Question Bank 002 - 230907 - 234251

Department of Management Accounting
MANAGEMENT ACCOUNTING III

(FINANCE)
MAC3761
QUESTION BANK 2 of 2
Define tomorrow.
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MAC3761/QB002
© 2023 University of South Africa
All rights reserved.
Printed and published by the University of South Africa

Muckleneuk, Pretoria
MAC3761/QB002/FINANCE/0/2023-2023
Compilers:
S Büchner
T de Bruyn
B Huma
C Leonard
T Mantloana
N Masela
M Nameng
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MAC3761/QB002
Table of Contents
1 INTRODUCTION ..................................................................................................................... 6
2 FREQUENTLY ASKED QUESTIONS .................................................................................. 7
3 TOPICS-TO-QUESTIONS MAPPING TABLE .................................................................. 11
4 QUESTIONS .......................................................................................................................... 12
4.1. QUESTION 01: EDCARS GROUP LIMITED .................................................................... 12
4.2. QUESTION 02: CARLO TITO MARIO AFRICA ............................................................... 18
4.3. QUESTION 03: DRESSED FOR SUCCESS .................................................................... 23
4.4. QUESTION 04: SPLITZ STORES (PTY) LTD .................................................................. 26
4.5. QUESTION 05: NEW MUTUAL GROUP........................................................................... 27
4.6. QUESTION 06: TOY STARS LIMITED .............................................................................. 30
4.7. QUESTION 07: A GREYS (PTY) LTD ............................................................................... 32
4.8. QUESTION 08: ZENZEL (PTY) LTD.................................................................................. 34
4.9. QUESTION 09: KINGSTON LIMITED ............................................................................... 35
4.10. QUESTION 10: QUEEN POWER ....................................................................................... 37
4.11. QUESTION 11: CHAPTERS & NOVELS .......................................................................... 40
4.12. QUESTION 12: SIMON & SON LIMITED .......................................................................... 43
4.13. QUESTION 13: S & S LIMITED .......................................................................................... 46
4.14. QUESTION 14: SIMUNYE GOLD ...................................................................................... 47
4.15. QUESTION 15: SANRAL ..................................................................................................... 50
4.16. QUESTION 16: MASHESHA (PTY) LTD........................................................................... 52
4.17. QUESTION 17: PICTURE PERFECT LIMITED ............................................................... 54
4.18. QUESTION 18: CITY OF NKANDLA ................................................................................. 55
4.19. QUESTION 19: PURIFIED H2O (PTY) LTD ...................................................................... 57
4.20. QUESTION 20: AFRICAN FISH & CHIPS ........................................................................ 59
4.21. QUESTION 21: KGORONG (PTY) LTD ............................................................................ 66
4.22. QUESTION 22: AFRICAN BAG (PTY) LTD ...................................................................... 67
4.23. QUESTION 23: FAST AND QUICK.................................................................................... 68
4.24. QUESTION 24: FAZEBOOK LTD ....................................................................................... 69
4.25. QUESTION 25: BOXER CASH & CARRY ........................................................................ 72
4.26. QUESTION 26: LION BRANDS LTD ................................................................................. 75
4.27. QUESTION 27: PBC LTD .................................................................................................... 79
4.28. QUESTION 28: umfula.co.za .............................................................................................. 84
4.29. QUESTION 29: HEALTH MATTERS LTD ........................................................................ 88
4.30. QUESTION 30: DISTELL LTD ............................................................................................ 95
4.31. QUESTION 31: TILES & STYLES OF AFRICA ............................................................. 104
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4.32. QUESTION 32: MAGNUS ORANGE LTD....................................................................... 113

4.33. QUESTION 33: MBOWENI TRADING (PTY) LTD ........................................................ 118
4.34. QUESTION 34: MONDLI GROUP LIMITED ................................................................... 125
4.35. QUESTION 35: BLUESKY WINGS LTD ......................................................................... 129
4.36. QUESTION 36: FAR & WIDE (PTY) LTD ........................................................................ 134
4.37. QUESTION 36: BHELL LTD .............................................................................................. 137
5 SOLUTIONS......................................................................................................................... 143
5.1. SOLUTION 01: EDCARS GROUP LIMITED .................................................................. 143
5.2. SOLUTION 02: CARLO TITO MARIO AFRICA .............................................................. 149
5.3. SOLUTION 03: DRESSED FOR SUCCESS .................................................................. 166
5.4. SOLUTION 04: SPLITZ STORES (PTY) LTD ................................................................ 170
5.5. SOLUTION 05: NEW MUTUAL GROUP ......................................................................... 172
5.6. SOLUTION 06: TOY STARS LIMITED ............................................................................ 174
5.7. SOLUTION 07: A GREYS (PTY) LTD.............................................................................. 177
5.8. SOLUTION 08: ZENZEL (PTY) LTD ................................................................................ 179
5.9. SOLUTION 09: KINGSTON LIMITED .............................................................................. 183
5.10. SOLUTION 10: QUEEN POWER ..................................................................................... 185
5.11. SOLUTION 11: CHAPTERS & NOVELS ......................................................................... 188
5.12. SOLUTION 12: SIMON & SON LIMITED ........................................................................ 193
5.13. SOLUTION 13: S & S LIMITED ........................................................................................ 198
5.14. SOLUTION 14: SIMUNYE GOLD ..................................................................................... 201
5.15. SOLUTION 15: SANRAL.................................................................................................... 207
5.16. SOLUTION 16: MASHESHA (PTY) LTD ......................................................................... 211
5.17. SOLUTION 17: PICTURE PERFECT LIMITED ............................................................. 215
5.18. SOLUTION 18: CITY OF NKANDLA ................................................................................ 218
5.19. SOLUTION 19: PURIFIED H2O (PTY) ............................................................................. 221
5.20. SOLUTION 20: AFRICAN FISH & CHIPS ....................................................................... 223
5.21. SOLUTION 21: KGORONG (PTY) LTD........................................................................... 235
5.22. SOLUTION 22: AFRICAN BAG (PTY) LTD .................................................................... 238
5.23. SOLUTION 23: FAST & QUICK ........................................................................................ 239
5.24. SOLUTION 24: FAZEBOOK LTD ..................................................................................... 242
5.25. SOLUTION 25: BOXER CASH & CARRY ...................................................................... 246
5.26. SOLUTION 26: LION BRANDS LTD ................................................................................ 249
5.27. SOLUTION 27: PBC LTD ................................................................................................... 254
5.28. SOLUTION 28: umfula.co.za ............................................................................................. 257
5.29. SOLUTION 29: HEALTH MATTERS LTD ....................................................................... 263
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MAC3761/QB002
5.30. SOLUTION 30: DISTELL LTD ........................................................................................... 279

5.31. SOLUTION 31: TILES & STYLES OF AFRICA .............................................................. 288
5.32. SOLUTION 32: MAGNUS ORANGE LTD ....................................................................... 296
5.33. SOLUTION 33: MBOWENI TRADING (PTY) LTD ......................................................... 308
5.34. SOLUTION 34: MONDLI GROUP LIMITED ................................................................... 323
5.35. SOLUTION 35: BLUESKY WINGS LIMITED .................................................................. 333
5.36. SOLUTION 36: FAR & WIDE (PTY) LTD ........................................................................ 344
5.37. SOLUTION 37: BHELL LTD .............................................................................................. 349
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MAC3761/QB002
1 INTRODUCTION
Dear Student,
Attached please find practice questions with their suggested solutions. We suggest that you
do work through these questions as if under exam conditions, making use of the allocated
marks and time as guidelines. Only once you have completed the integrated questions, you
should compare your answer to the suggested solutions. Your answers to these practice
questions must not be submitted to Unisa, it is purely for self-assessment purposes.
These integrated questions will indicate to you the standard required of you in the exam and
will help you to identify areas of weaknesses that you must pay attention to. Please note that
the questions in the exam will never look exactly the same as any other question, however,
the principles always stay the same.
Please refer to additional practice questions and the question bank posted on myUnisa under
“Additional resources” for more practice questions. Below we have also provided frequently
asked questions (FAQs), especially concerning the exam.
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2 FREQUENTLY ASKED QUESTIONS
1. Can I expect to see identical examination questions as included in previous exam papers or
other questions included in the assignment questions or in other tutorial letters?
No. You will not get questions that you have seen before, although the exam paper will test the
same principles as the questions included in past papers, practice case studies, assignment
questions and the study guide. The principles will be tested on a level that is acceptable for
third year students. Please work through all the examples and questions referenced in the
tutorial letters, assignment questions and the solutions, case studies, additional practice
questions and the question bank (all available on myUnisa). Once working through all these
different examples you will get an understanding of the different methods as to how the
principles can be tested.
2. Which topics are examinable?
All topics are examinable and you should refer to your tutorial letters as well as the MAC3761
Financial Management 8th Edition Study Outline file (under Additional Resources/Managerial
Finance 8th Edition FAQ and Explanation) which highlight key areas to focus on and sections
that are excluded from the MAC3761 - Finance syllabus. You are encouraged to attempt all the
assignments on your own and well in advance to prepare you for the examination.
3. Do I only need to focus on the information included in the MAC3761 - Finance tutorial letters or
do I also need to have knowledge of MAC2602?
In your tutorial letters of MAC3761 – Finance, we refer to assumed prior knowledge and we
refer you to the study guide of MAC2602. If you have not done this specific module (MAC2602)
but an equivalent one, please make sure that you make use of the study material available on
the website relating to MAC2602.
4. Will I receive a formula sheet or do I need to know my formulas?
Only certain formulas may be provided to you should they be tested in the exam.
These formulas include the following:
1. Formulas to calculate the beta coefficient

2. Covariance and standard deviation
3. Portfolio variance based on the correlation coefficient
4. Correlation coefficient
NB. You still need to know all other formulas by heart.
5. What is the examination format of the tests and year end examination for MAC3761?
The MAC3761 examination and test papers will be out of 100 marks (3-hour duration),
consisting of two questions, covering both Costing and Finance. The split between the two
components may not necessarily be 50%/50%, and you are encouraged to always well prepare
for both syllabi. You should also expect the integration of both Costing and Finance topics in a
question.
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MAC3761/QB002
6. Do I need to write out the formula (for ratio calculation) or can I substitute my amounts directly
into the formula to save time?
Writing down the formula and substituting the components / elements will enable the marker to
follow your thought process and may lead to conceptual / principle marks when applicable.
However, it should be noted that no marks are awarded for simply providing the formula.
7. When computing ratios, should we use the average or closing balances if using balance
sheet accounts?
ONLY when the question specifically states that average balances should be used. In all other
instances use the CLOSING BALANCES. You are encouraged to know how to apply both
methods. It should also be noted that when computing ratios, book values must be used instead
of market values, unless specifically instructed to or if the ratio formula requires a market value.
8. In the examination, will we be given specific ratios to compute or will we be required to

compute all ratios under a particular category (e.g. Profitability, Capital Structure/Solvency or
Liquidity)?
You will be asked specific ratios that you need to compute, and these will cover different
categories as outlined in your textbook. However, students may be required to compute ratios
under a particular category in an assignment or an FI concession assessment. You are advised
to study all ratios covered in the textbook and know the formulas off by heart. Cash flow related
ratios are not covered in MAC3761 – Finance syllabus.
9. When commenting on ratios, are there marks allocated for stating that there was an
increase/decrease between two different periods?
No. Marks are only awarded if relevant comment is provided over and above simply stating
there was an increase or decrease. You are advised to study the REQUIRED carefully to
understand whether you need to provide reasons for the increase or if you are required to
generally comment on the ratios. Remember to apply your comment to the scenario and not to
simply “dump” generic statements.
10. What should be included in the debt balance of the debt : equity ratio?
The debt (or interest-bearing debt) balance should include all the interest bearing debt
balances (this includes both the long- and short term portions of long term loans). Bank
overdraft is usually not included in the debt balance as the bank overdraft is normally used to
finance working capital shortfalls, unless the scenario / information depicts the overdraft to be
of a permanent nature.
11. Are preference shares to be classified as equity or liability?
For simplicity, in MAC3761 – Finance the distinguishing factor is whether the preference shares
are redeemable or irredeemable. Redeemable preference shares are classified as a long-term
liability and irredeemable (or non-redeemable) preference shares fall under equity.
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12. Can I make use of my calculator when calculating the Internal Rate of Return (IRR)?
If the question does not specify that you need to use the formula, you may use your calculator.
HOWEVER:
You need to write down the amounts and steps entered into your calculator and the type of
calculator (SHARP or HP) used. Marks will be allocated to these amounts and steps.
13. When calculating the Net Present Value, should I use the factors included in the table or can
I use my calculator?
No tables will be provided in the exams. However, you will be allowed to use a calculator. You
need to write down the amounts and steps entered into your calculator and the type of calculator
(CASIO, SHARP or HP) used. Marks will be allocated to these amounts and steps. There is no
need for writing discount factors when a financial calculator is used. If you do not have a
financial calculator, please make sure that you know the TVM formulas as they will not be
provided in the exam.
14. Will the valuation methods only be tested as part of Mergers and Acquisitions or will it be tested
separately?
You may be tested on both of the above. If an exam includes a valuation question, only one of
the two options will be tested (that is to say either as part of a Mergers and Acquisition question
or as a standalone valuation question).
15. In the examination, are we told which valuation method we should use?
The question will provide guidance as to which method you should use to carry out the
valuation. This information at times may not be clear and you are advised to always know which
methods are applicable.
16. When using the free cash flow method for valuation purposes, the non-operating assets of
the entity will not form part of the free cash flow valuation and should be valued separately.
What is the implication thereof?
It means that you will only include cash flow that represents the operational cash flow that is
“free” for distribution to all providers of capital independent of the way the business is financed.
Therefore, you need to EXCLUDE:
• Non-operational cash flow as non-operating assets should be valued separately

• Non-cash charges (depreciation and amortisation)
• Finance related cash flows
Therefore, you need to INCLUDE:
• The effect of capital expenditure and working capital investment that are necessary to
sustain the projected future free cash flow
• The taxation effect of the cash flows included
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Once you have determined the value by making use of the free cash flow method you will also
value the non-operating assets and the combined value is the value of the entity.
You may be tested on the free cash flow method where you need to exclude and include the
relevant cash flows but we will not examine you on the principle of the combined value. This is
only tested in later MAC modules.
17. When calculating WACC, should I use market values or book values?
Always make use of your market values unless the question specifically states that you need
to use the book values or if the only information available is the book values and there is no
information with relation to the market values. Note that the target capital structure should
always be used first if given in the scenario.
18. How do I take tradability (marketability) discounts into consideration when I value a company?
A scenario may be provided with a tradability discount information – in this case, you should
apply the tradability discount given. In the event that no tradability discount information is
provided and there are clear indications that tradability is an issue (very likely to be so in an
unlisted company), take it into account using your own discretion to decide on %. As a guideline
a discount of between 0% and 15% would be deemed reasonable – however, cue should
always be taken from the information provided.
19. How do I take minority interest discount and control premium into consideration when I value
a company?
Similar to the point above on marketability discount, the scenario may provide you with the
minority interest discount (decrease valuation) or control premium (increase valuation) to be
applied in the valuation. Where this is not given, yet the scenario indicates that there is
underlying control of the business or the stake being valued is for a minority interest, discretion
should be used to establish the fair discount % or premium %. An adjustment ranging from 0%
to 15% should be considered.
20. How do I know by how much the given P/E ratio in valuation calculation needs to be adjusted?
This relates to where a scenario provides an industry (or similar) P/E ratio and risk factors
need to be taken into account to determine a company’s adjusted P/E ratio (+/-). It should be
noted that students can discretionally adjust the P/E ratios as long as they are able to
substantiate why factors increase or decrease the P/E ratio given. An adjustment of more
than 3 points may be deemed less appropriate. NB: When marketability or control premium
is included in your adjusting factors for the P/E ratio then it is not necessary to further
add/deduct from the value.
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3 TOPICS-TO-QUESTIONS MAPPING TABLE
ANALYSIS OF FINANCIAL INFORMATION, STRATEGY AND RISK MANAGEMENT

EDCARS GROUP LIMITED
CARLO TITO MARIO AFRICA
DRESSED FOR SUCCESS
SPLITZ STRORES
NEW MUTUAL
WORKING CAPITAL MANAGEMENT
TOY STARS
A GREYS
ZENZEL
CAPITAL STRUCTURE AND COST OF CAPITAL
KINGSTON
QUEEN POWER
CHAPTERS AND NOVELS
SIMON & SON
S&S
SIMUNYE GOLD
CAPITAL BUDGETING
SANRAL
MASHESHA
PICTURE PERFECT
CITY OF NKANDLA
PURIFIED H2O
AFRICAN FISH & CHIPS
VALUATIONS AND MERGERS & ACQUISITIONS
KGORONG
AFRICAN BAG
FAST AND QUICK
FAZEBOOK
BOXER CASH & CARRY
LION BRANDS
INTEGRATED QUESTIONS
PBC LIMITED
Umfula.co.za
HEALTH MATTERS
DISTELL
TILES & STYLES OF AFRICA
MAGNUS ORANGE
MBOWENI TRADING
MONDLI GROUP
BLUESKY WINGS
FAR & WIDE
BHELL LTD
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MAC3761/QB002
4 QUESTIONS
4.1. QUESTION 01: EDCARS GROUP LIMITED (120 marks; 3½ hours)
Edcars Group Limited (also known as “Edcars”) is the largest non-food retailer in South Africa
and is listed on the Johannesburg Stock Exchange (JSE). The company is the leading retailer
of clothing, home appliances, stationery, cosmetics, accessories and cellular products in
Southern Africa with more than 3 000 retail stores, the majority of which are in South Africa.
Edcars caters for different LSM groups and also has become one of South Africa’s most
trusted brands.
The company’s main rivals are clothing retailers with less exposure in home appliances and
cellular products retail market than Edcars. Home appliances and related cellular products
tend to have quite higher margins than the clothing segment and these items are generally
sold on credit due to their high value.
The influx of discounted Chinese imports, coupled with high unemployment rates, has put the
company’s profit margins under pressure. The recent depreciation of the rand against world’s
major currencies (exacerbated by local politics) has sent the JSE share index into a downward
spiral and the shareholders of Edcars Group Limited have also seen a sharp decline in their
investment value in the company.
Edcars managed to increase its sales in the current year by almost a double-digit figure,
despite strict lending guidelines by the National Credit Regulator (NCR). This increase is partly
as the result of a more robust marketing campaign the company embarked on during the
financial year. Fifteen new stores opened in November 2015 and have performed above
expectations. Management of Edcars has invested a significant amount of capital in getting
these stores fully functioning.
The prime lending rate during the current financial year was 11,25% per annum and there are
365 days in a year. The target capital structure of Edcars Group Limited is 40: 60.
The statement of comprehensive income and the statement of financial position of Edcars
Group Limited are provided below:
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MAC3761/QB002
Statement of comprehensive income

For the year ended 30 September 2016
R million Notes 2016

Revenue 1 23 700
Cost of merchandise (13 300)
Gross profit 10 400
Other operating income 1 500
Other income 2 1 100
Trading expenses 3 (9 000)
Net finance costs 4 (1 000)
Profit before taxation 3 000
Taxation 5 ( 900)
Profit for the year 2 100
Dividends - Interim (600)
Dividends - Final (700)
Retained income for the year 800
Weighted average number of shares (million) 200

Number of outlets 3 100
Staff complement 22 200
Share price – closing (cents) 14 000
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Statement of financial position

At 30 September 2016
R million Notes 2016

Non-current assets
Property, plant and equipment 3 300
Other Investments 2 4 700
Goodwill 500
Current assets
Inventory 5 100
Trade and other receivables – retail 6 700
Prepayments 900
Cash and cash equivalents 800
Total assets 22 000
Capital and reserves

Stated capital 700
Other reserves 400
Retained income 8 800
Total equity 9 900
Non-current liabilities
Long-term portion of interest-bearing debt 4 5 300
Deferred taxation 300
Post-retirement medical benefits 200
Current liabilities
Short-term portion of interest-bearing debt 4 3 000
Trade and other payables 3 200
Operating lease liability 100
Total equity and liabilities 22 000
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NOTES
1. Of the R23,7 billion sales made during the year, about R16,6 billion were on credit.
Over the years, Edcars has maintained healthy relations with its suppliers resulting in
discounts received and flexible terms of payment. Purchases for the year amounted to
R12,1 billion of which 90% was secured on credit. The company also maintains a gross
profit percentage of 32% on clothing brands (viz. excluding homeware and cellular
products).
2. Other income relates to dividends received from investments (marketable securities)

in listed retail companies outside the country.
3. Trading expenses comprise of:

R million
Trading expenses
Depreciation and amortisation 500
Employee costs 3 200
Occupancy costs 2 000
Net bad debts 1 000
Other operating costs 2 300
9 000
4. Finance costs for the year amounted to R1,2 billion and interest income received on
credit bank balance was R200 million. Interest-bearing debt at 30 September 2015 was
R11 billion.
5. The corporate taxation rate is 28%.
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REQUIRED
a) Calculate the following profitability ratios for Edcars Group Limited for the year ended
30 September 2016 and provide possible explanation for any changes in these ratios
from 2015 (2015 ratios are provided below in brackets).
[Round answers to two decimal places]
a. Gross profit margin (41,85%)
b. EBIT margin (13,66%)
c. EBITDA margin (15,06%)
d. Net profit margin (7,07%)
e. Effective tax rate (27,79%)
f. Bad debt as % of sales (6,52%)
g. Total operating costs per store (R2,42m)
h. Revenue per employee (R0,88m)
(Calculations 16 marks & comments 8 marks)

(24)
b) Calculate the following return on capital ratios for Edcars Group Limited for the year
ended 30 September 2016 and provide possible explanation for any changes in these
ratios from 2015 (2015 ratios are provided below in brackets).
a. Return on other investment (27,19%)
b. Return on assets (12,37%)
c. Return on equity (20,94%)
d. Return capital employed (15,70%)
e. Non-current asset turnover (2,22 times)

(15)
c) Calculate the following liquidity ratios for Edcars Group Limited for the year ended 30
September 2016 and provide possible explanation for any changes in these ratios
from 2015 (2015 ratios are provided below in brackets).
a. Current ratio (2,01: 1)
b. Acid-test ratio (1,30: 1)
c. Cash ratio (0,31: 1)
d. Debtors’ days (180 days)
e. Creditors’ days (89 days)
f. Inventory days (129 days)
g. Business days (220 days)
h. Inventory turnover (2,83 times)

(24)
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MAC3761/QB002
d) Calculate the following capital structure/solvency ratios for Edcars Group Limited for
the year ended 30 September 2016; and where possible provide explanation for any
changes in these ratios from 2015 (2015 ratios are provided below in brackets).
a. Interest cover (2,75: 1)
b. Net interest cover (2,78: 1)
c. Effective interest rate (11,28%)
d. Interest-bearing debt to EBITDA (2,99: 1)
e. Interest-bearing debt to equity (86,32%)
f. Net interest-bearing debt to equity (77,34%)
g. Total debt ratio (56,21%)
h. Capital gearing ratio (46,95%)
i. Existing capital structure vs target capital structure

(26)
e) Calculate the following financial market/investor ratios for Edcars Group Limited for
the year ended 30 September 2016; and where possible provide explanation for any
changes in these ratios from 2015 (2015 ratios are provided below in brackets).
a. Earnings per share
b. Dividend per share
c. P/E ratio (14,2)
d. Earnings yield (7,04%)
e. Dividend yield (3,8%)
f. Dividend cover (2,0 times)
g. Dividend pay-out ratio (50,14%)
h. Price / book value multiple (3,18: 1)
i. Price / sales multiple (1,44: 1)

(25)
f) Describe key risks faced by Edcars Group Limited.
(6)
TOTAL: 120 MARKS
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4.2. QUESTION 02: CARLO TITO MARIO AFRICA (160 marks; 4¾ hours)
Carlo Tito Mario Africa (“CTMA”) 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 in 2013, today CTMA has a network
of 162 retail stores (excluding the online platform) in the Southern African Development
Economic region (SADEC) and the east coast of Australia.
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 CTMA at the end of its 2017
financial year was R9,457 billion (market value of equity), a jump of 12,75% from the previous
year. 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 Ceramic
Industries (Pty) Ltd (“Ceramic Industries”), one of its suppliers in an effort to ensure that the
company continues to attain its growth targets. CTMA has offered R5 billion in cash to the
existing shareholders of Ceramic Industries. This strategic acquisition has been well received
by the market, as it will likely lead to cost reduction and other synergistic benefits. CTMA also
continues to invest substantially in information technology and e-commerce to keep abreast of
opportunities in the rapidly changing environment. For ratio computation, CTMA uses closing
balances and book values except for effective interest rate and financial/investor ratios where
specific balances and values must be used in line with the formula.
The statements of comprehensive income and of financial position of Carlo Tito Mario Africa,
including salient information, are presented below.
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MAC3761/QB002
Statement of comprehensive income of Carlo Tito Mario Africa

For the year ended 31 December 2017
2017 2016
Notes Rm Rm
Revenue 6 662 6 819
In-store sales 6 058 6 585
Online sales 604 234
Cost of sales (3 748) (3 925)
Gross profit 2 914 2 894
Maintenance and other indirect expenses (301) (308)
Personnel costs (1 003) (1 031)
Depreciation, amortisation and impairments (410) (372)
Other operating expenses (256) (283)
Profit before interest and taxation 944 900
Finance costs (125) (113)
Finance income 24 8
Taxation (157) (150)
Net profit for the year 686 645
Interim dividend (70) (70)
Final dividend (134) (110)
Retained income for the year 482 465
SALIENT INFORMATION 2017 2016

Trading days 365 366
Number of retail stores 162 182
Number of employees (000) 25,4 26,1
Prime rate (%) 10,3 10,5
Corporate taxation rate (%) 28,0 28,0
Inflation rate (%) 4,8 6,4
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MAC3761/QB002
Statement of financial position of Carlo Tito Mario Africa

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
EQUITY AND LIABILITIES

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

Current tax liability 167 165
Total current liabilities 1 418 953
TOTAL EQUITY AND LIABILITIES 7 310 6 469
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REQUIRED
a) Calculate the following ratios for both the 2016 and 2017 financial years, and provide
possible reasons and ways to improve these ratios going forward.
i). Gross profit margin
ii). Change in online sales (2016 already calculated: 18,1%)
iii). Average salary
iv). Return on capital employed
v). Inventory turnover
vi). Debt: equity ratio
vii). Price-earnings ratio
(Calculation 14 marks, Comment 14 marks, presentation 2 marks)

(30)
b) Calculate the following ratios for both the 2016 and 2017 financial years, and provide
i). EBIT margin
ii). Change in personnel cost (2016 already calculated: 7,3%)
iii). Average sales generated by a store
iv). Return on equity
v). Cash ratio
vi). Capital gearing ratio
vii). Earnings yield
(Calculation 14 marks, comment 14 marks, presentation 2 marks)

(30)
c) Calculate the following ratios for both the 2016 and 2017 financial years, and provide
i). EBITDA margin
ii). Change in cost of sales (2016 already calculated: 3,7%)
iii). Online sales as % of revenue
iv). Return on assets
v). Acid-test ratio
vi). Interest-bearing debt: equity (net)
vii). Dividend cover

(30)
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d) Calculate the following ratios for both the 2016 and 2017 financial years, and provide
i). Net profit margin
ii). Change in net finance costs (2016 already calculated: 4,0%)
iii). Operating profit per store
iv). Non-current asset turnover
v). Current ratio
vi). Total debt ratio
vii). Creditors' payment period
viii). Times interest earned
ix). Dividend yield
x). Price/book value multiple

(42)
e) Calculate the following ratios for both the 2016 and 2017 financial years, and provide
i). Asset turnover
ii). Inventory days
iii). Debt: EBITDA
iv). Price/sales multiple
v). Debtors' collection period
vi). Times interest earned (net)
vii). Dividend pay-out ratio
(Calculation 14 marks, comment 14 marks)

(28)
TOTAL: 160 MARKS
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4.3. QUESTION 03: DRESSED FOR SUCCESS (30 marks; 54 minutes)
Dressed For Success Limited trades in the retail clothing sector and is listed on the general
retail sector of the Johannesburg Securities Exchange (JSE). The company focuses on young
buyers. Their unaudited results for 31 December 2X14 are shown below:
Statement of comprehensive income for the year ended 31 December 2X14
2X14 2X13
R’000 R’000
Turnover 908 191 814 521
Cost of sales (563 078) (553 874)

Opening inventory 120 000 198 000
Purchases 657 078 475 874
Less: Closing inventory (214 000) (120 000)
Gross profit 345 113 260 647

Operating expenses (187 634) (125 340)
Operating profit before other income, interest and tax 157 479 135 307
Finance charges (net) (23 547) (18 712)
Profit after interest before tax 133 932 116 595
Tax (37 500) (32 647)
Profit after tax 96 432 83 948
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Statement of financial position at 31 December 2X14

2X14 2X13
R’000 R’000
ASSETS
Non- current assets 330 187 314 124
Current assets 462 434 261 033
Inventory 214 000 120 000
Trade receivables 89 669 45 421
Cash balances and investments 158 765 95 612
Total Assets 792 621 575 157

Equity 343 876 294 876
Ordinary share capital 82 000 82 000
(82 million ordinary shares at R1 each)
Accumulated reserves 261 876 212 876
Non-current liabilities 188 386 111 579

Long term loan 188 386 111 579
Current liabilities 260 359 168 702
Trade payables 185 269 140 174
Accruals and provisions 75 090 28 528
Total equity and liabilities 792 621 575 157
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Financial ratios of Dressed For Success Limited

Ratio 2X13 2X14
(i) Gross profit percentage 32% ?

