the
aloe vera gel and of boiling the aloe vera leaves. These costs are allocated to hand
sanitisers and aloe vera liquid based on the net realisable values of the products. There
were 2,2 million litres of aloe vera gel (for making hand sanitisers – further refer to 2.4
below) and 3,04 million litres of aloe vera liquid produced during the 2021 financial year.
2.3. These overheads are not incurred within the joint manufacturing process and are also
not allocated to products.
2.4. For each litre of aloe vera gel, 250 millilitres of alcohol and other ingredients are added
to make the complete hand sanitiser. There are no volume losses in the process.
2.5. Chemicals added in processing the aloe vera liquid do not materially increase the
quantity and there are no known volume losses in the process.
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MAC3761
June 2021
2.6. The sales for the 2021 financial year were made as follows:
a. 2,1 million litres of hand sanitisers were sold at R3,46 per litre and it cost Aloetiser
R545 364 to market and sell these hand sanitisers to different retail stores. This
amount, as per the contract, has been fixed for the past three years.
b. 2,97 million litres of aloe vera liquid was sold to cosmetics manufacturers at R6,50
per litre. The company makes use of agencies who are paid a commission
equivalent to R0,50 per each litre sold.
c. Residual aloe vera leaves were sold to Left Aloe Limited for R875 000.
2.7. There were no raw materials, alcohol and other ingredients, chemicals, and work in
progress on hand both at the beginning and at the end of the financial year.
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MAC3761
June 2021
REQUIRED
For each question below, remember to:
• Clearly show all your calculations in detail;

• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-
value);
• Ignore time value of money and all taxation implications.
(a) Calculate the actual total overheads attributed to the Masks Division for the 9-
month period ending 31 December 2020.
▪ Round final answers to the nearest Rand. (8)
(b) Determine and conclude whether Baba Ndou and his Masks Division are
entitled to bonuses (and how much, if any) for the period ended 31 December
2020. Show all workings. (8)
(c) Critically evaluate the overall employee remuneration structure of Phalaborwa
Pharmaceutics Enterprise. (5)
(d) Determine the projected number of masks that the Masks Division needs to
produce and sell in order to meet its operating profit target for the 2021 financial
year. (10)
(e) Discuss business ethical issues that may be of concern to Phalaborwa
Pharmaceutics Enterprise and its operations. (5)
(f) Prepare a segmented actual statement of profit of loss (income statement) (by
product) of Aloetiser (Pty) Ltd, showing the profit for the year ended 31 March
2021 for each product, as well as the total for the company. (12)
(g) Based on the investment criteria and other factors that Phalaborwa
Pharmaceutics Enterprise needs to take into consideration, advise if the
Phalaborwa Pharmaceutics Enterprise should buy Aloetiser (Pty) Ltd. (7)
Total question 1 [55]
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MAC3761
June 2021

Listed on the Johannesburg Stock Exchange (JSE), Brat Lows Furniture Group (“BLF” or
“Group”) is a leading retailer of household furniture and electrical appliances in Southern
Africa. As at the end of 31 December 2020, its latest financial year end, BLF had 8 248
permanent staff members in its employ, following a year-to-year decline of 4% in its workforce
owing to the outbreak of COVID-19 pandemic which led to retrenchments and restructuring of
the Group. The Group also boasts of a portfolio of stores in Botswana, Lesotho, Namibia and
Eswatini.
The trading environment has been challenging for the furniture industry, especially following
the hard lockdown which saw furniture stores close for weeks countrywide and customers
across the board losing their employment. The Group had to impair its debtors book and
recapitalise its balance sheet by the fresh issue of ordinary shares to ensure continuity during
these turbulent times. Its peers have also struggled to keep their businesses afloat and many
furniture retailers had to shut down permanently.
The diversified portfolio (in terms of location, cash vs. credit customers and product range) did
help BLF weather the financial storm and its management is hopeful that 2021 will be a
profitable year. However, some investors are losing patience with the restructuring process of
the Group as the recent performance had led to suspension of dividends and decline in the
share price. Presented below are the summarised financial statements for BLF for the year
ended 31 December 2020.
A. The financial statements, together with other key information relating to Brat Lows
Furniture Group, are first presented below:
1. STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2020
Rm Notes 2020 2019

Revenue 5 670 6 453
Merchandise sales 4.1 3 602 4 475
Insurance and interest income 4.2 2 068 1 978
Cost of merchandise sales 4.1 (1 666) (2 174)
Opening inventory 796 812
Purchases 1 401 1 963
Cash carriage costs 313 195
Closing inventory (844) (796)
Operating costs 4.3 (4 107) (3 822)
Profit/(loss) before finance income and costs (103) 457
Finance income 43 64
Finance costs 4.4 (209) (248)
Profit/(loss) before taxation (269) 273
Taxation 79 (90)
Net profit/(loss) for the year (190) 183
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2. STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2020
Rm Notes 2020 2019

ASSETS
Non-current assets
Property, plant and equipment and right-of-use asset 1 232 1 018
Goodwill and intangible assets 297 308
Financial assets – insurance investments 621 503
Total non-current assets 2 150 1 829
Current assets
Inventory and financial assets 1 097 1 042
Trade and other receivables 2 956 3 326
Cash-on-hand and deposits 1 970 1 193
Total current assets 6 023 5 561
TOTAL ASSETS 8 173 7 390
EQUITY AND LIABILITIES

Capital and reserves
Ordinary share capital 4.5 1 458 458
Retained earnings 1 042 1 232
Other reserves 63 57
Total shareholders’ equity 2 563 1 747
Non-current liabilities 4.4 3 498 4 105

Current liabilities
Trade and other payables 874 948
Payments in advance 583 148
Short-term borrowings 4.4 655 442
Total current liabilities 2 112 1 538
TOTAL EQUITY AND LIABILITIES 8 173 7 390
3. OTHER SALIENT INFORMATION
2020 2019
Target capital structure – Debt: Equity (market values) 40:60 40:60
Prime lending rate (closing %) 7,0 10,0
ZAR: 1 US dollar (average) 17,84 14,45
ZAR: 1 US dollar (closing) 14,93 14,40
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4. NOTES AND ADDITIONAL INFORMATION
4.1. This relates to sale of furniture and electrical appliances both to cash customers and credit
customers. The value of cash sales is approximately 25% of the value of credit sales. The
Group’s purchases from the manufacturers are mainly on credit, and the Group continues
to maintain good relations with its suppliers.
4.2. The Group also provides credit life insurance cover to credit customers. Interest income
is derived from instalment sales and overdue accounts.
4.3. Operating costs include debtor costs of R2,257 billion for the current year (2019: R1,255
billion). The debtor costs are made up of trade bad debts written off, debt management
costs and debt impairments.
4.4. Finance costs relate mainly to the following long-term interest-bearing liabilities:
i. A 10-year loan facility received from Da Bank on 5 January 2017. This loan of R1,24 billion
currently incurs an interest rate of prime less 125 basis points per annum. Interest is
payable annually in arrears. Similar facilities bear an annual interest at prime less 100
basis points.
ii. Medium-term loan of R400m from Cressida Finance which is repayable fully on 20
December 2023. Fixed interest of R26 million is payable annually in arrears. BLF had
applied to Cressida Finance’s COVID relief fund to postpone its 20 December 2020
interest payment. However, the approval only came after the payment was made.
Cressida Finance has now agreed to postpone the 20 December 2021 interest amount to
20 December 2022. All other future payments are scheduled to be repaid as initially
planned. There is no additional interest on postponed payments. Market related interest
rate on similar term loans is 6,85% per annum.
iii. Fifteen million preference shares were issued two years ago at R70 per share. Preference
share dividends are payable annually in arrears at 80% of prime rate. Currently for the
same value of preference shares in the market, BLF would be expected to pay R62,4
million as an annual dividend.
iv. Twelve million debentures were issued at R45 each and are redeemable in four years’
time. However, there is a once-off premium of R0,75 per debenture payable one year
after redemption. Annual interest on these debentures is R36 million and is payable
annually in arrears. Similar debentures are trading at 6,25% per annum.
v. Other non-current liabilities (non-interest bearing) were recorded at R268 million for the
year ended 31 December 2020 (2019: R283 million).
vi. The market value of long-term interest-bearing facilities on 31 December 2019 was
R3,972 billion. The market value of equity on 31 December 2019 was R4,466 billion.
vii. The balance of finance costs relates to short-term borrowing costs.
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4.5. BLF issued additional shares to its existing shareholders during the 2020 financial
year in an effort to strengthen its balance sheet and decrease its gearing levels. These
shares were issued at a discounted price of R20 per share, bringing the total number
of ordinary shares issued to 224,9 million. This was the only movement in ordinary
share capital during the 2020 financial year. The market price subsequently
plummeted to R18,25 per share by the end of the 2020 financial year.
4.6. There were 366 days in 2020 (2019: 365) and the South African corporate tax rate
has remained unchanged at 28%.
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QUESTION 2
REQUIRED
For each question below, remember to:
• Clearly show all your calculations in detail; and

• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-
value).
(a) Determine the capital structure (expressed as a %) of Brat Lows Furniture
Group at 31 December 2020, based on both the book values and the market
values. You are also required to comment on the movements in capital
structure.
▪ Calculations – 15 marks; Discussion and commentary – 3 marks. (18)
(b) Assuming that Brat Lows Furniture Group has not yet reached its target capital
structure, provide practical ways in which the Group can improve its gearing
and move towards its target capital structure. (5)
(c) Discuss factors you would have considered before taking part in the Group’s
issue of additional ordinary shares during the 2020 financial year, if you were
one of the Group’s shareholders. (8)
(d) Calculate the cash conversion cycle of Brat Lows Furniture Group at 31
December 2020 and based on the information and nature of industry, advise
on practical ways to improve the cash conversion cycle.
▪ Where applicable, base your calculations on closing book values.
▪ Calculations – 5 marks; Advice – 4 marks. (9)
(e) Advise the management of Brat Lows Furniture Group on how to effectively
structure the business to return to profitability. (5)
Total question 2 [45]
Total question 1 and 2 [100]
©
UNISA 2021
All rights reserved. No part of this document may be reproduced or transmitted in any form or
by any means without prior written permission of Unisa.
CONFIDENTIAL
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Blue ticks
SUGGESTED SOLUTION (✓) are
alternative
QUESTION 1
(a) Calculate the total overheads attributed to the Masks Division for the 9-
[8]
month period ending 31 December 2020.
Overheads R Marks
Depreciation & machine service costs 12 943 826 ✓ r/w
[36 125 500 ÷ 7 890 000 x 2 827 000]
Rent, rates, water and electricity 5 547 622 ✓ r/w
[18 766 438 ÷ 6 840 m2 x 2 022 m2]
Safety and security costs 1 489 176 ✓✓
[(5 037 442 x 30,72 x 12)✓ ÷ 1 247✓]
OR: [(5 037 442 ÷ 1 247 ÷ 12)✓ x 30,72✓]
Ordering and material handling costs 284 866 ✓ r/w
[1 238 546 x 0,23]
Cafeteria, development and teambuilding costs 299 868 ✓✓
[(840 750 ÷ (702 ÷ 1,17)✓ x 214✓]
Head Office’s allocated overheads 2 128 423
Division’s specific costs (indirect labour costs) 9 470 000 ✓ r/w
Total overheads 32 163 781
 Given
(b) Determine whether Baba Ndou and his Masks Division are entitled to
bonuses (and how much, if any) for the period ended 31 December 2020. [8]
Show all workings.
Details R Marks
Sales 83 252 205 ✓ r/w
Variable manufacturing costs (39 487 668) ✓ r/w
Factory overheads [part a] (32 163 781) ✓ ©
Gross profit 11 600 356
Administration and selling costs (1 886 600) ✓ r/w
Net profit before tax 9 713 756
Gross profit margin 13,93% ✓ ©
Conclusion:
The Masks Division’s gross profit margin of 13,93% is more than the 12,75% target while
the actual net profit before tax of R9,713m is also more than the R8,5m target. As such,
both Baba Ndou and his division are entitled to a total of R2 166 504✓✓ in bonuses for
the 9-month period ending 31 December 2020 (R166 504 of this goes to Baba Ndou).✓©
1 mark for conclusion
 Given 2 marks for calculation
 20 875 828 + 4 611 840 + 14 000 400 = 39 487 668
 11 600 356 ÷ 83 252 205 = 13,93%
 Baba Ndou’s bonuses: R83 252 205 x 0,2% = R166 504 ✓rw
 Division’s bonuses: R2 000 000 ✓rw
 Total bonuses payable to Masks Division: R2 166 504 (R166 504 + R2 000 000)

