University of Fort Hare

Together in Excellence

NKUHLU DEPARTMENT OF ACCOUNTING

FINANCIAL MANAGEMENT 3A

AFM 300E

______________________________________________________________________

MID YEAR ASSESSMENT

12 May 2015
ASSESSOR: Prof L.Y Majova-Songca

MODERATOR: Prof. G. Bartlett

QUESTION TOPICS COVERED MARKS

1 Cost Volume profit Analysis 20

2 Analysis and Interpretation 25

3 Investment decisions and sources of finance 35

3 Valuations 40

TOTAL 120

INSTRUCTIONS:

 This paper consists of 11 pages (Including front page).

 Answer ALL questions.
 Start each question on a new page.
 Silent, non-programmable calculators may be used, unless otherwise instructed.
 Show all calculations clearly. Round all calculations to two decimal places.

1
QUESTION 1 (20 MARKS)

Part a

Calculation of contribution per unit

R R

Selling Price (1 000 000/100 000 ) 10.00

Less variable costs:

Direct materials 1.00

Direct labour 3.50

Variable overhead 0.60

Delivery overhead 0.50

Sales commission (2% of selling price) 0.20

5.8

Contribution per unit 4.2 (2 marks for contribution)

BEP = x selling price per unit

= X 10

= R 952 380 (2 marks for BEP)

Part b
(i)

R R

Revised Selling Price 9.00

Less variable costs:

Direct materials 1.00

Direct labour 3.50

Variable overhead 0.60

Delivery overhead 0.50

Sales commission 0.18

(2% of selling price) 5.78

2
 Contribution per unit 3.22 (2 marks)

Number of units sold 140 000 (1 mark)

Total contribution( 140 000 x 450 800

3.22)

Fixed costs 400 000 (1 mark)

Profit from proposal(i) 50 800 (1 mark)

(ii)

Desired contribution 480 000 (1 mark)

Contribution per unit for present proposal 3.22 (1 mark)

Required units to earn large profit 149 068 (1 mark)

Part c

(i) The variable cost of selling to the mail order firm is:

Direct material 1.00

Direct labour 3.50

Variable overhead 0.60

Delivery expenses Nil

Sales commission Nil

Additional package cost 0.50

5.60 (2 marks)

To break-even, a contribution of R 1.20 is required (60 000 fixed costs/50 000 units sold).
Therefore selling price to break-even is R 6.80 (R 5.60 + R 1.20). (2 marks)

(ii) To earn R 50 800 profit, a contribution of R 110 800 (R 60 000+ R 50 800) is required.
That is, a contribution of R 2.22 per unit is required. Therefore required selling price = R7.82 (R
5.60+ R 2.22). (2 marks
(iii) To earn the target profit of R 80 000, a contribution of R 140 000 is required. That is, R 2.80 per
unit. Therefore, required selling price= R 8.40 (R 5.60+ R 2.80). (2 mark)

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QUESTION 2 (25 MARKS)

Part a

2014 2013 Mark

(i) Gross Profit margin 7.91% 13.59% 1/2 mark eac
- The gross profit margin deteriorated by 41.8% from 2013 1 mark
- This is due to increase in cost of sales which is higher than the
increase in sales 1 mark
- The increase in cost of sales as as a result of increase in The
price of gold 1 mark
- The European customers were reluctant to accept price
increases so the increase in cots were not significantly passed on
to customers 2 marks
- The company was not functioning at full capacity therefore the
fixed costs absorbed by inventories will be higher resulting in less
gross profit per unit 2 marks
- Although selling prices also increased, the increase is offset by
the strenghtening rand as prices are quoted in US$. 2 marks

1/2 mark
(ii) Operating profit margin 1.93% 6.75% each
The operating profit magin deteriorated by 71.38% from 2013 1 mark
- This is mainly due the the decrease in gross profit 1 mark
- Increase in electricity also added to the increased operating
costs 1 mark
-The operating costs increased by only 1.45% which lower than
the CPI of 6%. This means the company was effective in managing
their operating costs 2 marks
-
1/2 mark
(iii) Net profit margin 0.91% 4.37% each
- The net profit magin deteriorated by 79.25% 1 mark
- This is due to a decrease in gross profit margin or increase in
manufacturing costs 1 mark
- This is also due to the decrease in opearting profits 1 mark
- Finance costs also increased slightly. 1 mark