(ii) Net operating profit percentage 16,6% ?
(iii) Change in turnover 10,3% ?
(iv) Return on assets 23,5% ?
(v) Return on equity 28,5% ?
(vi) Debtors collection period 29,1 days ?
(vii) Inventory turnover 4,6 times ?
(viii) Debt equity ratio 37,8 : 1 ?
(ix) Cash ratio 0,57 : 1 ?
Additional information:
• The company launched a new exclusive clothing brand at the beginning of 2X14 which
is very popular amongst most teenagers.
• The annual sales occurred evenly throughout the year. Of the turnover in 2014, 65%
was credit sales. This represents a slight decrease from the 70% credit sales in 2X13.
The financial manager has reviewed the company’s credit sales policy and intends to
decrease credit sales to 55% of turnover from 2X15 onwards.
• All inventories are purchased on credit. A substantial part of the new clothing brand is
imported from China. This inventory is ordered in large quantities to save on shipping
costs. The budgeted turnover of the company is R1 089 829 000 for 2X15.
• There are 365 days in a year and the company tax rate is 28%.
• You may ignore the impact of VAT.
REQUIRED
a) Calculate ratios (i) to (ix) for 2X14 in the table above, and provide possible reasons for
the deterioration or improvement thereof from 2X13 to 2X14. Take the additional
information into account for providing these reasons. Round your final answer to the
nearest decimal place.
TOTAL: 30 MARKS
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4.4. QUESTION 04: SPLITZ STORES (PTY) LTD (18 marks; 32 minutes)
Splitz Stores (Pty) Ltd (“Splitz Stores”) was founded 20 years ago by its current chairman,
Shaun Spielberg and the incumbent chief executive officer, Zelda Zara. The shareholders of
Splitz Stores are The Spielberg Family Trust (50%), Ms Zelda Zara (25%), Ms Geraldine
Ackerman, the chief financial officer (10%) and Splitz Stores Employee Share Trust (15%).
The company has over 150 retail stores throughout South Africa, which all sell shoes and
accessories. Splitz Stores prides itself on offering high quality fashion apparel at exceptional
prices, aimed predominantly at 18 to 30-year-old customers. International fashion trends are
closely monitored to ensure that Splitz Stores is abreast of the latest trends.
The National Credit Regulator (NCR) has recently given Splitz Stores a clean audit report for
its credit process when it comes to customers that buy on credit (50% of total sales are on
credit), while hefty penalties have been imposed on a number of its competitors. Generally,
consumer spending in South Africa has been depressed over the past two years as a result of
the knock-on effect of the global financial crisis. However, Splitz Stores has managed to
increase revenue despite the prevailing economic conditions. Ms Zara attributes this to Splitz
Stores’ retention of loyal customers and its ability to attract new customers. Shoes are sourced
both locally and internationally from suppliers who manufacture major shoe brands.
Splitz Stores generates positive cash flows annually. The board of directors of the company
has been exploring various options to utilise cash resources more effectively. Current deposit
rates in the money market are low and Mr Spielberg is of the firm opinion that surplus cash
should be paid out to shareholders and external debt should be considered if funds are needed
at a later stage. However, Ms Zara believes that Splitz Stores should always have a
reasonable level of cash on its balance sheet as a buffer.
REQUIRED
a) Critically discuss the arguments raised by Mr Spielberg and Ms Zara.
(8)
b) Identify and explain the risks that Splitz Stores is exposed to, using the classification
below:
• Business (4 marks)
• Financial (credit, interest & currency) (3 marks)
• Regulatory/legal (3 marks)
(10)
TOTAL: 18 MARKS
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4.5. QUESTION 05: NEW MUTUAL GROUP (30 marks; 54 minutes)
You have just been appointed the Head: Telecommunications Equity Fund at one of the
leading investment houses in South Africa, New Mutual Investment Group (“New Mutual”).
Your team’s mandate is to keep abreast of developments in the telecommunications industry
and advise the investment committee whether to buy, sell or hold shares in the relevant
companies. New Mutual already has exposure in this industry through an 8,75% shareholding
in MTM Group Limited (“MTM”), a leading emerging markets mobile operator. MTM’s share
price has come under a lot of pressure lately due to hefty fines imposed on its subsidiaries, as
well as growing competition in the sector. However, MTM continues to deliver solid results
mainly due to its robust cost control measures and the weakening rand (for its foreign
subsidiaries). The junior analyst in your team has already provided you with MTM’s key ratios
for the year ended 30 September 2016 (see below).
You have been tracking Hola Limited (“Hola”) share performance for a while now, and you are
convinced the company has got the right strategy to grow its business to rival MTM locally and
in the other parts of Africa. Hola is the sixth biggest network provider in the SADC region and,
just like MTM, is listed on the Johannesburg Stock Exchange. The company offers fixed line,
mobile, ICT and data services to business and consumer markets. Hola has just won a R2
billion tender to supply qualifying government employees with contract packages and this is
expected to increase its clientele of 2,8 million active customers by at least 15%. Looking at
its primary performance indicators, you are convinced that buying Hola shares would be a
great investment for New Mutual. MTM has also given its shareholders (including New Mutual)
a good return over the years and you are also considering increasing New Mutual’s exposure
in MTM.
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An extract from the annual report of Hola Limited at 30 September 2016 shows the
following:
Statement of comprehensive income R million

Net revenue 37 325
EBITDA 8 761
Finance charges 1 060
Statement of financial position R million

Non-current assets 33 875
Trade and other receivables 7 375
Other current assets 2 989
Share capital 6 888
Long-term loan 7 104
Current portion of the long-term loan 817
The information below relates to the share history and dividends declared by Hola
Limited:
Performance 2016
Weighted average number of shares (million) 505
Share price - low (cents) 5 141
Share price - high (cents) 6 007
Share price - opening (cents) 5 283
Share price - closing (cents) 5 885
Share price - average (cents) 5 529
Dividends declared - interim (R million) 280
Dividends declared - final (R million) 640
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Below are the ratios for MTM Group Limited calculated for the year ended 30 September
2016:
Ratios
(a) Dividend yield (%) 2,79
(b) Price-earnings ratio (times) 13,06
(c) Net interest-bearing debt to equity ratio (x: 1) 0,16: 1
(d) Return on assets (%) 12
(e) Effective taxation rate (%) 35,79
(f) EBITDA per customer (R) 3 680
(g) Change in share price (%) (2,27)
Additional information
• In computing ratios, New Mutual uses closing balances and book values, unless where
stated otherwise.
• The South African corporate tax rate is 28%.
REQUIRED
(a) Draft a memorandum to the investment committee of New Mutual advising whether to
invest in Hola Limited or to increase its investment in MTM Group Limited, by comparing
the two companies’ ratios computed.
[Round all calculations to the nearest two decimal places]
(Calculations 15 marks; comments 7 marks; and presentation 2 marks)

(24)
(b) Identify key risks faced by the South African telecommunications companies that the
investment committee of New Mutual should be aware of.
(6)
TOTAL: 30 MARKS
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4.6. QUESTION 06: TOY STARS LIMITED (10 marks; 18 minutes)
Toy Stars Limited is a retail company that trades in the toy industry. The following information
is available on 31 December 2X13:
Statement of comprehensive income for the year ending 31 December 2X13

2X13 2X12
Rand Rand
Turnover 4 400 000 4 120 000

Cost of sales 3 300 000 3 200 000
Purchases 3 530 000 3 254 000
Less: Closing inventory (626 000) (396 000)
Gross profit 1 100 000 920 000

Operating expense (820 000) (680 000)
Operating profit 280 000 240 000
Dividends received 5 000 5 000
Finance charges (net) (18 000) (8 000)
Profit before taxation 267 000 237 000
Taxation expense (75 000) (71 000)
Profit after taxation 192 000 166 000
Number of issued shares 700 000 700 000
Dividend (per share) 12 cents 10 cents
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Statement of financial position at 31 December 2X13

2X13 2X12
Rand Rand
Assets
Non-current assets 806 000 600 000
Current assets 1 468 000 1 133 000
Inventory 626 000 396 000
Cash balances and investments 195 000 283 000
Total assets 2 274 000 1 733 000
Equity and liabilities

Equity 1 015 000 865 000
Share capital and share premium 140 000 140 000
Accumulated reserves 875 000 725 000

Long-term loan 107 000 60 000
Current liabilities 1 152 000 808 000

Other payables and provisions 352 000 218 000
Total equity and liabilities 2 274 000 1 733 000
• 50% of the sales in 2X13 were cash sales (in 2X12 it was 60%). Management decided to
extend their credit facilities and believe that it would result in future growth. The intention
is to bring the percentage of cash sales down to 35% in 2X14 and to retain this percentage
split between cash and credit sales in future. The budgeted turnover for 2X14 is R5 120
000. All inventory purchases are done on credit.
REQUIRED
Calculate the working capital required to support the increase in sales budgeted for 2X14.
Show all your calculations.
TOTAL: 10 MARKS
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4.7. QUESTION 07: A GREYS (PTY) LTD (20 marks; 36 minutes)
A Greys (Pty) Limited has been operating an acute care facility in Gauteng. The hospital has
been operating for approximately 19 months.
“At A Greys (Pty) Ltd, our priority is to focus on the delivery of a special brand of health and
care to patients. Within a world class hospital, this unique approach is what makes the
difference and helps us to maintain our position as one of the top hospitals in the country,”
says the hospital director.
The hospital has recently experienced serious cash flow problems, amongst other things due
to the high start-up costs. The cash flow problems have reached critical proportions and
management are desperately seeking a solution to the problems. They have approached the
management consulting services division of their audit firm, where you work as a consultant,
to give them plausible ways by which to resolve their problems.
The following details were discussed during a meeting with the consultants from the audit firm:
Inventory
The value of the hospital's inventory is R750 000. This represents two and a half months’ worth
of inventory. The hospital purchases their inventory from various suppliers based throughout
the country. Not all suppliers are reliable with lead times ranging from anything from 1 to 15
days. Management suggests ceasing all purchases and using up the current inventory.
Thereafter they propose implementing a Just-In-Time inventory system.
Accounts receivable
Approximately 50% of the patients (based on value) are private patients and the remaining
50% are medical aid patients. The accounts department has a very relaxed atmosphere. In
fact, many of the personnel working in this department have on occasions been heard saying,
"I would not exchange this job for anything in the world".
The current amount outstanding from private and medical aid patients is R3 500 000.
Management informs you that medical aids can take up to 150 days to pay. "How long does it
take for you to do the billings for the hospital?” you ask. The reply astonishes you. "Sometimes
up to 90 days".
Approximately 20% of all private patient accounts and the private portions of the medical aid
accounts are irrecoverable. On further investigation you determine that all patients are
admitted, without asking for any deposit or checking validity of medical aid cards. No follow-
ups are done on outstanding amounts.
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Accounts payable
All purchases are done on a 3/10 net 30 basis. The suppliers are very strict regarding this.
Cash resources
The balance on the current account is R1 million (overdraft). The bank has intimated that they
would be willing to increase this facility. The effective interest rate applicable is prime + 5%
per annum. Currently prime is 10%. Further investigation has shown that most medical aids
pay by cheque and that it can take up to five days before the company banks the cheques.
REQUIRED
a) Draft a memorandum to management, in which you critically assess the working
capital management situation of the company. Where necessary, make
recommendations as to how to improve the management thereof as well as ways to
resolve the current cash flow crisis.
TOTAL: 20 MARKS
Comments:
3/10 net 30 - this means the buyer must pay within 30 days of the invoice date, but will receive
a 3% discount if they pay within 10 days of the invoice date.
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4.8. QUESTION 08: ZENZEL (PTY) LTD (20 marks; 36 minutes)
Zenzel (Pty) Ltd is a computer company that distributes computer hardware to smaller retail
companies. The following information relates to the current credit terms and other aspects of
the company's business:
i. Credit sales for the year amounted to R25 750 000.

ii. A 3% discount was offered to debtors that paid within 10 days.
iii. Bad debt provision for the current year amounted to R2 300 000.
iv. Currently, 20% of debtors pay within 10 days, while the remaining debtors take 45 days
on average to settle their accounts.
As many of the clients cannot afford to pay in cash or within the credit terms due to the current
economic circumstances, the company decided to make changes to the current credit policy.
The financial manager proposes to grant credit on 5/10 (5% discount for payment within 10
days) net 45 basis in future. The financial manager anticipates that 55% of current debtors will
now make use of this option, whilst the remaining current debtors will pay within 50 days on
average. Bad debt provision for existing customers will remain the same.
The following assumptions were also included in the proposal:
• Credit sales to new customers will increase with R2 500 000.

• 60% of new customers will pay within the discount period, while the remaining new
customers will pay within 65 days.
• The increase in sales is expected to result in a R1 250 000 increase in inventory, and
trade payables are likely to increase with R850 000.
• Bad debt will increase to R2 345 000 in total as a result of the new sales.
The contribution ratio is determined at 32%. The applicable tax rate is 28%, and WACC is
equal to 20%.
REQUIRED
a) Determine the impact of the new credit policy on the company's profitability and
comment if the company should accept the new credit policy by means of the annual
after-tax cash flow calculations.
TOTAL: 20 MARKS
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4.9. QUESTION 09: KINGSTON LIMITED (25 marks; 45 minutes)
Kingston Ltd is a medium size manufacturing business that is highly dependent on electricity
for production. Due to the recent load shedding, the production and profit of the company is
under massive strain. The directors have decided to invest in a solar power system as an
alternative energy source, to minimise the impact of load shedding on the business as there
is no other short to medium-term solution to the national electricity crisis. The project cost is
estimated at R13 000 000 and will commence as soon as the funding of the project is
confirmed. In order to evaluate the feasibility of the project, the company needs to establish
the company’s weighted average cost of capital.
The following is an extract from the statement of financial position at 31 March 2016.
Notes Rand
Equity and Liabilities
Total equity 65 000 000
Non-distributable reserves 15 000 000
Retained income 10 000 000
Non-current liabilities 26 500 000

12% Debentures 2 16 000 000
Long-term loan 3 10 000 000
Deferred tax 500 000
Current liabilities 2 500 000

Trade payables 1 900 000
Provisions 600 000
Total equity and liabilities 94 000 000
Notes
1. The historical average issue price of ordinary shares is 250 cents. The latest known
share price is 625 cents. Kingston Ltd has just declared and paid a dividend of 25 cents.
In line with its stable annual growth, the company is expecting to declare a dividend of
28 cents for the year ended 31 March 2017.
The government bonds (risk-free rate) currently yield 7%, and the company’s beta is
estimated at 1,2 while the market risk premium 7,9%.
2. Similar debentures are trading at 10% per annum. The interest is payable annually in
arrears and redemption date of these debentures is 31 March 2021.
3. The long-term loan is repayable in three years’ time and carries an interest rate of prime
rate-1%. The current prime rate is 10,5%. Similar loans trade at prime rate+2%.
• The current effective tax rate is 28%. All percentages given are before tax, unless
where otherwise stated.
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REQUIRED
a) Calculate the cost of debt (loan). (2)
b) Calculate the cost of debt (debentures). (2)
c) Calculate the cost of equity, using both the Gordon’s Dividend Growth and Capital
Asset Pricing models. (6)
d) Calculate the market value of a loan (4)
e) Calculate the market value of debentures. (4)
f) Calculate the market value of equity. (4)
g) Calculate the weighted average cost of capital. (3)
TOTAL: 25 MARKS
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4.10. QUESTION 10: QUEEN POWER (45 marks; 1󠄧⅓ hours)
Queen Power Ltd is a medium size manufacturing business that is highly dependent on
electricity for production. Due to the recent load shedding, the production and profit of the
company is under massive strain. The directors have decided to invest in a solar power system
as an alternative energy source, to minimise the impact of load shedding on the business as
there is no other short to medium-term solution to the national electricity crisis. The project
cost is estimated at R25 000 000 and will commence as soon as the funding of the project is
confirmed.
The following is an extract from the statement of financial position at 31 March 2016:
Notes Rand
Retained income 2 10 000 000
10% Preference share capital 3 15 000 000
12% Debentures 4 16 000 000
Trade payables 950 000
Bank overdraft 5 1 000 000
Provisions 600 000
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Notes
1. The historical average issue price of ordinary shares is 160 cents. The latest known
share price is 225 cents (cum dividend of 25 cents). In line with its stable annual growth,
the company is expecting to declare a dividend of 26 cents for the year ended 31 March
2017.
2. The company’s post-tax net profit margin for the year was 20%, while the operating profit
margin was 38%. Despite the slow economic growth and electricity supply disruptions,
the company managed to increase its sales by 11% to R30 000 000. Retained earnings
are not available for future projects.
3. The market value of these irredeemable preference shares is R20 000 000. Preference
shareholders have indicated their willingness to convert their shares into ordinary shares
should a need arise.
4. The 10-year debentures with a redemption discount of R757 574 were issued on 5 April
2010. The yield on similar debentures in the market approximates 8%. Interest is paid
annually in arrears.
5. The bank overdraft bears an average interest rate of 8% per annum. The overdraft is
used to bridge the working capital requirements when the need arises, and the balance
fluctuates monthly.
• The current effective tax rate is 28%. All percentages given are before tax, unless where
otherwise stated.
• The company has a target capital structure of 80% equity and 20% debt. Under the target
capital structure, ordinary share capital is to be maintained at 75% of total equity.
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REQUIRED
a) Calculate the weighted average cost of capital of Queen Power Ltd based on both the
current- and target capital structure, for the purpose of evaluating the proposed project
and comment on the differences between these calculations.
[Round rand amounts to the nearest rand and other numbers to the nearest two decimal
places]
(Calculations 22 marks; comments 3 marks)

(25)
b) Calculate the following ratios for the year ended 31 March 2016 using book values:
[Round your answers to two decimal places]
i). Return on assets

ii). Return on equity
iii). Capital gearing ratio
iv). Asset turnover
v). Price / book value multiple
vi). Interest-bearing debt to equity ratio
vii). Earnings yield

(20)
TOTAL: 45 MARKS
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4.11. QUESTION 11: CHAPTERS & NOVELS (50 marks; 1½ hours)
Chapters & Novels for Africa (trading as “CNA”) is Africa’s largest book and stationery outlet
and is listed on the JSE Limited. CNA has stores only in the major cities on the African
continent but the company, together with its sector peers, has faced tough competition from
online paperless book (e-book) retailers. The project steering committee of CNA has been
tasked with the running of two mutually exclusive initiatives to help boost the financial
performance of the company. Regarding one of the projects, Project Thewuka, the company
is looking at investing R76 253 745 into the business of transporting books and stationery to
different government schools throughout the continent. CNA already has a very credible and
reliable distribution system that covers most parts of Africa, from Cape to Cairo.
The following is an extract from the statement of financial position at 31 March 2017.
Notes Rand
Retained income 10 000 000
Preference share capital 2 30 000 000

Debentures 3 30 000 000

Provisions 600 000
Notes
1. The historical average issue price of ordinary shares is R2,50. The latest share price is
R6,50. CNA has recently declared and paid an ordinary dividend of R3 000 000 (from
R2 666 667 declared and paid a year ago) in line with its profit growth. The share issue
costs approximate 25 cents per share (only for the purpose of calculating cost of equity).
2. The company pays a total annual dividend of R3 450 000 on the preference shares.
Similar shares are trading at an average of 300 basis points below the prime rate.
3. The pre-tax annual interest payment on debentures is R3 450 000. The debentures will
be redeemed on 28 March 2020 at a premium of 10% of the capital amount borrowed.
The capital will be repaid on 31 March 2020, while the premium will be paid a year later
(on 31 March 2021). The going rate in the market for similar debentures is 9%.
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4. The bank overdraft bears an average interest rate of 8% per annum. The overdraft is
used to bridge the working capital requirements when the need arises, and the balance
fluctuates monthly.
5. The company has a target capital structure of 50% equity and 50% debt. Under the target
capital structure, ordinary share capital is to be maintained at 80% of total equity.
The second initiative is the reviewing of the working capital management strategy of the
company, particularly the credit policy. The following information relates to the current credit
terms of the company's business:
i). Sales for the year amounted to R30 000 000 and were all made on credit.
ii). A standard discount of 2,5% is currently offered to debtors paying within 8 days.
iii). Bad debt expense for the current year was R1 750 000.
iv). Currently, one-fourth of debtors pay within 8 days, while the remaining debtors take 50
days on average to settle their accounts.
The responsibility of the project steering committee is to advise the senior management
whether implementing a new credit policy would be of any benefit to CNA. The proposed
credit policy entails the following:
i. Credit is granted to customers on 3/10 (3% discount on payments made within 10 days)
net 40 basis in future. 30% of existing customers will make use of this option, whilst
the remaining current debtors will pay on average within credit terms.
ii. Bad debt expense ratio (based on total credit sales) is expected to be 5,5%.
• The prime interest rate is 10,5%.
• Gross profit margin is maintained at 40% throughout the year.
• There are 365 days in the 2017 financial year.
• The corporate taxation rate is 28%.
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REQUIRED
a) Calculate the weighted average cost of capital of Chapters & Novels for Africa
based on both the current and target capital structure, for the purpose of evaluating
the proposed project and comment on the differences between these calculations.
[Round rand amounts to the nearest rand and other numbers to the nearest one
decimal place.]
(Calculations 22 marks; comments 3 marks) (25)
b) With supporting calculations, determine how Project Thewuka should be financed,

if the company is working towards the target capital structure.
(Calculations 6 marks; comments 4 marks) (10)
c) Advise the project steering committee whether company should adopt the
proposed credit policy or continue with the current one.
[Show all workings starting with the gross profit. Use the weighted average cost
of capital based on the current capital structure, where applicable.]
(10)
d) Describe some of the risks faced by Chapters & Novels for Africa.
(5)
TOTAL: 50 MARKS
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4.12. QUESTION 12: SIMON & SON LIMITED (40 marks; 72 minutes)
Simon & Son Ltd is a medium size manufacturing business that is highly dependent on
electricity for production.
Due to the recent load shedding, the production and profit of the company is under massive
strain. The directors have decided to invest in a solar power system as an alternative energy
source, to minimise the impact of load shedding on the business as there is no other short to
medium-term solution to the national electricity crisis. The project cost is estimated at R16 250
000 and will commence as soon as the funding of the project is confirmed.
The three directors of the company are still not in agreement on how to fund the project and
have tasked your consulting team to investigate the three options on the table as possibilities
of funding the project. They will then make a final decision based on the information provided
by your consulting team.
From the minutes of the last board meeting you gathered that the views of the three directors
are as follows:
Managing director
He is of the opinion that the project should be financed through the issuing of new shares as
debt finance is riskier than equity finance.
Chief operating officer

He is of the opinion that the project should be financed through the issuing of cumulative
redeemable preference shares. He believes that this instrument is cheaper than other debt
instruments available to the company.
Financial director
She is of the opinion that the company should use a mix of debt and equity. Unfortunately, she
was not able to support her recommendation with proper reasons as the meeting had to be
adjourned due to time constraints and other meetings.
Your management consulting team was tasked by the financial director to
• critically evaluate each of the director’s views
• calculate the cost of capital for the proposed project
• establish the capacity of the company to raise debt, equity or both
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The following is an extract of the statement of financial position at 28 February 2016.
Notes Rand
Total liabilities 34 050 000
Preference shares 4 12 000 000
Provisions 600 000
Notes
1. The issued ordinary share capital is made up of 1 million shares. The latest known share
price was R66 cum div and the company has just declared a dividend of R6 per share. The
dividends are expected to grow at a rate of 8% per annum.
2. The retained earnings are not available for future projects.
3. The debentures were issued at an annual pre-tax coupon rate of 11% redeemable at the
end of eight years. Three of the eight years have already expired, and similar debentures
are currently yielding at an annual pre-tax coupon rate of 13,89% in the market.
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4. The 9% preference shares are redeemable at a premium of 5% in 10 years’ time. Dividends

for the current year have been paid and the preference shares in a similar risk class are
currently yielding 12% per annum.
5. The bank overdraft bears an average interest rate of 12,5% (after tax) per annum. The
overdraft is used to bridge the working capital requirements when the need arises, and the
balance fluctuates monthly.
6. The current effective tax rate is 28%.
7. The company has a target capital structure of 60% equity and 40% debt. The 40% target
debt consists of 20% debentures and 20% preference shares.
REQUIRED
a) Calculate the cost of capital for evaluating proposed project and indicate briefly what
assumptions underlie the use of this cost for the new project.
(Calculation 8 marks; comment 3 marks)

(11)
b) Prepare a memorandum to the board of directors where you critically evaluate each of the
director’s views on the appropriate funding instrument.
(10)
c) With supporting calculations, demonstrate the company’s ability / capacity to raise debt,
equity or both, if working towards the target capital structure.
(14)
d) Discuss five (5) qualitative factors that the directors should consider in the planning of the
implementation of the project.
(5)
TOTAL: 40 MARKS
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4.13. QUESTION 13: S & S LIMITED (10 marks; 18 minutes)
Simphiwe is the financial manager of S&S Ltd and has been instructed to find a suitable
funding instrument for new equipment that needs to be purchased at a cost of R375 000. He
has identified two possible funding instruments, namely a loan from CapC Bank and the issue
of new shares. He has discussed the loan option with the bank manager from CapC Bank and
also had discussions with a few investors that are interested in taking up some shares in S&S
Ltd.
The following information is available based on the outcome of his discussions:
CapC Bank
1. The bank manager of CapC Bank has agreed to grant a loan of up to 100% of the total
purchase value.
2. The loan will be granted in multiples of R75 000, and S&S Ltd can decide how many
multiples they would like to borrow from the bank.
3. For a 100% loan, the risk is higher and therefore the interest rate charged for a 100%
loan is 17,5% before tax.
4. For every R75 000 not taken up by S&S, the interest rate will decrease by 1,25% as the
risk to the bank reduces.
Issue of new shares to prospective investors
1. Investors are very keen to invest in S&S Ltd and after discussions; Simphiwe identified
enough interested parties to take up 100% of the investment amount needed.
2. If everything is financed through equity the equity holders will require a return of 15%
per annum on their investment.
3. If a portion of the funds are generated through the loan the investors are of the opinion
that it will increase their risk and they will therefore require a greater return on their
investment. They have agreed that they will require an additional return of 0,25% for
every R75 000 that is borrowed from CapC Bank.
REQUIRED
a) Determine the optimal capital structure of S&S Ltd to finance the new equipment.
Assume a corporate taxation rate of 28%.
TOTAL: 10 MARKS
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4.14. QUESTION 14: SIMUNYE GOLD (50 marks; 90 minutes)
Simunye Gold (“Simunye”) is an independent, South African domiciled and focused mining
group, which currently owns and operates three underground and surface gold operations in
the southern Free State. Simunye owns and operates high quality gold operations in South
Africa – consolidated into one group with one vision and strategy. In addition to its mining
activities, the group owns and manages significant extraction and processing facilities at its
operations, which beneficiate the gold bearing ore mined. Listed on the Johannesburg Stock
Exchange, Simunye is the largest individual producer of gold from South Africa and is one of
the world’s 10 largest gold producers.
The group is currently under negotiations with a Toronto Stock Exchange listed company One
Gold International to acquire its underground and surface operation just 50 kilometres south
of Johannesburg. This will increase Simunye’s annual gold production, enhancing existing
operational flexibility and providing the group with the potential to significantly extend its
operating life. Below are three expected outcomes of purchase price (in Canadian dollars –
CAD) from the negotiations.
Probability Bid price (CAD)
20% 25 000 000
50% 60 000 000
30% 50 000 000
Simunye has a target capital structure of 40%: 60% (debt: equity ratio). Ordinary share capital
must not exceed 80% of total equity. The debt portion is split 50: 50 between loans and
debentures. Loans are to be maintained at the same ratio as they currently are at their carrying
values (Ifafa Bank: Netbank). The capital structure as extracted from the company’s latest
statement of financial position (28 February 2017) is provided below.
Financing instrument Notes Rand (‘000)

Ordinary share capital (96 000 000 shares
1 1 200 000
issued)
8,5% Preference share capital 2 240 000
Loan: Ifafa Bank 3 570 000
Loan: Netbank 4 380 000
Debentures: JP Mogano Bank 5 135 000
Total capital employed 2 525 000
Notes
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1. Only 96% of the authorised share capital has been issued. A Simunye share is
currently trading on the Johannesburg Stock Exchange at R25 (issue costs are
estimated at 20 cents). The expected dividend to be declared on 28 February 2018 is
186 cents in line with company’s annual growth (recent dividend declared in February
2017 was 169 cents).
2. These irredeemable preference shares pay out a dividend of R20,4m annually and
their market value is estimated at R255m.
3. The long-term loan from Ifafa Bank was received on 4 March 2016 (a year ago) at
JIBAR + 1% and it will be repaid in two years’ time. Loans bearing similar terms are
trading at JIBAR + 0,75%.
4. The Netbank loan was issued 3 years ago at JIBAR + 1,25% and the going interest
rate for similar loans averages JIBAR + 0,5%.
5. The JP Mogano Bank debentures were issued at the beginning of this current financial
year (1 March 2016) and will be redeemed at a premium of 5% on 28 February 2020.
The coupon rate on these debentures is 9%, whereas the market rate for similar
debentures is 8,5%.
• The banks have indicated their willingness to avail their facilities for the funding of One
Gold International acquisition. The banks and shareholders will also accept any
reduction in capital (through share buyback and loan repayment) if necessary.
• Simunye aims to operate at its maximum ordinary share capital: total equity ratio of
80% where feasible.
• One Canadian dollar (CAD) buys 9,50 South African rand (ZAR) and this exchange
rate is expected to remain at these levels for the foreseeable future.
• The relevant JIBAR (Johannesburg Interbank Average Rate) is quoted at 8,25%. All
the above loans are referenced to this JIBAR.
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REQUIRED
a) Calculate or determine the relevant cost of capital for each of the financing instruments
used by Simunye to finance the new acquisition.
(10 marks)
b) Calculate the weighted average cost of capital of Simunye based on its target capital
structure.
(7 marks)
c) Calculate the weighted average cost of capital of Simunye based on its existing capital
structure (before the new acquisition) using book values.
(4 marks)
d) Calculate the probable bid price (R) for One Gold International business to be acquired
by Simunye.
(2 marks)
e) Determine how the new acquisition of One Gold International operations should be
financed based on book values, using where possible available loan facilities and/or a
fresh issue of shares.
(11 marks)
f) Calculate the market values for the capital employed by Simunye.

