MAC3761/203/0/2023

Tutorial Letter 203/0/2023

MANAGEMENT ACCOUNTING III

MAC3761

Year module

Department of Management Accounting

IMPORTANT INFORMATION

This tutorial letter contains important information about your

module.
 MAC3761/203/0/2023
CONTENT

Page

1. INTRODUCTION .......................................................................................................................... 3
2. SUGGESTED SOLUTION ............................................................................................................ 4

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 MAC3761/203/0/2023
Dear Student

1. INTRODUCTION
This tutorial letter contains the solution to test 03/0/2023. It is in your own interest to work through
the suggested solution in conjunction with the test question paper and your answers.

PLEASE REFER TO TUTORIAL LETTER 101 FOR INFORMATION ON HOW THE YEAR
MARK IS CALCULATED AS WELL AS THE WEIGHTING OF THE TESTS.

Test dates are communicated on myUnisa, on the module site.

It is important and in your own best interest that you access myUnisa and the MAC3761 module
site on a regular basis, as we post important announcements, including additional notes on the
site from time to time.

Kind regards
MAC3761 lecturers

Lecturers contact details: Refer to the module site on myUnisa.

E-mail: MAC3761@unisa.ac.za

2. SUGGESTED SOLUTION

a) Perform a SWOT analysis for MyTaxi on the existing business model and motivate (8)
each point raised.
b) List four (4) financial risks for MyTaxi and, for each risk, motivate in sufficient detail (4)
why you say it is a risk.

c) Calculate the weighted average cost of capital based on market values of the (10)
existing permanent sources of funding as at 30 June 2023.

d) i. Demonstrate with supporting calculations, how the acquisition of the new fleet (6)
should be financed, assuming that the company is working towards the target
capital structure.
(Note that the providers of the existing capital are willing to increase or decrease
their funding to MyTaxi should it be necessary)
(4)
ii. Briefly discuss four (4) factors MyTaxi should consider before deciding on the
source of finance.
e) Discuss factors that MyTaxi would need to consider in deciding which rental (6)
payment option to implement as set out in Part B.
No calculations required.

TOTAL [38]

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QUESTION 1: MyTaxi Limited (“MyTaxi”)
Please note:
The test counts 38 marks.
Question 1
Section Available Limit
(a) Several 8
(b) Several 4
(c) 10 10
(d)(i) 10 6
(d)(ii) 6 4
(e) Several 6
Total 38

a) Perform a SWOT analysis for MyTaxi on the existing business model and motivate (8)
each point raised.

Feature Strength and Weakness Opportunity and Threat

Control Controlled by the organisation Not controlled by the organisation
Origin Internal to the organisation External to the organisation
Can be used to achieve the organisation's Can be used to improve the organisation's
Use goals performance

SWOT analysis

Strengths

i. MyTaxi is an established brand and have working systems  in place already, for any new
project they basically build on what they are already doing, don’t have to re-invent the wheel 😊
Because they are an established brand they will attract customers.
ii. 
Everything happens online and the application process is easy and seamless, this is a
strength as well as the scalable technology led platform which enables the company to reach a
wide market and market share will increase.The application process is faster and this will
increase customer satisfaction. 
iii. MyTaxi supports financial inclusion of taxi operators who would otherwise not have access to
traditional funding (unique service/niche market/innovation). This is their competitive
advantage and would increase market share/marketability and enhance the company’s BEE
profile.
iv. Stringent credit worthiness checks are done by the third party,this is a strength, gives MyTaxi
peace of mind for taking on new clients in terms of their recoveries and ultimately the company’s
liquidity. 
v. MyTaxi charges a higher interest rate than traditional banks which would lead to an increase
its profits. 
vi. MyTaxi has the ability to raise funds as noted in USD loans and willingness by existing funders.
This makes investment in projects, raising working capital etc easier. 
vii. Any other valid point.

