Financial Planning Practice Questions

Question 1

The latest abridged financial statements of Blue Steel (Pty) Ltd are presented below:

Income Statement of Blue Steel (Pty) Ltd for the year ended 31 January 2016
(R 000’s)
Sales 100 000
Less Cost of goods sold 70 000
Gross Profit 30 000
Less operating expenses 15 000
Profit before interest and tax 15 000
Less Interest 5 000
Profit before tax 10 000
Less taxes (30%) 3 000
Net Profit after tax 7 000
Dividend 2 800
Retained earnings 4 200

Balance Sheet of Blue Steel (Pty) Ltd as at 31 January 2016

(R 000’s)
Equity 35 000
Ordinary Share Capital @ R10 each 23 000
Retained earnings 12 000
Liabilities 35 000
Long-term debt 15 000
Short-term debt 9 000
Accruals 2 000
Accounts payable 9 000
Total equity & Liabilities 70 000
Assets
Net non-currents assets 33 000
Current assets 37 000
Inventory 15 000
Accounts receivable 15 000
Cash 7 000
Total Assets 70 000

At a recent board meeting, the firm set the following objectives and targets for their 2017
financial year:
 The firm projects that sales will grow to R125 000 000 in 2017.
 Cost of goods sold, operating expenses, accounts payable and accruals will increase
proportionately with sales.
 The tax rate will decrease to 28%.
 Interest will remain unchanged in 2017.
 Cash and inventory will increase proportionately with sales, but accounts receivable
will double from 2017.
 Accounts payable will increase proportionately with sales.
  The firm will lower its payout ratio to 30% in order to support the growth in sales.
 Any additional finance needed must be raised from short and long-term debt and
equity. However, the company desires to maintain its current ratio and its debt ratio.
Required:
(a)
Determine whether or not Blue Steel (Pty) Ltd can achieve all of their goals simultaneously
for 2017, by completing the Pro-Forma Income Statement and Balance Sheet provided in
Appendix A on page 7. Detach this appendix from the test paper and include it in your
answer book.
 Question 1

Pro forma Income Statement of Blue Steel (Pty) Ltd for the year ending 31 January
2017
Sales 125 000
Less Cost of goods sold 87 500
Gross Profit 37 500
Less operating expenses 18 000
Profit before interest and tax 19 500
Less Interest 5 000
Profit before tax 14 500
Less taxes (28%) 4 060
Net Profit after tax 10 440
Dividend 3 132
Retained earnings 7 308

Pro forma Balance Sheet of Blue Steel (Pty) Ltd as at 31 January

2017
(R 000’s)
Equity 49 375
Ordinary Share Capital @ R10 each +9 346 30 067
Retained earnings + 7 308 19 308
Liabilities 49 375
Long-term debt + 3 293.92 18 293.92
Short-term debt + 8 331.08 17 331.08
Accruals 2 500
Accounts payable 11 250
Total equity & Liabilities 98 750
Assets
Net non-currents assets 41 250
Current assets 57 500
Inventory 18 750
Accounts receivable 30 000
Cash 8 750
Total Assets 98 750

EFN = 98 750 – (23 000 + 19 308 + 15 000 + 9 000 + 2 500 + 11 250)

= 18 692
Current ratio = 20 000 / 37 000 = 1.85
Maximum CL = 1.85 × 57 500 = 31081.08
Maximum STD = 31081.08 - 22 750 = 8331.08
Debt ratio = 35 000 / 70 000 = 0.5
Maximum LT debt = 0.5 × 98 750 = 49 375
LTD to be raised = 49 375 – (31 081.08 + 15 000) = 3293.92
Equity to be raised = 18 692 – (8 331.08 + 3 293.92) = 7 067.00

EFN
Short term debt = 8331.08
Long term debt = 3293.92
Equity = 7 067.00
Total EFN = 18 692.00
 Question 3
The latest financial statements of Cute Cosmetics Ltd are as follows:

Income Statement of Cute Cosmetics Ltd for the year ended 31 May 2006
(R 000’s)
Sales 150 000
Less Cost of goods sold 120 000
Gross Profit 30 000
Less operating expenses 15 000
Profit before interest and tax 15 000
Less Interest 3 000
Profit before tax 12 000
Less taxes (35%) 4 200
Net Profit, after tax 7 800

Balance Sheet of Cute Cosmetics Ltd as at 31 May 2006

(R 000’s)
Equity 27 500
Ordinary Share Capital 15 000
Retained earnings 12 500
Liabilities 34 000
Long-term debt 10 000
Short-term debt 15 000
Accounts payable 9 000
Total equity & Liabilities 61 500
Assets
Net non-currents assets 35 000
Current assets 26 500
Inventory 9 000
Accounts receivable 12 000
Cash 5 500
Total Assets 61 500