(12 marks)
g) Calculate the weighted average cost of capital of Simunye based on its existing capital
structure (before the new acquisition) using market values.
(4 marks)
TOTAL: 50 MARKS
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4.15. QUESTION 15: SANRAL (20 marks; 36 minutes)
After the successful hosting of the 2010 FIFA World Cup® and successful launching of the e-
toll system in Gauteng, the Western Cape Provincial Government (WCG) is following suit. The
City of Cape Town has won a bid to host Olympics 2024 and the WCG has started reviewing
its infrastructure with the view of making necessary upgrades.
South African National Roads Agency Limited (SANRAL) is responsible for the road
infrastructure throughout the country and has been given a mandate to improve major road
networks in the Western Cape in preparation for the Olympics games in 2024. The Department
of Transport and Public Works has made it clear that it would not allocate any funds to the
upgrade.
SANRAL is considering two alternatives for recovering the capital outlay on the road
infrastructure over the next five years. SANRAL can either use the e-toll system or the fuel
levy system.
Alternative 1: e-toll system

How it works: Gantries are constructed at different points on major roads around the Western
Cape. As a motor vehicle passes through a gantry, the car registration details are read
electronically and the information is passed directly to the control centre in Paarl where the
amount owed (toll fee) for passing that gantry is established. This is immediately sent to the
motor vehicle owner’s bank, instructing the bank to debit the owner’s account with the toll fee.
All Western Cape car owners are required to register with SANRAL. Visitors to the Western
Cape Province also need to register at any of the leading retailers in the province. A customer
centre will be established to attend to general road user queries, unpaid toll fees, unregistered
motor vehicles.
Alternative 2: Fuel levy system

How it works: No e-toll infrastructure will be put in place but a special levy will be charged to
the fuel price, meaning that the retail price of fuel (across all grades) will be increased at all
fuel stations across the country. This levy is then electronically transferred to SANRAL’s
account as fuel is purchased. Only the levy collected in the Western Cape will be used for the
Western Cape infrastructure development.
SANRAL has estimated capital expenditure (CAPEX) at the start of the project, where
applicable to be as follows:
CAPEX R
Roads 17 884 002
Gantries (civil works) 393 867
e-toll IT systems 1 837 480
Control centre – Paarl 229 756
Customer centre 217 217
IT Systems - fuel levy 5 545 682
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Running of the e-toll system

SANRAL expects 2 300 000 cars to go through the gantries per annum at an average toll fee
of R3,60 (which will not change) per car. About 30% of the cars passing the gantries will not
register for e-toll, making it impossible to recover amount owed by the unregistered users. The
toll revenue is expected to grow in line with inflation and increase in number of cars annually.
Electronic Tolling Collection Company has provisionally been awarded R6 500 000 tender to
manage the collection of toll fees and this is paid annually in arrears in equal instalments over
the next five years. Working capital of R1 677 123 is required at the start of the project.
Running of the fuel levy system

SANRAL will charge a fixed fuel levy of 55c per litre for the next five years. South African road
users currently consume 35 000 000 litres of fuel per annum, of which the Western Cape will
consume 30% (this ratio will apply for the duration of the project). Annual consumption of fuel
will increase in line with increase in number of road users.
SANRAL has estimated the initial working capital of R234 187. Operating costs are budgeted
at R650 000 per annum.
National Association of Automobile Manufacturers of South Africa (NAAMSA) expects the
Western Cape road users to increase at a steady annual rate of 6% for the duration of the
project. SANRAL is exempt from Income Tax in terms of s 10(1)(t)(iii) of the Income Tax Act.
The WACC is calculated using the RSA government bond rate of 7% before tax
REQUIRED
a) Using NPV calculation, determine which system SANRAL should use to recover the
capital outlay.
TOTAL: 20 MARKS
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4.16. QUESTION 16: MASHESHA (PTY) LTD (30 marks; 54 minutes)
MASHESHA (Pty) Ltd (“MASHESHA”) is a transport and logistics company, which operates a
national distribution network with a large client base and utilises a rigid dispatch and
prioritisation schedule. MASHESHA is currently in talks with Moya Technology Limited
(“Moya”), a company that distributes prepaid airtime to wholesalers, retailers, petrol stations
and end users throughout South Africa.
Moya’s business model is such that it customises the delivery of prepaid airtime according to
the circumstances and requirements of its clients, some of which are highlighted below:
• Moya supplies a large number of retail chain stores with prepaid airtime by sending
them a file via email or electronic file transfer. The file contains PINs (personal
identification number) which retailers then split and send to their various outlets.
• Prepaid airtime is supplied to smaller businesses such as corner cafes by installing
mobile Point Of Sale (POS) terminals. This allows for encrypted PIN inventory of
frequently used products to be delivered to and stored on the POS device. The devices
are operated by the cashier and are password protected, ensuring transactions are
secure. For the less structured operations mobile solutions are provided.
• Vending machines are supplied to busy supermarkets, 24 hour forecourts and hotels.
These are standalone units which can be operated by the customer.
Moya had previously undertaken the delivery of prepaid airtime in-house. Moya has recently
been experiencing several staffing problems and given the nature of its large, geographically
dispersed customer base, Moya has been finding it difficult to keep up and has made many
late deliveries over the past few months. Moya’s customers are extremely unhappy and have
been inundating them with complaints.
Moya has decided to outsource its distribution operations to MASHESHA in order to focus on
its primary business (technological solutions for the telecommunication industry). For the
delivery of prepaid airtime to its customers, Moya has proposed to pay MASHESHA a fixed
monthly fee of R450 000 and an additional R75 per 100 km travelled (all amounts at today’s
value). In return, MASHESHA will have to pay a once off cancellation fee of R100 000 (payable
immediately) in the event that MASHESHA terminates the contract before the expiration of its
five-year period.
In order to undertake the delivery service MASHESHA will have to purchase a fleet of delivery
trucks, an upfront capital investment of R 4 800 000. These trucks are reliable and fuel efficient
(requiring seven litres of fuel per 100 km for the first 3 years whilst thereafter 9 litres of fuel are
required per 100km).
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In accordance with the delivery fleet maintenance plan, annual maintenance costs (expected
to be R 336 000 in year 1) will escalate with increasing multiples of 2% every year, as the
delivery fleet increases with age and usage.
For accounting purposes MASHESHA depreciates its trucks over the useful lives determined
to be four years. SARS allows a wear & tear of 20% per annum on a straight line method. The
trucks will have a combined resale value of R1 200 000 at the end of five years. Total monthly
salaries of the truck drivers are expected to amount to R 264 000 in the first year with a 7%
annual increase thereafter. Other costs relating to the delivery fleet is expected to amount to
R 65 000 per year in year one.
• The current tax rate of 28% is expected to be applicable for the next 5 years.
• The fees paid by Moya to MASHESHA and other costs relating to the delivery fleet are
subject to an annual escalation clause of 5,9%.
• The weighted average cost of capital of MASHESHA is 15%.
• The current price of diesel amounts to R11,41/litre and average annual increases per
litre are expected to be as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
50c 70c 75c 80c 90c
• Based on current information and taking into account Moya’s growth plans, the
following represents the kilometres MASHESHA expects its fleet of delivery trucks to
travel over the next 5 years:
600 000 605 400 612 665 704 565 713 019
REQURED
a) Based on the principles of capital budgeting, advise MASHESHA whether it will be
beneficial to accept the terms of the contract proposed by Moya.
(20)
b) Discuss financial factors that MASHESHA should consider before accepting the terms
of the contract proposed by Moya.
(5)
c) Discuss the qualitative factors that Moya should consider when deciding on whether
to perform the delivery function inhouse as opposed to outsourcing.
(5)
TOTAL: 30 MARKS
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4.17. QUESTION 17: PICTURE PERFECT LIMITED (15 marks; 27 minutes)
Picture Perfect Ltd is in the printing industry and makes use of digital litho printers. The
operations manager has brought it to the attention of the financial manager that one of the litho
printers needs to be replaced.
Existing printer New printer
Current tax value R100 000
Cost price R200 000 R250 000
Current realisable value R180 000
Realisable value after 4 years R40 000 R60 000
Working capital R35 000 R50 000
Sales generated by printer per annum R350 000 R450 000
Fixed cost R100 000 R150 000
Variable cost R50 000 R70 000
• Depreciation is not included in the variable cost. SARS allows for wear and tear over
four years.
• The cost of capital is 15%.
• The current tax rate is 28%.
REQUIRED
a) Should Picture Perfect Ltd continue using their existing printer, or should they invest in
a new one? Perform a net present value (NPV) calculation to substantiate your
answer.
[Round your final answer to the nearest rand]
(12)
b) List two qualitative factors that Picture Perfect Ltd needs to consider when evaluating
whether or not to replace the existing printer.
(2)
c) Explain the difference between mutually exclusive and independent projects.

(1)
TOTAL: 15 MARKS
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4.18. QUESTION 18: CITY OF NKANDLA (25 marks; 45 minutes)
The City of Nkandla has embarked on a campaign of becoming one of Africa’s top tourist
attractions. The City Council bought a fleet of open-top buses from a Brazilian supplier. An
order of 50 identical buses was placed on 2 January 2015 at a unit cost of US $48 000, and
the buses arrived at the Durban harbour on 29 January 2015. An EFT payment was made on
the 29 January 2015 and a further R5 320 000 was spent on modification of the buses. The
buses were ready for use on 31 January 2015.
These 50-seater buses visit famous sites and attractions around the City of Nkandla and
tourists can hop-on-and-off with a ticket that is valid for the entire day. Ticket costs R30 per
adult, but children (under 12 years of age) pay a third of the ticket cost. Ticket sales are
expected to grow at an average of 4% per annum over the next 5 years. Working capital
requirements were budgeted at R4 000 000 at the start of the project.
The Council estimated that each bus would operate at 80% capacity throughout the year, with
1 trip scheduled per day. For every 3 adult tourists, there will be one child – the adult/child
ratio and the bus capacity are constant for the duration of the project (5 years).
SA Fleet Enterprise (SAFE) was awarded a fixed contract of R20 000 000 to manage the fleet,
with equal payments made annually for the next 5 years (the contract amount is after taking
into account total estimated cost of running the project and spreading these costs equally over
the 5 years). SAFE will be responsible for maintaining the buses, personnel management and
all the operational costs of running the project.
• The City of Nkandla depreciates its buses over 5 years on a straight line basis and the
value of buses at the end of the project is negligible.
• Weighted average cost of capital is 10%.
• The City of Nkandla is exempt from Income Tax in terms of s10(1)(c).
• Assume 250 days in operation per annum.
QUOTATIONS FROM THE BANK – Rand per USD

Date Selling rate Buying rate
02/01/2015 10,000 9,800
29/01/2015 10,450 10,250
31/01/2015 10,500 10,300

Month average 10,250 10,000
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REQUIRED
a) Determine whether you support the decision taken by the Council to invest in the
project.
(16)
b) Based on your answer above, calculate the project’s discounted payback period.
(4)
c) What are the qualitative factors that the Council would have considered before
embarking on the project? List.
(5)
TOTAL: 25 MARKS
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4.19. QUESTION 19: PURIFIED H2O (PTY) LTD (20 marks; 36 minutes)
Purified H2O (Pty) Ltd (“Purified H2O”) is a private company selling purified water to companies,
government departments and individuals mainly in the Gauteng area. The company sells
bottled water ranging from 500 ml to 10 litres. The business is growing faster than anticipated
and as a result the directors have decided to open one more city branch in either Sandton or
Pietermaritzburg. Purified H2O has limited financial resources and can only invest in one
branch. You, as the chief financial officer, have been requested to analyse the commercial
viability of the two cities and recommend which city will be the best for opening the branch.
After much research, the following information is available to you:
THE SANDTON MARKET
1. The new purifying machine will cost the company R600 000 and can be sold for R100
000 in five years’ time. Working capital of R120 000 will be required at the opening of
the branch.
2. The following are prices for different bottle sizes at the Sandton branch for walk-in
customers:
500ml – R5
1l – R7,50
5l – R25
10l – R50
105 000 walk-in customers (“sales volume”) are projected annually for the next five
years. Sales volume is expected to be equal for 500 ml, 1 l and 5 l. The 10l bottle size
has a low demand and it is expected that its sales volume will be half that of 500ml. The
sales mix is estimated to remain the same for the next five years.
3. The Sandton Conference Centre (SCC) is interested in securing a contract with Purified
H2O to be the sole provider of bottled water for their conference facility over a period of
five years. The conference centre has 20 conference rooms that are used for 26 days in
a month, with an average daily consumption of 50 units of 500 ml bottled water per
conference room. A special price of R4 per 500 ml has been agreed with SCC.
4. Good Life Restaurant at Sandton Square has agreed to purchase annually 200 000 500
ml bottles on condition that the price is R4.50 per bottle for the next five years.
5. Variable costs are estimated at R1 019 000 and fixed costs, including depreciation at
R975 000.
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THE PIETERMARITZBURG MARKET
1. Purified H2O will buy a second hand purifying machine at a cost of R500 000. The
working capital of R80 000 at the start of the project.
2. Normal average sales to walk-in customers are estimated at R3 500 000 per annum and
are estimated to remain the same for the next five years.
3. The company has registered on the supplier databases of government departments in
Pietermaritzburg. It is estimated that an average of R200 000 sales per annum will be
generated from the departments. These projections are in line with the actual sales
received by the Pretoria CBD branch.
4. The contribution ratio of the total branch sales is projected at 70% for the duration of
this five-year venture.
5. Cash fixed costs are estimated at R900 000 per annum.
• The current company tax rate is 28%.

• The company uses a weighted average cost of capital of 12%.
• SARS allows a wear and tear of six years for a brand new purifying machine, and five
years for a second-hand machine.
• The depreciation policy of the company is eight years for new machines and five years
for second-hand machines
REQUIRED
a) Advise the management team of Purified H2O whether they should invest in any of
the two branches.
TOTAL: 20 MARKS
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4.20. QUESTION 20: AFRICAN FISH & CHIPS (PTY) LTD (130 marks; 210 minutes)
African Fish & Chips (Pty) Ltd (“AFC”) is a fish and chips retailer and franchiser founded by
the famous British immigrant, Stuart Barker in 2010. Since its establishment, AFC has
achieved rapid growth with 10 of its own outlets opened in 2016 alone and about 2 000 direct
and indirect job opportunities created to date.
As a 100% family-owned business, initially Stuart Barker had to rely heavily on third party
funding, mainly banks and other development finance institutions. However, with increasing
profit levels the company has started to reduce its debt levels and is now working towards its
target capital structure (of 60%: 40% debt-to-equity at book values).
The company exclusively owns and runs all African Fish & Chips outlets that operate in three
coastal provinces. The inland stores are run and owned by licensed franchisees, which in turn
pay a royalty fee of 4% (based on their gross sales).
Despite a 15% increase in revenue for AFC, 2017 has not been a smooth ride for the company
and its peers as the country continues to be under a cloud of political uncertainty, the recent
credit downgrades, high levels of unemployment and abrupt climate changes. Because of
these challenging market conditions, AFC also had to restructure its business and revise its
growth strategy.
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The financial statements for the year ended 30 June 2017 are provided below.
Statement of comprehensive income

For the year ended 30 June 2017
R 000 Notes 2017

Revenue 242 455
Cost of sales (136 711)
Gross profit 105 744
Net operating expenses 1 (67 144)
Operating profit 38 600
Other income 2 3 486
Finance costs 3 (14 138)
Taxation (8 128)
Ordinary dividend (4 520)
SALIENT INFORMATION
Number of own stores 75
Number of franchise stores 114
Number of employees 312
Number of days in a year 360
Inflation rate (%) 5,70
Required rate of return 10,5
Prime lending rate (%) 10,75
Corporate taxation rate (%) 28,0
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Statement of financial position

At 30 June 2017
R 000 Notes 2017
ASSETS
Non-current assets
Other investments and loans 2 21 362
Current assets
Inventory 20 874
Total assets 228 866

Ordinary share capital (40 cents each) 3 8 000
Total equity 68 666
Preference share capital 3 20 000
Debentures 3 48 000
Long-term loan 3 58 500
Deferred tax 6 249
Current liabilities
Short-term borrowings 4 101
Provisions 3 174
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Notes
1. Net operating expenses (operating expenses less franchise income) are made up of
the following:
R 000
Salaries and wages 69 880
Depreciation 8 150
Administration and marketing 1 326
Amortisation 1 046
Other operating costs 1 818
Franchise income (15 076)
Net operating expenses 67 144
2. Other income comprises of the following items:

R 000
Dividend income – JSE listed shares 537
Interest received – call account 1 826
Profit on sale of an associate 1 123
Other income 3 486
3. Finance costs relate to interest paid on all the company’s interest-bearing loans and
debentures. They also include a preference share dividend amount of R1,9 million.
Finance costs are paid annually in arrears at a fixed interest (or dividend) rate, unless
stated otherwise. At the beginning of the current financial year the company had loans,
debentures and preference shares totalling R140 million.
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In its effort to remain one of the largest fast food outlets in the country, AFC is evaluating two
options for viability. However, due to funding constraints the company can only invest in one.
Below is one of the company’s independent projects.
Project Franchise 2023

The company has just spent R200 000 on a campaign to promote its franchise business to
sports stars in an effort to bolster brand awareness. There are plans to open ten franchises
throughout South Africa as AFC continues to support young entrepreneurs. It has been
established that location is key in the fast food market and new franchisees struggle to secure
good locations on their own. It is for this reason that AFC enters into a lease agreement on
behalf of its franchisees. AFC is responsible for paying an upfront refundable deposit
equivalent to an annual rental amount payable under the rental agreement (the deposit is
adjusted annually to keep up with the rental amount). The franchisees will pay the annual
rental directly into the landlords’ bank account at the start of the year. The average annual
rental per store is R200 000 and this is subject to an annual rental escalation clause of 10%.
The lease is initially for a six-year period.
AFC will incur an upfront setup cost of R1 500 000 to help new franchise businesses to get off
the ground – this amount is not recoverable from the franchisees, although it is fully tax
deductible. AFC estimates gross sales to be made by each franchise store to be R1,5 million
in the first year. Gross sales are expected to increase by 6% year on year. Total inspection
costs are estimated at R145 000 per annum. These costs include a 15% annual depreciation
on a mobile inspector, a special vehicle used to conduct site visits. The cost of the mobile
inspector is R500 000 (purchased at start of the project). The motor vehicle will be sold at the
end of the project (2023) for R50 000.
The royalty fee percentage remains fixed throughout the six-year franchise deal and the royalty
fees are received at the end of each year. The wear and tear allowed by SARS on vehicles
used by AFC averages 15% per annum. The company’s tax liability (or refund) is paid (or
received) one year after being due, except in the last year of the project where the tax is paid
(or received) in that last year. The project of opening the ten franchise stores is indivisible.
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REQUIRED
a) Calculate the following profitability ratios of African Fish & Chips (Pty) Ltd for the 2017
financial year; and provide, where possible, reasons for any changes from 2016
financial year ratios (given in brackets).
[Round rand amounts to the nearest rand and all other amounts to one decimal place]
i). Gross profit margin (48,2%)
ii). EBITDA margin (17,0%)
iii). Administration & marketing as % of operating expenses (2,0%)
iv). Income per franchise store (R128 806)
v). Average salary per employee (R202 714)
vi). Effective tax rate (27,6%)
(Calculation 12 marks; comment 6 marks) (18)
b) Using book values where applicable, calculate the following return on invested capital
ratios of African Fish & Chips (Pty) Ltd for the 2017 financial year; and provide, where
possible, reasons for any changes from 2016 financial year ratios (given in brackets).
[Round all amounts to one decimal place]

i). Return on assets (19,2%)
ii). Return on equity (26,2%)
iii). Return on capital employed (17,8%)
iv). Non-current asset turnover (1,3 times)
c) Calculate the following liquidity ratios of African Fish & Chips (Pty) Ltd for the 2017
financial year; and provide, where possible, reasons for any changes from 2016
financial year ratios (given in brackets).

i). Current ratio (1,9: 1)
ii). Inventory turnover times (5,6 times)
iii). Creditors’ payment period (58 days)
iv). Acid-test ratio (1,3: 1)
v). Business cycle (6 days)
vi). Cash ratio (1,3: 1)
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d) Using book values where applicable, calculate the following capital structure/solvency
ratios of African Fish & Chips (Pty) Ltd for the 2017 financial year; and provide, where
possible, reasons for any changes from 2016 financial year ratios (given in brackets).

i). Capital gearing ratio (0,74: 1)
ii). Debt ratio (72,1%)
iii). Times interest earned (3,3 times)
iv). Net interest cover (3,9 times)
v). Interest-bearing debt: equity ratio (2,2: 1)
vi). Net interest-bearing debt: equity ratio (1,5: 1)
vii). Interest-bearing debt: EBITDA (3,2: 1)
viii). Effective interest rate (9,6%)
e) Calculate the following financial markets/investor ratios of African Fish & Chips (Pty)
Ltd for the 2017 financial year; and provide, where possible, reasons for any changes
from 2016 financial year ratios (given in brackets).

i). Earnings per share (92 cents)
ii). Dividends per share (18,8 cents)
iii). Dividend cover (4,9 times)
iv). Dividend pay-out ratio (20,4%)
f) Discuss the business risks that African Fish & Chips (Pty) Ltd faces in its business
operations and advise on how these risks can be mitigated or reduced.
(10)
g) To evaluate the project outlined above under “Additional information”, you are required
to perform the calculations below, and advise if the company should undertake Project
Franchise 2023:
i). Net present value
ii). Net present value index
iii). Internal rate of return
iv). Payback period
(26)
h) Discuss the qualitative factors that African Fish & Chips (Pty) Ltd would have to
consider over and above the decision made in (d) above.
(6)
i) Describe two types of projects that are dealt with in capital budgeting and provide a
business example for each type.
(4)
TOTAL: 130 MARKS
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4.21. QUESTION 21: KGORONG (PTY) LTD (15 marks; 27 minutes)
The following information relates to Kgorong (Pty) Ltd:
• Latest dividend declared and paid in 2013: R 550 000
• Expected growth in dividends:

2014: 10%
2015: 15%
2016: 20%
2017 and thereafter: 25% per annum
• 28% is a fair rate of return on minority shares.
REQUIRED
a) Calculate the value of a minority share of 10% in Kgorong (Pty) Ltd.
(12)
b) What conditions should be met in order to obtain more reliable results when using
the Gordon Dividend Growth Model to value a minority share?
(3)
TOTAL: 15 MARKS
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4.22. QUESTION 22: AFRICAN BAG (PTY) LTD (12 marks; 22 minutes)
African Bag (Pty) Ltd (“African Bag”) is a Midrand-based retailer with operations throughout
Africa. The company imports and sells high-end handbag brands. More than 95% of its sales
are on credit, as most clients are not able to pay cash for the products.
The local economy has come under immense pressure because of the decline in global
demand of local resources and a record high unemployment rate. This, coupled with poor
credit risk management policy, has led to African Bag writing off 50% of its debtors’ book for
the year ended 31 December 2014.
The company also has a senior debt in its balance sheet, with a repayment date of 30
September 2015. One of the few options the company has to be able to continue as a going
concern is a fresh issue of shares to recapitalise its balance sheet. Jimmy Marcus, a leading
international retailer has, for years been trying to enter the South African market, and has now
made an offer to purchase 30% of African Bag.
The directors of African Bags have accepted the offer and the two companies expect the deal
to be completed on 30 June 2015 and the funds will be transferred immediately into African
Bag’s money market account on the same day. These funds will be kept in the account until
30 September 2015. Interest is earned/ paid equally throughout the year. Net operating profit
before tax for the 9 months ending on 30 September 2015 is expected to increase by 5% and
interest rates are not expected to change.
Information as at 31 December 2014

R'000
Enterprise value (after bad debt adjustment) 620 000
Net operating profit after tax (NOPAT) 68 054
Senior debt 200 000
Number of shares in issue 1 000 000

Interest on senior debt (p.a.) 10%
Interest on money market account (p.a.) 5%
Tax rate 28%
REQUIRED
a) Calculate the estimated EPS at 30 September 2015 of African Bag (Pty) Limited.
TOTAL: 12 MARKS
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4.23. QUESTION 23: FAST AND QUICK (20 marks; 36 minutes)
Fast Ltd made an offer to the shareholders of Quick Ltd on the basis of 4 shares in Fast Ltd
for every 5 shares held in Quick Ltd. The relevant financial information based on the latest
financial statements and market movements are as follows:
Fast Ltd Quick Ltd

Shares in issue (‘000) 200 000 60 000
Earnings after tax (R’000) 840 000 168 000
Dividend pay-out ratio 30% 40%
Net asset value (R’000) 6 400 000 1 020 000
Price per share (cent) 5 124 3 920
Debt: equity ratio 2:1 0,8:1
Both companies have paid dividends consistently in the past.
REQUIRED
a) What is the total number of shares that Fast Ltd will issue to the shareholders of Quick
Ltd?
(2)
b) What is the value placed on one Quick Ltd share as suggested by the offer of Fast
Ltd?
(2)
c) Advise the shareholders of Quick Ltd whether or not they should proceed with the
negotiations (consider the new business value, earnings and dividends). Note any
issues that they should address during the negotiation process.
(14)
d) Should Fast Ltd offer an additional R1 per Quick Ltd share in cash, over and above
the share exchange? Will this influence your initial recommendation?
(2)
TOTAL: 20 MARKS
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4.24. QUESTION 24: FAZEBOOK LTD (35 marks; 60 minutes)
FazeBook Limited (“FazeBook”) is a popular free social networking website that allows
registered users to create profiles, upload photos and video, send messages and keep in touch
with friends, family and colleagues. The site, which is available in 37 different languages,
includes public features such as:
• Marketplace - allows members to post, read and respond to classified ads.

• Groups - allows members who have common interests to find each other and interact.
• Events - allows members to publicise an event, invite guests and track who plans to
attend.
• Pages - allows members to create and promote a public page built around a specific
topic.
• Presence technology - allows members to see which contacts are online and chat.
Within each member's personal profile, there are several key networking components. The
most popular is arguably the Wall, which is essentially a virtual bulletin board. Messages left
on a member's Wall can be text, video or photos. Another popular component is the virtual
Photo Album. Photos can be uploaded from the desktop or directly from a smartphone camera.
An interactive album feature allows the member's contacts (who are generically called
"friends") to comment on each other's photos and identify (tag) people in the photos. Another
popular profile component is status updates, a micro blogging feature that allows members to
broadcast short Twitter-like announcements to their friends. All interactions are published in a
news feed, which is distributed in real-time to the member's friends.
Over the past year, the value of FazeBook shares has more than doubled. It has recently made
a bid for Wassup Limited (“Wassup”). Wassup has more than 450 million monthly users and
is popular with people looking to avoid text messaging charges. If successful it will be the
social networking giant's largest acquisition to date. In a statement announcing the proposed
deal, FazeBook’s founder Faizel Berg described Wassup's services as "incredibly valuable".
Wassup allows users to send messages over internet connections, avoiding text messaging
fees. The company claims it is currently registering one million new users a day. It makes
money by charging users a subscription fee of R1 per year, although it offers a free model as
well.
The bid offer is one share in FazeBook Limited for every four shares held in Wassup Limited.
Financial information relating to each company is given below:
Extract from the Statements of Financial Performance for the year ended 30 April 2017
FazeBook Wassup
R’m R’m
Turnover 1 500 450
Taxation 63 12
Profit after taxation 93 21
Dividends 12 12
Accumulated profit for the year 81 9
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FazeBook expects that the following specific synergies and related costs will flow from the
transaction:
• Some land and buildings of Wassup would be sold for R1 000 000 (after taxation) and
do not need to be replaced (the combined entity will have sufficient office space).
• Annual post-taxation wage savings at current prices are expected to be R750 000, while
future wage increases are expected to be double the inflation rate for next year and
equal to inflation for the following years.
• Fixed advertising and distribution cost savings of R200 000 (after taxation) would apply
for next year and for each year thereafter.
• Legal and other acquisition-related costs at present value are expected to amount to
R2,5 million (after taxation).
The following additional information is available:
• WACC of Wassup has been estimated at 18%.

• Company income taxation rate is 28%.
• Current rate of inflation is 5% per annum and it is expected to remain at approximately
this level in the foreseeable future.
• Unless otherwise mentioned, all fixed expenses are expected to grow by inflation only.
Statements of Financial Position as at 30 April 2017
FazeBook Wassup
R’m R’m
ASSETS
Current assets 330 175

TOTAL ASSETS 930 475
Share capital 270 150

(@ 150c each for both companies)
Retained earnings 210 135
Total equity 480 285
Non-current liabilities 300 90
Current liabilities 150 100
Total liabilities 450 190

TOTAL EQUITY AND LIABILITIES 930 475
Price earnings ratio (prior to bid) 20 12
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REQUIRED
(a) Calculate the present value of all specific synergies between FazeBook and
Wassup, net of associated costs.
[Round the saving up to the nearest million rand] (10)
(b) Establish the Rand value of FazeBook offer to Wassup, assuming that the offer
made by FazeBook reflects the fair market value of the two businesses.
(5)
(c) Discuss when the payment methods of (i) shares; (ii) cash, should be used and
the benefit(s) of using each particular method of payment.
(5)
(d) Calculate the earnings per share of FazeBook following a successful take-over.
(5)
(e) State what investigations you would expect FazeBook to have made prior to
instigating the take-over bid.
(7)
(f) Following a series of detailed talks and negotiations between FazeBook and
Wassup the board of directors of Wassup has decided that the proposed take-over
bid is not in the best interest of Wassup. Outline three (3) defensive tactics the
directors of Wassup can adopt to resist the proposed take-over.
(3)
TOTAL: 35 MARKS
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4.25. QUESTION 25: BOXER CASH & CARRY (35 marks; 60 minutes)
Tesco PLC is a British multinational grocery and general merchandise retailer headquartered
in London, United Kingdom. The Britain’s economy has continued to be sluggish, especially
following Britain’s Brexit vote and the company is now looking at the possibility of entering the
South African food retail industry. The company is in advanced talks with Brains Limited, a
private equity firm which owns 70% of shares in Boxer Cash & Carry (Pty) Ltd (“Boxer”). Tesco
is interested in making an offer to Brain Limited for its entire stake in Boxer.
Boxer is one of the major retailers in South Africa and has a strong presence in rural areas.
This supermarket’s revenue is currently growing at an average of 22% per annum mainly due
to its aggressive store expansion programme. Having started with five retail outlets in
KwaZulu-Natal ten years ago, the company boasts of a portfolio of 45 retail outlets in KwaZulu-
Natal and Eastern Cape. Boxer’s management team is young and dynamic, having taken over
the reins about eight months ago when Brains Limited acquired Boxer.
The market has reacted negatively to this possible foreign direct investment and as result
Brains Limited’s share price has dropped to 18 500 cents as at 30 September 2016. Brains
Limited has 15 million authorised shares, 80% of which has been issued. Brains Limited has
cited “growing competition” in the food retail space as one of the reasons behind the sale. The
food retail sector in the JSE saw an increase in share price of 16%, and the sector P/E ratio
currently averages 21. The financial statements of Boxer Cash & Carry (Pty) Ltd are given
below.
Statement of comprehensive income for the year ended 30 September 2016

R million
Sale of merchandise 2 100

Gross profit 440
Salaries and wages (130)
Depreciation (20)
Cost of sales (110)
Trading profit 180
Other income 10
Finance costs (30)
Profit before taxation 160
Taxation (40)
Profit for the year 120
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Statement of financial position at 30 September 2016

R million
Assets
Non-current assets 300
Land and buildings 160
Equipment and fittings 110
Investments 30
Current assets 180

Inventory 100
Trade receivables 60
Cash 20
Total assets 480

Equity 240
Ordinary share capital 60
Accumulated reserves 180
Non-current liabilities 150

8% Debentures 80
10% Long-term loan 70
Current liabilities 90
Provisions 50
Trade payables 40
Total equity and liabilities 480
1. The land and buildings can be sold at its open market value of R300m and the
estimated tax bill is R20m (for recoupments on allowances previously granted). The
estate agent charges 5% as a commission on the selling price.
2. The net realisable value of inventory is R45m and debtors can be factored (sold to a
financial institution) at 85% of the carrying value.
3. Early settlement of the current long-term loan (original maturity date is December 2020)
will amount to a cancellation fee of R7m.
4. Boxer’s investments are stated at historical carrying value and the estimated fair
market value is R50m.
5. For valuation purposes, the weighted average cost of capital of 12,5% should be used.
The corporate tax rate of 28% has remained unchanged for the past decade.
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REQUIRED
a) Calculate the market capitalisation of Brains Limited at 30 September 2016.