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Weaknesses

i. Utilisation of 3rd party (or reliance thereon) compromises customer data, confidentiality and
POPIA requirements - the issue here is with the way the business is structured. Customer data
could be intercepted. 
ii. A data breach could happen if the third party company does not keep customer data confidential
and their personal information leaks, the scenario does not state how data is kept safe or the
internal controls in place, MyTaxi can be liable in terms of POPIA if client’s personal
information is leaked.
iii. Heavy reliance on the online application system and if the system is not functioning
optimally it can lead to dissatisfied customers, reputational damage. 
iv. Nature of providing finance to taxi operators who do not have a “solid”/good credit history/
(higher interest rates charged), may lead to financial difficulties resulting in massive defaults.
This is our business model and a weakness because MyTaxi would have less liquidity and profit.
v. Substantial fees being paid to lawyers and potential litigations that may ensue. Could lead to
reputational damage and loss of income.
vi. The lack of diversification is also an issue - lean market. MyTaxi currently only has a single
product type to offer (although an “additional revenue stream” will be introduced as per the CFO)
and relying on the sales of one product only can lead to financial difficulties/liquidity issues/going
concern issues when that product is not doing so well, as there will be no other products to fall
back on.
vii. Concerns around policies conflict of interest/ethics in transactions.
viii. Any other valid point.

Opportunities

i. There might be an opportunity to roll out the same type of financial solutions with other vehicles
and markets like Uber. MyTaxi already has the systems in place so that would give them an
advantage.
ii. Could become vertically integrated, opportunity to expand to other markets, car finance
companies can offer other financial products, such as warranties, dents and scratch protection
products, tyre and rim warranty products to their customers. This can help car finance companies
generate additional revenue and improve customer loyalty. Currently MyTaxi is outsourcing
these services.
iii. The popularity of electric vehicles is increasing, and this presents an opportunity for car finance
companies to offer financing solutions for these vehicles. Car finance companies can offer special
financing terms for electric vehicles, which can make them more affordable for consumers. This
could be a long term strategy for the company, it will also eliminate the CO2 emissions, can
increase market share in this space.
iv. Any other valid point.

Threats

i. Increasing interest rates and fuel price hikes has an effect on MyTaxi’s offering in that there is
a lack of corresponding fare increases in line with interest rates, fuel levies etc. This makes
it difficult for customers to honour their financial commitments, there will be more bad debts,
liquidity will be under pressure.
ii. Due to the weakening economy and rising levels of unemployment in the country, less
commuters need to travel for work, therefore decreasing demand for taxis. Demand for taxi
finance decreases.

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iii. Social unstability such as riots, hijackings and sabotage can cause a lot of financial damage to
the company as the taxi business becomes dangerous for taxipreneurs.
iv. Government regulations that affect the public transport industry has a direct effect on MyTaxi
such as new routes and permits that are changed or limited to certain taxi associations. Could
become less financially viable for those taxipreneurs and in turn MyTaxi will lose customers.
v. E-hail taxi associations could threaten the taxi routes and in turn the taxipreneurs businesses
will be impacted negatively and could lead to loss in customers for MyTaxi etc.
vi. Lack/poor business acumen of taxipreneurs increases the risk of inability to repay loans.
vii. Any other valid point.

b) List four (4) financial risks for MyTaxi and, for each risk, motivate in sufficient detail why (4)
you say it is a risk.

Risk Reason
Financial risks:
1. Market risk: Currency risk • Rand weakening against the dollar will
lead to MyTaxi repaying higher interest and

Note:
(Also known as exchange rate
risk, it is the risk that the value
of a currency will change,
which can affect the value of
assets or liabilities
denominated in that currency.)
capital amounts. 
• Rand weaking against the dollar may also
cause prices of taxis to increase as the
manufacturers input costs may be in
foreign currency.
• Debt becoming more expensive ie USD
loan from United States Capital Bank.
Any one reason.

2. Market risk: Interest rate risk Volatile prime rate linked to loans. Our
borrowings are/may be linked to prime and
Note: movement in the interest rate will lead to
increase in interest expense.
(Risk that the value of an
investment will decline if
interest rates rise. If interest
rates rise, the value of these
investments will decline as
investors demand higher yields
(returns)).

3. Credit (or counterparty) risk Taxipreneurs may not be able to make

Note:
(The risk that a borrower will
not be able to repay a loan.)
rental payments or monthly instalments as
they fall due leading to impairments/write-
offs by MyTaxi. 