(c) Critically evaluate the overall remuneration scheme of Phalaborwa

[5]
Pharmaceutics Enterprise.
On basic salaries and wages

• The company seems to be in contravention of the Basic Conditions of Employment
Act✓, as it currently pays its labourers R18 per hour, while the minimum wage is
R20.76. This may lead to fines and penalties imposed by the Government, and
possible labour unrest and strikes✓. The company does, however, provide other
benefits to its labourers (bonuses, refreshments and developmental programmes)
and maybe the company can consider channelling this expenditure towards the
wages of labourers✓. 1 mark for contravention; 1 mark for consequences; 1 mark for other benefits
• Indirect labour costs make up approximately two-thirds of direct labour costs
(R9,47m vs. R14,4m) ✓, and this may suggest that supervisors and foremen are
paid significantly more than the labourers who are directly involved in the production
process. Usually there is a small number of supervisors compared to direct
labourers. 1 mark for indirect labour cost component; 1 mark for comparing with DL
On determining bonuses
• The company seems to be instilling commitment to the success of the organisation
by giving the divisions incentives over and above the normal wages and salaries.
This is likely to increase productivity by the divisions.
• Some manufacturing overheads may not be within the control✓ of the divisions or
methods to allocate these may not be favourable to other divisions.
• The bonus payable is not proportionated to the operating profit✓ – e.g. it does not
matter by how much the targeted operating profit is exceeded, this does not
influence how much is paid out as a bonus. There will be no bonuses payable if the
operating profit is slightly below the set target.
• The manager may be tempted to increase sales at any cost (overstatement or
incorrect classification) as their bonus is based on the sales generated✓. The
manager also gets paid significantly higher in bonuses than the entire division (and
he might still benefit from the divisional pool of bonuses). This may lead to
demotivated and unhappy workforce.
• The fixed bonus pool does not take into account the number of employees (currently
the Masks Division accounts for 35% of the entire factory labour force, and yet the
bonus pool of R2m is the same across the factory)✓.
• The bonus structure only takes into account financial factors – non-financial factors
should also be considered in rewarding the staff.
MAX: 5 marks

(d) Determine the number of masks that the Masks division needs to produce
[10]
in order to meets its operating profit target for the 2021 financial year.
Total fixed costs + target profit (43 367 471✓✓✓ + 18 000 000✓)
✓𝐟
Contribution per unit 0,513✓✓✓✓✓✓
= 119 624 700 units
Contribution per unit:

 Selling price: (83 252 205 ÷ 90 000 000) x 1,12 = 103,6 cents ✓r/w
 Direct materials: (20 875 828 + 4 611 840) ÷ 90m = 28,3 cents ✓ r/w
 Direct labour costs: 14 000 400 ÷ 90m✓ x (25÷18)✓ = 21,6 cents ✓✓
(or 777 800 ÷ 90m✓ = 0,00864 hours per unit x 2 500 cents✓ = 21,6 cents)
 Variable administration & selling costs:
(296 455 – 150 025)✓ ÷ (10,5m – 4,5m)✓ = 2,4 cents
Contribution per unit: 103,6 – 28,3 – 21,6 – 2,4 = 51,3 cents
Total fixed costs:

Fixed overheads [part a]: R32 163 781
Administration and selling costs: R150 025 – (4,5m x 0,024405✓©) = R40 202,50
OR R296 455 – (10,5m x 0,024405) = R40 202,50 (monthly)
Fixed administration and selling costs: 12✓ X 40 202,50 = R482 430
TOTAL: (R32 163 781 x 12÷9✓ + R482 430) = R43 367 471
MAX: 10 marks

(e) Discuss business ethical issues that may be of concern to Phalaborwa

[5]
Pharmaceutics Enterprise and its operations.
• The company might be engaging in illegal work with the government entities. The
company cannot be paying the entities✓ (and/or their employees) in order to sell
goods to these entities. This should be investigated to ensure that it is not a bribe of
any sort✓.
• PPE should ensure that the orders in the pipeline are valid and that the necessary
government procurement processes were followed✓.
• The company should have reported the electrical fault immediately✓ (supply of
electricity was considered essential services). Only ESKOM personnel or ESKOM
approved service provider should (re)/connect electricity and it is illegal for anyone
else to make these connections✓. PPE should report the matter and ESKOM must
make appropriate assessment of what might be owed. Electricity costs resulting from 1 mark for
this must be considered and accounted for appropriately for the following years✓. ethical concern
• The company seems to be in contravention of the Basic Conditions of Employment 1 mark for
Act, as it currently pays its labourers R18 per hour, while the minimum wage is consequences
R20.76✓. This may lead to fines and penalties imposed by the Government, and 1 mark for
possible labour unrest and strikes✓. PPE should consider adjusting and backdating appropriate
action
the wages or restructure the benefit package to consolidate all the benefits (e.g.
bonus portions and cafeteria benefits)✓.
• PPE seems to have continued its operations even during the hard lockdown (level
5)✓ and this might have been against the law at that time while exposing its
workforce to COVID-19 (unless considered essential services)✓.
MAX: 5 marks

(f) Prepare a segmented income statement (by product) of Aloetiser

(Pty) Ltd, showing the profit for the year ended 31 March 2021 for [12]
each product, as well as the total for the company.
PRODUCT INCOME STATEMENT

Details – Rands Sanitiser Liquid Total
Sales(A)(2,1mxR3,46)(2,97mxR6,50) ✓✓ 7 266 000 19 305 000 26 571 000
Less: Cost of sales (4 520 997) (10 638 422) (15 159 419)
Opening inventory ✓✓r/w 1 494 491 1 873 109 3 367 600
Plus: joint manufacturing costs✓✓✓✓ 4 579 102 8 305 258 12 884 360
Plus:specific manufacturing costs ✓✓r/w 923 187 3 648 000 4 571 187
Less: Closing inventory ✓✓✓ 2 475 783 3 187 945 5 663 728
Less: Variable selling costs ✓© - (1 485 000) (1 485 000)
Contribution (B) 2 745 003 8 666 578 11 411 581
Less: Fixed manufacturing costs ✓rw (3 261 955)
Less: Fixed selling costs ✓rw (545 364) - (545 364)
Net profit before taxation 2 199 639 8 666 578 7 604 262
Contribution margin ratio (B ÷ A) for part f 0,38 0,45 0,43
 Given
13 682 817 – 875 000 + 76 543 = 12 884 360✓r/w:
Sanitiser: 12 884 360 x 35,54%✓ = R4 579 102;
Liquid: 12 884 360 x 64,46% = R8 305 258
 R1,20 x 3,04m = R3 648 000
 Net realisable value
NET REALISABLE VALUE
Details – Rands Sanitiser Liquid Total
Sales (2,75m x R3,46); (3,04m x R6,50) 9 515 000 19 760 000 29 275 000
Less: further processing costs ©✓ (923 187) (3 648 000)  (4 571 187)
Less: Selling costs ✓ rw (545 364) (1 520 000) (2 065 364)
Net realisable value 8 046 449 14 592 000 ✓ 22 638 449
Allocation 35,54% 64,46% 100%
 R0,50 x 3,04m = R1 520 000✓
 Sanitiser: (1 494 491 + 4 579 102 + 923 187) ÷ (500K + 2 750K) x 1 150K
R2 475 783
Liquid: (1 873 109 + 8 305 258 + 3 648 000) ÷ (820K + 3 040K) x 890K
R3 187 945
CLOSING FINISHED GOODS INVENTORY
Details – quantity in litres Sanitiser Liquid Total
Units at the beginning of the year  500 000 820 000 1 320 000
Units produced during the year  2 750 000 3 040 000✓ 5 790 000
Less: Sold units (2 100 000) (2 970 000) (5 070 000)
Units remaining at end of the year  1 150 000 890 000✓© 2 040 000
 Sanitiser: 2 200 000 x 1,25l = 2 750 000✓
MAX: 12 marks

(g) Based on the investment criteria and other factors Phalaborwa

Pharmaceutics Enterprise needs to take into consideration, advise if the [7]
Phalaborwa Pharmaceutics Enterprise should buy Aloetiser (Pty) Ltd.
The contribution margin ratio for aloe vera liquid is 0,45 slightly above the required 0,40 as
the investment criterion and the contribution margin ratio for hand sanitiser is 0,38 (not
meeting the required criterion). Based on these two ratios only, PPE should consider not
buying Aloetiser (Pty) Ltd✓©. These below additional factors may also be considered before
reaching the decision:
• Possible synergistic benefits✓, considering that both companies are in the business
of manufacturing safety and health products currently in high demand due to COVID-
19.
• PPE uses the absorption costing method✓, and the importance of using the
contribution margin ratio as means of evaluating an investment should be carefully
evaluated.
• Alignment and running of operations especially between different provinces✓ (i.e.
Limpopo and Eastern Cape) should be considered carefully, including different
accounting and reporting systems used and PPE’s time in the market.
• The claims made by the owners that the business generated R22m net profit✓ in
the recent financial year raise concerns about the accuracy of the accounting
information provided, as well as the integrity of the owners (sales were only R26m
before taking into account obvious operating costs).
• Claims that the business will grow by 20% in 2022 should be verified✓, especially
by reviewing the performance of the first quarter of 2022.
• Increased global use of hygiene and healthy products may lead to profit growth for
the company✓.
• Owners might be desperate to sell✓, and this can present an opportunity for PPE to
offer a lower purchase price. At the same, this can be a concern if PPE may need
proper handover and post-acquisition support from the owners of Aloetiser.
• It may be difficult to predict how well Aloetiser will do post COVID-19✓ or once the
vaccine has been rolled out successfully. Considerations must also be made
regarding new companies entering this low-barriers-to-entry market.
• There seems to be a small market to sell the by-product✓ (residual aloe vera
leaves), considering that currently there is only one buyer.
• Hand sanitisers at hand cost about R2,99 (R1 494 491 ÷ 500 000) and this might
point to possibly decreasing selling price due to increased supply of these goods✓
in the market.
• Details assessments must be conducted to determine the profitability of further
processing the products✓ instead of selling them off before incurring additional
processing costs.
• Inventory levels seem to be increasing✓, pointing to possible difficulties in moving
the stock.
• Inclination of inventory valuation errors due to multiple valuation methods and
different costing systems✓.
• Consideration of future enforceability of existing contracts✓. For example, the
marketing and selling contract of hand sanitisers is currently negotiated at fixed cost
of R545 364.
MAX: 7 marks

QUESTION 2
(a) Determine the capital structure of Brat Lows Furniture Group at 31

December 2020, based on both the book values and the market values.
[18]
Comment on the movements in capital structure what the Group can do to
move closer to its target capital structure.
MAX: 15 marks on calculations
CAPITAL STRUCTURE BASED ON BOOK VALUES:
2020 2019
Capital structure
(Gearing ratio): 3 230✓𝐫𝐰 3 822✓
3 230 + 2 563✓𝐫𝐰 3 822 + 1 747
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝐵𝑒𝑎𝑟𝑖𝑛𝑔 𝐷𝑒𝑏𝑡 (𝐼𝐵𝐷)
𝐼𝐵𝐷 + 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
= 55,76% = 68,63%
Or expressed as 56%: 44% Or expressed as 69%: 31%
Interest-bearing debt
2020: R1 240m [Da Bank loan] + R400m [Cressida loan] + (R70 x 15m) [pref. shares] +
(R45 x 12m) [debentures] = R3 230m.
2019: R4 105m – R283m = R3 822m.
CAPITAL STRUCTURE BASED ON MARKET VALUES:

2020 2019
Capital structure
(Gearing ratio): 1 228 + 396 + 990 + 551 3 972
✓© ✓©
3 165 + 4 104 3 972 + 4 466
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝐵𝑒𝑎𝑟𝑖𝑛𝑔 𝐷𝑒𝑏𝑡 (𝐼𝐵𝐷)
𝐼𝐵𝐷 + 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
= 43,54% = 47,07%
Or expressed as 44%: 56% Or expressed as 47%: 53%
MARKET VALUES:
INSTRUMENT MARKET VALUE (FINANCIAL CALC.) COST OF LOAN
PV of interest + capital
FV - 1 240 million
PMT - 51,336 million (1 240 million x 7%-1,25%)x0,72 ✓ 𝐾𝑑1 = 4,32%
N 6 (10 years – 4 years: Dec 2020- Jan 2017) ✓
I 4,32% (7%-1% x 0,72)
Da Bank Comp PV 1 228 million (OR 1 228 420 464)

INSTRUMENT MARKET VALUE (FINANCIAL CALC.) COST OF LOAN
CF0 0
CF1 – 2021 0✓
CF2 – 2022 - 37,44 million (26 million x 0,72 x 2 years)✓ 𝐾𝑑2 = 4,932%
CF3 – 2023 - 418,72 million (400m + 18,72m✓)
I/Y 4,932% (6,85% x 0,72)
Cressida Finance Comp NPV 396 million (OR 396 412 945)
INSTRUMENT MARKET VALUE COST OF PREF.