1/2 mark
(iv) Return on assets 3.88% 13.19% each
- first calculate the EBIAT
Profit after tax 53 220
add after tax finance cost 28.08 22.32
EBIAT 81.08 242.32 1 mark each

- ROA has deteriorated by 70.6% 1 mark

- The decrease is due to decrease in profitability in 2014 1 mark

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 - Total assets also increased. The plant and equipment increased
with no corresponding increase in profitability 2 marks
- Assets are underutilised
1 mark
- Inventories increased and this is due to overproduction of
inventory 1 mark
- Trade receivables increased in line with the slight increase in
sales 1 mark

mark
1/2
(v) Return on equity 6.57% 29.18% each
- ROE has deteriorated by 77.5% 1 mark
The decrease is due to decrease in profits 1 mark
This is also due to increase in operating profits 1 mark
- ROE > ROA demonstartes a positive financial leverage 1 mark

NOTE : At least five ratios are expected and maximum mark per
ratio is 4 marks.

Maximum mark for part a is 20 marks

Part b

All ratios are as a % of revenue

Gold Group metal costs -65.14% -65.25% 1 mark

Other manufacturing costs -29.49% -29.35% 1 mark
Depreciation of manufacturing plant & equipment -0.43% -0.40% 1 mark
Inventory movements 2.97% 8.59% 1 mark
COS (excluding inventory) -95.06% -95.00% 1 mark
1 mark
- COS is mainly made up of gold group metals 1 mark
- The majority of the costs have been subjected to gold price
increases 1 mark
- None of the costs has increased more than the CPI of 6% which
reflects that management have managed costs well 1 mark
- COS overall has increased by 5.37% which closely reflects
inflation. 1 mark

Maximum mark is 5 marks

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QUESTION 3 35 Marks

Part a (25 marks)

CASH FLOW CALCULATION 2015 2016 2017 2018

Sale 2,299,000 2,679,000 2,764,500 1 mark

Variable Overhead (135,520) (157,920) (162,960) 1 mark

Timber (677,600) (789,600) (814,800) 1 mark

Other Material (508,200) (592,200) (611,100) 1 mark

Contribution (234,000) (234,000) (234,000) 1 mark

OR
Per unit
Revenue (500 less 5%
discount) 475 1 mark
Variable (allocated) overheads
(40% of 70) (28) 1 mark

Direct material (105+140) (245) 1 mark

Direct labour and fixed
overheads (irrelevant) - 1 mark
Contribution 202 1 mark

2015 2016 2017 2018

Quantity required 4,840 5,640 5,820

CASH FLOW CALCULATION 2015 2016 2017 2018

Contribution 977,680 1,139,280 1,175,640 1 mark

Other cash operating costs (50,000) (50,000) (50,000) 1 mark

Warehouse rental (90,000) (90,000) (90,000) 2 mark

Warehouse rental - 2015 (90,000) 1 mark

Driver costs (234,000) (234,000) (234,000) 1 mark

Purchase of trucks (500,000) 1 mark

Disposal of trucks 170,000 1 mark

Changes in working capital (132,132) (21,840) (4,914) 158,886 1 mark

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 (20,000)
Other working capital movement 20,000 1 mark

Taxation (122,364) (167,612) (225,392) 1 mark

Net cash flows (742,132) 459,476 592,754 925,134 1 mark

NPV @ 20% = R587 595

TAX CALCULATION 2015 2016 2017 2018

Contribution 977,680 1,139,280 1,175,640 1 mark

Other cash operating costs (50,000) (50,000) (50,000) 1 mark

Warehouse rental (90,000) (90,000) (90,000) 1 mark

Driver costs (234,000) (234,000) (234,000) 1 mark

Wear and tear (166,667) (166,667) (166,667) 1 mark

Recoupment     170,000 1 mark

Taxable income 437,013 598,613 804,973

Tax @ 28% 122,364 167,612 225,392 1 mark

Workings: Working capital changes

Closing balance (10% of quantity
required x 373 (cost per unit) - 132,132 153,972 158,886 2 marks

(132,132) (21,840) (4,914) 158,886

{Max mark = 25 marks}

Part b (10 marks)