This can happen for a number

of reasons, such as job loss,
illness, or unexpected

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expenses. Credit risk is a
major concern for lenders, as it
can lead to losses.
4. Insurance risk
Note:
The risk that an insurance
company will have to pay out a
claim. Insurance risk is a major
concern for insurance
companies, as it can lead to
losses.
5. Investment Risk
6. Liquidity risk/funding risk
Note:
(The risk that an entity will be
unable to meet its funding
requirements (not meet its
obligations as they fall due))
MAC3761/203/0/2023
(A) taxi(s) rented out to a customer may be in
an accident (including riots and
vandalism), stolen, hijacked or breakdown
and the insurance claim may not be (fully)
settled.
Theft at the warehouse can further increase
insurance claims. 

Any one reason 
Risk that the new rental project will not yield
the expected returns.
Downturn in the economy leading to
customers struggling with repayments, high
costs of operating, competition and other
factors highlighted above may cause MyTaxi
to be unable to meet its financial obligations
as they fall due.
Will not be able to raise the required funds.
Might not be able to make repayments on our
debt obligations.
Any one reason
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c) Calculate the weighted average cost of capital based on market values of the (10)
existing permanent sources of funding as at 30 June 2023.

MARKET VALUES:
INSTRUMENT MARKET VALUE (FINANCIAL CALC.) COST OF LOAN

PV of interest + capital
FV - 75 million
PMT 𝐾𝑑1 = 6,57%
- 4 516 875 (75 million x [9,75%-1,5%])x0,73

SABA Bank N 7 (2030 – 2023) = 7 years

I 6,57% ([9,75%-0,75%] x 0,73) 9,75% - 0,75%=9% x 0,73
Comp PV 72 753 458

INSTRUMENT MARKET VALUE (FINANCIAL CALC.) COST OF DEBENTURES

𝐾𝑑3 = 5,84%
CF0 0
CF1 (2024) - 3 467 500 (50 million x 9,5% x 0,73)
Debentures CF2 (2025) - 3 467 500 8 x 0,73 = 5,84%
CF3 (2026) - 53 467 500 (3 467 500 + 50m)
CF4 -2 190 000 (50m x 0,06 x 0,73)
(2027) 
I/Y 5,84 (8% x 0,73)
Comp NPV 53 213 016

INSTRUMENT MARKET VALUE COST OF EQUITY

7% +1,5(11%-7%)

Ordinary shares MVe: R360 000 000 market capitalisation

provided =13%

Ke= Risk free rate + (Beta

x Market risk premium)

INSTRUMENT MARKET VALUE COST OF PREF.

Preference dividend: 80 mil x 7,5% = R6 million

Dividend
Preference shares 𝐾𝑝 =
Value of pref
Market value provided in question as
R85 000 000 𝐾𝑝 =(6m)/R85m
Non-redeemable
therefore equity

𝐾𝑝 = 7,06%

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CALCULATION OF WACC USING MARKET VALUES

Portion of
Market value of capital Cost of Weighted cost of
Capital structure instruments structure capital capital

Ordinary shares 360 000 000 63,05% 13,00% 8,20%

Preference shares 85 000 000 14,89% 7,06% 1,05%

Long-term loan 72 753 458 12,74% 6,57% 0,84%

Debentures 53 213 016 9,32% 5,84% 0,54%

Bank overdraft and

revolving credit facility
(not included as this is
short-term finance
n/a n/a n/a n/a

Total 570 966 474 1 / 100% 10,63%

d) i) Demonstrate with supporting calculations, how the acquisition of the new fleet (6)
should be financed, assuming that the company is working towards the target capital
structure.
(Note that the providers of the existing capital are willing to increase or decrease their
funding to MyTaxi should it be necessary)

ii) Briefly discuss four (4) factors MyTaxi should consider before deciding on the (4)
source of finance.