At a recent board meeting, the firm set the following objectives for their 2007 financial year:
 The firm set a sales target for 2007 of R200 million.
 Accounts receivable and inventory will increase proportionately with sales, but cash
will double from 2006.
 After using up the spare capacity on existing non-current assets, the firm will have to
expand its warehouse, which would require an additional investment in net fixed
assets of R10 million, in order to meet the 2007 sales target.
 Cost of goods sold, operating expenses and interest will increase proportionately with
sales.
 The tax rate will decrease to 30% of profit before taxes.
 The firm will not issue any new ordinary shares during the year, but will pay a
dividend of R1.2 million. (The firm has not paid a dividend for the past few years).
 The firm does not wish to exceed their R25 million short-term credit limit with their
bank.
 Accounts payable will increase proportionately with sales.
 The firm’s long-term debt will remain at the 2006 levels for 2007.

Required:
(i) Determine whether or not Cute Cosmetics can achieve all of their goals simultaneously
for 2007, by completing the Pro-Forma Income Statement and Balance Sheet provided
in Appendix B, on Page 8. Detach this appendix from the test paper and include it in
your answer book. Write your student number in the space provided.
ROUND OFF RAND VALUES TO THE NEAREST CENT.
 Question 1
The most recent financial statements for Hi Grow Ltd, are shown below. 2016 sales are expected to
grow by 20 per cent. Interest expense will remain constant; the tax rate and the payout rate will
remain constant. Costs, other expenses, current assets, and accounts payable will increase
spontaneously with sales. If the firm is operating at full capacity and no new debt or equity is issued,
what is the external financing needed (EFN) to support the 20 per cent growth in sales? (You may
assume the total tax rate is constant).

HI GROW LTD 2015 Income Statement

(R)
Sales 905 000
Cost 710 000
Other expenses 12 000
PBIT 183 000
Interest paid 19 700
PBT 163 300
Taxes (35%) 57 155
Net profit after tax 106 145
Dividends 42 458
Additions to retained profits 63 687

HI GROW LTD 2015 Statement of Financial Position

Equity And Liabilities R Assets R

Capital employed Net Non-current Assets
Share Capital 21 000 Net plant and equipment 364 000
Retained profit 257 000
Total equity 278 000 Inventory 76 000
Accounts Receivable 43 000
Long-Term debt 156 000 Cash 25 000
Current assets 144 000
Accounts payable 65 000
Short term debt 9 000
Current liabilities 74 000

Total Equity And Liabilities 508 000 Total assets 508 000
 Question 4

The latest abridged financial statements of Blue Steel (Pty) Ltd are presented below:

BLUE STEEL (Pty) Ltd

Income Statement for the year ended 31 Dec 2009
R
Sales 315 000
less Cost of Sales 236 250
Gross Profit 78 750
less Operating Costs including Interest 40 950
Profit before Tax 37 800
less Taxes 10 584
Net Profit after Tax 27 216
less Dividends 5 443.2
Retained Profit for the Year 21 772.8

BLUE STEEL (Pty) Ltd

Balance Sheet as at 31 Dec 2009
R
EQUITY AND LIABILITIES
Equity 500 000
Ordinary Share Capital 400 000
Retained Profit 100 000
Liabilities 77 500
Long - Term Debt 50 000
Overdraft 12 500
Accounts Payable 15 000
Total equity and Liabilities 577 500
ASSETS
Net Non-Current Assets 460 000
Current Assets 117 500
Inventory 96 500
Accounts Receivable 21 000
Cash 0
Total Assets 577 500

The company has been awarded several large contracts and is anticipating a growth rate of
20% in sales for the financial year ending 31 Dec 2010.

Assume the following additional information for the 2010 financial year:
 All Asset items and accounts payable will grow at the same rate as sales.
 Cost of Sales, Operating Costs and Interest will increase at the same rate as sales.
 The tax rate and dividend payout ratio will remain unchanged.
 The company’s CFO has decided against using any additional long-term debt, thus any
additional finance required to sustain the growth, will be raised as follows:
o Overdraft funds first, with the firm’s new Current Ratio not falling below 2:1, and
o Ordinary Share Capital, only if necessary, thereafter.
Required:
Use the percentage of sales approach along with the above instructions to complete a pro
forma income statement and balance sheet, and to determine the extra financing needed
(EFN) to achieve the targeted level of growth in 2010. Show all your workings.