(3)
b) Determine how much Tesco PLC should offer Brains Limited for its interest in Boxer
Cash & Carry (Pty) Ltd, using the net asset value method.
(7)
c) Determine how much Tesco PLC should offer Brains Limited for its interest in Boxer
Cash & Carry (Pty) Ltd, using the earnings multiple method.
(8)
d) Calculate the value of Boxer Cash & Carry (Pty) Ltd business using the free cash flow
model. Assume that operating expenses include post-tax provision for bad debt
adjustment of R2m (non-cash item) and that income and expenses will grow at 3% per
annum for the foreseeable future.
(5)
e) Calculate the following ratios for 2016 and provide possible reasons for change in
previous year’s ratios (previous year’s ratios are provided in brackets).
[Round off your answers to two decimal places]
i). Net debt to equity (47,34%)
ii). Employee costs as % of revenue (5,83%)
iii). EBIT margin (10,2%)
iv). Cash ratio (0,41: 1)
v). Capital gearing ratio (33,67%)
vi). Inventory turnover (12,3 times)

(12)
TOTAL: 35 MARKS
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4.26. QUESTION 26: LION BRANDS LTD (50 marks; 90 minutes)
Lion Brands Limited (known as “Lion Brands”) is Africa’s leading food manufacturer and
continues to aggressively increase its footprints to countries outside the continent. Lion Brands
is the third biggest company on the JSE (based on the market capitalisation of approximately
R850 billion). The board of directors of the company is in advanced stages of talks with relevant
parties to discuss the acquisition of the following entities:
• Ellerine Cookies, a bakery division of Sasco Limited, and

• Twista (Pty) Ltd (“Twista”), a carbonated drinks manufacturer owned by Faf Molefe and
Marius Rabada
Ellerine Cookies
Ellerine Cookies is currently growing its profits at 80% of the inflation rate as consumers
become more health conscious. Revenue has of lately come under immense pressure due to
new industry players introducing healthier alternatives. Despite increased input costs following
the El Nino effect, the division continues to deliver strong results owing to sound cost control
measures being in place. Ellerine Cookies has also managed to service and reduce its debt
obligations amid increasing prime lending rate.
The board of directors of Sasco Limited is also considering shutting down the division and
moving its operating assets, including its non-current asset portfolio currently worth R300
million, to one of its most profitable divisions, in the event that the deal with Lion Brands falls
through. The audited financial statements of Ellerine Cookies are provided below:
Statement of comprehensive income for the year ended 31 December 2016
R 000
Turnover 178 381
Gross profit 75 809
Operating expenses (42 500)
Profit before interest, tax, depreciation and amortisation 33 309
Depreciation and amortisation (2 992)
Profit before interest and tax 30 317
Interest expense (4 712)
Profit before tax 25 605
Taxation expense (6 657)
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Statement of financial position at 31 December 2016
R 000
Assets
Current assets 111 033
Inventory 1 831
Trade receivables 63 421
Cash balances and investments 45 781
Total Assets 275 157

Equity 144 876
Ordinary share capital (R1 each) 60 000
Long-term loan 40 000
Accruals and provisions 28 528
Ellerine Cookies has just won a tender to supply bread to schools in the Ekurhuleni East District
with effect from January 2017 until December 2018. The division expects its profits to increase
by 20% per annum during this period and thereafter increase at its current growth rate. Ellerine
Cookies has committed an investment of R2 million over the next two years in sports
development (to be paid in equal instalments at the end of each year). The weighted average
cost of capital is estimated at 15%. The free cash flows of the entity approximate the division’s
net profit after reversing non-cash income and expenses.
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Twista
The company is currently owned 2 : 1 by Faf Molefe and Marius Rabada, respectively. Lion
Brands has made an offer to buy Faf Molefe’s entire stake in the business. Twista provides
top quality, innovatively flavoured soft drinks to the South African market at a competitive price,
all while conducting business in a responsible, fair and environmentally-friendly manner. The
competition is rife in the soft drinks industry and companies like Twista struggle to penetrate
the market due to limited distribution network and high marketing and branding costs.
Nonetheless, high margins and relatively low production costs result in good profits for most
soft drinks companies. Listed beverage companies have an average earnings-yield of 6,25%.
A listed share is said to trade at 10% above an unlisted share due to its liquidity (marketability).
The earnings of Twista for the past five years are reported below:
R 000 2012 2013 2014 2015 2016
Net profit 2 390 2 545 2 700 3 220 2 650
Earnings reported in the 2015 financial year include an after-tax profit of R400 000 made on
sale of a patent. During 2016, the longest-serving managing director of Twista resigned and
was paid R350 000 (net of tax) for the restraint of trade imposed on the director.
• Lion Brands will offer Faf Molefe shares in the company in exchange for his stake in Twista
as Lion Brands has only issued 34% of the 10 billion authorised shares.
• The general inflation rate is currently at 6,25%.
• There were 366 days in the 2016 financial year.
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REQUIRED
(a) Calculate the following ratios of Ellerine Cookies for the year ended 31 December 2016
and provide possible reasons for movement in these ratios (2015 ratios are given below
in brackets).
i). Operating profit margin (20,2%)
ii). Return on capital employed (14,5%)
iii). Asset turnover (0,8 times)
iv). Inventory turnover (8,8 days)
v). Interest bearing debt to EBITDA (1,5 : 1)
vi). Net interest cover (7,2 times)
[Round all calculations to the nearest two decimal places. No marks are
awarded for simply stating the direction of the movement unless relevant reason
is given.]
(18)
(b) Calculate the value of Ellerine Cookies' business at 31 December 2016, using the free
cash flow (discounted cash flow) method.
(12)
(c) Use the net asset value method to check the reasonableness of the valuation
performed in part (b) above and state any assumptions made.
(5)
(d) Determine the number of shares Lion Brands should issue in exchange for the stake in
Twista (use price-earnings multiple method, if necessary).
(15)
TOTAL: 50 MARKS
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4.27. QUESTION 27: PBC LTD (55 marks; 99 minutes)
PBC Limited (“PBC”) is one of the leading suppliers of cement in Southern Africa, with
manufacturing plants in South Africa, Zimbabwe and Botswana. The company also produces
aggregates, lime, burnt dolomite and limestone. The statement of comprehensive income and
statement of financial position for PBC are provided below:
Statement of comprehensive income for the year ended 30 September 2016
R mil 2016
Revenue 923
Cost of sales (644)
Gross profit 279
Operating costs (156)
Finance costs (50)
Interest income 8
Profit before taxation 81
Taxation ( 21)
Profit for the year 60
Shares in issue (‘000) 22 000

Share price – closing (cents) 3 440
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Statement of financial position at 30 September 2016
R mil 2016
Non-current assets
Goodwill 35
Investments 122
Current assets
Inventory 99
Trade and other receivables 120
Total assets 1 540

Stated capital 550
Other reserves 27
Retained income 338
Total equity 915
Long-term borrowings 465
Deferred taxation 18
Current liabilities
Provision 68
Trade and other payables 74
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ADDITIONAL INFORMATION:
2016 financial results
1. The following are some of PBC’s key performance indicators for the year ended 30
September 2015:
• EBITDA margin: 27,65%
• P/E ratio: 14,20 times
• Bad debt ratio: 6,89%
• Stock turnover: 5,88 times
• Debt-equity ratio: 0,58: 1
• Price to book value: 1,03: 1
2. Depreciation for the year ended 30 September 2016 was R71 million.
3. The credit sales make up 20% of total sales. Bad debts written off during the 2016
financial year amounted to R9,23 million.
ROBERT MURRAY LIMITED CONTRACT

PBC continues to face tough competition from foreign cement producers (due to dumping),
but the company still enjoys a 30% share of the South African cement industry. Due to strong
presence, PBC is one of the key limestone & cement suppliers of Robert Murray Limited
(“Robert Murray”), a major construction company in Africa. In August 2016 (two months ago),
Robert Murray won a bid to build a highway footbridge that would connect people between the
eastern and the western side of the Randburg business district.
The construction is expected to begin shortly (the start date is 1 November 2016 and
completion is expected to be on 30 June 2017) and PBC has already started clearing the area
next to the construction site to process and store its materials. This work by PBC should be
completed at the end of this month (31 October 2016) at a total cost of R1 million. PBC is also
raising a loan of R28 million from BnP Capital on 15 October 2016 to fund its supplies and
labour costs. The interest rate on this loan will be fixed at 150 basis points below prime and
the interest (not compounded) will be paid annually, whereas the capital portion will only be
repaid at the end of the loan term (14 October 2017).
PBC will be required to supply cement to Robert Murray at a fixed price for the duration of the
project to the total order value of R26 million. The orders will be spread evenly throughout the
project, starting at the beginning of November 2016. Delivery and other related costs will
amount to R500 000 per month but will be paid one month in arrears and borne by PBC. These
costs will not be transferred to Robert Murray.
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PBC will also supply limestone to Robert Murray for the next five months. The first load of
limestone will be sold and delivered to Robert Murray on 24 November 2016. This load will
cost PBC R4 million but will only be used by Robert Murray in December 2016. The cost of
production will increase by 15% in December 2016 and revert to November 2016 levels in
subsequent months. Assume sales take place in the same month of production.
PBC adds a margin of 50% on cost for all products sold to Robert Murray.
A new vehicle will be delivered to PBC’s site on 1 November 2016. The cost of the vehicle is
R200 000. The vehicle will be used by the site manager and is also expected to be used at
other company sites after the completion of the project. PBC expects this vehicle to have a
useful life of five years.
Operating income and expenses from the 2016 financial period (excluding the Robert Murray
contract) are expected to increase at an average annual rate of inflation + 4%. All income
earned and expenses incurred by PBC are distributed evenly throughout the year.
The prime rate is 10,5% while inflation is at 6%. The effective taxation rate should be used for
budgeting and projection purposes.
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REQUIRED
a) Calculate and comment on possible reasons for movement in the following ratios for
the year ended 30 September 2016:
[Round off answers to two decimal places.]
i). EBITDA margin

ii). P/E ratio
iii). Bad debt ratio
iv). Stock turnover
v). Debt-equity ratio
vi). Price to book value ratio
(Calculations 17 marks; comments 6 marks and presentation 2 marks)

(25)
b) Describe key business, currency and interest rate risks faced by PBC Limited.
(5)
c) Prepare a projected statement of comprehensive income for the three months ending
31 January 2017.
[Scale all rand values to R mil and show all workings.]
(25)
TOTAL: 55 MARKS
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4.28. QUESTION 28: umfula.co.za (30 marks; 54 minutes)
Umfula.co.za Ltd is a listed South African electronic commerce company with headquarters
in Cape Town. It is the largest internet-based wholesaler in South Africa and is seen as a
potential target for acquisition by financial analysts.
Umfula.co.za Ltd started as an online bookstore, but soon diversified, selling DVDs, VHSs,
CDs, video and MP3 downloads/streaming, software, video games, electronics, apparel,
furniture, food, toys, and jewellery. The company also produces consumer electronics —
notably, Umfula.co.za e-book readers, Umlilo tablets, Umlilo TV and Umlilo Phone — and is a
major provider of cloud computing services.
The value of the company has therefore been a matter of public debate in recent weeks and
the following financial information is available:
Year 2012 2013 2014 2015
R million R million R million R million
Turnover 263 265 290 300
Profit after tax 17 17 19 20
Total dividends 10 11 11 12
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Statement of financial position information on 31 December 2015

R million
Assets
Non-current assets 282
Current assets 168
Inventory 125
Total assets 450

Equity 258
Ordinary share capital 40
Accumulated reserves 218
8% debenture 50
Current liabilities 142
Trade payables 82
Bank overdraft 60
Total equity and liabilities 450
All sales were on 30 days’ credit to commercial customers. In order to encourage customers
to pay on time, Umfula.co.za proposes introducing an early settlement discount of 1% for
payment within 30 days, while increasing its normal credit period to 45 days. It is expected
that, on average, 50% of customers will take the discount and pay within 30 days, 30% of
customers will pay after 45 days, and 20% of customers will not change their current paying
behaviour (thus paying in 60 days).
Umfula.co.za is currently placing orders of 1 500 units of the Umlilo-Phone (U-phone) per
month, the demand for which is constant. Pear Ltd is the only supplier of U-phone and the cost
of U-phone purchases over the last year was R54 million. The supplier has offered a 2%
discount for orders of U-phone of 3 000 units or more. The average stock on hand is 750 units
(1 500/2). Each order costs Umfula.co.za R3 000 to place and the holding cost is R50 per unit
per year. The revised accounts receivable policy will be financed by the overdraft facility.
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1. The shares of Umfula.co.za Ltd have a nominal (par) value of 100c per share and a market
value of R5.00 per share.
2. The cost of equity of the company is 9%.
3. The business sector of Umfula.co.za Ltd has an average price/earnings ratio of 20 times
(the adjusted price/earnings ratio of Umfula.co.za after considering its risk profile is
estimated to be 3 points below the business sector’s price/earnings ratio).
4. The 8% debentures are redeemable at nominal (par) value of R100 per debenture in
seven years’ time and the after-tax cost of debt of Umfula.co.za Ltd is 6% per year.
5. The expected net realisable values of the non-current assets and the inventory are R276m
and R130m, respectively.
6. In the event of liquidation, only 80% of the trade receivables are expected to be
collectable.
7. Umfula.co.za has an overdraft facility charging interest of 10% per year.
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REQUIRED
a) Calculate the impact on the collection period as well as the financial impact (in R millions)
of the net benefit or cost of the proposed changes in trade receivables policy and remark
on your findings.
[Round off the rand values to million and all other calculations to 1 decimal]

(6)
b) Determine (in millions) whether the bulk purchase discount offered by Pear Ltd is
financially acceptable; and explain the assumptions outlined by your calculation.

(6)
c) Calculate the value of Umfula.co.za Ltd using the following methods:

i). Market capitalisation (equity market value) (2 marks)
ii). Net asset value (liquidation basis) (2 marks)
iii). Price earnings method using the business sector average P/E ratio (2 marks)
iv). Gordon’s dividend growth model (2 marks)
g for the Gordon’s dividend growth model should be calculated as follows:
g = bre
Where:
𝑠𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 ℎ𝑖𝑠𝑡𝑜𝑟𝑖𝑐 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑎𝑛𝑑 𝑡𝑎𝑥

b = historic retention ratio { }
𝑠𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 ℎ𝑖𝑠𝑡𝑜𝑟𝑖𝑐 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥
𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟

re = current return on shareholders’ fund { }
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦
(8)
d) Analyse and debate the relative merits of the valuation methods in part (c) above in
determining a purchase price for Umfula.co.za Ltd.
(8)
(Communication skills – clarity of expression, layout and communication 2 marks)

(2)
TOTAL: 30 MARKS
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4.29. QUESTION 29: HEALTH MATTERS LTD (100 marks; 180 minutes)
PART A
Health Matters Limited (“Health Matters”) is a chain of pharmacies operating across South
Africa. Its aim is to offer customers a wide variety of medicine and other healthcare products
at affordable prices. A large portion of its medicine is sold over the counter and otherwise, is
imported from two different pharmaceutical companies incorporated in the UK and USA
respectively. In order to counter Rand/Pound/US Dollar fluctuations, a strict foreign currency
policy is followed.
Owing to a robust financial performance history and its brand popularity, Health Matters
successfully listed on the JSE a year ago in a bid to raise capital. The company wishes to
expand into the rest of Africa within the next few years. Zoe Padayachee, one of the directors
of Health Matters, is currently engaged in negotiations with Nigeria’s Federal Ministry of Health
in an effort to penetrate the African market, as the company continues to struggle to grow the
South African business.
At the last shareholders’ meeting, a possible acquisition of 25% of Health Matters by the UK
based pharmaceutical company, Johnson & Glaxo Limited (J&G) was discussed, and the
majority of affected shareholders voted in favour of the acquisition. Johnson & Glaxo Limited
has offered the 25% shareholders of Health Matters the following:
• A cash payment of £1 800 000 will be made on 31 October 2017.
• 175 000 shares (fifty million shares are currently issued by J&G) will be issued to the
25% Health Matters shareholders. Johnson & Glaxo Limited is listed on both the JSE
and the FTSE. The market capitalisation of Johnson & Glaxo Limited is estimated to
remain around R4 billion for the next two months.
• The dividend due on the 175 000 shares above will be paid to the 25% Health Matters
shareholders on 31 October 2017 (the dividend yield will average about 4%).
• Johnson and Glaxo Limited (as it will be one of the three biggest shareholders) will be
able to appoint one-third of the board of directors of Health Matters Limited.
• The transaction date for this deal will also be 31 October 2017.
The following information relating to the past financial years of Health Matters is relevant:
Year 2014 2015 2016 2017
R million R million R million R million
Turnover 200 225 260 285
Profit after tax 14,0 16,0 18,0 20,0
Ordinary dividends 10,5 12,5 13,5 15,0
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The statement of financial position of Health Matters at the end of its financial year is
provided below.
STATEMENT OF FINANCIAL POSITION AT 30 SEPTEMBER 2017
Notes Rand
/ Info
ASSETS
Non-current assets a 65 000 000
Current assets 66 825 000
Inventory b 60 000 000
Trade receivables b 6 825 000
Total assets 131 825 000


Preference shares 3 15 000 000
Interest-bearing borrowings 4 6 000 000

Trade payables 1 425 000
Interest-bearing borrowings 5 3 250 000
Provisions 900 000
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Notes
1. Health Matters has an authorised ordinary share capital of ten million shares and a market
value of ordinary shares of R180 000 000 (see “Additional information” for profits and
dividends).
2. Fifty thousand debentures (at a nominal value of R500 each) were issued on 1 October
2016 at a fixed rate of prime less 300 basis points. Interest is serviced annually and capital
is repaid on 30 September 2022. An exit fee of R1,20 for each debenture redeemed will
be paid on 1 October 2022. Similar debentures currently bear an interest rate of 8% per
annum.
3. The preference shares carry a dividend pay-out rate of 8% and will be redeemed at a
premium of 6% in 4 years’ time. However, the premium is only paid a year later (after
redemption). The dividend for the current year has already been paid and preference
shares in the similar risk class are currently yielding 10,5% per annum.
4. The R6 000 000 loan was obtained on 1 October 2014 from Katz Finance and the company
pays an annual interest of R542 400 to Katz Finance (the market value of the loan is
currently R6 007 924).
5. A two-year loan bearing interest rate of 8,5% per annum was obtained from Able Bank
Limited on 1 October 2016. The loan is repayable on 30 September 2018 and the company
does not intend renewing the facility. The interest rate on similar loans is 8,25% per annum.
6. The bank overdraft bears an average interest rate of 10,5% (after tax) per annum. The
overdraft is used for working capital requirements when the need arises, and the balance
fluctuates monthly.
7. The company has a target capital structure of 70% equity and 30% debt. Under the target
debt, debentures should be double the sum of other interest-bearing instruments (these
interest-bearing instruments should always be utilised in equal proportions).
a) Non-current assets consist of land and building which was last revalued at R42 000 000
five years ago. The property price index used in these valuations has since increased at
4,5% per annum. All other non-current assets can be sold at R99 000 000 before incurring
disposal costs of R34 641. Ignore tax implications on asset disposal and revaluations.
b) Half of the inventory on hand can be sold at its cost, while the other half received much
later can be sold at a mark-up of 20% on sales. The debtors’ book can be sold at 80% of
its carrying value. Marketing and selling costs are estimated at R2 500 000.
c) Health Matters’ profits are expected to grow to R21 600 000 in the 2018 financial year,
while the dividend cover remains constant. Growth between from 2017 and 2018 financial
year will be maintained for the foreseeable future.
d) The prime lending rate currently is 10,5% and the company taxation rate is 28%.
e) There are 365 days in the 2017 financial year.
f) Foreign exchange spot rates (£ to R1):
30 September 2016 0,0593

30 September 2017 0,0586
31 October 2017 0,0605 (forecast)
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REQUIRED
i. Calculate the weighted average cost of capital (WACC) of Health Matters Limited at 30
September 2017 based on both the target and the existing capital structures.
[Round off percentages to one decimal place]

(24)
ii. Discuss what factors Health Matters would need to consider when financing its expansion
programmes in the future, if working towards its target capital structure.
(5)
iii. Determine how much it will cost Johnson & Glaxo Limited to buy the 25% stake in Health
Matters.
(5)
iv. Determine how much Johnson & Glaxo Limited should be offering the shareholders of
Health Matters for the stake in the business, assuming that the net asset value method
would be appropriate to value Health Matters business.
(5)
v. Comment on the differences between the valuation/s performed above and Johnson &
Glaxo Limited offer, by critically evaluating any limitations / assumptions made.
(5)
vi. Discuss three qualitative factors that the directors of Health Matters should consider in
planning its expansion into the rest of Africa (focus on political, social and economic factors
regarding Nigeria).
(6)
PART A: 50 MARKS
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PART B
Zoe Padayachee had previously worked in the pharmaceutical industry in the US and has built
strong relations with some of the large pharmaceutical companies. During her recent visit she
met with one of the directors of a large pharmaceutical company, Interpharm. In their meeting,
the director mentioned that Interpharm is considering distributing their products into Africa.
They were of the opinion that it would be a good idea to first retail their products through South
African outlets for a period of five years, before distributing to the rest of Africa.
Zoe Padayachee saw this as an opportunity and suggested that Interpharm consider retailing
its products through Health Matters’ stores. In a follow up meeting between Zoe Padayachee
and Interpharm, it was stated that Health Matters Limited would have to pay Interpharm a
once-off initiation fee of $2 500 000 on 31 October 2017 (start of the contract) for the exclusive
right to sell Interpharm products.
Research conducted by Health Matters costing R1 000 000 indicated that sales of Interpharm’s
product line would probably amount to R150 000 000 in year one and this would be expected
to increase by 6% annually thereafter for the remainder of the contract period. Inventory
costing $10 000 000 would be purchased from Interpharm in 2018 and the cost would be
expected to escalate by 5% annually thereafter. Health Matters would have to bear all
marketing costs in order to create a market for Interpharm in South Africa.
The research conducted determined the following marketing costs:

• Once-off marketing cost of R4 000 000.
• Printing and communication costs of R75 000 per month.
• TV and radio advertisements of 140 advertisements aired per year to the value of R50 000
per ad.
The above costs had been estimated to escalate at the inflation rate of 5% per annum
thereafter. The working capital requirements would be expected to amount to 12% of sales
per year and would be incurred at the beginning of each year. The starting working capital is
R18 000 000.
Assume for the purposes of this question that the initial upfront payment for the right to sell
Interpharm products can be amortised over the life of the project and SARS will permit a 4-
year allowance. The marketing costs are deductible in 2018 for tax purposes. All cash flows
take place at the end of the year unless specifically stated otherwise. Assessed losses from
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Health Matters’ business ventures are not ring-fenced and can be deducted from the
company’s overall profits.
The forecasted foreign exchange spot rates (for every one US dollar) are provided below:
31 October 2017 R13,00
31 October 2018 R13,50
31 October 2019 R13,20
31 October 2020 R13,05
31 October 2021 R12,80
31 October 2022 R12,70
31 October 2023 R12,65
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REQUIRED
i. Using the net present value method, advise the directors of Health Matters whether it
would be feasible to sell the products of Interpharm on an exclusive basis for a period
of five years.
(18)
ii. Discuss the qualitative factors that Health Matters needs to consider before entering
into the agreement with Interpharm.
(5)
iii. Using the information in Part A, calculate the following ratios for the 2017 financial
year and comment on how the ratios may be improved (one mark per each ratio
calculated):
o Profitability (Calculation 2 marks, comment 1 mark)
o Capital structure and solvency (Calculation 3 marks, comment 1 mark)
o Liquidity (Calculation 2 marks, comment 1 mark)
o Return on invested capital (Calculation 2 marks, comment 1 mark)
o Financial market/investor (Calculation 3 marks; comment 1 mark)
[Round all calculations to one decimal place and clearly show ratios by their
categories above]
(17)
iv. Based on information provided in both Part A and Part B, assess the internal and
external environment of Health Matters using a SWOT analysis.
(10)
PART B: 50 MARKS
TOTAL: 100 MARKS
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4.30. QUESTION 30: DISTELL LTD (100 marks; 180 minutes)
Distell Group Limited (“Distell”) is Africa’s leading producer and marketer of spirits, fine wine
ciders and ready-to-drinks. This Stellenbosch-based company is listed on the JSE Stock
Exchange and it employs about 5 300 people worldwide. Some of its popular brands are
Hunter’s, Savanna, Three ships, Amarula and Nederburg. Its main rivals in the South African
beverage market include SABMiller, Brandhouse and Edward Snell & Co. The average sector
PE ratio is about 15.
Recent extreme weather conditions have not been favourable to the industry as the raw
material prices went up; however, for exporters the effect was countered by a weakening rand
against major currencies. Despite tough economic environment, the Distell Group has been
able to deliver double-digit growth on revenue for the past 5 years. As part of its social
responsibilities, the company increased its workforce by 6% during the financial year under
review (2015).
In an effort to cement its strong position, Distell is set to make an offer to buy 100% of shares
in Namibia Breweries (Pty) Ltd. This will help the company to further diversify its portfolio as it
would be entering the very competitive, yet profitable beer market.
Financial information of Distell Group Limited is given below.
Source: Distell website (www.distell.co.za)
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NOTES
1. Only sales to major liquor stores and big wholesales are on credit with payment terms
varying from 30 days to 60 days. These have always made up 80% of total sales, while
the rest is sold to small liquor outlets and individuals. All purchases are made on credit.
2. Financial assets include investments in the Top 40 share index of the JSE Stock
Exchange. These funds can be accessed within 24 hours from the time a request is
made to the brokers. The value of the investment at 30 June 2015 was R204 068 000
(2014: R188 450 000). Transaction costs are negligible.
3. The expected rate of return in the market approximates 12,59% and the risk premium
is estimated at around 5,77% (Distell’s historic beta is 1,5).
4. Interest-bearing borrowings account is made up of:
• 10-year debentures with a carrying value of R447 143 000 were issued five
years ago at a coupon rate of 7% and are currently trading at R502 123 000.
Only the interest is paid annually - the capital is repaid at the expiry of the
facility. The market yield formula is used calculate the cost of these debentures.
• A R2 billion long-term loan secured over land and buildings which was obtained
from Investec on 6 July 2014. This deal was done at a fixed rate of prime less
400 basis points. Interest is serviced annually and the capital is repaid on 5 July
2020 with an exit fee of R50 million. Similar loans currently bear interest rate of
7% per annum.
• 10 000 000 preference shares were issued on 28 June 2015 and repayable in
6 years’ time. The yield on similar preference shares has been 5,2% for the
past two months.
No other long-term interest-bearing loans were received or repaid during the

year.
5. Interest-bearing borrowings relate to a two-year 6,8% loan facility received on 3 July

2014 from Rand Merchant Bank and is repayable on 28 June 2016. The interest rate
on similar loans is 6,5%. This facility will be renewed or replaced at its expiry.
ADDITIONAL INFORMATION
• The company tax rate is 28% and you may ignore any CGT implications.
• Prime rate has remained at 10,25% for the past two years and the economists do not
foresee a rate change in the short term.
• The consumer price index is 6,3%. Assume 365 days in a year.
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REQUIRED Sub- Total

total
(i) Analyse the financial statements of Distell Group Limited for the year
(45)
ended 30 June 2015. You are required to calculate ratios under the
following categories:
• Profitability
• Capital structure and solvency
• Liquidity
• Return on invested capital
• Financial market/investor
(Cash flow related ratios not examinable)
For every ratio calculated, where possible you must (a) provide
possible reasons for the movement; (b) measures to be taken to
improve/maintain the ratio and (c) consequences of not
implementing proper measures addressed in (b). No marks are
given for merely stating that the ratio increased/decreased.
[Round number of shares to the nearest million and all other

calculations to one decimal place]
Communication skills – layout, structure and logical argument.
(5) 50
(ii) Calculate the weighted average cost of capital (WACC) of Distell

(18)
Group Limited at 30 June 2015.
[Round percentages to one decimal place and rand amounts to the

nearest R’000]
Communication skills – layout and structure
(2) 20
Total for Part A 70
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PART B
(This part is a continuation of the scenario above)
NAMIBIA BREWERIES INVESTMENT

Based in Namibia, this small brewery is experiencing financial difficulty due to a severe price
hikes in malt and hops, some of its key ingredients. Some of the raw material is usually
imported from neighbouring countries and with the weakening Namibian dollar, the rising
production costs are putting margins under pressure. With strict pricing regulations currently
in place, Namibia Breweries find it difficult to pass these costs to consumers. The company
was founded in 1856 and is considered the pride of the nation and has 15% of the beer market
share in Namibia. However, recent poor management decisions have rocked the financial
standing of the company. Despite this, the Distell board is of the opinion that there are valuable
synergies that can be unlocked between these two companies. Namibia Breweries operations
are strictly run on cash basis. The relevant financial information of Namibia Breweries is
provided below.
Abridged statement of financial performance for the year ended 31 May 2015
N$
Turnover 20 099 245

Raw material 1 (10 138 315)
Labour costs 2 (5 911 478)
Depreciation: manufacturing equipment (1 891 670)
Marketing expenses 3 (1 022 152)
Distribution costs 4 (482 532)
Share of head office costs 5 (352 001)
Profit before tax 301 097

Income tax expense (88 824)
Profit for the year 6 212 273
NOTES
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1. Raw material is made up of three components:
• Raw material A (50% of total raw material cost) currently sourced from a
supplier in Angola will now be provided by a Namibian company which has had
strong relations with Distell, at a cost of 75% of its value.
• Raw material B & C will be purchased from a South African farmer at a 10%
discount off what Namibia Breweries is currently paying. However, an additional
N$85 000 p.a. will be incurred on transportation. To exit from its existing
contractual obligation with its old supplier, a penalty fee of N$20 000 will have
to be paid.
2. In order to bring Namibia Breweries salary scales in line with Distell Group
remuneration policy, a salary increase adjustment of 12,5% will be effected.
3. Distell is planning to change the trading name of Namibia Breweries in the event of a
successful takeover. As a result, all marketing activities will be halted (no cost will be
incurred) until the end of 2016 financial year and thereafter it is expected that only 20%
of the current marketing expenses will be incurred going forward.
4. A special distribution route levy of N$27 000 has been imposed by the Namibian
government. This is payable at the end of the 2018 financial year and is treated as a
profit and loss item.
5. All Namibia Breweries head office activities will now be handled down in Stellenbosch
where Distell Group has capacity to undertake this task at no extra cost.
6. Namibia Breweries recorded profit before tax of N$1 351 369 in 2014 and N$1 038 778
in 2013. These profit levels are considered to be sustainable as opposed to
extraordinary costs incurred by the business during the 2015 financial year. Similar
companies (though bigger) listed on the Namibian Stock Exchange are trading at
earnings yield of 5%.
ADDITIONAL INFORMATION
• The Namibian government is giving a once-off grant of $50 000 to foreign companies
that are investing in its food and beverage production sector and Distell will also qualify
for this grant.
• The total annual cash flow upon acquisition will occur for the indefinite future. Income
and expenses are expected to increase at 5% per annum.
• The weighted average cost of capital is 20%.
• You are required to use the effective tax rate for relevant tax calculations.
• The purchase consideration for this acquisition will be by means of shares issued in
Distell Limited.
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REQUIRED Sub- Total

total
(i) Draft a memorandum to Distell Group Limited board of directors

(27)
advising them on the number of shares the Group should issue to the
shareholders of Namibia Breweries as a purchase consideration of
the company. Show all workings. Ignore control premium,
marketability and minority discounts.
[Round rand/dollar amounts to the nearest rand]
Communication skills – layout, structure and logical argument.
(3) 30
Total for Part B 30
TOTAL: 100 MARKS
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4.31. QUESTION 31: TILES & STYLES OF AFRICA (80 marks; 144 minutes)
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 on the African continent.
As Tiles & Styles continues to enjoy strong brand affinity based on its reputation for a high
quality year-round value offering, the market has also responded positively sending the
company’s market capitalisation to an unprecedented R9,450 billion at the end of its 2017
financial year. 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 financial statements of Tiles & Styles, salient information and notes are provided below,
followed by the financial information relating to Tile Ses’la.
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Statement of comprehensive income of Tiles & Styles of Africa