New fleet R100 000 000

New warehouse R10 500 000
Total investment needed R110 500 000

We have secured a loan from United States Capital Bank for USD 2 500 000.
Converted into Rand on transaction date of 2 August 2023:
2500 000 x R18,65 = R46 625 000

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Market value Portion of New investment

Capital of capital needed
structure instruments structure Target

360 000 000

(0,6x 0,75 x 681 466 474)
Ordinary 75% x 60% =
shares 45% (53 340 087) 306 659 913
60
%
(0,6 x 0,25 x 681 466 474)
Preference 25% x 60% =
shares 85 000 000 15% 17 219 971 102 219 971

72 753 458
49 997 558

Long-term
loan 18,01% 122 751 016
40
% 49 997 558
%

Debentures 53 213 016 15,15% 103 210 574

R46 625 000

USD loan 6,84% 46 625 000

110 500 000 R681 466 474

Total 570 966 474 1 / 100%

Market value R570 966 474

Add new investment R110 500 000
Total after new investment R681 466 474

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Target is 60:40 E:D

EQUITY:

R681 466 474 x 60% = R408 879 884

Split R408 879 884 equity of which 75 % belongs to ordinary shares ie R306 659 913

25% belongs to preference shares ie. R102 219 971

Conclusion:

MyTaxi will have to buy back shares to the value of R53 340 087 and issue preference shares to the
value of R17 219 971.

DEBT:

R681 466 474 x 40% = R272 586 590

Already issued R46 625 000 USD loan + R72 753 458 + R53 213 016

= R172 591 474

R272 586 590 - R172 591 474 = R99 995 116 split equally between SABA long term loan and
debentures.

=R99 995 116/2

=R49 997 558

Of the R146 620 116 new debt required for the target, R46,625m has already been secured in the
form the USD loan and the balance will be shared equally between the two existing facilities ie. long
term loan from SABA bank and the debentures.

Ordinary shares: Buy back shares with a market value of R72 521 337 ie 72 521 337/R45 per share =
1 611 585 shares. Issued number of shares will decline from 8000 000 in issue less 1 611 585 = 6 388
415. How will this affect control? Does the company have the money to buy back shares ie cash? Will
shareholders be willing to sell?

Preference shares: Issue more preference shares to the value of R10 826 221. Will this affect
control? It is non-redeemable shares. There will be an increase in dividends to be paid out because
more shares in issue. Could put strain on cash flow.

Long-term loan: Finance through another loan for R41 472 558 with SABA Bank or similar Bank with
same interest rate. Debt is cheaper due to tax deductibility, but cash flow will be put under pressure,
debt covenants have to be met. Control will not be affected.

Debentures: Issue additional debentures for R41 472 558 therefore R41 472 558/R10 = 4 147 256
new debentures. MyTaxi will have to pay interest to the holders of the debentures but it is tax
deductible and the cost of debentures is the cheapest source of finance as per the above workings.

Control will not be affected. Will have impact on cash flow.

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d (ii)
Briefly discuss four (4) factors MyTaxi should consider before deciding on the source of finance.

Note to students
1. It should be a relevant factor;
2. The response has to make sense in the context and has to be
clear.

• COST: MyTaxi should consider using an instrument which has the lowest effective cost of
capital (additional administration costs should also be considered). Equity is generally more
expensive vs. debt that has a tax deduction. The company should also factor in any possible
changes to these rates when it determines the cheapest form of finance. As it can be noted
from the WACC calculation in (i) above, the preference shares and debentures bear the lowest
cost of capital compared to SABA loan (6,57%) and ordinary shares ie. equity (13%). The bank
overdraft is expensive and is not considered part of the permanent capital structure by
the company.

• CASH FLOWS (Matching): The pattern of cash flows should also be considered, especially
in matching the revenue to the service cost of debt. MyTaxi Ltd will have to consider the
timing of the share buy back and the payment on the loans. Most of the instruments require
annual interest payment in arrears giving us enough time to collect instalments during the year.
Preference shares are ideal because if we do not have enough money we can skip paying a
dividend.

• CAPITAL STRUCTURE: The company is not operating at its optimal structure (where
WACC is lowest) but it is operating at this capital structure of 21,68:78,32 (D:E) currently (see
part a above). MyTaxi should consider the source(s) of finance which will move it to the target
capital structure. Target capital structure is 40:60 (D:E). If the company is working towards the
target capital structure, they would need to consider more debt issue as this will be moving
them towards that. Also take debt covenants and liquidity etc. into account.