After tax cost of debt 2015 2016 2017 2018

Cost (500,000) 1 mark

Depreciation tax shield 46,667 46,667 46,667 1 mark

Sale 170,000 1 mark

Tax on recoupment (47,600) 1 mark

Net cash flows (500,000) 46,667 46,667 169,067 1 mark

Net present cost at 20% = 330 882 1 mark

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After tax cost of leasing 2015 2016 2017 2018

Lease instalment (200,000) (200,000) (200,000) 1 mark

Tax shield on lease payments 56,000 56,000 56,000 1 mark

Net cash flows (200,000) (144,000) (144,000) 56,000 1 mark

Net present cost of leasing @20% = 387 538 1 mark

The company should borrow and buy the trucks as the net present cost of
buying is less than the net present cost of leasing 1 mark

{Max marks for part b = 10 marks}

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QUESTION 4 (40 Marks)

GRACE (PTY) LTD

Introduction
I have been requested to value a 70% share in Grace (Pty) Ltd, a private company producing
herbicide resistant soya bean seed. Mr Bhutiza, the owner of these shares, has been
approached by Bestbean Ltd in this regard. The valuation date is 30 September 2008. (2)

Valuation method
A controlling interest is being valued, and there is sufficient information available to forecast
future cash flow. The appropriate method is therefore the free cash flow method. (2)
Grace (Pty) Ltd has a minority interest in a private company, Agriclol (Pty) Ltd, which is
unrelated to their current operations. Growth is expected in future dividends. This
investment will thus be valued using Gordon’s dividend growth model. (1)

CASH FLOW CALCULATION

2015 2016 2017 2018

R R R R
Sales 20,000,000 24,000,000 28,800,000 33,120,000 (1)
Cost of sales (13,000,000) (15,600,000) (18,720,000) (24,840,000) (1)
Gross profit 7,000,000 8,400,000 10,080,000 8,280,000 (1)
Finance costs (15,000) (15,000) (15,000) (15,000) (1)
Operating cost (3,733,099) (4,031,747) (4,354,287) (4,702,630)
Profit before tax 4,353,253 5,710,713 3,562,370 (1)
Tax @ 28% (1,218,911) (1,599,000) (997,464) (1) P
Profit after tax 3,134,342 4,111,714 2,564,907
Change in WC (441,666) (530,000) (615,000) (1)
Investment in new assets (2,000,000) (1)
Disposal of old assets 500,000 (1)
Tax benefit on wea & tear old assets 126,000 126,000 (2)
Tax benefit on wea & tear - new assets 140,000 (2)
Net cash flows 2,818,676 2,207,714 2,089,907
Terminal value 25,775,520 (1)
Net cash flows including terminal value 2,818,676 2,207,714 27,865,427
0.833 0.6944 0.5787
20,006,716 2,347,957 1,533,036 16,125,722

NPV of cash flows @ 20% = 20 006 716 (1)

Calculation of change in working capital

9
 2015 2016 2017 2018
Debtors (= sales/12) 1,666,667 2,000,000 2,400,000 2,760,000
Change in debtors (333,333) (400,000) (360,000) (2)

Inventory (=COS/6) 2,166,667 2,600,000 3,120,000 4,140,000

Change in inventory (433,333) (520,000) (1,020,000) (2)

Creditors (=COS/9) 1,625,000 1,950,000 2,340,000 3,105,000 (2)

Change in creditors 325,000 390,000 765,000

Total change in WC (441,667) (530,000) (615,000) (1)

Calculation of terminal value

= CF3 (1+g)/(ke – g)
= 2 089 907 (1.11)/ (0.2-0.11) (1)
= 25 775 520 (1)

Valuation on the 12.5% interest in Agriclol (use Gordon’s Growth model

P0 = D1 /(Ke – g)
= (25 000 x 1.08) (1)
(0.18-0.08) (1)
= R270 000

Valuation of Holiday home

Value = after tax earnings X earnings multiple
=(60 000 x 0.72) X 12 (2)
= R518 400

Valuation of long term loan

Value = 50 000/0.1
= R500 000 (2)

Value of business = 20 006 716 (1) P

Add value of house = 518 400 (1) P

10
Add value of listed shares = 270 000 (1) P
Less market value of loan = (500 000) (1) P
Value of equity = 20 295 116
Conclusion : Value of 70% shareholding of Mr Bhutiza = R20 295 116 X 0.7 = R14 206 581 (1)

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