2017 2016
Notes Rm Rm
Revenue 6 662 6 819
In-store sales 6 058 6 585
Online sales 604 234
Cost of sales (3 748) (3 925)
Maintenance and other indirect expenses (301) (308)
Personnel costs (1 003) (1 031)
Depreciation, amortisation and impairments (410) (372)
Other operating expenses (256) (283)
Profit before interest and taxation 944 900
Net finance costs 1, 2 (101) (105)
Taxation (157) (150)
Net profit for the year 686 645
Interim dividend (70) (75)
Final dividend (134) (110)
SALIENT INFORMATION 2017 2016

Trading days 365 366
Number of retail stores 162 182
Number of employees (000) 25,4 26,1
Dividend growth (%) 10,0 10,0
Prime lending rate (%) 10,3 10,5
Corporate taxation rate (%) 28,0 28,0
Inflation rate (%) 4,8 6,4
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Statement of financial position of Tiles & Styles of Africa

2017 2016
Notes Rm Rm
ASSETS
Property, plant and equipment 3 788 3 659
Goodwill 681 590
Deferred tax 61 58
Other non-current assets 102 68
Total non-currents assets 4 966 4 526
Inventories 850 838

Marketable securities 41 47
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
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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 company will maintain the current dividend growth rate going
forward.
The medium and long-term borrowings at 31 December 2017 were made up of the
following:
• R1 billion debentures were issued three years ago and are redeemable at a
premium of R3,6 million and the maturity date is 31 December 2021. The
premium is payable on 31 December 2022 and is not 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.
• 600 million 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 lending 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. However, issuing new ordinary shares will cost
approximately 0,5% of the market share price.
2. Finance costs on short-term borrowings are negligible. Interest rates given are before
tax unless stated otherwise. The total finance income earned during the financial year
(R12m) had declined by 20% from the previous year.
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The information below relates to Tile Ses’la (Pty) Ltd.
The Bala brothers identified an opportunity in the market, and started importing ceramic tiles
from different parts of the world. They founded Tile Ses’la (Pty) Ltd (Pty) Ltd in 1989 and six
years ago, having built up enough human capital and reserves, the company constructed its
own tile-manufacturing site in Alberton, Johannesburg. The company has since then produced
all its tile range locally, but continues to enjoy exclusive manufacturing and distributing rights
from international tile manufacturers to ensure that its clients get to choose from a wide variety
of the best tiles in the world.
The company supplies both the tile retailers and the end-consumers across the country. Rapid
changes in technology and increased competition in the sector has compelled the owners to
consider selling a major stake, or even all of its business. Below are the financial statements
of 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
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Statement of financial position of Tile Ses’la (Pty) Ltd

2017
Rm
ASSETS
Investments 732
Intangible assets 54
Total non-currents assets 2 775
Inventories 550
Total current assets 1 388
TOTAL ASSETS 4 163
Stated capital 818

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
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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 outlets being 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 remaining will be sold
at a mark-up of 20% based on the selling price.
• All the remaining 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.
Ignore any tax implications arising from note 2 above.
3. To determine annual free cash flows yearly, the company uses the following formula
below:
Free cash flows (FCF) =
Latest 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)
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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 (same industry as Tiles
& Styles). 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%.
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REQUIRED
a) Calculate the following ratios of Tiles & Styles for the year ended 31 December 2017
and provide insightful reasons for the movement from prior year.
[Round all answers to one decimal place]
i. Change in online sales (20016: 13,4%)
ii. Interest cover
iii. Store sales per employee
iv. Inventory turnover (days)
v. Dividend cover
vi. Return on capital employed
(Calculations 12 marks; comments 6 marks; presentation 2 marks)
(20)
b) Calculate the weighted average cost of capital of Tiles & Styles at 31 December 2017.
(10)
c) 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)
(15)
d) Based on your calculation in part (c) above, determine the number of preference
shares that will be issued to finance the acquisition of Tile Ses’la (Pty) Ltd. Assume the
nominal value of a share does not change.
(3)
e) 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 (DCF) methods.
(P/E multiple method 11 marks; DCF method 5 marks, conclusion 2 marks)
(18)
f) Use the net asset value method to check the reasonableness of the calculations
performed in part (c) above.
(7)
g) Describe different types of acquisitions, and provide an example for each. Explain
the type of acquisition of Tile Ses’la by Tiles & Styles.
(7)
TOTAL: 80 MARKS
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4.32. QUESTION 32: MAGNUS ORANGE LTD (100 marks; 180 minutes)
Magnus Orange Limited (“MO Ltd”) is a bus services company listed on the JSE Alternative
Exchange (AltX) under the Transportation Services Sector. The company operates bus routes
in major cities across South Africa, with the largest concentration in Gauteng. All its operating
routes are currently not linked between cities. Owing to rapid growth in urbanisation, the
company has experienced a high demand for its services and continues to seek ways to
improve profitability and efficiency.
In a recent newspaper article, the CEO of MO Ltd published the following statement:
“Today, through the support of our shareholders and other key stakeholders, we are proud to
announce that from the beginning of the 2019 financial year, MO Ltd will link the three
metropolitans in Gauteng, namely, Tshwane, Johannesburg and Ekurhuleni ("CitiLink Project).
In addition, the bus services will also be extending to Mogale City metropolitan (“Mogale City
metro”). Mogale City municipality awarded MO Ltd a contract to provide bus services to its
residents for the next six years. MO Ltd is considering whether to partner with a local bus
operator in a joint venture (Project Nthuseng) or acquire a majority stake in one of these bus
providers (Project Dira). The project task team of MO Ltd is already working with the
management of Dira Bus Services Company (“DIRA”) to explore the possible acquisition of
51% of DIRA’s issued share capital. The project task team estimates that at least R50 million
will be required for each of the two projects. This will increase our asset base to about R400
million.
Chief Executive Officer, Magnus Orange
The finance and investment team provided the following working papers:
1. Extracts from the Statement of Profit and Loss of MO Ltd and key non-financial indicators
for the six months ending 31 March 2018 (WPPR 1).
2. Extracts from the Financial Position as at 31 March 2018 (WPPR 2).
3. Earnings based valuation for the acquisition of Dira Bus Services Company (WPPR 3).
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Extract – SPL
Prepared by: Pretty Blog Reporting Date: 31 March 2018
WPPR 1
Reported to: CEO Prepared on: 02 June 2018
Magnus Orange Limited

FINANCIAL INDICATORS:
Notes R’000
Revenue 1 461 000
Profit before taxation expense 2 26 174
EBITDA 68 248
Finance costs 9 454
Interim dividend 2 744
Earnings per share (cents) 113
Key non-financial indicators:

2017 FY 2018
Employee costs (R’000) 182 744 85 000
Number of employees 719 769
Black representation – Management (%) 24,0 29,1
Black representation - General (%) 78,1 79,9
Road accidents 60 42
Supplier and enterprise development spend (R’000) 12 145 10 178
Greenhouse gas emissions (tonnes) 17 034 9 104
Share price (cents) 1 440 1 383
Notes
1. Majority of the operating income and expenses are earned and incurred evenly
throughout the year.
2. Once-off income of R358 000 (non-operating) was received from one of the political
parties in January 2018. Due to subsequent bad publicity, MO Ltd board took a
resolution not to accept this income in the future. Since 2015 the effective tax rate
has averaged about 29,5% per annum. The current corporate tax rate is the same
as it has been in previous years of assessment. The prime lending rate is 10,25%.
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Extract – Financial Position

Prepared by: Pretty Blog Reporting Date: 31 March 2018 WPPR 2
Magnus Orange Limited

CAPITAL EMPLOYED
Notes R’000
Capital and reserves 121 885
Ordinary share capital 1 30 000
Other reserves 1 533
Preference share capital 2 48 125
Non-current liabilities 102 875

Long-term loan 3 100 000
Deferred taxation 2 875

Bank overdraft 4 18 022
Notes and additional information:

1. MO Ltd has 20 million authorised share capital. The Transportation Services Sector
share is expected to yield a return 14% (risk premium is 7,5%), while the beta of MO
Ltd share is estimated at 0,924.
2. 385 000 preference shares with a nominal value of R125 each are currently valued
at R54,155 million. These were issued four years ago at a fixed dividend rate of 8,2%
(which is approximately 80% of the prime lending rate).
3. The five-year loan was obtained from Captec Bank on 1 April 2016. The interest on
this loan is payable a year in advance (on 2 April) at an annual rate of 6%. Similar
loans, which also attract a low interest rate currently have an interest rate of 5,8%.
4. Bank overdraft facility (also from Captec Bank) is utilised throughout the year to meet
company’s liquidity requirements and the balances vary monthly. There is a limit of
R20 million on this overdraft. Captec Bank charges an interest at prime less 2%
(generally, overdraft facilities carry a prime interest rate).
5. MO Ltd is working towards an optimal capital structure of 30%: 70% (Debt: Equity).
Non-redeemable preference share capital should be 10% of capital employed.
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Valuation of DIRA (earnings-based)

Prepared by: Associate accountant Reporting Date: 31 March 2018 WPPR 3
Dira Bus Services Company has had three successive profitable years, obtaining a clean audit
report in each. The directors of the company also expect growth in profits of 5,5% per annum
for the next two years. DIRA has an experienced team of drivers and assemblers. Despite
rising oil prices and aging fleet, DIRA continues to maintain a very low staff turnover compared
to the industry. The company is also considering to have a black representative in its executive
committee. Unlisted shares are estimated to be trading at 5% below JSE-listed shares under
the Transportation Services Sector (average sector P/E is 10,7).
Note 2016 2017 2018

R’000 R’000 R’000
Profit for the year 10 975 9 250 11 471
Government grant 1 (2 000)
Fine 2 864
Maintainable earnings (ME) 10 975 9 250 10 335
Average sector P/E 10,7%

Positive Factors:
Outstanding financial performance & clean audit +1
Experienced drivers and assemblers +1
Negative Factors:
Rising prices and aging fleet -1
Marketability -2
9,7%
Value
ME x Adjusted P/E (10 235 x 9,7%) 99 280
Less: Marketable discount (99 280 x 5% estimated) (4 964)
Plus: Control premium (99 280 x 8%) 7 942
Less: Minority interest discount 0
Amount to be offered by MO Ltd 102 258
1. Once-off government grant of R2 million for the recapitalisation of the existing fleet.
2. Fine of R864 000 for uncompetitive behaviour payable to the Competition Commission. This will
only be paid during 2019 financial year.
Additional notes
1. Extracts from the statement of financial position

R’000 R’000
Assets Equity and liabilities
Non-current assets - Ordinary shares 116 500
- Fleet 100 000 - Retained Earnings 11 235
- Furniture & Equipment 25 515
Current assets Non-current liabilities 7 255
- Inventory 13 000 Current liabilities 3 525
Total 138 515 Total 138 515
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REQUIRED
a) Calculate the following ratios for Magnus Orange Limited for the period ended 31 March
2018, and provide practical ways to improve these ratios.
i. Net profit margin
ii. Return on assets
iii. Effective interest rate
iv. Debt equity ratio
v. Dividend yield
vi. Price/book ratio
(12)
b) Analyse and discuss the human, social and natural capital performance of Magnus
Orange Limited for the period ending 31 March 2018. Show all workings.
(15)
c) With reference to the capital expenditure projects to be undertaken by Magnus Orange

Limited, explain the following terms:
i. Divisible project
ii. Independent projects
iii. Mutually exclusive projects
iv. Capital rationing
(8)
d) Draft a report on capital structure and sources of finance, in which you cover the following:
i. Weighted average cost of capital of Magnus Orange Limited for the period ending 31
March 2018.
ii. Criteria to be used in deciding on how to finance the expansion to Mogale City metro.
iii. How the expansion to Mogale City metro should be financed (show workings).
(35)
e) Write an email to the Project task team of Magnus Orange Limited, in which you critically
evaluate the valuation calculation performed by the associate accountant. The email
should cover:
i. Any errors or inaccurate assumptions made by the associate accountant.
ii. Re-performance of the valuation of the stake in Dira Bus Services Company at 31
March 2018, using the price-earnings multiple method.
iii. Reasonability check of the valuation performed above, using the net asset value
method.
(25)
f) Critically evaluate the implementation of the e-toll system in Gauteng and advise on how
this should be best addressed going forward.
(5)
TOTAL: 100 MARKS
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4.33. QUESTION 33: MBOWENI TRADING (PTY) LTD (100 marks; 180 minutes)
Mboweni Trading (Pty) Ltd (“Mboweni Trading”) is a fashion lifestyle retailer which specialises
in superior quality clothes and shoes at reasonable prices. The bulk of its merchandise is
imported from China, Thailand and Indonesia, while the remainder is uniquely designed and
manufactured from a factory located in Hammanskraal, which is located fifty kilometres north
of Pretoria. Mboweni Trading operates five retail stores in different parts of South Africa, two
of these are based in Gauteng and contribute 50% of the company’s revenue. The company
prides itself as the market leader when it comes to quality and pricing of its products. Of lately,
Mboweni Trading has dominated the South African media as a success story of black
economic empowerment after experiencing rapid growth in its bottom line owing to its unique
market position. The success of Mboweni Trading has not gone unnoticed by the investment
community, with the company receiving offers from investors willing to buy a stake in it. The
average offer price is R5,50 per share and is considered to reflect the true net worth of the
company.
As part of its long-term growth strategy, the company is exploring possibilities of venturing into
another line of business in order to maximise profits. This new product line will include the
manufacturing of linen, curtains and carpets. Mboweni Trading is considering an investment
in an industrial sewing system consisting of heavy duty sewing machines, embroidery and
pressing machines, which will be imported from China at a total cost of ¥2 100 000. This
excludes upfront setup costs of ¥100 000 and yearly maintenance costs of ¥15 780. The
assembling will take place on 1 October 2018 at the company’s factory and the payment of
the machine and setup costs will be effected on the same day. The industrial sewing system
will be brought into operation a week after assembling. In anticipation of this significant cash
outflow (machine and setup costs are incurred at the start of the project), the company will
take out a forward exchange contract on 1 September 2018.
The following economic forecasts have been made:
• The spot rate on 1 September 2018 – ¥0,500: ZAR1

• The FEC rate (1-month) on 1 September 2018 – ¥0,535: ZAR1
• The spot rate on 1 October 2018 – ¥0,512: ZAR1
• The spot rate on 30 September 2019 – ¥0,526: ZAR1
• The average rate for 12 months ending 30 September 2019 – ¥0,536: ZAR1
The company estimates immaterial movement in Yuan and Rand exchange rate after
September 2019. The company will continue sourcing its raw material from its BRICS aligned
partners in Brazil and China, as it continues to enjoy good relations with its suppliers. The
company’s labour force is made up mainly of the residents of Hammanskraal and this has led
to positive impact on the sustainable development of the surrounding communities.
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The following information relates to the industrial sewing system:
• The factory will operate eight standard working hours Monday to Friday and a four-
hour overtime shift on Saturday.
• About 20 000 kg of material will be purchased per annum. 5% of the material will be
wasted before the production process starts.
• On average a unit sold will use 2,5 kg of the input material and will be sold for R400
and the sales value will increase by 10% per annum. The finished units will be sold at
material cost price + 90%.
• The factory will employ ten factory workers at an hourly rate of R25 per worker.
Overtime is paid at a premium of 100% of standard hourly rate.
• The company aims to negotiate with its trade union to increase the wages of all its
employees by an average of CPI + 70 basis points per annum over the next eight years.
• The existing factory manager (currently earning R150 000 per annum) will also be
responsible for the new industrial sewing system. However, the company will now pay
this factory manager a salary of R16 000 per month.
• A yearly government grant of R112 000 will be received in advance each year for the
duration of the use of the industrial sewing system. The grant (not taxable) is aimed at
encouraging companies to invest in underdeveloped segments of the economy and
combating unemployment.
• The industrial sewing system has an accounting useful life of eight years, depreciated
on a straight line basis.
• Direct cash factory overhead costs will amount to R85 000 per annum.
• The South African Revenue Services grants a s12C allowance of 25% per annum on
the industrial sewing system.
• The company will dispose of the industrial sewing system at its carrying value after five
years of operation.
• There will be no closing balances of inventory and work in progress at the end of each
year.
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The following are the financial statements of Mboweni Trading (Pty) Ltd for the year ended
30 June 2018:
Statement of comprehensive income for the year ended 30 June 2018
Notes R
Sale of merchandise 20 423 000
Cost of sales (9 476 000)
Gross profit 10 947 000
Depreciation and amortisation (438 000)
Employee costs (2 904 000)
Marketing and administration costs (2 415 000)
Bad debt expenses (68 000)
Other trading expenses 1 (1 928 000)
Interest income 141 000
Other income 2 1 230 000
Profit before finance costs 4 565 000
Finance costs 3 (607 000)
Profit before income tax 3 958 000
Income tax expense (1 050 000)
Net profit for the year 2 908 000
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Statement of financial position at 30 June 2018

Notes R
Non-current assets 10 916 000
Property, plant and equipment 7 245 000

Intangible assets 2 001 000
Investment property 1 670 000
Current assets 6 435 000
Inventories 65 000
Cash and cash equivalents 4 078 000
Total assets 17 351 000

Capital and reserves 8 250 000
Stated capital 4 2 400 000

Non-distributable reserves 5 750 000
Distributable reserves 5 100 000
Medium-term borrowings 6 7 444 000

Provision 200 000
Short-term borrowings 7 502 000

Current income tax liabilities 15 000
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Notes
1. Other trading expenses include R13 000 loss incurred by the procurement department
for stolen inventory and incorrect purchases. This amount, although only representing
about 0,2% of the value of all the merchandise bought on credit during the year, has
been gradually declining over the years to current levels, and this is considered
reasonable.
2. Other income relates to proceeds from the auction of non-core assets during the year.
Auction expenses have already been netted off against this amount.
3. Finance costs are made up of the interest and dividends paid on the following facilities:
Medium-term borrowings 584 680
Short-term borrowings – Vaal Building Society (overdraft) 22 320
4. Two million shares were issued when the company was formed at R0,75 each. The
additional shares were issued fifteen months ago at a premium of R2,25 each. The
total dividend declared and paid for the 2018 financial year end was R950 000. The
dividend is expected to grow at 6,05% per annum for the foreseeable future.
5. Non-distributable reserves relate to the revaluation surplus on the company’s property,

plant and equipment following the revaluation done three years ago. There were no
movements in this account during the current year.
6. Medium-term borrowings comprise of the following:

• A five-year term loan from Netbank obtained on 1 July 2016 currently bears a post-
tax amount of R142 560 per annum (a fixed rate of 8,25% per annum). Similar
loans bear an interest rate of 8,56% per annum.
• Another loan for R2,4 million was obtained from BEADvest Bank on 17 July 2017
at a fixed rate of 8,40% per annum. Similar loans also average 8,56% per annum.
• Two million 7% preference shares will be redeemed at R1,60 per share in four
years’ time. The dividend is cumulative and similar preference shares yield prime
less 270 basis points in the market.
• There were no loans repaid and no preference shares redeemed during the year.
7. The short-term borrowings relate to the company’s bank overdraft facility which is used
to bridge any gap in the liquidity requirements of the company. The interest rate is
charged on the outstanding amount at prime lending rate.
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1. The average performance of Mboweni Trading’s competitors for the year ending in
2018 is provided below (industry average):
Revenue growth – 2018 (%) 8,5

Return on assets, using NOPLAT (%) 15,2
Return on equity, using opening balances (%) 28,0
Net interest cover (times) 7,0
Dividend pay-out ratio (%) 43,6
Creditors’ payment period (days) 36
Capital gearing ratio (x: 1) 0,45
Bad debt expense ratio (%) 0,8
Fixed asset turnover (times) 3,0
Effective interest rate, using book values (%) 7,5
2. The following are the funding options Mboweni Trading is considering to use in order
to finance any costs required at the start of the industrial sewing system project:
a. The company has enough authorised share capital to finance the project.
b. 400 000 non-redeemable preference shares can be issued at R3,00 with a
dividend yield of 90% of the prime lending rate.
c. BEADvest Bank is willing to provide up to R2 million of the funds required for
the project. However, the bank has indicated that the pricing will be as follows:
Capital borrowed Interest rate charged

First R1 000 000 Market-related rate
The balance (the portion over R1 million) Market-related rate + 8,44%
d. The cost of equity will increase by 4 percentage points if more than R1,5 million
debt is raised.
3. All rates are before taking into account the corporate tax rate of 28%, unless stated
otherwise. The prime lending rate is 10% and the CPI is expected to average 4,8% for
the foreseeable future.
4. The company operates 360 days a year and the factory is running for 52 full weeks a
year. The cash flows are assumed to take place at the end of each year, unless stated
otherwise.
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REQUIRED
a) As the management accountant of Mboweni Trading, draft an email to the company
management, commenting on the company’s performance as compared to the
industry average and provide practical ways Mboweni Trading can improve its ratios.
(Calculations 20 marks; discussion 15 marks)
(35)
b) Calculate the weighted average cost of capital of Mboweni Trading at 30 June 2018
using market values.
(17)
c) Advise the management of Mboweni Trading on how the industrial sewing system
should be funded (net amount required), if the decision is to undertake the project.
Assume R4 million is required to finance the project and the cost of capital should be
used to support the financing decision.
(Calculations 12 marks; discussion 3 marks)
(15)
d) Advise the management of Mboweni Trading whether they should invest in the
industrial sewing system. Show all relevant workings and explain qualitative factors
they should consider.
(20)
e) Given the nature of Mboweni Trading business, describe key risks that the business
is faced with and provide possible mitigating factors.
(10)
f) Calculate the foreign exchange profit or loss of Mboweni Trading at 1 October 2018
for the forward exchange contract that would have been taken out on 30 September
2018, given the following prevailing rates on 1 October 2018:
• The spot rate – ¥0,520: ZAR1
• The FEC rate (1-month) – ¥0,508: ZAR1
• The FEC rate (4-months) – ¥0,500: ZAR1
• Average rate for 4-month period ending 1 October 2018 – ¥0,516: ZAR1
(3)
TOTAL: 100 MARKS
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4.34. QUESTION 34: MONDLI GROUP LIMITED (50 marks; 90 minutes)
Mondli Group Limited (“Mondli” or “the Group”) is a global, diversified woodfibre (a paper
making material extracted from trees) company. The Group focuses on providing the following
products to customers across more than 150 countries: dissolving wood pulp, speciality paper
and packaging papers, as well as printing and writing papers. Mondli was incorporated in 1940
and has its primary listing on the Johannesburg Stock Exchange (JSE). The Group has over
12 500 employees in over 35 countries and has predominantly-automated, energy-intensive
manufacturing operations on three continents (10 facilities in Southern Africa, 3 in the United
States of America and 5 in Western Europe). The Group’s headquarters are in Johannesburg
(South Africa) and oversee three main sub-divisions: Mondli Paper and Paper Packaging
(“Paper Division”), Mondli Dissolving Wood Pulp (“Pulp Division”) and Mondli Forests
(“Forest Division”).
The Paper Division focuses on the production of packaging, speciality, printing and writing
papers. The Pulp Division produces dissolving wood pulp that is primarily used in textile,
industrial and pharmaceutical applications. The Group has a 16% share of the dissolving wood
pulp market, and has the right expertise, technology and track record to meet the growing
demands of its customers in this sector. The wood and pulp needed for the Group’s products
are either produced within Mondli Group or bought from accredited suppliers.
Mondli is committed to collaborating and partnering with stakeholders and aims to be a trusted
and sustainable organisation with an exciting future in woodfibre. Through intentional
evolution, Mondli will continue to grow its business into a profitable and cash generating,
diversified woodfibre group, focusing on dissolving wood pulp, paper and products in adjacent
fields. The smart decisions that Mondli executes with speed include responding to global
trends and anticipating customers’ needs, establishing production sites that can switch
between packaging papers and printing and writing papers. The Group continues to operate
with focus and agility by making smart investments in existing and adjacent areas with strong
potential growth. This, in turn, enables the Group to offer an expanded range of products that
contributes toward a tomorrow that is better than today.
The Group operates in a fast-paced world with diverse and complex issues impacting the
planet, society and the way the Group conducts business. Renewable energy approximates
45% of total energy utilised by the Group. Mondli adopts a partnership approach, whereby the
Group develops long-term relationships with global, regional and local customers. Cash sales
average 22,5% of credit sales and customer credit terms vary from 30 days to 90 days
depending on the relationship the Group has with the customer and also considering the
operations of the customer. Currently, there are no discounts granted to customers. The Group
also carries out intensive Research and Development (R&D) in order to develop products to
suit customers’ specific needs and to stay ahead of the competition.
The Group’s financial year ends on the last day of February each year.
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1. THE FIVE-YEAR REVIEW OF MONDLI GROUP LIMITED FOR THE 2016 TO 2020
FINANCIAL YEARS IS PROVIDED BELOW:
Details Notes R million
2020 2019 2018 2017 2016
Revenue 5 929 5 295 5 141 5 390 6 061
Profit before interest and tax 583 571 572 400 331
Net interest expense 1.1. 162 125 149 171 194
Taxation 98 108 104 62 2
Ordinary dividends paid 81 59 44 28 24
Preference dividends paid 1.3.1. ? ? ? ? ?
Market capitalisation 3 383 3 633 2 796 1 539 2 025
Shareholders’ equity 1.2. 1 947 1 747 1 378 1 015 1 044
Net interest-bearing debt 1 567 1 320 1 407 1 774 1 942
Interest-bearing debt 1.3. 1 930 1 870 2 110 2 230 2 470
Cash (363) (550) (703) (456) (528)
Inventory 741 636 606 596 687
Trade receivables 800 683 697 660 745
Trade payables 1 009 858 839 865 1 035
Provisions (current) 51 52 52 30 25
Details 2020 2019 2018 2017 2016
Prime rate (%) 10,0 10,25 10,25 10,50 10,25
Corporate tax rate (%) 28 28 28 28 28
Operating days 366 365 365 365 366

1.1. Net interest expense is after taking into account the interest income of R22 million for
the year ended 29 February 2020 (2019: R29 million).
1.2. The beta of a Mondli share is calculated to be 1,18 and the expected market return is
13,44% while the risk premium is estimated at 8,89%.
1.3. The interest-bearing debt as at 29 February 2020 is made up of the following
instruments at their respective book values, which are equivalent to the nominal
values:
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1.3.1. Two hundred million preference shares that will be redeemed on 28 February 2023
at their original issue price (and par value) of R4,50 per share. The preference shares
carry a fixed dividend of 12,50% per annum. To date, the preference dividends of
each financial year were paid in full in their respective financial year. Preference
dividends are paid on the last day of February each year. Similar shares have an
annual yield of prime+4.
1.3.2. A term loan for R530 million was taken on 5 March 2017 at a fixed interest rate of
12,75% per annum. The interest is paid in arrears on the last day of February each
year. At 29 February 2020 similar loans were trading at 13,5% per annum.
1.3.3. Two million debentures were issued at par value in 2015 and the interest of R55
million is payable in arrears on the last day of February each year. On 29 February
2020 these debentures were worth R483 million. These debentures will be redeemed
on 28 February 2022 at par value.
2. PLANS FOR THE 2021 FINANCIAL YEAR

2.1. Extract from budgeted information:
Details 2021
R million
Revenue 6 200
Profit before interest and tax 602
Net interest expense 126
Inventory 760
Provisions (current) 45
▪ Operating days for the 2021 financial year are 365 days.
▪ The weighted average cost of capital is expected to be 13,5% per annum throughout the
financial year.
2.2. Proposed changes to working capital management:

The Group’s finance team is concerned about the management of working capital, in particular,
the trade receivables book. In this regard, the Group is considering the following changes to
the management of working capital as from the beginning of the 2021 financial year:
2.2.1. Introduction of a 1,5 % cash discount for cash sales customers only.
2.2.2. Introduction of interest on outstanding trade receivables. In this regard, interest at
10% per annum will only be levied on accounts that are more than 90 days old.
2.2.3. Sending of text messages towards the end of each month to notify and remind
customers of their outstanding balances.
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2.3. The above proposal (see point 2.2.) is expected to result in the following for the
2021 financial year:
2.3.1. Cash sales as a component of total sales will be 30%.
2.3.2. 15% of credit sales will be fully settled on the 108th day from the date of sale. The
remaining credit customers will either settle within 90 days from the date of sales or
have their accounts (including accumulated interest) written-off as bad debts.
2.3.3. Bad debt expense to decrease by R35 million.
2.3.4. Text message notification cost will be R2 million.
2.3.5. Trade receivables will average R620 million.
REQUIRED
(a) Identify and briefly discuss five key risks that Mondli is confronted with; and briefly
describe how each of these risks can be mitigated. (10)
(b) Calculate the weighted average cost of capital of Mondli as at 29 February 2020.
▪ Round Rand amounts to the nearest R million, and all other numbers to one decimal
place. (15)
(c) The following two points are applicable to answering question 2 (c) only:
1. The Group uses book values and closing balances when analysing ratios, however
2. The Group uses average balances in computing business days.
Calculate the following ratios for Mondli for the year ended 29 February 2020 and explain
possible reasons for movement from the previous year (2019).
▪ Where applicable, round the final answers to two decimal places.
(i) Capital gearing ratio (3)
(ii) Acid-test ratio (3)
(iii) Debtors’ collection period (4)
▪ Ratio calculations – 7 marks; Explanations – 3 marks
(d) Critically evaluate Mondli’s dividend policy over the five-year period ended
29 February 2020. Provide relevant calculations to support your argument(s).
▪ Calculations – 6 marks
▪ Discussion – 3 marks
▪ Where applicable, round calculations to one decimal place.
▪ Limit your evaluation to the aspects of the dividend policy evident from the scenario. (9)
(e) Based on the plans for the 2021 financial year, advise the finance team of Mondli as to
whether it is financially feasible to implement the proposed working capital management
changes.
▪ Support your advice with relevant and necessary calculations.