Preference shares BV: 15 mil x R70 = 1 050 million ✓
Dividend: 1 050 x 7% x 0,8 = 58,8 million Dividend

Preference shares 𝐾𝑝 =
Value of pref
Dividend
𝑀𝑉𝑝𝑟𝑒𝑓. =
Cost of pref.
62,4m✓
𝐾𝑝 =
58,8m 1 050m
𝐾𝑑2 = ✓
5,94%
= 990 million (989 898 990) 𝐾𝑝 = 5,94%
INSTRUMENT MARKET VALUE (FINANCIAL CALC.) COST OF DEBEN
𝐾𝑑3 = 4,50%
CF0 0
CF1 - 25,92 million (36 million x 0,72) ✓
Debentures CF2 - 25,92 million
CF3 - 25,92 million Mark for
CF4 - 565,92 million ([12 mil x R45]✓+ 25,92m) R540m
CF5✓ - 6,48 million (12 mil x R0,75 x 0,72)
I/Y 4,50 (6,25% x 0,72)
Comp NPV 551 million (551 011 674)
INSTRUMENT MARKET VALUE COST OF EQUITY
Ordinary shares MVe: 224,9million × R18,25✓ = R4 104 mil
COMMENTS: MAX: 3 marks

Gearing decreased from 69% to 56% based on book values and from 47% to 43% based
on market values. This may be attributed to the following:
o Fresh issue of ordinary shares (to the tune of R1bn – based on book values) ✓
o Possible repayment of long-term loans (decrease in closing values from R3 822m
to R3 230m) ✓
o The decrease in market value of equity (due to decline in share price) did not have
a significant impact on increasing the gearing, as this was offset by decrease in
long-term loans. ✓
Using market values, the Group is slowly approaching the desired/target capital structure
of 40%:60%.

(b) If Brat Lows Furniture Group has not yet reached its target capital structure,
provide practical ways in which the Group can improve its gearing and [5]
move towards its target capital structure.
• The Group can formulate a turnaround strategy✓ to return to profitability, and then
increase retained income, effectively increasing the equity of the business (cost-
cutting, revenue increase, market increase, aggressive marketing campaign, etc.).
• The Group can sell unprofitable stores, non-core assets✓ (of the R2,150bn base)
and/or reduce levels of inventory (by not restocking) and use any excess cash on
hand and proceeds from the sale of the assets above to repay existing debt.
• Brat Lows Furniture Group can consider fresh issue of shares to the public✓.
• The Group can approach the existing providers of long-term capital (preference
shares, debentures and loans) for possible restructuring of the existing facilities✓
(on interest rates, conversion to ordinary shares, capital reduction, debt
consolidation).
• Brat Lows Furniture Group can early repay the existing facilities✓, and take on new
facilities, especially where the market interest rates are lower than what the Group
is currently being charged (market rate for debentures is 6,25% but currently paying
6,67%).
• Once the Group resumes dividend payment, these could be done in the form of a
scrip dividend✓, therefore using the saved cash to repay debt, while increasing the
share capital.
• The Group can improve its capital structure by funding more of its current assets by
current liabilities✓ (increasing trade payables which are likely to be interest-free, and
the Group currently has good relations with its suppliers). The resulting excess cash
can then be used to reduce long-term debts. The Group can also consider delaying
payments to its suppliers (increase trade payable days) within reasonable
timeframes.
• Increase the proportion of cash sales✓ and subsequently utilise the resulting cash
proceeds for immediate/bullet debt reduction.
• The Group can also utilise cash on hand to reduce its debt✓.
MAX: 5 marks

(c) Discuss factors you would have considered before taking part in the
Group’s issue of additional ordinary shares during the year, if you were one [8]
of the Group’s shareholders.
▪ How does this proposed issue affect my percentage holding in Brat Lows Furniture
Group? Am I likely to lose control or significant influence✓ if I do not exercise the
option to buy more shares?
▪ Do I have the required funds (availability) ✓ to further invest in the business, and
how will this additional investment affect the diversification of my investment
portfolio?
▪ Do I have the appetite for additional risk in the equity market? ✓ What are my other
investment alternatives and how much return do they offer? How have the other
comparable companies in this sector fared?
▪ What are the prospects of the entire industry and is it the industry one would like to
invest in?
▪ The shares have been discounted to R20 – how has the share performed✓ in the
past and am I likely to make substantial profit at the additional purchase of the
shares?
▪ How confident am I in the business and the managers that they will be able to turn
the business around? ✓ Am I likely to see an increase in the value of the shares?
▪ The Group has recently suspended its dividend – is this likely to continue?✓ How
has the Group enforced its dividend policy in the past?
▪ What has been my historical return✓ on this share (based on the dividend yield as
well as the share price growth)? Have I also lost patience and confidence that things
will get better?
▪ How has the business been impacted by COVID-19✓ and is it likely to survive in the
post-COVID era? Are there any new markets the business can go into?
▪ Is the business likely to continue as a going concern? What are the company’s future
growth prospects?
▪ Is this the best time to buy the share✓ – probably at lowest levels?
▪ Have I considered the tax effect✓ of buying at R20, and tax on dividends to be
declared in the future? Am I a speculative investor or a long-term investor, and what
is the tax implication on each of the options?
▪ Are there any measures I can put in place to limit or mitigate✓ against the risk
associated with this investment (e.g. use of derivatives)?
MAX: 8 marks

(d) Calculate the cash conversion cycle of Brat Lows Furniture Group at 31
December 2020 and based on the information and nature of industry, [9]
advise on some practical ways to improve the cash conversion cycle.
CASH CONVERSION CYCLE:
2020
Trade receivable days: DAYS
2 956
𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
x 366
(2 882✓©+2 068✓)
x 366
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
218
2 956
x 366
4 950
Credit sales (x): x + 0,25x = 3602

x = R2 882m✓rw
2020
Trade payable days: DAYS
874
𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
x 366
1 401
x 366
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
228✓r/w
2020
Inventory days: DAYS
844
x 366
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 1 666
x 366
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
185✓r/w
DAYS
CASH CONVERSION CYCLE
(218+185-228) ✓© 175
ADVICE: MAX: 3 marks (one mark per each class of working capital)
When improving the cash conversion cycle, a company attempts to collect from its debtors
sooner; convert its inventory sooner; and delay payment to its creditors. By so doing a
company reduces the number of business days (operating or cash conversion cycle).
Trade receivable days: ✓

Based on the calculations above, the Group collects from its debtors over a period of 218
days on average (just over 7 months). The Group can then consider providing incentives to
debtors who pay within, say 6 months (e.g. interest-free for the first 6 months). The Group
can also consider putting stringent policies on granting of credit, especially during the
recession. This will not only improve the Group’s liquidity but there is likely to be a decrease
in bad debt, debt management costs and impairment expenses. Furthermore, the company
could reduce the cash sales: credit sales proportion by increasing the cash sales
component.
Trade payable days: ✓

The terms are already quite generous, and to ensure continued good relations with suppliers
the Group should not consider delaying payments to suppliers (whose period is already
longer than debtors’ days). However, the Group can consider negotiating the prices with the
suppliers, especially where payment is made sooner.
Inventory days: ✓
The furniture and electric appliances remain on the floor for about six months. The Group
runs the risk of stock being “outdated”, especially electric appliances. The entry of small
boutiques with more trendy furniture will also lead to difficulties in selling the furniture. The
Group should consider reducing the amount of stock that is kept on hand (this will also lead
to decrease in holding costs). The Group could also take orders from customers before the
goods are sourced from suppliers, which based on good relations they maintain, are likely
to deliver within reasonable timeframe.
MAX: 9 marks
(e) Advise the management of Brat Lows Furniture Group on how to effectively
[5]
structure the business to return to profitability.
The Group can consider the following strategies: MAX: 5 marks
o Establish an online sales platform✓ to reach a broader market (locally and
internationally), especially during the lockdown.
o Develop and execute social media marketing campaigns✓ and advertise via social
media “influencers”.
o Shut down unprofitable stores✓ and sell assets from these operations or move to
profitable stores.
o Reduce the percentage of credit sales✓ as a percentage of total sales and put
stringent controls in place to ensure creditworthiness of the potential customers.
o Add free after-sales services✓ (free delivery, assembly or minor items).
o Buy struggling and desperate furniture retailers and/small boutiques✓ which are
likely to bring more synergies to the business. Explore other markets to expand to.
o Renegotiate✓ prices with suppliers (consider free delivery) and lower interest rates
with long-term capital providers.
o Review product profitability✓ and adjust to ensure focus is on more profitable
products. Electrical appliances are likely to be sourced outside the country – and the
weakening rand may lead to lower profit margins or less sales.
o Keep inventory levels✓ low and buy items after they have been ordered by the
customers. Consider effective leadership to be put in place.
o Partner with property development companies✓ to build and sell fully furnished
properties.
o Consider supplying school furniture✓ via engagement with the Department of
Education.

MAC3702
MAY/JUNE 2020
UNIVERSITY EXAMINATIONS
May/June 2020
MAC3702
APPLICATION OF FINANCIAL MANAGEMENT TECHNIQUES
100 marks
3 hours
30 minutes additional time for uploading
THIS PAPER CONSISTS OF EIGHT (8) PAGES.
INSTRUCTIONS:
Please remember to complete the Honesty Declaration.
Follow these steps to submit your take-home answer file.

1. Access myUnisa at https://my.unisa.ac.za/portal and login using your student number and
myUnisa password.
2. Click on the “myAdmin” tab in the top navigation.
3. In the “Assessments” submenu, click on the “Assessment Info” tool in the drop-down
list.
 Locate the section for UNISA summative assessments at the bottom of the list.
 Find the corresponding portfolio number for your module.
 Click on the Submit link in the Action column and follow the steps described below.
Load the answer file from your PC to myUnisa:
 Click on the Browse button next to File Name.
 In the Choose File dialog box, select the file you want to upload, and then click OK.
 Select the correct file format from the File Format drop-down list. Only PDF formatted
files are allowed to be uploaded.
 Click on the Continue button. If you do not click Continue, no submission action will
take place.
 The link for upload will close at exactly 18:30pm.
PLEASE NOTE:
1. The paper consists of ONE (1) question.

2. All sub section parts (a) to (g) must be answered and clearly indicated.
3. All calculations must be shown.
4. PROPOSED TIME-TABLE: (Avoid deviating from this as far as possible.)
Question Subject Marks Time

number (minutes)
Capital budgeting, Weighted average cost of capital, Working
1 100 180
Capital Management, Ratios and Discussion.
100 180
Page 1 of 8 CONFIDENTIAL
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MAC3702
MAY/JUNE 2020
Question 1 (100 marks; 3 hours)
Eddy Fashion Holdings (“EFH”) is South Africa’s oldest and biggest retailer by assets and is
listed on the Johannesburg Stock Exchange. In the recent years the company has struggled
to deliver impressive results as it faces serious competition from both local and international
retailers. The company’s share price was trading at 4 598 cents on 01 October 2018, at the
start of the financial year, but had lost about 52% of its value by the end of September 2019
as it recorded a net loss of R109 million. With no dividend declared at the end of the year, this
loss brought the company’s net asset value down to R1 269 billion. EFH’s significant
shareholders include the Public Investment Corporation (22%), Rembrandt Group (19%) and
African Rainbow Capital (15%). Only 50% of the company’s authorised shares remains
unissued.
The company has approached the Industrial Development Company (IDC) for a possible
capital injection into the business of up to R8 850 million in order to pay off its interest-bearing
debt, increase working capital levels, and embark on a new expansion programme. EFH
requires R600 million for its ARISE & DREAM project (see Part A below); R8 billion to repay
its long-term debts (see Part B); and R250 million (see Part C) to manage liquidity for the next
few months. IDC has proposed that EFH issues new EFH ordinary shares in return for the
capital injection into EFH business.
Part A – ARISE & DREAM Project
EFH will be embarking on a new comprehensive business model that is aimed not only at
revenue generation, but also at the empowerment of upcoming and aspiring young designers.
The EFH procurement team has already identified four of South Africa’s top young designers
to be part of the new clothing range called “ARISE & DREAM”. The designers will
conceptualise and design the clothes which will then be sent to EFH’s trusted local
manufacturers to manufacture the required quantities for all its 350 participating stores. Once
major alterations and renovations have been completed at these stores, ARISE & DREAM
clothing range will be sold for a period of five years (ending December 2025) before the range
becomes out of fashion. It is estimated that afterwards the company will be able to find
substitute products to sell utilising space previously occupied by ARISE & DREAM clothing
range. Each store is expected to generate an average trading profit of R65 000 per annum on
the extra space going forward (after taking into account future wear and tear allowances). This
trading profit will increase at 4,80% per annum.
The final four top young designers, with their designs showcased below, are: Nkhensani Nkosi,
Amanda Laird, Mzukisi Mbane and Jacques van der Watt.
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MAC3702
MAY/JUNE 2020
TOP 4 YOUNG DESIGNERS:
Style For All, by Nkhensani Nkosi Cherry, by Amanda Laird
Imprint, by Mzukisi Mbane Lace and frills, by Jacques van der Watt
1. Capital expenditure
The first two years (2020 & 2021) will be for the construction phase, however, ARISE &
DREAM sections at all participating stores will be operational at the end of the first year.
Full capacity will only be reached at the end of 2023. At the start of the project EFH will
spend R245 million on alterations and renovations and another R245 million will only be
spent a year later (these qualify for 5% wear and tear allowance). The balance of the
project amount will be spent between store fittings and working capital (see note 3 below).
Working capital will be equivalent to 50% of the store fittings costs. Store fittings will also
be purchased at the beginning of the project and are subject to a capital allowance of 20%.
Wear and tear as well as capital allowance are only deductible once the stores are opened
and operational (pro rata applies).
2. Working capital
The working capital will only be required once the ARISE & DREAM sections at all
participating stores are operational. 60% of the total working capital requirement will be
provided for in the first year of opening the stores, with the balance being provided in the
following year. Only 90 cents in a Rand of the invested working capital will be recovered
at the end of the project.
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MAC3702
MAY/JUNE 2020
3. Sales
The young designers have signed a five-year agreement to design the clothing range to
be sold at the 350 participating stores. The range entails men’s, women’s, kids’, footwear
and accessories for every occasion. The expected number of units to be sold by each
designer per annum are given below, with the starting average price per item. The ARISE
& DREAM clothing line is priced at a mark-up of 50% on cost (manufacturing).
Manufacturing costs include designers’ fees paid to the four young designers.
Number of units expected to be sold and unit price:

Expected annual % of capacity (Quantity)
Number of
Design Average price
units per 2021 2022 2023 2024 2025
per unit 2
store1
Cherry 2 000 R200
Lace and frills 2 000 R150
55% 90% 100% 100% 100%
Imprint 2 000 R150
Style For All 2 000 R100
1
This is at full capacity per store per year. There is a demand, spread evenly throughout the year for all the
products manufactured each year. All four clothing labels will be available at all participating stores.
2
This average price per unit is the price at the start of the construction phase. The selling price will increase
by 6% per annum.
4. Operating/trading costs
Expected operating costs will amount to a total of R30 million per annum for all the
participating stores (excluding marketing costs). These operating costs will be incurred at
the same time the revenue is realised. The company will also be embarking on a 3D
marketing campaign for its new clothing range. The 3D marketing will display the new
clothing range using a 3D clothing visualisation technology at various shopping centres
where the participating stores are located. Payment for related marketing costs, made in
advance, will be R2 million in the first year of launching the clothing range but will reduce
by 20% (based on the initial marketing cost) in each following year. Excluded from the
amounts above is an annual depreciation charge of 10% on buildings and 25% on
equipment and fittings. Depreciation is only accounted for once the asset has been brought
into use.
5. Salaries
The company will have to contract a digital marketing manager and Sethu Ndamase with
eight years’ experience in the advertising industry has already been identified. Sethu
Ndamase will likely start at the beginning of 2020 in order to familiarise herself with the
business. The job requires her to manage, develop and expand the marketing department
with current marketing technology models and tools. She will be responsible for:
[TURN OVER]

MAC3702
MAY/JUNE 2020
 Creating efficient, effective advertising strategies in digital spaces to promote the

new clothing range.
 Focus on increasing sales and brand loyalty by holding events or campaigns to
increase awareness and surveys.
No interview has been conducted with her yet but her expected salary package for the
2020 financial year will be R982 377 with an expected increase of 8% per annum and
included in this amount are the following:
 Annual contribution to the retirement fund of R100 000, and

 Once-off reallocation cost of R38 000 and a sign-on bonus of R100 000 (these
amounts will be paid at the start of the contract).
Sethu Ndamase was referred to EFH by one of the reputable recruitment agencies, and
the agency will be paid R120 000 for their work in identifying the suitable candidates for
this job. This payment will be effected at the beginning of 2020.
Part B – REPAYMENT OF DEBT
EFH has the following interest- and dividend-bearing facilities at 30 September 2019:
Preference share capital: The three million preference shares were issued three years ago
at a nominal cost of R605 per share, which bear a fixed dividend yield of prime+20bps. Similar
shares are estimated to be trading at R581 each. The redemption date of all these shares is
29 September 2025.
Debentures: 10-year term debentures for R3 144 million were also issued around the same
time as the preference shares above. The finance costs (net of tax) on these debentures
amount to R249 million per annum. The premium and the annual administration costs are
waived, but there is a once-off administration fee of R15 million payable on 30 September
2025. Debentures structured in this manner incur interest at prime lending rate.
Long-term loan: A loan of R871,5 million was obtained on 2 October 2018 and its capital is
repaid in three equal annual instalments. The fixed 11% interest is also paid on the last day
of each financial year. Similar loans bear an interest rate of about 9,75%.
Subordinated debt: EFH also obtained an unsecured subordinated debt from African
Rainbow Capital for R2 010 million on 10 October 2015 at an equivalent interest rate of
prime+2. Similar subordinated debt facilities are estimated to yield an interest at prime lending
rate.
Short-term loan: The loan for R450 million was obtained from CreditSis Bank at prime lending
rate and is repayable on 28 February 2020. The loan was taken out to settle unexpected legal
costs after the company was embroiled in a price-fixing scandal. The company was forced to
take out this loan due to low cash reserves at the time. The cash position of the company has
since improved as EFH closed the year with more than R300 million of cash and cash
equivalents and a zero balance on its bank overdraft facility.
The interest expense on this loan for the year ending 30 September 2019 was R26 million.
Similar loans and overdraft facilities are generally priced around prime+1.
[TURN OVER]

MAC3702
MAY/JUNE 2020
Part C – WORKING CAPITAL MANAGEMENT
EFH’s debt levels have been on the rise in recent years due to a number of internal and
external factors which have unfolded over the years. One of the major internal factors cited is
poor liquidity management processes. The company has often flout the budgeting/forecasting
processes and as a result finds itself having to use expensive debt to fund any deficits in its
working capital. However, since the IDC bailout application the management team has
implemented more stringent controls around the working capital of the company.
The statement of financial position on 30 September 2019 had net current assets of
approximately R2 billion and is made up of the following:
* Net current assets Rm

Inventory (6 132 000 items of clothing) 1 533
Trade and other receivables 3 752
Income tax liabilities 299
Cash and cash equivalents 341
Other current assets 102
* The net current assets exclude the interest-bearing liabilities given in Part B above.
Cash sales average 25% of total sales and each month’s credit sales are invoiced on the last
day of the month. Credit sales are also collected as follows:
o 60% within 7 days after the invoice date;
o 28% by the end of the month after sales.
o 9% by the end of the second month after sales; and
o 3% is uncollectible.
Half of the monthly purchases the company makes, is paid for in the month of purchase and
the remainder in the following month. The number of items of clothing (units) in each month’s
closing inventory equals 120% of the next month’s units of sales. EFH maintains an average
product mark-up of 33% on selling price. The company also expects in the foreseeable future
to maintain the existing average cost price per unit (as indicated in net current assets above).
The actual and budgeted sales of EFH are given below:
Month Units
September 2019 (Actual) 5 253 000
* October 2019 (Actual) 5 110 000
November 2019 (Budgeted) 5 876 500
December 2019 (Budgeted) 6 054 000
January 2020 (Budgeted) 5 270 000
February 2020 (Budgeted) 5 538 600
* Actual units purchased during October 2019 totalled 6 029 800.
[TURN OVER]

MAC3702
MAY/JUNE 2020
Part D – ADDITIONAL INFORMATION
 EFH undertakes projects that have an internal rate of return of at least 20%.
 As at 30 September 2019, EFH had 840 million authorised ordinary shares.
 The South African corporate income tax is rate 28%.
 Prime lending rate is 10,25% and the cost of equity is 15,2%.
[TURN OVER]

MAC3702
MAY/JUNE 2020
REQUIRED
a) By calculating the internal rate of return, determine whether EFH should undertake the
ARISE & DREAM project. [You can scale your workings down by Rm]
(27)
b) Using market values at 30 September 2019, calculate the weighted average cost of
capital (WACC).
(18)
c) Draw up a purchases (production) budget in units for EFH for the months of November,
December 2019 and January 2020.
(10)
d) Calculate budgeted cash receipts and payments for the months of November, December
2019 and January 2020.
[Focus only on the sales and costs associated with the purchase of inventory]
(15)
e) Calculate the following ratios for EFH for the year ended 30 September 2019; and provide
practical ways the ratios can be improved (use market values where possible):
 Interest-bearing debt equity ratio (net)
 Current ratio
 Return on equity
 Price/book ratio
 Cash interest cover
(Calculations – 5 marks; comments – 12 marks)
(17)
f) Determine the number of shares to be issued by EFH to the Industrial Development

Company if the parties agree to the terms of the bailout (also calculate the new
shareholding by the major shareholders after the deal).
[Assume for the purpose of this deal each EFH share is priced at premium of 10% above
its current share price]
(8)
g) Discuss the factors that should have been considered before deciding on obtaining the
funds from the Industrial Development Company. No calculations are required.
(5)
TOTAL: 100 MARKS
UNISA 2020
[TURN OVER]

MAC3702 May /June 2020
Internal rate of return for EFH
2020 2021 2022 2023 2025 2025
Alterations and (245 000) (245 000)

renovations
Fitting cost (73 333)
Working capital (22 000) (7 333) 33 000
Sales 231 000 400 680 471 912 500 266.7 530 240.3
Cost of sales (154 000) (267 120) (314 608) (333 484.4) (353 493.5)
Operating Costs (30 000) (30 000) (30 000) (30 000) (30 000)
Marketing costs (2 000) (1 600) (1 280) (1 024) (819.2) 0
Recruitment agency (120)
fees
Marketing manager (982.48) (911.9) (984.8) (1 063.6) (1 148.8) (1 240.7)
Wear and Tear (24 500) (24 500) (24 500) (24 500) (24 500)
Wear and Tear - Fittings (14 667) (14 667) (14 667) (14 667) (14 667)
Taxable cash (3102.48) 5321.1 62128.2 85049.4 95647.7 106339.1
Tax at 28% 868.70 (1489.91) (17395.9) (23813.8) (26781.35) (29774.95)
Net cashflows (320566.8) (224 002) 76 566.3 100 402.2 108 033.5 148 731.2
IRR using sharp 6.51%

calculator
EFH should not undertake the project because the IRR is 6.5% and is below the 20% which is below the
recommended percentage.
Calculations
1. Store fittings and working capital fund = 600 000 000-(245000000x2)

= R110 000 000
• Fitting cost = 2/3xR110 000 000

= R73 333 333
• Working Capital = 1/3xR110 000 000

= R36 666 667
• Working capital in year in year one = R36 666 667 X 60%

= R22 000 000
• Working capital in the year two = R36 666 667 X 40%

= 7 333 333
• Working capital recovered at the end of the project = R36 666 667 X 0.90
= R33 000 000
2. Sales
2021 2022 2023 2024 2025
660 000 X 350 1 144 800 X350 1 348 320 X 350
231 000 000 400 680 000 471 912 000 500 226.7 530 240.3
3. Cost of sales
2021 2022 2023 2024 2025

231 000 000 X 400 680 000 X 471 912 000 X 500 226 700 X 530 240 300 X
100/150 100/150 100/150 100/150 100/150
=154 000 000 =267 120 000 =314 608 000 =333 484 4667 =353 493 533
(b)
Calculating the WACC
Instruments Market value Weight Costs WACC

Ordinary shares 926 856 800 000 0.994 15.2 15.11
Preference shares 1 743 000 000 0.00186 8.39 0.0157
Debentures 3 244 054 775 0.0035 7.38 0.0256
Long term loan 575 646 981.5 0.00617 7.02 0.0433
932 419 400 000 15.20
Calculations
1. Ordinary shares
Market value of the shares = (840 000 000 x 50%) x (4598 x 0.48)
= R 926 856 800 000

Ke = 15.2%
2. Preference shares
Market value = 3 000 000 x 581
= 1 743 000 000
Cost of preference shares

PV = -581
FV = 605
N=6
PMT = 45.52 (605 X 0.1045) X 0.72
I=?
Therefore interest = 8.39%
3. Debentures
Cost of debentures = 10.25(1 - 0.28)
= 7.38%
Market value
FV = 3 144
I = 7.38
PMT = 249
N=7
PV = ?
PV = 3234.27
Admin fees.
N =6
FV = 15 000 000
I = 7.38
PV = ?
Present value = R9 784 775.40
Therefore, the present value of the debenture = (9 784 775.4 + 3 234 270 000)
=3 244 054 775
4. Long term debt

Cost of debt =9.75(1-0.28)

= 7.02%
2019 2020 2021
290 500 000 290 500 000 290 500 000
69 022 800 39 382 200 20 393 100
359 522 800 329 882 200 310 893 100
0 0.9298 0.865
PV 306 724 450 268 922 531.5
Therefore PV = 575 646 981.5
(C). Production budget
Details September October November December January February

Opening stock (613200) (7051800) (7264800) (634000) (664320)
Sales 5253000 5170000 5876500 6054000 5270000 5538600
Closing stock 6132000 7051800 7264800 6324000 66646320
Production/Purchases 6089500 5113200 5592320
(D) Cash Budget
Details October November December January

Receipts:
Cash sales 367281250 378375000 329375000
Credit sales at 60% 574875000 661106250 681075000
Credit sales at 28% 268275000 308546250 317835000
Credit sales at 9% 88644375 86231250 99165938
Cash payments:
Cost of sales (1) 552302631 568984962 520545113
(2) 517857143 552302631 568984962
Bed debts 29548125 287437750 33055313

(e). Ratios
Interest bearing debt equity ratio can be improved
• Reduce debt through the utilization of the of internal finances.