• CAPACITY (Availability): MyTaxi will have to establish from its providers of capital (including
possible new providers) whether they are able to provide the company with required funds.
SABA Bank and holders of debentures are willing to increase their exposure to MyTaxi.
The bank overdraft, at high interest rate cannot be utilised to fund the permanent capital
requirements of the business.

• CONSTRAINTS: Taking a loan, bond or issuing a debenture may require some form of
security, e.g. property of the company including the investment being acquired. The foreign
loan is most likely secured over the fleet and the warehouse which should be sufficient
since the loan amount of R47m is less than the fleet plus warehouse worth more than R100m.
This is not the case for ordinary and preference shareholders. Other lenders may require
MyTaxi to achieve and maintain certain levels of profitability and assets, and breaching such
covenants may lead to lenders demanding immediate repayment of the facility.

• CONTROL: The shareholding/ownership of MyTaxi will likely change if ordinary shares are
bought back. This may lead to changes in decision-making powers or votes. However, for
loans and preference shares (non-convertible), there are usually no voting rights or ownership
changes when these instruments are used.
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e) Discuss factors that MyTaxi would need to consider in deciding which rental (6)
payment option to implement as set out in Part B.
No calculations required.

Notes to students:
A student cannot merely repeat the information we provided without
considering the best option.
No calculations were required, no marks if you only do calculations.

Below is a table that compares the two payment options (not required):

Item Rental option 1 Rental option 2

Fixed at 60
Payment term Varies depending on rental period (Term A or B)
months

10% for rental periods of 36 months or less, 15%

Deposit None required
for rental periods of more than 36 months

Varies and is
linked to the
Varies for rental periods of 36 months or less, fixed
Interest rate South African
for rental periods of more than 36 months
prime interest
rate

Balloon/residual
Not allowed Allowed for rental periods of more than 36 months
payment

Penalty for early

Yes No
settlement

Recovery rate Yes, 95% Yes, varies between the two options

The best option for MyTaxi will depend on their risk appetite and their goals.

Rental option 1

• The fixed payment term and the penalty for early settlement give them a degree of certainty
about the timing and amount of money they will receive.Under this option it is also more simple to
administer these agreements which are standardised across.

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• A varying interest rate is applied which means MyTaxi will benefit from increased rental
payments in the event that the interest rate increases but there is also a degree of risk involved
should interest rates decrease, their rental amounts received would then also decrease.
• Recovery rate is anticipated at 95% therefore bad debts is estimated at 5%, slightly below the
current levels.
• No deposit is required under rental option 1.

Rental option 2 Terms A and B

• Term A requires a smaller deposit than term B and term A does not allow for a balloon payment.

• The varying payment terms and the balloon/residual payment under Term B give the client more
flexibility, but they also make it more difficult for MyTaxi to predict how much money they will
receive because of payment amounts being variable and linked to prime interest rate.
• The balloon payment under term B postpones large capital inflows although MyTaxi will reap
the benefits of a higher deposit required than term A. Defaults on loans should be less.
• However, the fixed interest rate for term B could be a risk for MyTaxi because they might lose
out on increased rental income if the South African prime interest rate increases.Recovery rate will
be 85% therefore bad debts is 15%. The deposit under term B is higher AND a balloon payment is
allowed.

Bad debts will likely increase under option 2 Term A if the prime interest rate increases and clients
start to default on their payments. But the recovery rate is anticipated higher which is also something
MyTaxi needs to consider.

Ultimately, the best option for MyTaxi will depend on their risk appetite and their goals. If they are
looking for a lower-risk option, then Option 1 may be the best choice. If they are looking for a
higher-risk option with the potential for higher returns, then Option 2 may be the best choice.

Here are some other factors that MyTaxi may want to consider:

• The current state of the South African economy. If the South African economy is in a recession,
then the financial institution may want to choose Option 1 to reduce their risk. However, if the South
African economy is growing, then the financial institution may want to choose Option 2 to potentially
earn higher returns. This will also impact bad debts and will impact MyTaxi’s liquidity. 
• The longer the client rents the taxi, the older the taxi gets and the less money MyTaxi will be
compensated with by WeBuyTaxis so it will have a negative financial effect if clients opt for the
longer rental terms. Therefore, the longer rental period and consequently higher rental income,
must make up for the loss in value of the taxi.
• Any other valid point.
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