▪ Round calculations to the nearest R million.
▪ Ignore all taxation implications.
▪ Where applicable, average balances must be used.
▪ Advice – 1 mark (6)
Total marks [50]
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4.35. QUESTION 35: BLUESKY WINGS LTD (50 marks; 90 minutes)
BlueSky Wings Limited (“BlueSky”) is a South African registered company with a 31 January
year-end. BlueSky operates commercial aircraft for both domestic and international travels.
Currently, the company owns only two aircraft that are predominately used for international
travels. Being highly competitive, the South African domestic air travel market is a relatively
low margin business proposition and thus less attractive to BlueSky. As such, BlueSky’s focus
is on international routes rather than domestic routes, and therefore it is not an airline of choice
amongst South African passengers.
To maximise profitability from its international travel business, BlueSky’s aircraft are seldom
on the ground. The company’s chief executive officer (CEO) is known for saying “the only time
I want to see my aircraft touching the ground is when it lands”. Despite offering its pilots
remuneration that is notably above the industry norm, the company’s pilot turnover is
considerably higher than the industry average. In several instances, on the back of the
company’s back-to-back flight schedules, BlueSky had been compelled to employ
inexperienced, although suitably qualified pilots. The health and wellness of the pilots is a top
priority, therefore, BlueSky’s pilots are obliged to sleep after each shift to minimise fatigue.
BlueSky’s flight-bookings, payments, check-ins and enquiries are done online only. The
company only accepts online credit card payments and requires a “travel deposit” via a
customer’s credit card. The travel deposit is used as insurance against flight cancellations
without the required 48-hours’ notice and is only released 5 days after the trip. Due to historical
information technology (IT) related challenges, the company has recently outsourced all its IT
function to a recently formed Dubai-based IT company.
1. PROPOSED PURCHASE OF AN ADDITIONAL AIRCRAFT

As part of assessing the financial viability of purchasing an additional commercial aircraft (B-
737), Ms Du Plessis (BlueSky’s management accountant) prepared the below capital
budgeting working paper:
Subject: New commercial aircraft (B-737) capital budgeting exercise

Prepared by: Management Accountant – Karen Du Plessis
Details Calculations and/or details Notes R

million
Purchase price 1.1 (168)
Working capital requirements 1.1 (98)
Revenue R1,8 billion x 4 years 1.2 7 200
Fuel costs R720 million(m) x 4 years 1.2 (2 880)
Salaries R120m x 4 years 1.2 (480)
Repairs and maintenance R20m x 2 years 1.3 (40)
Other operating costs (2 532)
Variable overheads R30m x 4 years 1.2 120
Fixed – hangar rental costs R3m x 4 years 1.4 12
Fixed – Depreciation 1.5 2 400
Interest expense on loan R180m x 5 years 1.6 (900)
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Subject: New commercial aircraft (B-737) capital budgeting exercise

Prepared by: Management Accountant – Karen Du Plessis
Details Calculations and/or details Notes R

million
Recoupment 180
Proceeds on sale 1.1 180
Less: Tax base Correct tax base at end of year 4 1.5 0
Net cash flows before taxation R282
Taxation R282m x 28% 2.6 (R78,96)
Expected total net cash flow R203,04
Internal rate of return R203,04m ÷ ($168m ÷ $0,07) = 8,46%
Conclusion: B-737 is expected to generate total net cash flows of R203,4 million and IRR
of 8,46% for the four years under review. Despite the IRR being lower than the company’s
weighted average cost of capital (WACC), the expected total net cash flow is nonetheless
positive. The financial viability of the new aircraft is therefore acceptable, I therefore
recommend that the new aircraft be purchased.
1.1. If financially viable, the new aircraft will be purchased on 1 February 2021 at a purchase
price of $168 million. The applicable exchange rate is R1: $0,07. This aircraft will be
used for four years after which it will be sold for R180 million. The working capital
investment required will be R98 million, however, only 90 cents for every invested R1
will be recouped at the end of year four.
1.2. Based on historical observations of the company’s similar projects, these items are
always impacted by the annual general inflation. The average general inflation rate for
the four years under review is expected to be 4,5% per annum (p/a).
1.3. The aircraft will be bought with a free 2-year standard service and maintenance plan
relating to the first two years. Subsequently, the service and maintenance costs will be
R20 million per year.
1.4. Two years ago, BlueSky entered into a long-term lease agreement to lease an aircraft
hangar (“aircraft garage”) at a fixed rent expense of R3 million per year. This leased
hangar has capacity to house four aircraft at a time.
1.5. BlueSky depreciates aircraft at 20% per annum on a straight-line basis while the South
African Revenue Services (SARS) allows wear and tear on a straight-line basis over four
years only for similar aircraft. You can assume that both the depreciation charge and the
tax base are correct.
1.6. The purchase of the aircraft will be financed by a 5-year Rand-denominated term loan
from a South African financial institution at an interest expense of R180 million p/a
payable annually in arrears. According to Ms Du Plessis, debt is cheaper and therefore,
no other form of finance was considered to finance the aircraft.
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2. FINANCING OF THE NEW AIRCRAFT

At the presentation of the capital budgeting working paper as per point 1 above, BlueSky’s
CEO questioned Ms Du Plessis’ exclusive preference of debt finance in financing the full
purchase price of the aircraft as opposed to a combination of debt and equity funding. The
CEO rather proposed that the aircraft be financed in line with BlueSky’s current debt:equity
structure. In this regard, the following information is made available:
2.1. BlueSky’s current permanent capital structure at market values as at 31 January 2021:
Ordinary share capital 6 million shares R1,5 billion
Term loan R0,8 billion
Non-redeemable 2,5 million shares @ R100 nominal value each R0,3 billion
preference shares
Debentures R0,4 billion
2.2. BlueSky will issue 4 million new ordinary shares at their market value as at 31 January
2021. BlueSky’s shares have a beta of 1,4. The market return rate is 9,5% p/a, and the
risk-free rate is 100 basis points above the prime lending rate of 7,5% p/a.
2.3. The required total debt will be split equally between the applicable debt instruments as
per the company’s permanent capital structure. The market-related pre-tax interest rate
of similar term loans is 8% p/a.
2.4. Non-redeemable preference shares are issued at a fixed rate of 11% p/a. Similar
preference shares are currently issued in the market at 150% of the prime lending rate.
2.5. BlueSky issued all its existing debentures at nominal value of R800 each and at a post-
tax fixed interest rate of 6,5% p/a. All issued debentures as at 31 January 2021 will be
redeemed on 31 January 2027 at a 2,5% discount on nominal value. On 31 January 2021,
the market value of similar debentures was R782 each.
2.6. The applicable corporate taxation rate is 28%.
2.7. BlueSky uses the weighted average cost of capital (WACC) to assess the financial viability
of capital investments. The company includes the funds required for the capital investment
project being assessed, since the project under consideration will impact the current
capital structure.
3. PROPOSED ACQUISITION OF BiDFLEST CABIN CATERING PTY LTD (“BCC”)
BlueSky is currently contracting BCC to provide catering services in all its aircraft. Although
BCC is one of the BiDFLEST Group’s 25 subsidiaries, it is registered and operates as an
independent company. Despite BCC being a going concern, as part of its unbundling strategy,
BiDFLEST Group is considering selling its 80% equity stake in BCC with the effective deal
date of 31 December 2020, this amid stiff and increasing competition from Aircraft Foods
Incorporation (“AFI”), a company with similar business activities to BCC. AFI is a foreign
company that is listed in the New York Stock Exchange (NYSE) only.
Regarding the proposed acquisition of BCC, the following additional information is made
available:
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3.1. BCC was established and incorporated in 1995 and has been in operation since then.
3.2. BCC’s financial performance in each of the recent four financial years is as follows:
Details 2020 2019 2018 2017
R’000 R’000 R’000 R’000
Revenue 5 500 22 050 21 000 20 000
Cost of services rendered (5 200) (8 820) (8 400) (8 000)
Other operating costs (2 350) (2 205) (2 100) (2 000)
Profit/(loss) for year (R2 050) R11 025 R10 500 R10 000
Dividends declared and paid R0 R2 205 R0 R0
3.3. BCC’s 2020 financial performance was severely impacted by the COVID-19 pandemic.
Under normal circumstances, the company’s profit for the year would have grown by
approximately 5% from the immediate preceding financial year. On the back of COVID-
19, BCC was approved for a R13,6 million business relief fund for the 2020 financial year,
and these funds will be received in the 2021 financial year. Beyond the 2020 financial
year, BCC is expected to maintain its historical growth in profits.
3.4. On 31 December 2020, the ordinary shares of AFI were trading at $0,75 per share on the
NYSE while the annual market rate of return of the aviation catering industry by reference
to the NYSE was 6%. On this date, the applicable exchange rate was R1: $0,071. Despite
the country risk factor, AFI is arguably the only company with similar risk profile and growth
prospects as BCC.
3.5. Resulting from strong yearly earnings since the 2000 financial year, the majority of which
were ploughed back into the company, BiDFLEST Group has always been reluctant to
sell BCC. However, because of continuing disagreements over dividend payout, the
BiDFLEST Group is now ready to divest from the aviation catering industry.
3.6. Post the COVID-19 pandemic, the BiDFLEST Group expects BCC to return to its
operational excellence and profits well into the future, hence a goodwill value of
approximately R25 million for BCC is agreed upon. Furthermore, BCC’s administrative
office block was recently valued by the Ekurhuleni Municipality at R75 million, a value that
is approximately 2% above the property’s fair market value. Except for this administrative
office block, BCC does not own any other non-operating assets.
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REQUIRED
(a) Identify and discuss five key risks that BlueSky is confronted with; and
describe how each of these risks can be mitigated. (10)
(b) By reference to capital budgeting technique and principles thereof, critically
evaluate Ms Du Plessis’ capital budgeting working paper and subsequently
comment whether the basis of her conclusion thereto is correct.
▪ Your evaluation must be limited to the aspects deemed inconsistent
with, or not applied consistent with, the capital budgeting technique
and principles thereof.
▪ You are not required to perform or reperform a capital budgeting

exercise. (12)
(c) Assist Ms Du Plessis to answer the CEO’s question about the preference of
debt to finance BlueSky’s new aircraft purchases by discussing possible
advantages to BlueSky for utilising debt as a form of finance. (4)
(d) Take into consideration the below three points in answering question 1 (d) only:
1. Assume that the purchase price of the new aircraft is R2,8 billion;
2. Except for point 1 above, all the other applicable information remains as
given in the scenario; and
3. By reference to points 1 and 2 above, assume that the correctly calculated

annual net cash flows (all in arrears) from the new aircraft as determined by
a capital budgeting exercise are as follows:
Details R million
CF0 CF1 CF2 CF3 CF4
Annual net cash flows -R2 890 +R750 +R750 +R760 +R550
Based on the net present value (NPV) principles and taking into consideration
the above three points, advise BlueSky whether it should purchase the new
aircraft.
▪ Your advice (1 mark) must be supported by all relevant and necessary

calculations (13 marks).
▪ In your advice, no qualitative and/or non-financial factors must be

considered or presented. (14)
(e) Given the information made available in the scenario, identify and motivate
for the most appropriate valuation method that BlueSky should use to establish
the value of 80% equity stake in BCC as at 31 December 2020.
▪ You are not required to perform a valuation exercise.
▪ Identification (1 mark) and motivation (9 marks).
▪ Where necessary, support your motivating factor(s) with calculations. (10)
Total marks [50]
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4.36. QUESTION 36: FAR & WIDE (PTY) LTD (30 marks; 54 minutes)
Far & Wide (Pty) Ltd (“FW”) is a logistics company owned by Mulaudzi Limited. FW specialises
in door-to-door, overnight and same-day deliveries. FW makes use of highly advanced
technology to plan and coordinate its various delivery routes across the country.
1. EXTRACTS FROM FW’S FINANCIAL STATEMENTS AT 31󠄧 OCTOBER 2020:
Profit or loss items Notes 2020 2019

R’000 R’000
Revenue 1.1 87 000 85 500
Cost of services rendered 1.2 (43 500) (38 000)
Other operating expenses 1.3 (25 100) (23 800)
Finance costs (3 500) (4 500)
Net profit for the year R11 100 R14 300
Financial position items Notes 2020 2019

R’000 R’000
Trade and other receivables 1.1 17 000 6 000
Other assets 91 620 104 300
TOTAL ASSETS R108 620 R110 300
Ordinary share capital 1.4 50 000 50 000
Retained earnings 18 340 10 420
Liabilities
Long-term loan 1.5 23 000 25 000
12% Preference share capital (@R4 par value each) 1.6 8 000 8 000
Trade and other payables 5 800 5 000
Bank overdraft 0 7 180
Courier deposits 1.7 300 500
Dividends payable (ordinary & preference) 1.9 3 180 4 200
TOTAL EQUITY AND LIABILITIES R108 620 R110 300
Salient items 2020 2019

Operating days 366 365
Corporate tax rate 28% 28%
1.1. 80% of revenue is generated on credit to contractual corporate customers, while 20% is
generated from “pay-as-we-deliver” household customers.
1.2. Cost of services rendered does not include any once-off or exceptional expenses.
1.3. Other operating expenses include depreciation and amortisation charges of R13,1
million (2019: R13,3 million).
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1.4. FW has more than 2,2 million shares in issue. On 31 October 2020, these shares were
trading at R25 each while FW’s Price/Revenue multiple was 0,7 times on that same day.
1.5. On 31 October 2020, the market value of the long-term loan was R23,5 million.
1.6. On 31 October 2024, all the preference shares will be redeemed at 6% discount on par
value. On 31 October 2020, the market-related cost of similar redeemable preference
shares was 12,6%.
1.7. All corporate customers are required to pay a “courier deposit” as security for the
afforded credit facility. Upon cancellation of any corporate customer contract, the courier
deposit is repaid in full.
1.8. As at 31 October 2020, the market-related cost of equity was 11,5% and the market-
related cost of the long-term loan was 14,0%.
1.9. All dividends are declared on 31 October and subsequently paid on 15 March the
following year.
2. INVITATION TO TENDER
FW was approached by the University of Azania (“UAZ”), a leading distance-learning tertiary
institution, to tender for the provision of door-to-door courier services of the UAZ study
materials. The tender requires an overnight delivery of the study materials to UAZ’s registered
students. The tender price as put forward by UAZ is R75 million. The following additional
information was made available to you to assist FW in assessing the financial viability of the
tender:
2.1. The delivery vans and working capital requirements

FW will require a fleet of 50 delivery vans (vans) for the entire 3-year duration of the contract
(tender period) and a R5 750 000 investment in working capital at the beginning of the tender
period. The purchase price of each van is R650 000. FW already has five of the required vans
and these five vans were bought new 24 months ago at R650 000 per van and were never
used since then. When in use, each van will clock on average 50 000 kilometres (km) per year.
In their first two years, the fuel consumption of each van will be 7-litres/100km and thereafter
7,5-litres/100km. For the duration of the tender period, FW will employ 10 new graduates from
UAZ’s School of Logistics for a logistics management internship programme and 50
matriculants from the nearby community as drivers of the vans. The annual stipend for both
the internship programme and the drivers will be R150 000 per person.
The South African Receiver of Revenue (SARS) allows wear and tear on delivery vans at 40%
in year 1 and year 2, thereafter, 20% in each of the subsequent year(s). Wear and tear is only
allowed starting from the year in which the delivery van is brought into use.
2.2. Revenue
Revenue receipts will be made at the end of each year. R28 million of the tender price will be
received in the first year, after which the receipt will increase by 5% per year but will be limited
to the outstanding portion of the tender price not yet received. SARS will allow taxation of
revenue on a cashflow basis.
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2.3. Fuel costs

FW will enter into a fuel supply contract will Zarsol (Pty) Ltd at a rate of R12,5 per litre (p/l) in
the first two years of the tender period and thereafter the rate will increase to R14 p/l.
2.4. Maintenance costs

The maintenance of the vans is compulsory. Each van is always bought with a free standard
maintenance plan of 2-years or 100 000km, whichever comes first. A free maintenance plan
allows a customer to use the vehicle without incurring any maintenance costs for the duration
of the plan. The price of the free maintenance plan is never used to reduce the purchase price
of the vans. The market price of the maintenance is R18 000 per van per year during the first
two years of the tender period. Thereafter, the price of the maintenance will increase to
R20 000 per van per year. Where applicable, the maintenance costs are paid annually in cash.
2.5. Insurance costs

The insurance cost for each of the 50 delivery vans will be R1 800 per month for the duration
of the tender period.
REQUIRED
(a) For question 2(a) only, assume that FW uses book values and closing
balances when calculating and analysing the ratios:
Calculate the following ratios for both the 2020 and the 2019 financial years
and provide a possible reason for each movement:
(i) Trade receivable collection period (3)
(ii) EBITDA margin (3)
(iii) Ordinary dividend payout ratio (3)
(b) Provide one possible reason why FW’s working capital management would
not include the management of trading inventory. (1)
(c) With regard to the invitation by UAZ to tender:
(i) Calculate FW’s weighted average cost of capital (WACC) as at 31 October 2020,
and briefly explain the importance of WACC to FW in its assessment of the
financial viability of the tender. (8)
▪ Explanation – 2 marks
(ii) Based on capital budgeting principles, advise FW whether it will be financially
beneficial to accept the tender.
▪ Show all your calculations to support your advice.

▪ Your advice must be based on quantitative analysis only. (12)
Total marks [30]
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4.37. QUESTION 36: BHELL LTD (50 marks; 90 minutes)
Bhell Electronics Group (“BEG”) is a multinational group of companies that manufactures and
sells laptops, desktops and related electronic accessories. Bhell International is the parent of
the group’s 20 subsidiaries located across 20 countries. BEG’s financial year end is 30 June.
Within the group, each subsidiary uses the currency of its domicile as its reporting currency.
BEG reports using the South African Rand (ZAR). Bhell® Limited (“Bhell”) is the South African
subsidiary of BEG. Bhell is listed on the Johannesburg Stock Exchange and is the sole
distributor of BEG’s products within South Africa.
1. A summary of Bhell’s full set of management accounts is set out in point 2 and 3 below:
2. Profit or loss summary of the 2020 financial year
Notes 2020 2019
R’000 R’000
Revenue 2.1. 280 000 212 500
Cost of sales (219 296) (162 520)

Purchases 2.2. 221 514 159 634
Closing inventory (7 458) (5 240)
Dividend income 2.3. 225 210
Net operating expenses 2.4. (56 112) (46 150)
Normal taxation 1 420 1 214
Net profit for the year R3 195 R2 670
Ordinary dividends paid 2.5. 1 800 1 425

Preference dividends paid 2.5. 1 375 1 375
Other salient information 2020 2019
Number of Bhell’s factory shops 2.6. ? 25
Operating days 366 365
2.1. Revenue represents the sale of laptops, desktops and accessories to various retail
stores, corporate customers and household customers. For the 2020 financial year 65%
(2019: 60%) of total revenue was on credit.
2.2. 80% (2019: 60%) of the 2020 financial year’s purchases were made on credit. The
majority of the purchases are imported from BEG’s manufacturing plant in the
Netherlands, and these purchases are invoiced in US dollars only. In this regard, Bhell
does not make use of hedging facilities.
2.3. Dividend income relates to investment in Tharghost® Limited (“Tharghost”) – refer to
3.1 below. Tharghost is a company that specialises in the manufacturing and selling of
laptop bags. For the 2020 financial year Tharghost paid ordinary dividends of 150 cents
per share (2019: 140 cents).
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2.4. Among others, included in net operating expenses are the following expense items:
Details 2020 2019
R’000 R’000
Depreciation 8 600 8 800
Net finance costs* 5 928 8 700
*Net finance costs are after interest income of R3,325 million (2020) and R2,7 million
(2019).
2.5. To date there are no dividends owing.

2.6. Seven new factory shops (“shops”) were opened on 1 July 2019. No other changes to
the number of shops took place.
3. Financial position summary of the 2020 financial year
Notes 2020 2019
R’000 R’000
ASSETS
Non-current assets 122 500 119 500
Fixed properties (shops) and other movables 66 000 67 000
Bhell patent 20 000 21 000
Investment in Tharghost at cost 3.1 1 500 1 500
Fixed deposits 3.3 35 000 30 000
Current assets ? ?
Inventory ? ?
Cash balances 0 18 133
Total assets ? ?

Equity 3.2 ? ?

Long-term loan (long-term portion) 3.3 65 000 80 000
1 million 8% Debentures 5 000 5 000
Current liabilities ? ?

Long-term loan (short-term portion) 3.3 15 000 15 000
Provisions for warranties 3.4 ? ?
Bank overdraft 3.3 1 168 0
Total equity and liabilities ? ?
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3.1. Bhell has a 10% equity stake investment in Tharghost.

3.2. Bhell’s ordinary shares were issued at inception for R20 per share with a total book value
of R30 million (no changes in issued share capital since). Retained earnings (Bhell’s only
reserves) at the end of the 2020 financial year were R0,46 million (2019: R0,44 million).
The company’s share price on 30 June 2019 was R25 per share, and by the end of the
2020 financial year this had increased by 6%. There are also 5 million non-redeemable
preference shares in issue (since inception) at a fixed rate of 11% per annum. In
accordance with Bhell’s memorandum of association, there are no other classes of
equity instruments while the authorised number of shares is 2 million ordinary shares
and 5 million non-redeemable preference shares.
3.3. Bhell borrows from and invests with South African financial institutions only.
3.4. Provision for warranties relate to future probable claims for returns of damaged goods.
4. PROPOSED PLANS FOR 2021 FINANCIAL YEAR

4.1. WORKING CAPITAL MANAGEMENT CHANGES
Bhell is forecasting a 6,5% growth in revenue from the 2020 financial year level and a 25%
gross profit margin for the 2021 financial year. This has, however, raised concerns about the
possible additional working capital requirements that might be needed to fund the growth,
considering the company’s recent reliance on the overdraft facility. In this regard, changes to
the management of the company’s working capital are proposed. The intention is to implement
the following working capital management measures aimed at reducing the company’s use of
the overdraft facility without negatively impacting on the afore-mentioned revenue growth:
(i) Increasing the credit sales proportion to 70% of the total revenue and introducing stringent
receivable collection procedures. In this regard, the collection period is expected to reduce
to 45 days.
(ii) Purchases will increase by 5,7% whilst maintaining the current credit purchases at 80%
of total purchases. BEG has agreed to relax its collection terms, and this will result in an
overall payable period of 60 days. The inventory turnover will be 12 times.
(iii) The closing positive bank balance of the 2021 financial year is expected to be R5,472
million.
4.2. PROPOSAL TO ACQUIRE ADDITIONAL EQUITY STAKE IN THARGHOST® LTD

Bhell is one of Tharghost’s major customers. All the laptops that Bhell sells are sold with a
complementary laptop bags which are purchased exclusively from Tharghost. Currently, Bhell
holds a 10% equity stake in Tharghost and is investigating the possibility to acquire the
remaining equity stake as at 30 June 2020 and become Tharghost’s only shareholder.
Tharghost’s year end is 30 June.
As part of the due diligence regarding the proposed acquisition, the following information was
extracted from Tharghost’s audited financial statements for the year-ended 30 June 2020:
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Notes BVs* MVs*

2020 2020
R’000 R’000
Ordinary share capital and retained earnings 4.2.1 23 000 ?
10% Redeemable preference share capital 4.2.2 5 000 4 000
8,50% Debentures @ R4 face value each 4.2.3 15 000 15 375
Provisions for warranties 1 500 1 500
Total equity and liabilities R47 000 ?

* BVs: Book values; and MVs: Market values
From statement of profit or loss Notes 2020 2019 2018

R’000 R’000 R’000
Net profit for the year 4.2.4. R1 374 R1 284 R1 200
Notes and additional information applicable to the proposed acquisition of Tharghost:
4.2.1. Tharghost’s ordinary shares were all issued at R10 each. On 30 June 2020, Tharghost
declared and subsequently paid a dividend of 150 cents per ordinary share. No other
ordinary dividends were declared or paid during the 2020 financial year. Tharghost’s
dividend yield at 30 June 2020 was 6%. The retained earnings balance as at 30 June
2020 was R8 million. The applicable cost of equity on 30 June 2020 was 14,50%.
4.2.2. On 30 June 2020 similar preference shares were trading at 12,50% per annum.
4.2.3. All the debentures are redeemable on 30 June 2024 at their total nominal value of R15
million.
4.2.4. Included in the net profit for the 2020 financial year is R110 000 depreciation charge
for the 2020 financial year. Tharghost’s depreciation rates are the same as the wear
and tear rates granted by South African Revenue Services (SARS) for similar assets.
4.2.5. Tharghost is forecasting a year-on-year net profit growth of 10%, 12% and 10% for the
2021, 2022 and 2023 financial years, respectively. These profit forecasts include
depreciation charges of R100 000 in each financial year, and an expected loss (of R35
000) on some of the assets that will be sold for R45 000 during the 2022 financial year.
4.2.6. Beyond the 2023 financial year, Tharghost’s annual free cash flows will grow at roughly
the same rate as reflected in the growth of net profits as per section 4.2. above.
4.2.7. Additional capital investments are forecasted as follows: R500 000 in 2021 and R250
000 in 2023.
4.2.8. Net working capital investment is forecasted as follows:

Details Forecast Current
Financial year 2023 2022 2021 2020
R’000 R’000 R’000 R’000
Net working capital closing balances R1 302 R1 317 R1 280 R1 225
4.2.9. The applicable corporate taxation rate is 28%.
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MAC3761/QB002
REQUIRED
(a) Using the closing book value balances where applicable, calculate the following
ratios for both the 2019 and the 2020 financial years of Bhell; and for each ratio
calculated provide a possible reason for the movement:
(i) EBITDA margin (3)
(ii) Interest cover (3)
(iii) Earnings-yield (3)
(iv) Interest-bearing debt to equity ratio (3)
(b) Discuss how Bhell is exposed to different categories of currency risk (if any) and
how best these risks can be mitigated. (5)
(c) Bhell’s management accountant is of the view that the company will require a
maximum of R1,5 million additional investment in working capital if the proposed
changes to the management of working capital were to be implemented during
the 2021 financial year.
Comment on the correctness of the above view by Bhell’s management

accountant.
(8)
▪ Support your commentary with all the relevant and necessary calculations.
▪ Where applicable, closing book value balances must be used in the
calculations.
▪ Where applicable, round final answers to the nearest thousand Rands.
(d) With regard to the proposed acquisition of Tharghost® Limited, draft a report
dated 30 June 2020 to the management of Bhell and address the following three
matters:
(i) The management of Bhell is of the view that, instead of the proposed equity
investment, Bhell also has an option to purchase Tharghost’s net assets. From
Bhell’s perspective only, assist the management by discussing inherent differences
between investing in the equity and purchasing the net assets of the target company. (6)
(ii) As part of a reasonability test to support Tharghost’s market capitalisation as at 30
June 2020, use the free cash flow valuation technique to determine Tharghost’s
total equity value as at 30 June 2020. (14)
(iii) By reference to Bhell’s cash position as at 30 June 2020 and applicable statutory
limitations as per Bhell’s memorandum of association, discuss possible payment
methods that Bhell’s management can consider using in acquiring the equity stake
in Tharghost. (5)
Total marks [50]
141
MAC3761/QB002
ANSWERS:
142
MAC3761/QB002
5 SOLUTIONS
5.1. SOLUTION 01: EDCARS GROUP LIMITED
i. Profitability ratios
Ratios 2016 2015 Possible reasons
Gross Profit Margin: 10 400 > Higher margins in non-

23 700 clothing brands
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛
𝑆𝑎𝑙𝑒𝑠 = 43,88% = 41,85% > Good relations with
suppliers - discounts
EBIT Margin: 10 400 + 1 500 − 9 000 > Cost of marketing

23 700 campaigns
𝐸𝐵𝐼𝑇
𝑆𝑎𝑙𝑒𝑠 = 12,23% = 13,66% > Running of new stores
& promotional costs
EBITDA Margin: 2 900 + 500 > Market campaigns

23 700
𝐸𝐵𝐼𝑇𝐷𝐴 > Running of new stores
𝑆𝑎𝑙𝑒𝑠 = 14,35% =15,06% & promotional costs
Net Profit Margin: 2 100 >More income

23 700 generated from non-
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
operating activities
𝑆𝑎𝑙𝑒𝑠 = 8,86% = 7,07%
> Low finance costs
Effective tax rate: 900 >Poor tax planning

3 000 (penalties & interests)
𝑇𝑎𝑥𝑎𝑡𝑖𝑜𝑛
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 = 30 % = 27,79% > Some expenses not
tax allowed
Bad debt as % credit sales: 1 000 >Stricter lending policies

16 600
𝐵𝑎𝑑 𝑑𝑒𝑏𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 > Sound debt collection
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 6,02% = 6,52% processes
> Non-clothing retail

customers better
creditworthiness
Total op costs per store: 9 000 > Deteriorating of Rand

3 100 for non-Dollar expenses
𝑇𝑟𝑎𝑑𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑜𝑟𝑒𝑠 = R2,90m =R2,42m > The introduction of
new stores (setup costs)
& extra costs to promote
Revenue per employee: 23 700 > Incentives to staff to

22 200 sell products and hit
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
targets
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 = R1,06m = R0,88m
> High value products
143
MAC3761/QB002
ii. Return on invested capital
Return on other investment: 1 100 > Investments made

4 700 towards end of year
𝑂𝑡ℎ𝑒𝑟 𝑖𝑛𝑐𝑜𝑚𝑒
𝑂𝑡ℎ𝑒𝑟 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 = 23,4% = 27,19% > Strain in the economy
decreasing dividends
Return on Assets (RoA): 2 900 > Better utilisation of

22 000 assets/longer trading
𝐸𝐵𝐼𝑇
hours
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 = 13,18% = 12,37%
> Assets fully deployed
at start of a branch
Return on Equity (RoE): 2 100 >Profits boosted by non-

9 900 operating activities
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
𝐸𝑞𝑢𝑖𝑡𝑦 = 21,21% = 20,94% > Investors are getting
better return than what
the industry offers
Return on Capital Employed 2 900 > Indication that new

(RoCE): 8 300 + 9 900 stores are generating
profits early for the
𝐸𝐵𝐼𝑇 = 15,93% =15,70% company
𝐼𝐵𝐷 + 𝐸𝑞𝑢𝑖𝑡𝑦
Non-current asset turnover: 23 700 >Better utilisation of

8 500 assets
𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠 = 2,79 times = 2,22 times > New stores and
equipment not kept
idling for long period
144
MAC3761/QB002
iii. Liquidity ratios
Current ratio: 13 500 >Increase of sales might