• Issuing of more ordinary shares.
Current ratio can be improved through
• Reducing the issuing discount to encourage customer to pay in time.

• Paying outstanding liabilities in time
Return on equity can be improved through
• Borrow short term and long-term finances to increase expansion.

• Reduce labor expenses
Price/Book value can be improved by.
• Issuing of high dividends. This will send the message that the company is optimistic of
the future profits generations.
Cash interest cover can be improved by
• Reducing the interest-bearing debt

• Keep enough cash through a properly manages cash conversion cycle.
(f) Number of shares to be issued.
4598 X 0.48 =2207.04
Shares will be issue at 10% premium thus the price will be 2207.04 + 10% =2427.744
The value of funds required = R 8 850 000 000
Number of shares will be = 8 850 000 000/22.07
= 400 996 828 shares.


Application of Financial Management

Techniques
MAC3702
FASSET MOCK EXAMINATION
Date: Second Semester
Department of Management Accounting
PLEASE NOTE:
1. This paper consists of THREE (3) questions.

2. All questions must be answered.
3. All answers must be handwritten.
4. Basic workings, where applicable, must be shown. Use of pencil is not permitted.
5. EACH QUESTION MUST COMMENCE ON A SEPARATE PAGE.
PROPOSED TIMETABLE
Question Topic Marks Minutes

1 Capital structure, M&A and valuations 50 90
2 Capital budgeting 20 36
3 Working capital 30 54
100 180


Tiles & Styles of Africa (“Tiles & Styles”) is South Africa’s leading retailer of tiles, bathroom fixtures and
related products. The company provides superior ceramic tile flooring and walling at competitive prices to
a growing market. Listed on the JSE three years ago, today Tiles & Styles has a network of 162 retail
stores in the African continent.
As the company continues to enjoy strong brand affinity based on its reputation for a high quality year-
round value offering, the market capitalisation of Tiles & Styles at the end of its 2017 financial year was
R9,45 billion (market value of equity). This was despite constrained discretionary disposable income of its
customers and the Rand plunging to its lowest levels in more than 15 years against major currencies.
The Competition Tribunal has just approved the company’s offer to acquire 51% of Tile Ses’la (Pty) Ltd
(“Tile Ses’la”), one of its suppliers in an effort to ensure that the company continues to attain its growth
targets. Tiles & Styles has offered R5 billion in cash to the existing shareholders of Tile Ses’la. This
strategic acquisition has been well received by the market, as it will likely lead to cost reduction and other
synergistic benefits. Tiles & Styles also continues to invest substantially in information technology and e-
commerce to keep abreast of opportunities in the rapidly changing environment.
The statement of financial position of Tiles & Styles, salient information and notes are provided on the next
page, followed by the financial information relating to Tile Ses’la.

Statement of financial position of Tiles & Styles of Africa

For the year ended 31 December 2017
2017 2016
Notes Rm Rm
ASSETS
Property, plant and equipment 3 788 3 659
Goodwill 681 590
Intangible assets 334 151
Deferred tax 61 58
Other non-current assets 102 68
Total non-currents assets 4 966 4 526
Inventories 850 838

Trade and other receivables 1 049 994
Marketable securities 41 47
Cash and cash equivalents 404 64
Total current assets 2 344 1 943
TOTAL ASSETS 7 310 6 469

Stated capital 542 542
Retained income and other reserves 3 154 2 645
Total equity 1 3 696 3 187
LIABILITIES
Medium and long-term borrowings 1 1 912 2 077
Net retirement benefits liability 240 212
Provisions 44 40
Total non-current liabilities 2 196 2 329
Short-term borrowings 2 651 250

Current tax liability 167 165
Total current liabilities 1 418 953
TOTAL EQUITY AND LIABILITIES 7 310 6 469
SALIENT INFORMATION 2017 2016

Prime rate (%) 10,3 10,5
Corporate taxation rate (%) 28,0 28,0
Inflation rate (%) 4,8 6,4

NOTES
1. Tiles & Styles has a target capital structure of 30: 70 (Debt: Equity), and aims to maintain a ratio of
3:1:1 (debentures: bank loans: preference shares) on its debt composition. The ordinary dividend
(2017: R280 million) is expected to continue growing at 9% per annum in the foreseeable future.
The medium and long-term borrowings at 31 December 2017 were made up of only the following:
 R1 billion debentures were issued three years ago and are redeemable at a premium of
0,5% and the maturity date is 31 December 2021. The premium is payable on 31 December
2022; and although the premium is tax deductible there is no interest charged for the late
settlement of the premium. The debentures were issued at a fixed interest rate of 6,8%
(similar debentures are currently trading at a post-tax rate of 5,2%).
 A bank loan of R612 million was obtained on 28 December 2015 and the interest paid yearly
is fixed at R55,08 million. The going rate in the market for similar loans is 8,5% per annum.
 Preference shares were issued on 28 December 2014 and are redeemable on 28

December 2021. These preference shares carry a fixed dividend pay-out of 7% (classified
as finance costs). Preference share deals structured this way are currently trading at 75%
of the prime rate.
The providers of capital are willing to increase their facilities at prevailing market rates. The
providers of capital are also willing to reduce the existing facilities, should the company wish to do
so.
2. Interest expense on short-term borrowings is negligible. Interest rates given are before tax unless
stated otherwise.

The information below relates to Tile Ses’la (Pty) Ltd:
Statement of comprehensive income of Tile Ses’la (Pty) Ltd

2017 2016 2015
Rm Rm Rm
Revenue 3 670 3 539 3 189
Cost of sales (2 182) (2 117) (1 902)
Gross profit 1 488 1 422 1 287
Employee remuneration (184) (144) (134)
Depreciation and amortisation (113) (90) (81)
Other operating expenses (net) (128) (141) (115)
Trading profit 1 063 1 047 957
Finance income 127 119 95
Profit before taxation 1 190 1 166 1 052
Taxation (310) (316) (307)
Profit for the year 880 850 745

Statement of financial position of Tile Ses’la (Pty) Ltd

2017
Rm
ASSETS
Property, plant and equipment 1 989
Investments 732
Intangible assets 54
Total non-currents assets 2 775
Inventories 550
Trade and other receivables 327
Cash and cash equivalents 511
Total current assets 1 388
TOTAL ASSETS 4 163
Stated capital 818

Retained income 2 794
Non-distributable reserves 161
Total equity 3 773
LIABILITIES
Subordinated loan 74
Provisions 12
Total non-current liabilities 86
Short-term borrowings 26
Trade and other payables 278
Total current liabilities 304
TOTAL EQUITY AND LIABILITIES 4 163

Valuation information
1. The following items should be considered in establishing the sustainable earnings of Tile Ses’la:
 Gross profit in 2015 was down by R83 million because of protests that led to Tile Ses’la being
outlets closed for three weeks. There was no material change in other operating expenses
during that year.
 On 22 June 2017 Tile Ses’la received an out-of-court settlement of R20 million after one of its
competitors infringed the company’s trademark.
 Other operating expenses in 2016 include a R40 million insurance pay-out which was received
by Tile Ses’la in September 2016 for loss of a key member of staff.
(The above amounts are net of tax and therefore tax implication on the above transactions can
be ignored).
2. In the event that the board of directors of Tile Ses’la decides to wind up the company through
disposing of its assets, the following financial information has been established:
 The company’s land and buildings (recorded at a carrying value of R400 million) is currently
worth R4,24 billion. This is before taking into account selling and other legal expenses of 0,3%.
 The company will be able to sell some of its trademarks with a carrying value of R30 million for
R380 million.
 40% of the company’s inventory will be sold at cost, while the balance will be sold at a gross
profit margin of 20% on cost.
 All other assets will be sold at carrying value.
 The subordinated loan was obtained at the inception of the company from its shareholders at
a 0% interest rate. The agreement requires the company to pay a fee equal to 0,43% of the
current net asset value whenever it settles the loan in the event of liquidation or sale of its
assets.
 The company will settle all its other liabilities at carrying value.
3. To determine annual free cash flows yearly, the company uses the following formula below:
Free cash flows (FCF) =
Previous two years’ average net profit for the year
Add: Non-cash expenses for the previous year (if any)
Less: Non-cash income for the previous year (if any)
Additional information
The future growth in profits in the near future for Tile Ses’la will average 4% per annum. Similar companies
listed on the JSE trade at an average P/E multiple of 13,29. Analysts estimate that unlisted companies in
the same sector should allow for a risk factor of 1,5 in establishing the business value. The required rate
of return to be used in the valuation of Tile Ses’la is 14%.

REQUIRED
a) Calculate the weighted average cost of capital of Tiles & Styles at 31 December 2017.
(6)
b) Advise how the acquisition of Tile Ses’la (Pty) Limited should be financed, assuming that Tiles &
Styles is working towards the target capital structure.
(Show all calculations)
(14)
c) Advise the board of directors and shareholders of Tile Ses’la whether they should accept the offer
made by Tiles & Styles, using both the price-earnings multiple and the discounted cash flow
methods.
(Price-earnings multiple method 11 marks, free cash flow method 5 marks)
(16)
d) Use the net asset value method to check the reasonableness of the calculations performed in part
(c) above.
(7)
e) Describe different types of acquisitions, and provide an example for each. Explain the type of
acquisition of Tile Ses’la by Tiles & Styles.
(7)
[50]

Question 2 (20 marks; 36 minutes)

Mbombela Concession Company (MCC) is a railway company running the state-of-the-art rapid rail
network in Gauteng. Its flagship initiative in South Africa is the Gautrain, a world class rail connection
comprising of two links, namely a link between Tshwane and Johannesburg and a link between OR Tambo
International Airport and Sandton. The Gautrain is responsible for carrying more than 80 000 passengers
per week between 10 major stations. The service is quite popular amongst Gauteng’s workforce due to
the fast speed the trains travel at, saving commuters invaluable time while providing comfort and safety on
board. The Gautrain also provides bus services for commuters who do not work or live close to the Gautrain
stations. Commuters who choose to drive their cars to the Gautrain station can also park their cars at
Gautrain parking buildings at a reasonable fee. Non-Gautrain users are charged more than Gautrain users
for utilising either the bus services or parking facilities.
Following the success of this 80 kilometre rail network launch and its increasing demand, MCC has
embarked on a feasibility study to introduce a new rail corridor linking Roodepoort and Sandton (known as
“Jozi Connect project”). New stations will be built in Roodepoort, Fairland, Cresta and Randburg, while
minor alterations will be effected at the Sandton station. Three major components (phases) of this project
have been identified, mainly:
 Stations, rail works and trains;

 The parking service and
 The bus shuttle service
The construction and setting up all these phases is expected to be finalised at the end of 2018.
The stations, rail works and trains

The net present value calculated for this phase of the project is R128 000 (negative).
The bus shuttle service

The net present value calculated for the bus shuttle service is R3,445 million (positive).
The parking service

The net present value of this phase has not yet been determined, but the project details are as follows:
MCC is envisaging constructing parking buildings right opposite the four stations that will be built from
scratch. The construction will commence at the beginning of 2018 and will be completed just before the
Christmas period of 2018. The cost of building at the four stations (assume it is payable at end of 2018)
will be R1 billion and the working capital required at the start of the project is R65 million. It is the policy of
MCC to depreciate its parking structures over a period 80 years.
About 10 000 passengers per week are expected to utilise the parking bays at the four stations in the first
two years of operation and this number will grow by 20% in the third year of operation to reach capacity as
some Gautrain users prefer to the use the bus shuttle service.
There is an expected economic boom around the stations and demand for more parking space is
anticipated. MCC will rent out its spare capacity parking bays to nearby businesses (these are non-
Gautrain users). The demand is expected to be 5 000 parking bays per annum in the first two years of
operation and then 3 000 in each of the following three years (until 2023).
Total operating costs, including depreciation, are expected to approximate R50 million and will grow at
inflation rate of 6% p.a. The parking tariffs paid by car owners will also increase by the inflation rate. The
growth on parking tariffs and operating costs will remain at inflation rate until 2023 and thereafter, these
will grow at 3,65% p.a. (for terminal value). Gautrain users will pay a tariff of R200 on average per week
for parking, a massive discount of 57,15% on the standard parking tariff (first year of operation rate).
The effective taxation rate (this is also after taking into account tax benefit on the buildings) is 24% -
therefore ignore capital allowance on parking buildings. The WACC has been established to be 15% and
cash flows take place at the end of the year unless stated otherwise. There are 52 weeks in a year.