Use Appendix B provided on page 14 of your exam paper to complete the pro forma income
statement and balance sheet. Detach Appendix B from the exam paper and place it in your
Question 2 answer book. Write your student number in the space provided.
(36 marks: 32 minutes)
 Question 2
(i)Pro-Forma Income Statement of Cute Cosmetics Ltd for year ended 31 May 2007
(R 000’s)
Sales 200 000
Less Cost of Sales 160 000 (80% of sales)
Gross Profit 40 000
Less operating expenses 20 000 (10% of sales)
PBIT 20 000
Less interest 4 000 (2% of sales)
PBT 16 000
Less taxes (30% of PBT) 4 800
NPAT 11 200
Less dividend 1 200
Addition to Retained Profit 10 000

Pro-Forma Balance Sheet of Cute Cosmetics Ltd as at 31 May 2007

(R 000’s)
Equity 37 500
Ordinary share capital 15 000 unchanged
Retained earnings 22 500 (+ 10 000)
Liabilities 46 500
Long-term debt 10 000 unchanged
Short-term bank loan 24 500
Accounts Payable 12 000 (6% of sales)
Total equity & Liabilities 84 000
Assets
Net non-current assets 45 000 (+ 10 000)
Current assets 39 000
Inventory 12 000 (6% of sales)
Accounts Receivable 16 000 (8% of sales)
Cash 11 000 (double 2006)
Total Assets 84 000

From the Pro Forma Statements, the Firm will be able to achieve all its goals in 2007. They
will only need to utilize R24.5 million of their 25 million short-term bank loan facility.
[43]
 Question 3

Using the % of Sales approach and assuming a 20% increase in sales, the pro forma income statement
for 2016 is as follows:

HI GROW LTD
Pro Forma Income Statement 2016

Sales R1 086 000 (905 000 x 1.2)

Costs 852 000 (710 000/905 000) x 1 086 000
Other expenses 14 400 (12 000 / 905 000) x 1 086 000
PBIT 219 600
Interest 19 700 (unchanged)
PBT 199 900
Taxes (35%) 69 965 (rate unchanged)
Net profit after tax R129 935

The payout ratio is constant, so the dividend paid this year is the payout ratio from last year
times net income:
Dividend = (R42 458 / R106 145) × (R129 935)
= R51 974

And the addition to retained profits will be:

Addition to retained profit = R129 935 – 51 974
= R77 961

The new retained profits on the pro forma statement of financial position will be:
New retained profits = R257 000 + 77 961
New retained profits = R334 961

Using the % of Sales Approach and assuming no new Debt or Equity finance raised, the pro
forma statement of financial position (SOFP) for 2015 will look as follows:

HI GROW LTD
Pro Forma SOFP 2016

Equity and Liabilities (R) Assets (R)

Owner’s equity Non-current assets
Share capital 21 000 Net plant and equip. 436 800
Retained profit 334 961
355 961
Inventory 91 200
Non-current liabilities Accounts receivable 51 600
Long-term debt 156 000 Cash 30 000
Current assets 172 800
Accounts payable 78 000
Short-term debt 9 000
Current liabilities 87 000

Total equity and liabilities R598 961 Total assets R609 600
So the EFN is:
EFN = Total assets required – Total liabilities and equity
= R609 600 – 598 961
= R10 639 (in order to ↑ sales by 20%, Debt and/or Equity of R10 639 will have to be
raised)
 Question 4

Pro Forma Income Statement (R)

2010

Sales 378 000 315 000*1.2

Less Cost of Sales 283 500 75%
Gross Profit 94 500
Less Operating costs and interest 49 140 13%
PBT 45 360
Less Taxes (28% x PBT) 12 700.80
NPAT 32 659.20
Less Dividends (20% x NPAT) 6 531.84
Retained profit for the year (80% x NPAT) 26 127.36

Pro Forma Balance Sheet (R)

2010

EQUITY AND LIABILITIES

Equity 572 500
Ordinary share capital 446 372.64 (400 000 + 46 372.64)
Retained earnings 126 127.36 (100 000 + 26 127.36)
Liabilities 120 500
Long-term Debt 50 000 No change
Overdraft 52 500 (12 500 + 40 000)
Accounts payable 18 000 4.76%
Total Equity and Liabilities 693 000 (carried up)

ASSETS
Net Non-Current Assets 552 000 146.03%
Current Assets 141 000 37.30%
Inventory 115 800 30.63%
Receivables 25 200 6.67%
Cash 0 0%
Total Assets 693 000 183.33%

Workings:
EFN = Increase in TA - addition to retained profit – increase in A/P
= (693 000 – 577 500) – 26 127.36 – (18 000 – 15 000)
= 115 500 – 26 127.36 – 3 000
= R86 372.64

To be raised as follows:
 L. T. debt: None
 Overdraft:
2 = Minimum Current Ratio
2 = CA/CL
2 = 141 000/(Max. Overdraft + 18 000)
2*(Max. Overdraft) + 36 000 = 141 000
 2*(Max. Overdraft) = 105 000
(Max. Overdraft) = 52 500
Max. new Overdraft = 52 500 – 12 500 (existing overdraft)
= 40 000
 Ordinary share capital = EFN – new Overdraft
= 86 372.64 – 40 000
= R46 372.64