6 300 have led to more debtors
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 2,14: 1 = 2,01: 1 > Possible revaluation of
stock at hand.
Acid-test ratio: 13 500 − 5 100 > Slight improvement –

6 300 improved cash
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
generated from
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 1,33: 1 = 1,30: 1 operations.
Cash ratio: 800 + 4 700 > Ability to cover its

6 300 current obligations out of
𝐶𝑎𝑠ℎ + 𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
cash and cash
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 0,87: 1 = 0,31: 1 equivalent
> More suppliers and

credit grantors happy to
provide funding
Debtors’ collection period: 6 700 >Stricter lending policies

𝑥 365
16 600
𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 > Sound debt collection
𝑥 365 = 147 days
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 180 days processes
Creditors’ payment period: 3 200 > Suppliers more lenient

𝑥 365
90% 𝑥 12 100 to the company (track
𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
𝑥 365 record)
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 107 days = 89 days
> Interest-free credit and
company taking
advantage
Inventory days: 5 100 > Fashion out of stock

𝑥 365
13 300 and not sold
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 = 140 days = 129 days > High value items move
slowly
Cash conversion cycle: = 147 + 140 - 107 > Better credit control
processes in place (NCR
Debtors’ days +inventory days = 180 days = 220 days intervention)
- Creditors’ days > Better terms
negotiated with
suppliers
Inventory turnover (times): 13 300 > Fashion out of stock

5 100 and not sold
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 2,61 times = 2,83 times > High value items move
slowly
145
MAC3761/QB002
iv. Capital structure/solvency
Interest cover (TIE): 2 900 > Increasing operating

1 200 costs and new store
𝐸𝐵𝐼𝑇
costs
𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 = 2,42 times = 2,75 times
>High interest rates
currently paid
> High debt for most part

of year
Net interest cover: 2 900 > Increase in cash

1 000 reserves from profits
𝐸𝐵𝐼𝑇
𝑁𝑒𝑡 𝑓𝑖𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 = 2,9 times = 2,78 times > Increase in interest
rates
Effective interest rate: 1 200 > Good relations /

11 000 negotiations with banks
𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡𝑠
(low rates)
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 (𝐼𝐵𝐷) = 10,91% =11,28%
> Better company credit
status leading to
cheaper credit
IBD to EBITDA: 8 300 > Repayment of loan

3 400 (2015: R10bn)
𝐼𝐵𝐷
𝐸𝐵𝐼𝑇𝐷𝐴 = 2,44: 1 =2,99: 1 > Increase in operating
profit from new stores
Debt-equity ratio: 8 300 > Repayment of short-

9 900 term portion to reduce
𝐼𝐵𝐷
gearing
𝐸𝑞𝑢𝑖𝑡𝑦 = 83,84% = 86,32%
Debt-equity ratio (net): 8 300 − 800 > Cash generated from

9 900 operations & interest
𝐷𝑒𝑏𝑡 − 𝑐𝑎𝑠ℎ
received increased
𝐸𝑞𝑢𝑖𝑡𝑦 = 75,76% = 77,34%
> Repayment of short-
term portion to reduce
gearing
Debt ratio: 12 100 > Repayment of short-

22 000 term portion to reduce
𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
gearing
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 = 55% = 56,21%
Capital gearing ratio: 5 300 + 3 000 > Repayment of short-

8 300 + 9 900 term portion to reduce
𝐼𝐵𝐷 = 46,95% gearing
𝐼𝐵𝐷 + 𝐸𝑞𝑢𝑖𝑡𝑦 = 45,6%
146
MAC3761/QB002
Current vs Target Capstruct: 5 300 + 3 000 > Though short of target,

8 300 + 9 900 year to year seems to be
𝐼𝐵𝐷
getting closer –
𝐼𝐵𝐷 + 𝐸𝑞𝑢𝑖𝑡𝑦 = 45,6% : 54,4% = 40%:60% repayment of loans &
profitability
v. Financial / investor ratios
Earnings per share (EPS): 2 100

200
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 = R10,50 per share
Dividend per share (DPS): 600 + 700

200
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
P/E multiple: 140 > Tough market

10,5 conditions (competition)
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
and investors losing
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 13,33 =14,20 confidence
Earnings Yield: 10,5 > Tough market

140 conditions (competition)
𝐸𝑃𝑆
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 = 7,5% = 7,04% confidence
Dividend yield: 6,50 > Decline in share price

140 while maintaining
𝐷𝑃𝑆
dividend growth
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 = 4,6% = 3,8%
Dividend cover: 10,5 > Dividends increased to

6,50 meet expectations
𝐸𝑃𝑆
despite low profits
𝐷𝑃𝑆 = 1,62 times = 2,0 times
> Dividend policy more
generous to attract
investors
Dividend pay-out ratio: 6,50 > Dividends increased to

10,5 meet expectations
𝐷𝑃𝑆
despite low profits
𝐸𝑃𝑆 = 61,90% = 50,14%
> Dividend policy more
generous to attract
investors
147
MAC3761/QB002
Price / Book value multiple: 140 𝑥 200 > Tough market

9 900 conditions (competition)
𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 = 2,83: 1 =3,18: 1 confidence while
profitability improves
Price / Sales multiple: 140 𝑥 200 > Tough market

23 700 conditions (competition)
𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 1,18 times = 1,44 times confidence though sales
achieve high growth
Key risks faced by Edcars Group Limited
Fashion trends – risk of buying out of season products, obsolescence and availability of in-
fashion products
Regulations/laws – Tightened laws relating to lending and administering debtors and BEE
compliance may hinder sales growth
Political situation – Service delivery protest and possible closure of businesses, looting and
threats may disrupt the company operations
Operational risk – undetected theft and increased security (especially on high value items) on
premises may lead to additional operating costs
Competition – Increased competition from local and foreign retailers may cause the market
share of the company to shrink
Forex – volatility of rand against other currencies may lead to increased cost of sales on
products sourced outside the country
Economics – Increase pressure on consumers and unemployment may lead to credit default
by consumers and decreased sales due to unaffordability
Regulations/laws – The government may not intervene to address challenges in the local
textile industry and the dumping of products by foreign companies
Customer satisfaction – faults/guarantees on appliances and mobile phones sold may have a
severe reputational damage and reinstatement costs
Funding – Downgrading of SA credit rating and increased cost of borrowing will lead to
company paying more interest rates and possible struggle to raise funds
TOTAL: 120 MARKS
148
MAC3761/QB002
5.2. SOLUTION 02: CARLO TITO MARIO AFRICA
(Ratios grouped according the classification in FO Skae)
Profitability ratios: MARGIN
Gross profit margin
2 914 2 894
6 662 6 819
= 43,7% = 42,4%
Possible reasons:
Improved relations with suppliers or cheaper suppliers have been sourced
Reduction in fuel prices, insurance costs
Bulk purchases of raw material
Increase selling price
Shut down of non-profitable stores
Possible ways of improvement:

Switch to cheaper suppliers or negotiate better prices with current ones
Increase selling price
EBITDA margin
944 + 410 900 + 372

6 662 6 819
= 20,3% = 18,7%
Possible reasons:
Improved efficiencies in the buying department (refer to GP margin)
Entered into fixed contracts with service providers to avoid price escalations
Laid off of redundant employees and reduced of employee benefits

Rent out excessive office space, lay off redundant employees
Get rid of “nice-to-have” company benefits
Negotiate better rates with service providers
149
MAC3761/QB002
EBIT margin
944 900
6 662 6 819
= 14,2% = 13,2%
Possible reasons:
Laid off of redundant employees and reduction of employee benefits
(Improvement mainly driven by GP margin – and does not support better expense management)

Net profit margin
686 645
6 662 6 819
= 10,3% = 9,5%
Possible reasons:
Entering into fixed contracts with service providers to avoid price escalations
Laying off of redundant employees and reduction of employee benefits
(Improvement mainly driven by GP margin – and does not support better expense management)

150
MAC3761/QB002
Profitability ratios: CHANGE
Change in online sales
604 − 234
234
= 18,1% (given)
= 158,1%
Possible reasons:
Significant contribution in e-commerce
Aggressive market campaigns for online purchases (including incentives)
More affluent areas are penetrated by the company
Increased selling prices for online customers

Incentivise online buyers
Cold call regular in-store customers to switch to online
Perform analytics on online sales to promote products likely to be purchased
Change in cost of sales
3 748 − 3 925
3 925
= 3,7% (given)
= (4,5%)
Possible reasons:
Improved relations with suppliers or cheaper suppliers have been sourced
Reduction in fuel prices, insurance costs (entered into fixed contract)
Bulk purchases of raw material
Shut down of non-profitable stores leading to less purchase

Enter into long-term fixed contracts with suppliers to lock prices
Switch to cheaper suppliers
Buy manufacturers’ businesses or manufacture some products internally
151
MAC3761/QB002
Change in personnel costs
1 003 − 1031
1 031
= 7,3% (given)
= (2,7%)
Possible reasons:
Laid off of redundant employees and reduced employee benefits
Froze salaries
Shut down of non-profitable stores and let go of staff

Fix the basic salary and increase commission
Freeze salaries especially for senior management
Change in net finance costs
101 − 105
105
= 4,0% (given)
= (4,0%)
Possible reasons:
Decrease in interest rates
Decrease in loans (repayment)
Increase in interest income (due to increased cash levels)

Negotiate with banks better rates
Repay loans as soon as possible
152
MAC3761/QB002
Profitability ratios: MATERIALITY
Average salary
1 003 000 1 031 000

25,4 26,1
= R39 488,20 = R38 905,70
Possible reasons:
Salaries increased to keep up with inflation
Incurred costs of retrenchment or transfers
Increased staff benefits (e.g. pension fund and medical aid contribution)

Fix salaries and introduce commission based incentives where necessary
Reduce workforce amid online sales platform increased sales
Average revenue generated by store
6 662𝑚 6 819𝑚
162 182
= R41 123 456,8m (R41,1m) = R37 467 0333 (R37,5m)
Possible reasons:
Shutdown of less profitable stores
Increase sales volume (due to staff incentives and aggressive promos)

Review less profitable stores and close down where necessary
Introduce new range of tiles and supplementing products
Online sales as % of revenue
604 234
6 662 6 819
= 9,1% = 3,4%
Possible reasons:
Investment in e-commerce and technology led to ease of access
Aggressive market campaigns for online purchases (including incentives)
More affluent areas are penetrated by the company
Increased selling prices for online customers
153
MAC3761/QB002

Incentivise online buyers
Cold call regular in-store customers to switch to online
Perform analytics on online sales to promote products likely to be purchased
Operating profit per store
944𝑚 900𝑚
162 182
= R5 827 160,5 (or R5,8m) = R4 945 055,0 (or R5,0m)
Possible reasons:
Shutting down of less profitable stores

Dispose of stores not yielding good profits
154
MAC3761/QB002
RETURN ON INVESTED CAPITAL
Return on assets
944 900
7 310 6 469
= 12,9% = 13,9%
Possible reasons:
Assets acquired (or store opened late in the year) towards the end of the year
Revaluation of assets during the year (not done in recent years)
Possible breakdown during the year or strikes
Investment in technology – but benefits not yet flowing

Consider opening shops for longer and on weekends
Establish systems to fair value the assets
Consider impairment on assets
Dispose of assets that are non-core or yield low returns
Return on capital employed
944 900
3 696 + 1 912 3 187 + 2077
= 16,8% = 17,1%
Possible reasons:
Capital might not be applied/released as soon as received (e.g. loans held in business account)
Funds tied in bank and other non-current assets
Reduction of stores and capital not injected into more profitable businesses
Use of closing balances does distort the figures

Keep low levels of cash
Set up capital management team to monitor capital movement
Return on equity
686 645
3 696 3 187
= 18,6% = 20,2%
155
MAC3761/QB002
Possible reasons:
Reduction of stores or decline in sales led to less profits being generated
Use of closing balances does distort the figures

Keep low levels of cash
Set up capital management team to monitor capital movement
Identify profitable projects on regular basis to ensure timely injection of capital into new ventures
Effective tax rate
157 150
843 795
= 18,6% = 18,9%
Possible reasons:
Possible assessed losses from previous years (from other stores if operating independently)
Government (including foreign) granting tax incentives
Tax planning expertise used by the company
Low tax rates in other SADC regions / DTA

Regular reviews of tax legislation to ensure maximisation of profits
Asset turnover
6 662 6 819
7 310 6 469
= 0,9 times = 1,1 times
Possible reasons:
New investment in technology
Company kept more cash at hand

156
MAC3761/QB002
Non-current asset turnover
6 662 6 819
4 966 4 526
Possible reasons:
New investment in technology

LIQUIDITY
Current ratio 2017

2 344 1 943
1 418 953
= 1,7: 1 = 2,0: 1
Possible reasons:
Significant increase of short term borrowings to maintain cash levels
Increase of trade purchases to take advantage of cheap funding

Repay short-term borrowings with excess cash
Negotiate with suppliers for discount on early payments and settle early
Acid-test ratio
2 344 − 850 1 943 − 838

1 418 953
= 1,1: 1 = 1,2: 1
157
MAC3761/QB002
Possible reasons:
(Slight decline)
Increasing levels of inventory despite fewer stores and sales
Significant increase of short term borrowings to maintain cash levels
Increase of trade purchases to take advantage of cheap funding

Repay short-term borrowings with excess cash
Negotiate with suppliers for discount on early payments and settle early
Decrease levels of stock (without losing on bulk purchase discounts)
Cash ratio
404 + 41 64 + 47
1 418 953
= 0,31: 1 = 0,12: 1
Possible reasons:
Loan taken to increase cash levels
Cash generated from profitable operations
Online sales may have been mainly (if not all) on cash

Incentivise cash customers while charging interest and admin costs on credit customers
Renegotiate to repay loans late, without incurring much interest
Inventory turnover
3 748 3 925
850 838
Possible reasons:
Stock held from stores that might have been closed down
Company may be struggling to sell some of its goods due to declining demand

For big orders, clients to place an order in advance before purchase
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Inventory days
850 838
𝑥 365 𝑥 366
3 748 3 925
= 82,8 days = 78,1 days
Possible reasons:
Company may be struggling to sell some of its goods due to declining demand
(This is not helped by the fact that the current year is a day shorter)

For big orders, clients to place an order in advance before purchase For big orders, clients to
place an order in advance before purchase
Debtors’ collection period
1 049 994
𝑥 365 𝑥 366
6 662 6 819
= 57,5 days = 53,4 days
Possible reasons:
Debtors might be highly indebted and struggle to make payments timeously
No proper follow up is made on outstanding debt or penalty imposed
Incentivise cash customers while charging interest and admin costs on credit customers
Impose limits on accounts and reduce these if breached
Creditors’ payment period
600 538
𝑥 365 𝑥 366
3 748 3 925
= 58,4 days = 50,2 days
Possible reasons:
Company settling creditors late to take advantage of “interest-free” borrowing
Better deals struck with suppliers to delay payments
Shift purchases to suppliers with better trading terms
Delay payment of creditors to the latest day if no interest is charged
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CAPITAL STRUCTURE & SOLVENCY
Effective interest rate
101 + 24
2 077
= 6,8% (given)
= 6,0%
Possible reasons:
Company negotiated better rates during the year
Possible reclassification of financial instruments
General decline in interest rates
Better credit score received from rating agency

Negotiate with banks for better rates or restructure the deals and classification of costs
Reduce exposure to decrease the financial risk
Times interest earned
944 900
101 + 24 105 + 8
Possible reasons:
Increase in interest expense – loans only repaid towards the end of the year
Capital not reinvested immediately after the shutdown of stores
Decline in gross profit as the result of store closure
Negotiate with banks for better rates or restructure the deals and classification of costs
Reduce exposure to decrease the financial risk
Times interest earned (Net)
944 900
101 105
Possible reasons:
Increase in interest income – due to increase cash reserves
Increase in operating profit at the back of stringent cost controls

Invest excess cash in interest yielding markets (especially money markets)
Consider increasing use of equity to finance future products
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Capital gearing
1 912 2 077
1 912 + 3 696 2 077 + 3 187
= 34,1% = 39,5%
Possible reasons:
Increase in the profits for the year, lowering exposure in borrowings
Slight decrease in borrowings (through repayments or conversion)

(Consider capital structure) if increasing debt: declare higher dividend or borrow more
If decreasing debt: Repay debt quicker and refinance via equity
Interest-bearing debt: equity
1 912 2 077
3 696 3 187
= 51,7% = 65,2%
Possible reasons:

Interest-bearing debt: equity (net)
1 912 − 404 2 077 − 64

3 696 3 187
= 40,8% = 63,2%
Possible reasons:
Increase in profits leading to high levels of cash

161
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Debt ratio
2 196 + 1 418 2 329 + 953

7 310 6 469
= 49,4% = 50,7%
Possible reasons:
(Slight improvement) – idling assets
Increase in profits leading to high levels of cash
Increase in profits leading to buying stock on cash
Financing of new assets (technology & shops) using equity

Interest-bearing debt to EBITDA
1 912 2 077
944 + 410 900 + 372
= 1,4: 1 = 1,6: 1
Possible reasons:
Increase in operating profit at the back of stringent cost controls

Implement stringent measures to contain costs, while aggressively promoting online platform
Repay debt with excess cash from operations
162
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FINANCIAL MARKETS/INVESTOR
P/E ratio
9 457 1
9 457
686 1,1275
645
= 13,8 times
= 3,0 times
Possible reasons:
Positive reception of the online initiatives implemented by the company
Reduced financial risk (repayment of loan and increase in cash reserves)
Potential acquisition of key suppliers may lead to decrease in cost of manufacturing

Implement share-based incentives for management to ensure value creation
Continue to restructure business to steer all stores towards profitability
Improve on marketing the company online services
Earnings yield
686 645
9 457 1
9 457
1,1275
= 7,3%
= 7,7%
Possible reasons:
Positive reception of the online initiatives implemented by the company
Reduced financial risk (repayment of loan and increase in cash reserves)
Potential acquisition of key suppliers may lead to decrease in cost of manufacturing

Price / Book value multiple
9 457 1
9 457
3 696 1,1275
3 187
= 2,6 times
= 2,6 times
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Possible reasons:
(Slight difference if 2 decimals are used: from 2,63 in 2016 to 2,55 in 2018)
Investors’ response in line with the increase in the net asset value – meeting expectations
Company initiatives may not have been viewed to add extra value (beyond what is expected) –
reduction of stores and the IT infrastructure investment

Price / sales value multiple
9 457 1
9 457
6 662 1,1275
6 819
= 1,4 times
= 1,2 times
Possible reasons:
(Slight difference if 2 decimals are used: from 2,63 in 2016 to 2,55 in 2018)
Investors’ response in line with the increase in the sales value – meeting expectations
Company initiatives may not have been viewed to add extra value (beyond what is expected) –
reduction of stores and the IT infrastructure investment

Dividend cover
686 645
70 + 134 70 + 110
Possible reasons:
More dividend declared at the back of increased cash reserves
Market expectations to increase dividend annually
Could be in line with dividend policy in place
Lack of investment opportunities after closing down stores

Improve on marketing the company online services and investment in technology
Increase in-store sales while maintaining expenses in order to increase the profitability
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Dividend pay-out ratio
70 + 134 70 + 110
686 645
= 29,7% = 27,9%
Possible reasons:

Dividend yield
70 + 134 70 + 110
9 457 1
9 457
1,1275
= 2,2%
= 2,1%
Possible reasons:
(Slight increase)
Industry data needed to put in perspective

TOTAL: 160 MARKS
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5.3. SOLUTION 03: DRESSED FOR SUCCESS
RATIOS for 2X14
(i) Gross profit percentage
Gross profit
=
Turnover
345 113
= 𝑥 100
908 191
= 38%
GP margin improved from 32% to 38% due to:
Reason:
• Sales increasing at a higher rate than cost of sales (better inventory cost control)
• Higher margins on the new exclusive brand introduced in 2014
• Favourable exchange rate movement (e.g. strengthening Rand lowered costs)
• Bulk purchases to cut shipping costs and bulk purchase discounts
(ii) Net operating profit percentage
Operating profit (EBIT)

=
Turnover
157 479
= 𝑥 100
908 191
= 17,34%
The net operating profit percentage has increased from 16,6% to 17,34% due to:
Reason:
• Increase in operating profit percentage is less than 1% (compared to 6% increase
on gross margin) – company’s operating costs do not seem to be monitored closely
• The increase in operating costs may be due to extra costs incurred on promoting
the new product range
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(iii) Change in turnover
Turnover for 2X14−Turnover for 2X13

=
Turnover for 2X13
908 191−814 521

= 𝑥 100
814 521
= 11,50%
Increase in sales of 11,50% compared to 10,31% for the previous year due to:
Reason:
• The newly launched clothing brand is popular amongst most teenagers
• Increase in sales due to general inflation
(iv) Return on assets (ROA)
EBI
=
Total assets
157 479
= 𝑥 100
792 621
= 19,87%
A decline in ROA from 23,5% to19,87% due to:
Reason:
• Increase in current assets of 77% could indicate inefficiencies in working capital
management or underutilisation
• Operating profit increasing at a lower rate than assets
(v) Return on equity (ROE)

Profit after tax
=
Equity
96 432
= 𝑥 100
343 876
= 28,04%
Slight decline in return on equity ratio (from 28,5% to 28,0%) due to:
Reason:
• Retained income not effectively ploughed back into the business
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(vi) Debtors’ collection period
Closing balance of trade receivables

= x 365
Credit sales
89 669
= x 365
908 191 x 65%
= 55,4 days
Increase in debtors’ collection period (adverse) from 29,1 to 55,4 days due to:
Reason:
• Customers are struggling to settle their accounts (despite decrease in credit
sales % (decrease from 70% to 65%)
• Poor credit collection policy / credit control measures
(vii) Inventory turnover
Cost of sales
=
Inventory
563 078
=
214 000
= 2,7 times
Increase in inventory turnover (adverse) from 4,6 times to 2,7 times due to:
Reason:
• Unnecessary high levels of stock kept at stores
• Large consignments of imported stock to limit the ordering cost
• Poor inventory control.
(viii) Debt equity ratio
Interest bearing debt

= x 100 OR Interest bearing debt: Shareholders’ equity
Shareholders′ equity
188 386
= x 100
343 876
= 54,8 : 1
Increase in debt equity ratio from 37,8 : 1 to 54,8 : 1
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Reason:
• Significant increase in long-term loan (up almost 70%) – high interest rate or
additional loan taken to finance the new clothing line
• Excess cash in hand is not used to reduce the loan liability
• Information on target capital structure needed to compare with current position
(ix) Cash ratio
= Cash: Current liabilities
= 158 765: 260 359
= 0,61 : 1
Improvement in cash ratio from 0,57 : 1 to 0,61 : 1
Reason:
• Increase in cash reserves and investments (more sales are now on cash basis)
• Though there is a significant increase in current liabilities, cash at hand increased
even more
TOTAL: 30 MARKS
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5.4. SOLUTION 04: SPLITZ STORES (PTY) LTD
a) Evaluation of opinions provided by Board
Arguments in favour of paying out surplus cash to shareholders

Paying out surplus cash to shareholders would enable them (shareholders) to utilise cash for
own purposes
Excess cash on balance sheet may render company a takeover target
Paying out cash will increase ROE
Lower levels of solvency & liquidity after paying out surplus cash
If returns on cash < WACC then better to distribute cash to shareholders
Gearing the Splitz Stores balance sheet

Introducing a reasonable degree of leverage does enhance shareholder value due to the tax
shield
Gearing will introduce financial risk
Splitz Stores will need to meet debt covenants, which may be restrictive
Splitz Stores might need to provide the assets as security
Gearing will lower WACC
Arguments for retaining cash on the balance sheet
Having cash available for investment or to survive tough times may be prudent
Splitz Stores operates in the fashion industry (higher risk) therefore having cash available is
sensible
Splitz Stores can move rapidly to pursue opportunities instead of trying to raise debt
Dividends tax of 10% is withheld on dividend paid to shareholders
Any valid argument
8 MARKS
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b) Identifying and explaining the risks
BUSINESS RISKS
Business risk - changes in fashion trend will result in stock obsolescence
Business risk - stock theft especially small/accessory items
Business risk - entry of foreign retailers in local markets (or low barriers to entry)
Business/information risk - consolidation and centralising of functions at different stores
(150 operations)
Business risk - decision taken not in the best interest of the company but for family interest
FINANCIAL RISKS
Currency risk - changes in exchange rates not in favour of Splitz stores
Financial / investment risk - cash resources not optimally utilised
Financial risk - cash handling at stores and remittance
Credit risk - some of the customers will not be able to settle their accounts
REGULATORY/LEGAL RISKS
Legal risk - identity theft at application and possible lawsuits
Regulatory risk - credit check will not be done accurately

Regulatory risk - NCA will impose regulation that will impact the growth of business (e.g.
stricter credit policy, additional documentation, etc.)
10 MARKS
TOTAL: 18 MARKS
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5.5. SOLUTION 05: NEW MUTUAL GROUP
PART A
Ratios Hola MTM Comments
DPS: (280+640) / 505 = 1,82

920 / 505
Dividend yield: > In relation to share price, Hola
R1,82 yields a higher dividend return
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 R58,85
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 > Hola has a more aggressive
= 3,09% = 2,79% dividend pay-out policy
OR > Hola attracting investors with a

Note: where use of total MV:
[R58,85x505m] or [R55,29x505m] Use of average generous dividend policy
AND R1,82𝐜
Total dividend: R920m R55,29 > Hola’s dividend pay-out ratio is
high at 45%
= 3,29%
EPS: 2 043 / 505 = 4,05

Price-earnings ratio: > Investors have less confidence in
R58,85 MTM (not much future growth
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 R4,05 perceived)
𝐸𝑃𝑆
= 14,53 =13,06 > Hola - right strategy in place
OR > Hola - impact on the share price

Note: where use of total MV: Use of average of the recent litigations and fines
[R58,85 x 505] or [R55,29 x505] R55,29
AND
R4,05𝐜 > Government tender won by Hola
Earnings: R2 043m
increased investor confidence
= 13,65
> Hola’s financial risk based on

Net debt-equity ratio: (7 104 + 817) − 2 548 5 373 / 26 607 level of borrowing is higher
6 888 + 19 179
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 − 𝑐𝑎𝑠ℎ > Significant cash resources held by
𝐸𝑞𝑢𝑖𝑡𝑦 = 0,20: 1 = 0,16: 1 Hola
OR Equity: 33 875 + 2 548 + 7 375

> Risk of default (by both
+ 2 989 -7 104 – 12 259 - 817 companies) is low
> Under/poor-utilisation of assets

Return on assets: by Hola (idling)
2 900 + 1 060 3 960
𝐸𝐵𝐼𝑇 46 787 >Revaluation and depreciation
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 policies for Hola might need to be
= 8,46% = 12% reviewed
> Cost control & weakening rand
 Total assets: 33 875 + 2 548 > Hola has a high depreciation and
+ 7 375 + 2 989
amortisation (EBITDA R8 761 &
EBIT R3 960)
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> Both companies are paying above

Effective taxation rate: 2 900 − 2 043 857 SA corporate tax rate (different tax
2 900 regimes)
𝑇𝑎𝑥𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥𝑎𝑡𝑖𝑜𝑛 = 29,55% = 35,79% > Non-deductible expenses
incurred
> Import and other taxes

> Significant number of Hola clients
EBITDA per customer: 8 761 might be on a prepaid call plan
2,8
𝐸𝐵𝐼𝑇𝐷𝐴 > Decline in fixed line revenue
𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 = R3 129 = R3 680 (Hola)
> Hola’s new government tender is

likely to increase the ratio
Change in share price: 5 885 − 5 283 602 > Significant increase in share price
5 283 - Hola (investor confidence
𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 − 𝑜𝑝𝑒𝑛𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒
restored)
= 11,40% = -2,27%
> Hola - Possible sharp decline in
prior year
> Negative sentiments re MTM

share (more info required)
Max: 24 marks
PART B
o The company may fail to comply with relevant authorities (RICA, pricing, etc.) – compliance risk
o Competition threats from foreign investors and Whatsapp may squeeze company margins
o Campaigns to lower data costs and increasing labour strikes may impact the operations of the
business – political risks
o Foreign operations and foreign transactions expose the company to financial loss –
financial/currency
o Foreign operations may be subject to hostile reception and government interference – political
risks
o The company may struggle to service its debt due to changes in interest rates and financial
leverage – financial risks
o Changes in credit ratings may have an impact on ability to raise funds and service debt – financial
risks
o Vandalism of infrastructure may disrupt the services provided to its customers (cables, towers,
etc.)
o Hacking of systems and access to trading secrets, network downtime, etc. may have an impact
of the running of the business – information risks
o B-BBEE ratings – failure to comply may have negative financial implications
o The company faces a brand and reputation risk as a result of failure in systems and processes
o Technological advances may leave the company behind
Max: 6 marks
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5.6. SOLUTION 06: TOY STARS LIMITED
Additional working capital required:
Workings R
Increase in trade receivables (i) 331 632
Increase in inventory (ii) 102 240
Increase in cash (iii) 17 804
Increase in trade payables (iv) (131 040)
Additional working capital required 320 636
Workings
(i) Calculation of increase in trade receivables calculation
Trade receivables = R647 000
Credit sales (2X13) = R4 400 000 x 50%
= R2 200 000
accounts receivable
Current ratio (2X13) = %
credit sales
R647 000
= %
R2 200 000
= 29,4%
2X14 credit sales
R5 120 000 x 65% = R3 328 000
Increase in trades receivable
(R3 328 000 − R2 200 000) x 29,4% = R331 632
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(ii) Calculation of increase in inventory
Inventory (2013) = R626 000
Inventory
Current ratio (2013) = %
Turnover
R626 000
= %
R4 400 000
= 14,2%
Increase in inventory
(R5 120 000 − R4 400 000)x 14,2% = R102 240
(iii) Calculation of increase in cash
Profit after tax

Net profit percentage (2013) = %
Turnover
R192 000
= %
R4 400 000
= 4,4%
Profit after tax

Earnings per share (2013) =
Number of shares
R192 000
=
700 000
= 27,4 cents
Earnings per share - dividendper share

Profit retained (2013): = %
Earnings per share
27,4 - 12
= %
27,4
= 56,2%
Increase in cash
Increase in sales x NP% x profit retained = R720 000 x 4,4% x 56,20%
= R17 804
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(iv) Calculation of increase in trade payables
Trade payables
Current ratio (2013) = %
Turnover
R800 000
= %
R4 400 000
= 18,2%
Increase in trade payables
(R5 120 000 − R4 400 000)x 18,2% = R131 040
Conclusion:
The additional working capital required to support the increased sales budget for
20x14 is R320 636.
TOTAL: 10 MARKS
176
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5.7. SOLUTION 07: A GREYS (PTY) LTD
MEMORANDUM
TO: Manager
DATE: xx Month 2016
FROM: Consultant
WORKING CAPITAL MANAGEMENT OF A GREYS (PTY) LIMITED
Dear Sir/Madam
As per your request, we have investigated the working capital management of A Greys (Pty)
Limited and detail our findings below.
INVENTORY
The idea of reducing your inventory levels will result in a shortening of the working capital
cycle, save holding and other inventory related costs and free some much needed funds.
This can be brought about by limiting new purchases.
One major, problem which we would like to bring to your attention however, is the fact that
the Just-in-time philosophy promotes a zero inventory holding policy. This can only be
achieved by buying from a small group of reliable suppliers.
In A Greys’ case, it would appear that the suppliers are definitely not reliable and furthermore
they are based throughout the country, which implies that you would have to wait for the
supplies to be freighted to you. It is critical for you to realise that as you operate a hospital,
keeping zero stock levels would not be advisable as lives could be lost while you wait for
desperately needed supplies to arrive.
A safety stock of 10 days can be recommended: R750 000 x 10/75 days = R100000.
ACCOUNTS RECEIVABLE
Problems need to be addressed:
The long processing time which it takes for your personnel to process patient accounts. At
this stage it can take up to 90 days for your staff to process accounts. You should attempt to
keep this to a minimum – as soon as the patient has been discharged you should start
processing their accounts and submit them to the medical aid or mail them to the patient in
the case of private patients.
The medical aids take far too long to process accounts – one member of staff should be
assigned to follow up on the status of accounts at the different medical aids and to exert
pressure on them to process your accounts more timeously and to remit payment thereof
faster.
Major deficiencies exist as regards the checking of creditworthiness, which appears to be

resulting in the high debt levels. The following could be proposed in this regard:
• A Grey should have a well-documented, sound credit policy in place.
• All private patients should pay a substantial deposit.
• They must furthermore supply administrative staff with references who can be
contacted to check on creditworthiness.
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• All medical aid patients must give a medical aid card proving their membership. One
member of staff should then actually confirm with the medical aid that the patient is in
fact a member of the medical aid and that the procedure has been pre-authorised. No
medical aid patient must be submitted without an authorisation number.
• There appears to be no debt collection policy with regard to amounts outstanding,
particularly the private portion of accounts. By not following up such amounts, the
hospital will suffer financial loss. All amounts outstanding should be followed up and
handed over for debt collection where necessary.
ACCOUNTS PAYABLE
The current effective cost of creditor financing is:
Kf = (0.03/0.97) x (365/20) = 56.44%
The current effective interest rate on the overdraft is only 15%. It would therefore be
recommended to rather make use of the bank overdraft facility as far as possible.
CASH RESOURCES
A culture of banking cheques and cash timeously should be developed. Medical aids should
be requested to rather make direct transfers in your bank accounts (EDI) – this would
eliminate the lag on the banking of the cheques and the funds would thus be available
quicker.
RECOMMENDATIONS
In addition to ways in which to improve the working capital management, the following can
be considered as being short-term solutions to your current problems:
• A Greys could consider factoring you debtors/.