REQUIRED
a) Advise the management of Mbombela Concession Company whether to undertake the construction
of the parking buildings, and provide motivation for the advice given.
(Calculation 17 marks; comment 3 marks)
(20)

Question 3 (30 marks; 54 minutes)
The Fire and Brimstone Limited is a company that trades in the tyre industry. The following information is
available on 28 February 2018:
Statement of comprehensive income for the year ending 28 February 2018
2018 2017
Rand Rand
Note
Turnover 1 8 500 000 7 850 000
Cost of sales 3 850 000 3 600 000
Opening inventory 850 000 1 200 000
Purchases 2 4 200 000 3 250 000
Closing inventory (1 200 000) (850 000)
Gross profit 4 650 000 4 250 000

Operating expenses (3 200 000) (2 180 000)
Operating profit 1 450 000 2 070 000
Dividends received 500 000 420 000
Finance charges (net) (118 000) (98 000)
Impairment loss on goodwill (100 000) -
Profit before taxation 1 732 000 2 392 000
Taxation (392 960) (552 160)
Profit for the year 1 339 040 1 839 840
Attributable to
Preference shareholders 300 500 600 000
Ordinary shareholders 1 038 540 1 239 840
1 339 040 1 839 840

Statement of financial position on 28 February 2018
Note 2018 2017

Rand Rand
Assets
Non-current assets 3 120 500 3 480 500
Property, plant and equipment 1 250 000 1 550 000
Goodwill 450 000 550 000
Investments in associates 850 500 850 500
Financial assets 570 000 530 000
Current assets 2 698 000 2 150 000

Inventory 3 1 200 000 850 000
Trade receivables 1 1 048 000 980 000
Cash balances and investments 450 000 320 000
Total assets 5 818 500 5 630 500
Equity and liabilities

Equity 2 525 000 2 325 000
Ordinary share capital (800 000 ordinary shares) 1 600 000 1 600 000
Non-controlling interests 250 000 250 000
Accumulated reserves 175 000 125 000
Retained income 500 000 350 000
Non-current liabilities 2 442 000 2 558 000

Long-term loan 950 000 1 200 000
Debentures 12 000 8 000
Preference shares (250 000 preference shares) 1 000 000 1 000 000
Deferred taxation 480 000 350 000
Current liabilities 851 500 747 500

Trade payables 350 000 425 000
Short-term debt 501 500 322 500
Total equity and liabilities 5 818 500 5 630 500

Notes
1. Credit sales increased from 55% of turnover in 2017 to 65% of turnover in 2018. Credit terms
for the debtors of the company are 60 days from invoice date and for the standard industry
terms are between 45 and 60 days.
2. In 2018, 40% of the company’s purchases were made on credit in comparison to 50% in
2017. The company’s payment terms to creditors are between 45 and 60 days from invoice
date, and discount of 10% is received if payment is made before 45 days. Standard payment
terms for the industry are 60 days from invoice date.
3. The average stock turnover period for the industry is 90 days and the average business
cycle for the industry is 100 days. All raw materials are purchased on the just-in-time (JIT)
basis. The inventory in the statement of financial position consists of finished goods only.
Additional information
Sales and Accounts receivable

 The Fire and Brimstone Limited has decided to offer customers paying cash a 10%
discount. If customers buy on credit and pay within 45 days, they will receive a 5%
discount.

 Sales increased during the last year, as the company signed a contract with a major car
manufacturer to supply all the tyres for its new cars. The contract will end in five years’
time.

 Furthermore, The Fire and Brimstone Limited has recently been appointed as the supplier
of choice for all the major insurance companies. The new tollgates increased traffic on the
country's secondary roads, resulting in more potholes. Subsequently, insurance
companies are experiencing an all-time high in insurance claims for tyres. The insurance
companies pay cash for these claims.
Purchases and Accounts payable

 The company’s current payment terms to creditors are between 45 and 60 days. It is clear
that the company is not taking advantage of the benefit of early settlement discounts
offered to it. The financial manager decided to revisit the company’s strategy for its creditor
payments. A decision was taken to reduce creditor payment terms to 45 days from invoice
date in order to take advantage of the benefit of the settlement discount.
Inventory
 A new industrial engineer was appointed in order to reassess the company’s stock turnover
period. He established the reason for the time lag as being new, inexperienced staff
members recently employed in the manufacturing division.

 Transport companies are experiencing backlogs due to recent floods, making some areas
inaccessible. This leads to a longer turnaround time for collection of finished goods at the
company’s warehouse and distribution thereof to sales outlets.

 The manufacturing plant still uses old technology that does not enable sufficient workflow
due to long setups and throughput times.

 Finished goods are transported from the plant to the warehouse, from where it is then
distributed to various outlets.


14
 The Fire and Brimstone Limited stores its inventory at a third party’s warehouse. The
warehouse is situated in an industrial area known for its high crime statistics. There have
been incidents in the past of burglaries at the warehouse. The warehouse is located
approximately 100 kilometres away from the company’s major outlets. A monthly storage
fee is charged based on floor space used to store the inventory. The larger the stock
holding, the bigger the floor space needed and the higher the storage fee will be.

REQUIRED
a) Calculate the business cycle of The Fire and Brimstone Limited for year 2018 in days
and comment on the performance of each component in line with the notes provided.
There are 365 days in a year and the company adjusts for VAT at 14%, where necessary.
Round off your answers to two decimal places.
(15)
b) Discuss the impact of the additional information provided on the company’s business
cycle by explaining how the additional information will affect the business cycle.
(15)
[30]
©
UNISA 2018

Notes for marking:
1. Symbols/signs used:
r/w Right or wrong – the answer must be exact
CA Calculation must be completed and correctly expressed
C Carry-through mark (use marks from previous calculation)
±/y Year and signage must be correct
2. Note that extra marks may be awarded for presentation and logical layout.

Question 1 (a)
CALCULATION OF WACC – based on target capital structure (see workings below)
Portion of capital Cost of Weighted cost

Capital structure structure capital of capital
Marks given below
Ordinary shares (workings) 0,70r/w 12,2% 8,5%
Debentures (0,30 * 3÷5) 0,18r/w 5,2% 0,9%
Bank loan (0,30 * 1÷5) 0,06 r/w 6,1% r/w 0,4%
Preference share (as above) 0,06r/w 7,7% r/w 0,5%
1 / 100% 10,3% CA
Max: 8 marks
Question 1 (b)
FINANCING DECISION – R5bn acquisition of Tile Ses’la (see workings below)
Consider Current Capital Capacity Target Capital 1 mark - adding to R5b

SCALING Capital structure Structure (Balancing) % Structure 1 mark – balancing
(R ‘m)
Ordinary shares R9 450 +2 020 0,70 R11 470
Debentures R992 +1 957 0,18 R2 949
Bank loan R650 +333 0,06 R983
Preference shares R293 +690 0,06 R983

If 30:70 & the
Total R11 385 c R5 000 100% R16 385  amount is
increased by
ALL 4 instruments R5bn
Conclusion: Acquisition of Tile Ses’la must be financed as follows: c

 Issue of ordinary shares (R2,020 billion) – Retained income in the form cash can
be used to reduce risk of dilution of control
 Issue of debentures (R1,957 billion) – Consideration should be made to borrow
from different entities due to the amount required
 Taking a new banking loan facility (R333 million) and
 Issue of redeemable preference share issue (R690 million)
Max: 12 marks

WORKINGS
1(b) workings 1(a) workings
 
INSTRUMENT MARKET VALUE COST OF EQUITY
Ordinary shares 𝑴𝑽𝒆 = R9,45 billion (given) 𝑲𝒆 = 𝐑𝟐𝟖𝟎𝐦 𝐱 𝟏,𝟎𝟗

𝐑𝟗 𝟒𝟓𝟎 𝐦
 + 𝟗%
𝑲𝒆 = 12,2% 
INSTRUMENT MARKET VALUE COST OF DEBENTURES
CF0 0
CF1 - 48,96m (1bn x 6,8% x 0,72) 
Debentures CF2 - 48,96m 𝐾𝑑1 = 5,2% (given)
CF3 - 48,96m
CF4 - 1 048,96m (1bn)+48,96m 
CF5 - 3,6m (1bn x 0,005 x 0,72) 
I 5,2
NPV 992 064 186
INSTRUMENT MARKET VALUE COST OF LOAN
Interest paid 𝐾𝑑2 = 8,5% x 0,72

𝑴𝑽𝒅𝟐 =
𝐾𝑑2
Bank loan = 6,1%
55,08m x 0,72
𝑴𝑽𝒅𝟐 =
6,1%𝐜
𝑴𝑽𝒅𝟐 = R650 124 590
INSTRUMENT MARKET VALUE (FINANCIAL CALC.) COST OF PREF.
CF0 0 𝐾𝑝 = 10,3% x 75%

CF1 - 21m (1 912–1 000–612) x 7% 
Preference shares CF2 - 21m
CF3 - 21m = 7,7%
CF4 - 321m (1 912–1 000–512) + 21 
I 7,7 c
NPV 292 997 833  c

ALTERNATIVE MARKET VALUE (FINANCIAL CALC.) - ALT COST OF DEBENTURES

PV of capital
FV - R1 000m 
N 4
Debentures I 5,2 𝐾𝑑1 = 5,2% (given)
Comp PV 816,464m (c1) Capital & Interest
can be done in
one calculation
PV of interest
PMT - 48,96m (1bn x 6,8% x 0,72) 
N 4
I 5,2
Comp PV 172,806m (c2)
PV of premium
FV - 3,6m (R1bn x 0,005 x 0,72) 
N 5
I 5,2
Comp PV 2,794m (c3)
Market value = R992 064 186 (c1 + c2 +c3) 
ALTERNATIVE MARKET VALUE (FINANCIAL CALC.) COST OF PREF.
FV -300m 𝐾𝑝 = 10,3% x 75%

PMT - 21m 
Preference shares I 7,7 c
N 4
= 7,7%
PV 292 997 833  c
Same approach can be used for Debentures

Question 1 (c)
i). Valuation using the price-earnings method
1. Determine maintainable earnings of Tile Ses’la
Rm 2015 2016 2017
Profit for the year (given) 745 850 880
Loss of gross profit  r/w 83
Out of court settlement  r/w (20)
Insurance pay-out  r/w (40)
Maintainable earnings 828 810 860
No trend – use weighted average method r/w 1/6 2/6 3/6
Weighted average maintainable earnings  c 138 270 430
Weighted average maintainable earnings 838
2. Determine the implied/adjusted P/E ratio of Tile Ses’la
P/E multiple of listed companies (given) 13,29

ANY 1 positive factor Positive factors (decreasing risk) 
Well established business/market leader +0,5
Geographical diversification +0,5
Well-known brands – trade mark as proof +1
Exclusive distribution rights +0,01
ANY 1 negative factor Negative factors (increasing risk) 
Rife competition -1,8
Rapid changes in technology -2,0
Unlisted company factor (given)  r/w -1,5
Adjusted P/E multiple – Tile Ses’la 10

3. Determine value of Tile Ses’la after adjusting for control premium and marketability discount
R million
1 mark for the valuation Price-earnings valuation before adjustments (R838m x 10)  c 8 380
amount calculated and
adjusted PE (Must NOT Add: Control premium (R8 380m x 12,17%) any between % 0% – 15% 1 020
be a %) Value before marketability discount adjustment 9 400
Less: Marketability discount (already priced) -
100% business value 9 400
51% x R9,4 billion -
Value of 51% stake of Tile Ses’la 4 794
Max: 11 marks
ii). Valuation using the free cash flow method
Free cash flows for 2018 R million
Average profit for 2016 & 2017 (880+850/2) r/w 865

ONLY 1 mark if years
used are 2016 & 2015
Depreciation & amortisation for previous year (non-cash) r/w 113
Tax on depreciation & amortisation  c (37)
Free cash flows for 2018 941
Discounted free cash flows:

𝐶𝐹𝑖
=
WACC−g
941
=
(14%−4%)
100% business value = R9 410 million
51% of Tile Ses’la (Pty) Ltd = R4 799 million
Conclusion: The board of directors, together with the shareholders, of Tile Ses’la (Pty) Ltd should
accept the Tiles & Styles of Africa offer of R5 billion as the valuations performed above show that
the company is worth R4,8 billion.  CA (mark whether under P/E multiple or DCF method workings)
Max: 5 marks

Question 1 (d)
i). Valuation using the net asset value method
Rm
ASSETS
PPE (1 989 – 400 + 4 240) – (4 240 x 0,003) 5 816 r/w
Investments 732 r/w
Intangible assets (54 – 30 + 380) 404 r/w
Inventory (550 * 40%) + (550 * 60%) + (550 * 60% * 20%) 616 r/w
Trade and other receivables 327 r/w
Cash and cash equivalents (can be netted off against price) 511
Less: LIABILITIES & OTHER COSTS
Non-current liabilities (86) r/w
Settlement of the subordinated loan (3 773 * 0,0043) (16) r/w
Current liabilities (304)
Estimated value of Tile Ses’la 8 000
Value of stake sold (51% x 8 000m) 4 080
Conclusion: According to net asset value method, the stake to be sold is worth R4,1 billion (R700 million
below the other two valuation methods, and R900 million below the offer made by Tiles & Styles of Africa).
The net asset value method will not consider the true value attached to the brand of Tile Ses’la (including
human capital, customer loyalty, brand, value of exclusive rights, etc.). The board of directors and
shareholders of Tile Ses’la should accept the offer as it is better than all three methods used.  CA
Max: 7 marks
Question 1 (e)
a) Types of acquisitions (general)
The type of
1. Horizontal acquisition: Two companies that are in direct competition and share the same product line
acquisition and markets. Example – a beer manufacturing company buying another beer manufacturing company
must be
defined (AB InBev buying SABMiller).
2. Vertical acquisition: Two companies both on a given chain of supply (customer and a supplier).
Example – ESKOM buying a coal mine like Anglo Coal.
3. Conglomerate acquisition: Two companies that trade in unrelated markets.  Example – Woolworths
buying Kulula.com 
b) Types of acquisition of Tile Ses’la – VERTICAL ACQUSITION (Tile retailer buying a tile
manufacturer)  r/w
Max: 7 marks

Question 2
R’000 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

2018 (beg) 2018 2019 2020 2021 2022 2023
Description
Surveyor cost – sunk  -

Buildings  ±/y (1 000 000)
Working capital  ±/y (65 000) 65 000
For year Rev: Gautrain users  If years are incorrectly 104 000 110 240 140 225 148 639 157 557
& shown, give marks for
increase Rev: Non-Gautrain use revenue & costs if 121 354 128 635 81 812 86 720 91 924
of 6%
Operating costs  increase correct.
(37 500) (39 750) (42 135) (44 663) (47 343)
Terminal (cont.) value 1 402 926
Taxation at 24%  Workings can be shown below (45 085) (47 790) (43 176) (45 767) (48 513)
Net cash-flows (65 000) (1 000 000) 142 769 151 335 136 726 144 929 1 621 551
SHOW INPUT keys: CF0 CF1 CF2 CF3 CF4 CF5 CF6
Calculator
inputs I/Y = 15%
Net Present Value  124 163
Signage and the year must be correct
to get the marks

Workings
Year 2 Year 3 Year 4 Year 5 Year 6

Tariff – Gautrain users R200 x 1,06 R200 R212 R225 R238 R252
Tariff – Non-Gautrain users R200 ÷ 0,4285  R467 R495 R524 R556 R589
No of Gautrain users 10 000 10 000 12 000 12 000 12 000

No of Non-Gautrain user 5 000 5 000 3 000 3 000 3 000
R’000
Rev: Gautrain users R200 x 52 x 10 000&12000 104 000 110 240 140 225 148 639 157 557
Rev: Non-Gautrain users R467 x 52 x 5 000 & 3 000 121 354 128 635 81 812 86 720 91 924
Operating costs excl. depr 50m – (1 000m / 80)  37 500

Annual increase R37 500 x 1,06 Allow if increase based on full R50m 39 750 42 135 44 663 47 343
Terminal value in year 6 V6 = Cf6+1 ÷ (WACC – g)

Cf6 157557+91924-47343-48513
Cf6+1 153 625 (above) x 1,0365 
 Terminal value 159 232 ÷ (0,15–0,0365) 

1 402 926 rounding
Max: 17 marks

The taxation calculation table needed not

be shown separately, especially where
there is no sale of an asset OR wear & tear.
TAXATION calculation Year 2 Year 3 Year 4 Year 5 Year 6

Net revenue c Revenue – Operating costs 187 854 199 125 179 902 190 696 202 138
Taxation at 24% 45 085 47 790 43 176 45 767 48 513
R’000 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

2018 (beg) 2018 2019 2020 2021 2022 2023
Factors (Alternative)
Net cash-flows (65 000) (1 000 000) 142 769 151 335 136 726 144 929 1 621 551
Rev: Non-Gautrain use 1,000 0,870 0,756 0,658 0,572 0,497 0,432
Discounted cash flows (65 000) (869 565) 107 954 99 505 78 173 72 055 701 041
I/Y = 15%
Net Present Value 124 163

Conclusion
The aggregate NPV for this project is R127 480 000 - positive (R3,445m + R124,163m c – R0,128m) and
therefore the project must be accepted.
The project is indivisible and the company cannot choose to implement one phase of the project and reject
others, e.g. MCC cannot accept the parking service and bus shuttle service phase and reject the station,
rail works & trains.
These phases are also dependent in the sense that rejecting one of the phases will have an impact on
projected cash flows from the other phases, e.g. without the stations, trains and rail infrastructure, there is
no need for the parking and bus shuttle services.
In making the decision, the company should also consider the performance of the existing Gautrain
operations and to help it better forecast.
The implementation of Jozi Connect project will also boast the economy with possible direct and indirect
job opportunities to be created and efficiencies in the economic activities of the province. 
Max: 3 marks

For any valid discussion point, a mark is

given as the question requires any
comment based on notes 1 to 3.
Question 3 (a)
i). Calculate and comment on debtor’s collection period Bonus mark if consistent rounding to 2 decimal places 
Accounts receivable
x 365
Credit sales
1 048 000ᵅ
114 x 365
65% x (8 500 000) x 
100
1 048 000
x 365
6 298 500
= 60,73 days
ᵅ Alternative: Average balance 1 048 000 + 980 000)/2 = 1 014 000

Days if average is used = 58,78 days and without VAT = 66,99 days)
Discussion  maximum: 1 mark
Customers adhere to credit policy as an average debtor settles their account (60,73) in line with the normal credit
terms 60 days).
There is a low risk of bad debts as customer generally settle in line with credit terms.
The company is more lenient to its customers as the industry collects as early as in 45 days. The competitors might
be having better credit controls and incentives than the company.
980 000
Debtors are settling their accounts quicker than last year 2017: 72,67 days) [ 114 x 365]
55% x 7 850 000 x
100
Improved communication with customers, reminders of outstanding debt and selling more to existing credit
customers led to the decrease in debtors’ days.
Note: where VAT has not been taken into account in the calculation, the debtors’ collection period is 69,23 days
2017: 82,85 days) – valid comment: Debtors not adhering to credit terms and take longer to settle than industry
average although the ratio is improving or bad debt risk increases).

ii). Calculate and comment on the stock turnover period
Inventory
Cost of sales
1 200 000ᵅ
x 365
3 850 000
= 113,77 days
ᵅ Alternative: average balance 1 200 000 + 850 000) /2 = 1 025 000

Days if average is used = 97,18 days
It takes the company almost 4 months to convert its stock into sales (24 days later than industry) – this indicates
poor stock management processes. This is evidenced by the issues already pointed out by the industrial engineer.
This is likely to result in stock theft and /or damage.
There is a possible increase in holding costs (storage, insurance, etc.).
There is a minimal risk of running out of stock.

850 000
The company is holding its stock much longer than last year 2017: 86,18 days) [ x 365]
3 600 000
Note: where average has been used, the stock turnover period is only 7,18 days longer than the industry norm –
students must comment in line.

iii). Calculate and comment on creditors’ payment period
Trade payables
x 365
Credit purchases
350 000ᵅ
114 x 365
40% x (4 200 000) x 
100
350 000
x 365
1 915 200
= 66,70 days
ᵅ Alternative: average balance 350 000 + 425 000)/2 = 387 000

Days if average is used = 73,75 days without VAT = 84,08 days)

The company seems to be in breach of credit terms with its suppliers (60 days) and the payments are made on average
a week after invoices are due.
Possible cash flow difficulties (timing) – debtors settled in 60,73 days and inventory is converted in 113,77 days as
customer generally settle in line with credit terms.
The company is not taking advantage of the 10% discount where invoice is settled within 45 days.
Late payments may cause credit facility to be suspended/blacklisting or strained relationship and cash balance 2017:
83,74 days).
Late payments may result in late payment penalties and/or interest.
Settlement of creditors’ accounts is delayed to utilise funds for other purposes (purchase of assets, investments).
The company is settling its accounts quicker than last year – improved relationship and cash balance 2017: 83,74 days)
425 000
[ 114 x 365]
50% x 3 250 000 x
100
Note: where VAT has not been taken into account in the calculation, the creditors’ collection period is 76,04 days
2017: 95,46 days) – Comments above are still valid. Denominator, if without VAT, is 1 680 000
iv). Calculate and comment on business cycle of The Fire and Brimstone Limited
Days
Debtors’ collection period 60, 73
Plus: Stock turnover period 113,77 c
Less: creditors’ payment period (66,70) c
Business cycle 107,80 
Discussion  c maximum: 1 mark

The industry average’s business cycle is 100 days and therefore we can establish that The Fire and
Brimstone Limited has a 7,8-day longer business cycle than the industry average. The competitors may have
more cash at their disposal to take advantage of possible cash discounts and allow for speculative
investments. Poor controls around inventory and debt management and slow response to tackling this issue
will cause the company to struggle to keep up with the competition
Max: 15 marks

1 mark for presentation (each component presented with a heading

Question 3 (b) 1 mark for understanding how the business cycle is affected
Sales and Accounts receivable

Business cycle component Increase/decrease of the Reason for
business cycle days increase/decrease
Debtors’ collection period  Business cycle positively  Credit customers will be
affected encouraged to settle their
accounts earlier or pay
OR cash – to take advantage
of 5% & 10% discount
 Decrease of business offered (decrease in trade
cycle days receivables & debtors’
collection period) 
Debtors’ collection period  Business cycle not affected  For new cash paying
customers (10%
OR discount), there will be no
change in business cycle
 No change in business days
cycle days (no impact on trade
receivables & credit
sales) 
Debtors’ collection period  Business cycle not affected  Impact of sales to the
major car manufacturer
OR has already been effected
(last year)
 No change in business (no additional impact on
cycle days trade receivables & credit
sales) 
Debtors’ collection period  Business cycle not affected  Sales to cash paying
insurance companies will
OR not change the business
cycle days
 No change in business (no impact on trade
cycle days receivables & credit
sales) 

Purchases and Accounts payable
Business cycle component Increase/decrease of the Reason for

business cycle days increase/decrease
Creditors’ payment period  Business cycle negatively  Settling creditors earlier
affected will result in a longer
business cycle – cash
OR resources likely to be
strained
 Increase of business cycle (decrease in trade
days payables & creditors’
payment period) 
 Potential increase in profit

and cash in the long run
(due to savings on
discount)
Inventory
Business cycle component Increase/decrease of the Reason for increase/decrease
business cycle days
Stock turnover period  Business cycle negatively  The time lag means
affected inventory takes longer to
leave the factory
OR (increase in inventory &
stock turnover period) 
 Increase of business cycle  New and inexperienced
days staff in the manufacturing
division will inevitably
lead to an increased
manufacturing turn-
around time which will
increase the business
cycle. 
Stock turnover period  Business cycle negatively  Further delays

affected experienced by transport
companies lead to
OR increase in the business
cycle
 Increase of business cycle (increase in inventory &
days stock turnover period)

Stock turnover period  Business cycle negatively  The old technology of the
affected machine will lead to
slower manufacturing
OR time, therefore increasing
the business cycle 

 Increase of business cycle (increase in inventory &

days stock turnover period)
Stock turnover period  Business cycle negatively  More time is taken in

affected moving the stock from the
plant to various outlets
OR (increase in inventory &
stock turnover period)
 Increase of business cycle 
days
Stock turnover period  Business cycle negatively  100km distance increases

affected the number of days to
convert the inventory into
OR sales (increase in
inventory & stock turnover
 Increase of business cycle period) 
days  Risks associated with
moving the goods
(hijacking, breakdowns,
etc.) may cause the
company to incur extra
costs (increase in
inventory & stock turnover
period) 
 The company will also
incur additional holding
costs especially where
stock is not sold on time.
(increase in inventory &
stock turnover period)
Max: 15 marks
































MAC 3702
SUGGESTED SOLUTION
OCTOBER 2018 EXAM
a) When funding new projects, it is essential to consider the target debt equity ratio as this will
determine the capacity of the company to raise a particular form of funding without drastically
altering its capital structure and weighted average cost of capital.
Also note that when a company issues non-redeemable preference shares it can serve as equity
when analysing the capital structure.
Note that SA Clinic is a private company and does not have a tradeable market price.
PROPOSAL 1
Current
capital Target capital
structure structure Capacity
Book value
Equity 14 240 000 (1) 25 410 000 (3) 11 170 000
Debentures 3 560 000 (2) 10 890 000 (4) 7 330 000
17 800 000 36 300 000 18 500 000
New R12 500 000 x
project 18 500 000 1.48
36 300 000
1. R36 300 000 x 70%

2. R36 300 000 x 30%
3. R25 410 000 – R14 240 000
4. R10 890 000 – R3 560 000
No of ordinary
shares to be issues
Total value 11 170 000
Net price ÷ R3,86 (R4.05 – 4.78%)
2 893 782
Shares
No of debentures
Nominal value R70,00
104 714
Debentures

PROPOSAL
No of Preference
shares to issued
Nominal value ÷ R100,00
111 700
preference
shares
No of debentures
Nominal value R70,00
104 714
Debentures
b) Weighted average cost of capital
Weighted average cost of capital

Value Weight Cost WACC
Equity 14 240 000 81,34% 11,94% 9,71%
Debt 3 267 330 18,66% 8,64% 1,61%
17 507 330 100,00% 11,32%
Cost of equity: In order to calculate the cost of equity we need the current market price. Since the
company is not listed, this information is unavailable. The R4,05 given in the question is not an
indication of fair value as this is a private company and the issue price could have been agreed upon
by the shareholders to raise the funds.
I have therefore used the current issue price of R3,25 as per the statement of financial position
Growth: The question states that growth will double going forward, therefore 3.5% x 2 = 7%.
𝐷1
𝐾𝑒 = +𝑔
𝑃0
0.15 𝑥 1.07
𝐾𝑒 = + 0.07
𝑅3.25
𝐾𝑒 = 11.94%

Market value of debentures
1 2 3 4
2019 2020 2021 2022
Capital repayment (3 560 000)
Premium (1) (11 392)
Interest paid (300 000) (300 000) (300 000) (300 000)
Tax benefit on interest (2) 84 000 84 000 84 000 84 000
Tax benefit on premium (3) 3 190
(216 000) (216 000) (224 202) (3 776 000)
𝑃𝑉 @ 8.64%: − 216000𝑐𝑓, −216000𝑐𝑓, −224202𝑐𝑓, −3776000𝑐𝑓, 8.64𝑖 𝐶𝑜𝑚𝑝 𝑁𝑃𝑉
𝑵𝑷𝑽 = 𝑹𝟑 𝟐𝟔𝟕 𝟑𝟑𝟎
𝑲𝒅 = 𝟏𝟐% 𝒙 𝟎. 𝟕𝟐 = 𝟖. 𝟔𝟒%
1. R3 560 000 x 0.32%

2. R300 000 x 28%
3. R11 392 x 28%
c) Foreign exchange profit or loss
FEC rate at 1 December 2018 1,48

Spot rate at 1 January 2019 1,58
Gain (0,10)
Foreign amount 12 500 000
Gain (1 250 000)

d) Risks and mitigating factors of implementation
RISKS MITIGATING FACTORS

1. Viability is not certain 1. Detailed research needs to be undertaken
including the preparation of a capital
budget
2. Operating skills and servicing of machines 2. Ensure that we sufficient skills to ensure
that machines are operated as intended
and also that servicing can be done locally
– send relevant people overseas for
training
3. Timing of implementation 3. Proper planning will ensure that delays are
kept to a minimum
4. Funding of project 4. Availability of funds – funding must be
secured ASAP as this will cause further
delays
5. Affordability of repayments and interest 5. Proper budgeting will help make better
financial decisions
6. Medical aid schemes not authorising 6. Hold meetings with medical aid schemes
treatment to ensure that that proper procedures are
followed to ensure that patients are able to
use the service without worrying about the
costs

e) Ratio analysis
Change in other operating income
470
− 1 = −11.32%
530
No available information with respect this line item. Management needs to identify reasons for
the decrease. Given that this is a clinic, it may relate to sales of over-the-counter medication and
supplies.
EBITDA margin
𝑬𝑩𝑰𝑻𝑫𝑨
=
𝑹𝒆𝒗𝒆𝒏𝒖𝒆
2018 2017
1640 + 560(𝑑𝑒𝑝) 1380 + 420(𝑑𝑒𝑝)
= =
6600 5500
= 33.33% = 32.73%
• The margin increased very slightly

• This was caused by the fact that revenue increase by a higher rate than operating costs
• Revenue increased by 20% while operating costs increased only by 15.13%
• An indication either of cost control measures or that the clinic was able to pass on any cost
increases to patients
Effective tax rate

𝑻𝒂𝒙 𝒄𝒉𝒂𝒓𝒈𝒆
=
𝑷𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒕𝒂𝒙
2018 2017
334 307
= =
1260 1060
= 26.51% = 28.96%
• Effective rates differ from statutory rates as a result of permanent differences.

• In 2017 it seems we had items that were not deductible for tax purposes while in 2018 it
seems we had items of income that were not taxable

Times interest earned (Interest cover)

The number of times interest is covered by EBIT
𝑬𝑩𝑰𝑻
=
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒑𝒂𝒊𝒅
NB: Interest received generally not a sustainable income item. Sometimes solutions net-off
the interest. This ratio is about financial risk and the ability to meet interest payments. I
therefore recommend not to net-off the interest received against the interest paid
2018 2017
1640 1380
= =
420 340
= 3.9 𝑡𝑖𝑚𝑒𝑠 = 4.06 𝑡𝑖𝑚𝑒𝑠
• Interest costs have increased for no logical reason as the non-current debt is the same as
2017 and the short-term borrowings have decreased.
• Notwithstanding this, EBIT has increased by R260 000 while the interest only by R40 000
which gives rise to the slight drop in the interest cover.
Capital gearing ratio
𝑳𝒐𝒏𝒈 − 𝒕𝒆𝒓𝒎 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒃𝒆𝒂𝒓𝒊𝒏𝒈 𝒅𝒆𝒃𝒕(𝑳𝑻𝑫)

=
𝑳𝑻𝑫 + 𝒆𝒒𝒖𝒊𝒕𝒚
2018 2017
3560 3560
= =
3560 + 14240 3560 + 13830
= 20% = 20.47%
• This ratio has improved slightly but as a result of decreased debt but rather an increase in
retained profits

Dividend pay-out ratio

𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆
=
𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆
2018 2017
0.15 0.1449
= =
0.2692 0.2189
= 55.72% = 66.2%
2018 2017
𝑅926 000 𝑅753 000
𝑒𝑝𝑠 = 𝑒𝑝𝑠 =
3 440 000 3 440 000
= 0.2692 = 0.2189
Dividend 2017: Dividend growth is 3.5% therefore Div2018 is 3.5% bigger than Div2017
∴ R0.15 ÷ (1+3.5%) = R0.1449
𝑁𝑜 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝑅11 180 000 ÷ 𝑅3.25 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 3 440 000 𝑠ℎ𝑎𝑟𝑒𝑠
• It is clear that the policy is not a stable % (ratio) of earnings

• The reason for the decline is that eps grew by 23% while dividends growth was at 3.5%.
Return on equity
𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙
=
𝑬𝒒𝒖𝒊𝒕𝒚
2018 2017
𝑅926 000 𝑅753 000
= =
𝑅14 240 000 𝑅13 830 000
= 6.5% = 5.45%
• Equity remained fairly stable while earnings per share grew by 23%
• More of revenue was converted into profits.
• As mentioned earlier revenues increased at a better rate than costs.

f) Free cash flow
Free cash flow

R
Profit before taxation 1 260 000
Add: Depreciation 560 000
Add: Long term interest 300 000
Less: interest received (1) (40 000)
2 080 000
Taxation (2) (406 800)
1 673 200
Working capital 225 000
Inventory (5000’ – 4550’) 450 000
Trade and other receivables (2050’- 1840’) (210 000)
Short-term borrowings (180’- 140’) (40 000)
Trade and other payables (45’- 20’) 25 000
1 898 200
Capital expenditure (3) (1 035 000)
863 200
1. Interest received is assumed to be earned from cash and cash equivalents. It has been left out of
the free cash flow as the actual cash balances will be added to the value.
2.
Taxation R
Taxation per SOCI 334 000
Add: Tax on interest paid 84 000
Less : tax on interest received (11 200)
406 800
3.
Capital expenditure R
Opening carry value 9 500 000
Depreciation (560 000)
Closing carry value (9 975 000)
(1 035 000)

Value of operations
𝐹𝐶𝐹1
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 =
𝑊𝑎𝑐𝑐 − 𝑔
𝑅863 200 𝑥 1.07

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 =
11.32% − 7%
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 = 𝑅21 380 185
Valuation
Value of operations 21 380 185

Add: Cash and cash equivalents 1 410 000
Less: Market value of debt (3 267 330)
Value before owner level adjustments 19 522 855
Less: Marketability discount say 20% (3 904 571)
Less: Minority discount say 15% (2 928 428)
12 689 856
26% thereof 3 299 362
Net asset value
Net asset value

Net equity 14 240 000
Fair value adjustment property (R3.8m – R2.0m) 1 800 000
16 040 000
The NAV is being compared to the FCF value before owner level adjustments.
The Difference in value is due the fact that NAV is based on historical results which excludes
potential growth, while the FCF method has been based on future sustainable cash flows with
growth built into the valuation

10
g) Mobile units NPV
Mobile units appraisal

0 1 2 3 4 5
Cost price (4 500 000)
Residual value (1) 900 000
Net operating CF 593 000 555 680 1 731 121 1 689 188 1 644 739
Grant received (2) 1 215 000 1 215 000 2 430 000 2 430 000 2 430 000
Maintenance (3) (100 000) (106 000) (112 360) (119 102) (126 248)
Nurses salaries (4) (360 000) (381 600) (404 496) (428 766) (454 492)
Other (162 000) (171 720) (182 023) (192 945) (204 521)
(4 500 000) 593 000 555 680 1 731 121 1 689 188 2 544 739
𝑵𝑷𝑽@𝟏𝟓% = −𝑹𝟏𝟗𝟒 𝟗𝟓𝟎
−4500000𝑐𝑓, 593000𝑐𝑓, 555680𝑐𝑓, 1731121𝑐𝑓, 1689188𝑐𝑓, 2544739𝑐𝑓, 15𝑖 𝑐𝑜𝑚𝑝 𝑁𝑃𝑉
Calculations
1. R4 500 000 x 20%
2. 2 single payments then 3 double payments: 𝑥 + 𝑥 + 3(2𝑥) = 𝑅3 240 000𝑥 3𝑢𝑛𝑖𝑡𝑠
∴ 𝑥 = 𝑅1 215 000 𝑎𝑛𝑑 2𝑥 = 𝑅2 430 000
3. R25 000 x 4 quarters = R100 000, increase by 6% thereafter
4. R120 000 per nurse x 3 = R360 000, increase by 6% thereafter
5. R4 500 x 12 months x 3 units = R162 000, increase by 6% thereafter
h) The NPV is negative, therefore from a quantitative perspective the project should be rejected.
From a qualitative perspective
• To try and procure additional funding as this is a PBO
• The service is for the community and maybe to negotiate better prices on the mobile units
• Try to get some private funding as well

11
i) Risks associated with running mobile clinics

• Mobile clinics run the risk of being removed/stolen and may require security
• The mobile units can be broken into during the night where supplies are stolen
• The costs of moving from area to area can be costly as the three units fulfil different
functions and must all move together.
• Damage to mobile units while in transit (Insurance)
• Government tends to delay payments. What if grants are not received timeously?
• Risk that the grant money is not utilised properly. The risk of fraud or corruption.
j) Effects and risks of HIV in the workplace

• People with HIV are singled out in the workplace and bear the risk of intimidation
• People with HIV are likely to fall ill, and this affects productivity
• Should a worker die of HIV, new workers need to be employed and trained. This comes at a
cost
• Companies, as part of their social responsibility, need to make regular testing available at
the work place at their own cost
• Should workers be working with sharp tools, etc there is a higher of contamination.

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COST‐VOLUME‐PROFIT ANALYSIS ‐ FORMULAE

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Asset Management Ratios

Debt Management Ratios

****Common Equity is also referred to as Owner’s Equity or Stockholders Equity

Earnings per share = Net Income/Shares Outstanding

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Type Ratio Formula Significance

Current ratio Current Assets Test of debt-paying ability 3

**Accts Receivable, Net means Accounts

Inventory Turnover Cost of Goods Sold Test of management

Total Asset Turnover Net Sales How many times we have

Equity (or Solvency) Ratios

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Debt to Equity Ratio Total Liabilities How much we owe in

Return on total assets Net Income How many times we have

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2. COMPOUND INTERST: I = P(1+i) ³ I = compound interest, P = principal and i = interest rate

5. FUTURE VALUE (ORDINARY ANNUITY): ³ I = Annuity amount or payment, i = Interest rate, n =

6. FUTURE VALUE (ANNUITY DUE):

12. EFFECTIVE INTEREST RATE

7. PRESENT VALUE (SINGLE PAYMENT):

13. NOMINAL RATE

8. PRESENT VALUE (ORDINARY ANNUITY):

9. PRESENT VALUE (PERPETUITY):

10. PRESENT VALUE (ANNUITY DUE):

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QUESTION 2 – CAPITAL STRUCTURE AND COST OF CAPITAL

1. DEBT:EQUITY RATIO (D:E) (SIMPLIFIED)

3. REQUIRED RATE OF RETURN

4. Capital Asset Pricing Model (CAPM)

5. WEIGHTED AVERAGE COST OF CAPITAL (MARKET VALUES)

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1. Profitability and performance

Receivable days (debtors’ collection period)

Payable days (creditors’ payment period)

Inventory turnover ratio (times)

Receivable days + Inventory days - Payable days

3. Solvency and financial/capital structure