• Negotiate an increase in the bank overdraft facility.
• Consider possibly making use of a banker’s acceptance.
• Negotiate with the bank for a lower rate or consider approaching other banks to
negotiate facilities at a lower rate.
• Negotiate an increase in the creditors’ payment period.
• Encourage private debtors to pay quicker by offering them discounts; and to charge
interest and administration fees on long outstanding accounts.
• Improve the debt collecting and efficiency within the accounts department by offering
performance related bonuses. Change the current “relaxed” culture to a professional
culture.
Please note that these are only short-term solutions to your problem. You should also ensure
that your mix of short-term financing to long-term financing is correct – in other words that
you are not financing fixed assets with short-term sources of financing.
TOTAL: 20 MARKS
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5.8. SOLUTION 08: ZENZEL (PTY) LTD
(a) Comparison of current vs new credit terms
Current credit New credit terms

sales & credit Current credit Additional credit
terms sales sales
A B C
Credit sales R25 750 000 R25 750 000 R2 500 000
Discount rate 3% 5% 5%
Discount on % of credit sales 20% 55% 60%
Pay in 10 days 20% 55% 60%

45 days 80%
50 days - 45%
65 days - 40%
Bad debt R2 300 000 R2 300 000 R45 000

WACC 20%
Contribution rate 32%
Increase in inventory R1 250 000
Increase in trade payables
financing R850 000
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(b) Calculations
Current credit New credit terms

sales & credit Current Additional
Calculation terms credit sales credit sales
A B C
Contributions 1 R8 240 000 R8 240 000 R800 000
Discount 2 (R154 500) (R708 125) (R75 000)
Bad debt 3 (R2 300 000) (R2 300 000) (R45 000)
Contribution before
holding cost R5 785 500 R5 231 875 R680 000
Tax on contribution
before holding cost 7 (R1 619 940) (R1 464 925) (R190 400)
After tax cost R4 165 560 R3 766 950 R489 600

Holding cost (after tax
cost) (R536 164) (R395 068) (R123 836)
Debtor holding cost 4 (R536 164) (R395 068) (R43 836)

Inventory holding cost 5 – – (250 000)
Creditors – saving in
holding cost 6 – – 170 000
R3 629 396 R3 371 882 + R365 764
R3 629 396 = R3 737 646
Increase /(Decrease) in annual cash flow after tax

(new total less current total) R108 250
Note 7: Tax on contribution before holding cost

Contribution before
holding cost R5 785 500 R5 231 875 R680 000
x 28% tax x 0.28 x 0.28 x 0.28
Tax on contribution before

(R1 619 940) (R1 464 925) (R190 400)
holding cost
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Additional notes on the impact of holding costs (opportunity cost) on credit terms
Due to the fact that more sales are made on credit with the new credit terms it takes longer for
the cash to be available to make payments. As this is the case the company can consider the
effect of the holding (opportunity) cost on the cash flow.
Remember that the holding cost is calculated by making use of the company’s WACC and
WACC is considered as an after tax cost, therefore the impact of direct tax is not calculated
on the holding cost.
Companies do not always take the holding cost into consideration as it is not always significant
enough to impact the decision. You do however need to calculate it for MAC3702 purposes
and if you do decide not to include it based on the fact that it is insignificant, you do need to
state your reasoning and show your calculation.
Calculations:
1 Contributions = credit sales x contribution rate
A and B = R25 750 000 x 32%
= R8 240 000
C = R2 500 000 x 32%
= R800 000
2 Discount = credit sales x % making use of credit x discount rate
A = R25 750 000 x 20% x 3%
= R154 500
B = R25 750 000 x 55% x 5%
= R708 125
C = R2 500 000 x 60% x 5%
= R75 000
3C Bad debt increase = R2 345 000 – R2 300 000
= R45 000
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4 Holding cost = (credit sales x percentage on 10 days/365 x WACC) +
(credit sales x percentage on other days/365 x WACC)
A = (R25 750 000 x 20% x 10/365 x 20%) + (R25 750 000 x 80%
x 45/365 x 20%)
= R536 164
B (R25 750 000 x 55% x 10/365 x 20%) + (R25 750 000 x 45%
x 50/365 x 20%)
= R395 068
C = (R2 500 000 x 60% x 10/365 x 20%) + (R2 500 000 x 40% x
65/365 x 20%)
= R43 8365
5C Increase in inventory = increase in inventory x WACC

holding cost
= R1 250 000 x 20%
= R250 000
6C Increase in creditors = increase in trade payables x WACC
= R850 000 x 20%
= R170 000
Conclusion:
The company should accept the new credit policy, as it results in an increase of annual cash
flow before tax.
TOTAL: 20 MARKS
182
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5.9. SOLUTION 09: KINGSTON LIMITED
a) Calculate cost of debt (loan)
Loan 𝐾𝑑1 = (10,5% + 2%) x 0,72 = 9%
b) Calculate cost of debt (debentures)
Debentures 𝐾𝑑2 = 10% x 0,72 = 7,2%
c) Calculate cost of equity

Using Gordon’s Dividend Growth Model
𝐷1
𝐾𝑒 = +g
𝑃0
28
𝐾𝑒 = + 0,12
625
𝐾𝑒 = 16,48%
Using Capital Asset Pricing Model
𝐾𝑒 = Rf + ß (Rm – Rf)
𝐾𝑒 = Rf + ß (Rp)
𝐾𝑒 = 7% + 1,2 * (7,9%)
𝐾𝑒 = 16,48%
d) Calculate market value of loan (Vd1)
Key Variables Value
FV R10 000 000 -10 000 000

N 3 years 3
i (10,5% + 2%) x 0,72 9
PMT R10 000 000 x (10,5% - 1%) x 0,72 -684 000
Comp PV Calculation 9 453 240
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e) Calculate market value of debentures (Vd2)
Key Variables Value
FV R16 000 000 -16 000 000

N 5 years – (2021 – 2016) 5
i 7,2% 7,2
PMT R16 000 000 x 12% x 0,72 -1 382 400
Comp PV Calculation 16 939 648
f) Calculate market value of equity (Ve)
𝑅40 000 000

Number of shares =
𝑅2,50
= 16 000 000
Ve = R6,25 x 16 000 000
Ve = R100 000 000
g) Calculate Weighted Average Cost of Capital (WACC)
Current capital structure
Market Cost of
Instrument values Weight (A) Capital (B) WACC
Ordinary shares 100 000 000 0,79 16,48% 13,02%

Debentures 16 939 648 0,13 7,20% 0,94%
Long-term loan 9 453 240 0,08 9,00% 0,72%
Total 126 392 888 1/100% 14,68%
TOTAL: 25 MARKS
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5.10. SOLUTION 10: QUEEN POWER
a) Calculate weighted average cost of capital
Cost of capital
Ordinary shares 𝐷1
𝐾𝑒 = +g
𝑃0
26
𝐾𝑒 = + 0,04 {g = (26-25)/25 * 100)}
200
𝐾𝑒 = 17%
Preference shares 𝐷𝑖𝑣𝑖

𝐾𝑝 = 7,5% {10% x 15m / 20m} : 𝐾𝑝 =
𝑀𝑉
Debentures 𝐾𝑑 = 8% x 0,72
= 5,76%
Target capital structure
Cost of WACC
Instrument Weight (A)
capital (B) (A x B)
Ordinary shares  0,60 17,00% 10,20%

Preference shares  0,20 7,50% 1,50%
Debentures 0,20 5,76% 1,15%
Total 1/100% 12,85%

 Ordinary shares: 80% x 75% = 60%
 Preference shares: 80% x 25% = 20%
Market Cost of
Ordinary shares  50 000 000 0,57 17,00% 9,69%

Preference shares 20 000 000 0,23 7,50% 1,73%
Debentures  17 000 000 0,20 5,76% 1,15%
Total 87 000 000 1/100% 12,57%
 Number of shares in issue: R40 000 000 / R1,60 = 25 000 000

Ordinary shares: 25 000 000 x R2,00 = R50 000 000
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 Debentures:
Key Variables Value
FV R16 000 000 – R757 574 -15 242 426

N 10 years – (2016 – 2010 lapsed period) 4
i 8% x 0,72 (after tax effect) 5,76
PMT R16 000 000 x 12% x 0,72 -1 382 400
Comp PV Rounded to nearest Rand 17 000 000
Max: 22 marks
Comments:
The current capital structure is not far off the target as demonstrated by calculations above
(12,57% vs 12,85%). The company is currently not operating at its optimal capital structure.
The company must introduce more debt to achieve its target capital structure. The new project
presents an opportunity for the company to achieve its optimal capital mix. Currently the
company has low level of debt, although debt seems to be cheaper (after-tax benefit) and if
the company increases its debt proportion, WACC will decrease.
Max: 3 marks
b) Calculate following ratios

EBIT
i. Return on assets
Total assets
30 000 000 x 0,38

=
84 050 000
= 13,56%
Net profit
ii. Return on equity
Total equity
30 000 000 x 0,20

=
65 000 000
= 9,23%
Interest−bearing debt (IBD)
iii. Capital gearing ratio
IBD+Total equity
16 000 000
=
81 000 000
= 19,75%
Sales
iv. Asset turnover
Total assets
30 000 000
=
84 050 000
= 0,36 times
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Market value
v. Price / BV multiple
Book value
50 000 000
=
65 000 000
= 0,77 times
IBD
vi. Debt-equity ratio
Total equity
16 000 000
=
65 000 000
= 24,62%
EPS
i. Earnings yield
Share price
6 000 000
EPS = = 24c
25 000 000
24c
E/Y=
200c
= 12%
Max: 20 marks
TOTAL: 45 MARKS
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5.11. SOLUTION 11: CHAPTERS & NOVELS
PART A
Cost of capital
𝐾𝑒 = +g
𝑃0 −𝑓𝑐
18,75 𝑥 1,125
𝐾𝑒 = + 0,125
650−25
𝐾𝑒 = 15,9%
𝑅3 000 000
𝐷1 = = 18,75c
𝑅40 000 000/250𝑐
𝑅3𝑚−𝑅2,67𝑚
𝑔 = = 12,5%
𝑅2,67𝑚
Preference shares
𝐾𝑝 = 7,5% {10,5% - 3%}
Debentures 𝐾𝑑 = 9% x 0,72
= 6,5%
Cost of WACC
Instrument Weight (A)
capital (B) (A x B)
Ordinary shares
ᵩ
0,40 15,90% 6,36%
Preference shares
ᵩ
0,10 7,50% 0,75%
Debentures 0,50 6,50% 3,25%
Total 1/100% 10,36%
ᵩ Ordinary shares: 50% x 80% = 40%

ᵩ Preference shares: 50% x 20% = 10%
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MAC3761/QB002
Market Cost of

Ordinary shares 104 000 000 0,57 15,90% 9,06%
Preference shares 46 000 000 0,25 7,50% 1,88%
Debentures  33 746 255 0,18 6,50% 1,17%
Total 183 746 255 1/100% 12,11%

ORDINARY SHARES:
Number of shares in issue: R40 000 000 / 250c = 16 000 000
Market value = 650c x 16 000 000 = R104 000 000
 PREFERENCE SHARES:
Market value = R3 450 000 / 0,075 = 46 000 000
 DEBENTURES:
Amount Key Calculation
0 CF0 (2017)
2 484 000 CF1 (2018) 3 450 000 x 0,72
2 484 000 CF2 (2019)
32 484 000 CF3 (2020) (3 450 000 x 0,72) + 30 000 000
3 000 000 CF4 (2021) 30 000 000 x 10%
6,5 I/Y 9% x 0,72
NPV Market value = 33 746 255
Max: 22 marks
Comments:
The current capital structure indicates that the company has not yet reached its ideal capital
structure as WACC is currently 12,11% as opposed to just 10,36%. The current funding
structure of the company is costing more than its targeted structure. The company will have to
introduce more debt (which is cheaper) to move the current capital structure towards the
targeted/optimal capital structure. Changes in cost of capital will also impact the company in
its attempt to move towards the target capital structure.
Max: 3 marks
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PART B
Financing the new project:

Current capital structure Market Value
Ordinary shares R104 000 000
Preference shares R46 000 000
Debentures R33 746 255
Capital employed R183 746 255
New investment R76 253 745
R260 000 000

Total capital structure after new investment
Capital structure Current New Capital

capital investment structure after new
structure investment
(Balancing
figure)
Equity R104 000 000 - R104 000 000
Preference shares R46 000 000 (R20 000 000) R 26 000 000
Debentures R33 746 255 R96 253 745 R130 000 000
Total R183 746 255 R76 253 745 R260 000 000
Project Thewuka should be financed entirely through the issue of debentures (R76 253 745).
Should the conditions allow, CNA should buy back its preference shares to the market value
of R20 000 000 to operate at its target capital structure. Instead of the preference share
buyback, CNA can always wait for another investment opportunity to move towards its target
capital structure. The company should not utilise its authorised share capital for Project
Thewuka. The debentures in the scenario are the cheapest source (6,5% after tax), while
ordinary shares are the most expensive (15,9%), hence the advice to use debentures to
finance the new initiative.
Max: 10 marks
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PART C
Notes Existing (E) Proposed (P)
Gross profit 1 R12 000 000 R12 000 000
Discount 2 (R187 500) (R270 000)
Bad debt expenses 3 (R1 750 000) (R1 650 000)
Profit before holding costs R10 062 500 R10 080 000
Tax on profit above (at 28%) (R2 817 500) (R2 822 400)
R7 245 000 R7 257 600
Holding costs - debtors 4 (R393 160) (R308 556)
Benefit/(loss) from option R6 851 840 R6 949 044
The company should implement the new policy as it increases profits by R97 204 (R6,95m –
R6,85m) .
1 Gross profit = credit sales x gross profit margin
E and P = R30 000 000 x 40%
= R12 000 000
2 Discount = credit sales x % making use of credit x discount rate
E = R30 000 000 x 25% x 2,5%
= R187 500
P = R30 000 000 x 30% x 3%
= R270 000
3 Bad debt expenses
E = Given
P = R30 000 000 x 5,5%
= R1 650 000
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4 Debtors = (credit sales x percentage on 8 days/365 x WACC) +
(Holding costs) (credit sales x percentage on other days/365 x WACC)
E = (R30 000 000 x 25% x 8/365 x 12,11%) +
(R30 000 000 x 75% x 50/365 x 12,11%)
= R393 160
P = (R30 000 000 x 30% x 10/365 x 12,11%) +
= (R30 000 000 x 70% x 40/365 x 12,11%)
= R308 556
Max: 10 marks
PART D
o The company’s trading stock (especially books and magazines) may become outdated and
therefore not saleable (obsolescence).
o Increased competition from e-businesses may push the company out of the market.
o Rapid growth and diversification may lead to complexities in running the company.
o Customers (including governments) may not settle their accounts (bad debts).
o The company may distribute materials without proper rights leading to possible lawsuits,
which could also lead to reputational damage.
o Cargos may not reach intended destinations (due to theft, breakdowns, etc).
o Environmental lobby groups (e.g. anti-deforestation campaigns) may disrupt the
operations of the company.
o Government may impose laws that are detrimental to the company (or the company may
contravene laws).
o The company may default on its loan obligations (including servicing of interest and
interest rate changes).
o Political instability and political intervention may impact on the success of foreign
operations.
o Movement in exchange rates may lead to increase in the cost or reduction in profits.
o Possibility of fraud taking place in other parts of the continent, and impact thereof on the
reputation of the company.
o Any other valid point
Max: 5 marks
TOTAL: 50 MARKS
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5.12. SOLUTION 12: SIMON & SON LIMITED
a) Cost of capital and underlying assumptions
Instrument Cost of equity

𝐾𝑒 = +g
𝑃0
P0 = Cum div – div = Share price ex div

6(1,08)
𝐾𝑒 = + 0,08
60
𝐾𝑒 = 18,8%
Preference shares 𝐾𝑝 = 12%
Debentures 𝐾𝑑 = 13,89% x 0,72
= 10,00%
Capital structure Portion of Cost of Weighted

capital capital cost of
structure * capital
Ordinary shares 0,60 18,8% 11,28%
Preference shares 0,20 12,0% 2,40%
Debentures 0,20 10,0% 2,00%
Total 1/100% 15,68%
* As per target capital structure
8 MARKS
Assumptions (any 3 of the assumptions below):

• The appropriate cost of capital to evaluate the project is WACC.
• When financing the project, the target capital structure will be maintained at 60% equity
and 40% debt.
• The project is marginal. Most investments are indeed small, relative to the total capital
value of the firm.
• The project has the same level of risk as the firm’s existing activities. If the project has a
risk structure that differs from that of the existing activities, an appropriate risk-adjusted
rate should be used.
• Cost of equity, debt and WACC will remain the same.
3 MARKS
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(b) Memorandum
To: Directors of Simon & Son Ltd
From: AB Consultants
Date: XX/XX/201X
EVUALUATION OF THE FUNDING OPTIONS AS SUGGESTED BY THE BOARD OF

DIRECTORS
Financing through issuing of new shares:
View of Managing Director (MD)
We would need to clarify the MD’s view.
When a company uses new shares (equity) to finance an investment there is a couple of
things to consider.
• It is normally very costly to obtain equity through the issue of new shares as there are
considerable marketing expenses and professional fees that need to be paid.
• The issuing of new shares can also have an impact of the existing control in the
company.
• Due to the fact that there is a higher risk for the equity holders than for the debt holders,
the equity holders normally require a higher rate of return on their investment resulting
in a more expensive form of finance than debt.
• Dividends paid to shareholders are also not tax deductible.
• It is a flexible form of finance as there is no risk of defaulting on the interest or capital
repayments (as there is no obligation to pay these).
Financing through issuing of cumulative redeemable preference shares (debt):

View of Chief Operating Officer (COO)
We are not in agreement with the view of the COO.
Preference shares are not the cheapest form of debt finance. Bond financing is cheaper than
preference shares due to following:
• Debt holders tend to ask for lower returns than preference shares and ordinary
shareholders as their investments are in most instances secured.
• The preference share dividend is also not tax deductible and therefore more expensive.
• Preference shareholders rank after debt when there is a claim against the company.
Financing through issuing a mix of debt and equity:

View of Finance Director (FD)
We are in agreement with the views of the FD based on the following.
• An appropriate mix of debt and equity (the optimal capital structure) would tend to lower
the firm’s WACC.
• There is no single optimal capital structure for all companies. Each company and each
industry will have an optimal mix. This optimal capital structure will be based on the
194
MAC3761/QB002
company’s ability to access a particular market, the current capital structure and
therefore the ability to restructure the statement of financial position of the company.
• When a project is financed the company should aim to maintain the current level of
WACC and therefore maintain the target capital structure.
• The new project should have a similar risk profile to that the company.
If you need any additional information with regards to the funding methods, please feel free
to contact us.
Yours sincerely
Funding consultants
10 MARKS
(c) Company’s capacity to raise debt or equity
Instrument Market value

Ordinary shares MV = Number of shares x cum div share price
= 1 000 000 x (R66 – R6)
= R60 000 000
Preference shares Annual dividend = R12 000 000 x 9%

= R1 080 000
Final capital redemption = R12 000 000 x 1,05
= R12 600 000
INPUT in calculator (HP10bII)
N 10
I/YR 12
PMT R1 080 000
FV R12 600 000
COMP PV R10 159 104
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Debentures Annual interest after tax = R15 000 000 x 11% x 0,72
= R1 188 000
Final capital redemption = R15 000 000
Debentures (cont.)
INPUT in calculator (HP10bII)
N (8 – 3) = 5
I/YR 13,89% x 0,72 = 10
PMT R1 188 000
FV R15 000 000
COMP PV R13 817 275
Instrument Market Value
Ordinary shares R60 000 000
Preference shares R10 159 104
Debentures R13 817 275
Total R83 976 379
Total capital structure after new

R100 226 379
investment
Capital Target capital Current capital Capacity

structure structure structure
Equity 60% R60 135 827 R60 000 000 R135 827
Pref. shares 20% R20 045 276 R10 159 104 R9 886 172
Debentures 20% R20 045 276 R13 817 275 R6 228 001
Total R100 226 379 R83 976 379 R16 250 000
Conclusion:
The company has almost no capacity to raise equity (only about R135 827 to raise), but has
some capacity to raise debt (through the issue of preference shares for R9 886 172 and
debentures for R6 228 001).
14 MARKS
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MAC3761/QB002
(d) Qualitative factors
• The current load shedding might have an impact on the implementation of the solar
panels.
• The appointment of a specialist service provider for the maintenance of the project.
• Training that the current employees should receive to enable them to use the solar
panels.
• Additional security to ensure that the solar panels are not vandalised or stolen.
• The period of installation and the short to medium term solution to the load shedding
problem.
• The impact of bad weather conditions.
• Any other valid point.
5 MARKS
TOTAL: 40 MARKS
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5.13. SOLUTION 13: S & S LIMITED
The loan can only be taken up in factors of R75 000, therefore there are 6 possibilities on how the capital structure can be combined.
R375 000 / R75 000 = 5 + 1 where there is R0 debt.
Option Capital Portion of Required Adjustment Total rate of Total rate of Weighted rate
structure capital rate of return before return after of return
structure return tax tax (after tax)
1 Debt 5/5 = 100% 17,5% -(0 x 1,25%) = -0,00% 17,50% 12,60% 12,60%
Equity 0/5 = 0% 15,0% +(5 x 0,25%) = 1,25% 16,25% 16,25% 0,00%
WACC 12,60%
2 Debt 4/5 = 80% 17,5% -(1 x 1,25%) = -1,25% 16,25% 11,70% 9,36%
Equity 1/5 = 20% 15,0% +(4 x 0,25%) = 1,00% 16,00% 16,00% 3,20%
WACC 12,56%
3 Debt 3/5 = 60% 17,5% -(2 x 1,25%) = -2,50% 15,00% 10,80% 6,48%
Equity 2/5 = 40% 15,0% +(3 x 0,25%) = 0,75% 15,75% 15,75% 6,30%
WACC 12,78%
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Option Capital Portion of Required Adjustment Total rate of Total rate of Weighted rate
structure capital rate of return before return after of return
structure return tax tax (after tax)
4 Debt 2/5 = 40% 17,5% -(3 x 1,25%) = -3,75% 13,75% 9,90% 3,96%
Equity 3/5 = 60% 15,0% +(2 x 0,25%) = 0,50% 15,50% 15,50% 9,30%
WACC 13,26%
5 Debt 1/5 = 20% 17,5% -(4 x 1,25%) = -5,00% 12,50% 9,00% 1,80%
Equity 4/5 = 80% 15,0% +(1 x 0,25%) = 0,25% 15,25% 15,25% 12,20%
WACC 14,00%
6 Debt 0/5 = 0% 17,5% -(5 x 1,25%) = -6,25% 10,75% 8,10% 0,00%
Equity 5/5 = 100% 15,0% +(0 x 0,25%) = 0,00% 15,00% 15,00% 15,00%
WACC 15,00%
Conclusion:
Based on the calculations the best optimal structure is option 2, where the project is financed through R300 000 debt (4 x R75 000) via a loan
from CapC Bank and R75 000 (1x R75 000) through the issuing of new shares. At this point WACC is the lowest and therefore the most cost-
efficient.
TOTAL: 10 MARKS
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5.14. SOLUTION 14: SIMUNYE GOLD
a) Calculate cost of capital
𝐾𝑒 = +g
𝑃0−𝑓𝑐
𝑅1,86
𝐾𝑒 = + 0,10 { g = (186-169)/169 }
(𝑅25−𝑅0,20)
𝑲𝒆 = 17,5%
Preference shares 20 400 000 𝐷𝑖𝑣𝑖

𝐾𝑝 = {𝐾𝑝 = }
255 000 000 𝑀𝑉
𝑲𝒑 = 8%
Loan: Ifafa Bank 𝑲𝒅𝟏 = (8,25% + 0,75%) x 0,72
𝑲𝒅𝟏 = 6,48%
Loan: Netbank 𝑲𝒅𝟐 = (8,25% + 0, 50%) x 0,72
𝑲𝒅𝟐 = 6,3%
Debentures: JPM 𝑲𝒅𝟑 = 8,50% x 0,72
𝑲𝒅𝟑 = 6,12%
Max: 10 marks
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b) Calculate weighted average cost of capital
Values Cost of
Instrument Weight (A) Capital (B) WACC

Ifafa Bank loan 0,12 6,48% 0,78%
Netbank loan 0,08 6,30% 0,50%
JPM Debentures 0,20 6,12% 1,22%
Total 1/100% 11,86%
TARGET CAPITAL STRUCTURE WEIGHTINGS
SOURCE INSTRUMENT CALCULATION WEIGHT

DEBT 40%
Loan – Ifafa Bank (50% x 1,5/2,5) $ = 40% x 50% x 1,5 / 2,5 $ 12%
Loan – Netbank (50% x 1,0/2,5) $ = 40% x 50% x 1,0 / 2,5 $ 8%
Debenture – JPM (50%) = 40% x 50% 20%
EQUITY 60%
Ordinary share (<80%) = 60% x 80% 48% (max)
Preference share (bal.) = 60% x 20% 12%
TOTAL 100%
$ Alternative:
Ifafa = 570 / (570+380)
Netbank = 380 / (570+380)
Max: 7 marks
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c) Calculate weighted average cost of capital (BV)
Book Values Cost of

Instrument Weight (A) Capital (B) WACC
Ordinary shares 1 200 000 0,47 17,50% 8,23%

Preference shares 240 000 0,10 8,00% 0,80%
Ifafa Bank loan 570 000 0,23 6,48% 1,49%
Netbank loan 380 000 0,15 6,30% 0,95%
JPM Debentures 135 000 0,05 6,12% 0,31%
Total 2 525 000 1/100% 11,78%
Max: 4 marks
d) Calculate the bid price
Bid price = (20% x 25m) + (50% x 60m) + (30% x 50) = CAD50 000 000
= 50 000 000 x R9,50
Bid price = R475 000 000
Max: 2 marks
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e) Determine the new acquisition should be financed
Current capital structure Book Value

Ordinary share capital R1 200 000 000
Preference share capital R240 000 000
Loan: Ifafa Bank R570 000 000
Loan: Netbank R380 000 000
Debentures: JP Mogano Bank R135 000 000
Total R2 525 000 000
Total capital structure after new investment R3 000 000 000
Instrument % Target capital Current capital Capacity

structure structure
Ordinary shares 43,3% 1 300 000 000 1 200 000 000 100 000 000
Preference shares 16,7% 500 000 000 240 000 000 260 000 000
Loan: Ifafa Bank 12,0% 360 000 000 570 000 000 (210 000 000)
Loan: Netbank 8,0% 240 000 000 380 000 000 (140 000 000)
Debentures: JPM 20,0% 600 000 000 135 000 000 465 000 000
Total 100% 3 000 000 000 2 525 000 000 475 000 000
Conclusion:
To operate at its target capital structure, Simunye will have to issue new ordinary shares to
the value of R100m (4 million shares at R25 each). The company is not able to issue more
shares as only 4 million shares (96% shares issued – 96 million shares) are available from its
authorised share capital – unless a special resolution is undertaken to increase its authorised
share capital.
The company will also have to issue preference shares worth R260m. Since the preference
shares are irredeemable, they are classified as equity. Ordinary share capital will then make
72% (1 300 ÷ 1 800) of total equity, which is well within the 80% limit.
Simunye must reduce its loan exposure to Ifafa Bank and Netbank by R210m and R140m
respectively. This is good because the loan interest rates after tax (6,80% and 6,30%) are
slightly higher the interest rate after tax on debentures (6,12%). The company should consider
any hidden costs that might arise from the cancellation or early repayment of these loans.
Debentures to the value of R465 million will have to be issued to bring it to 20% of total capital
employed (50% of total debt). This is currently the cheapest form of external funding at 6,12%
interest rate after tax.
Alternatively, Simunye can consider raising the entire amount (R475 million) from JP Mogano
Bank to avoid unnecessary admin costs and to save time and then correct its capital structure
as time goes on.
Max: 11 marks
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f) Calculate the market values for capital employed
INSTRUMENT MARKET VALUE COST OF EQUITY
Ordinary shares 96 000 000 × R25 = R2 400 000 000 𝑲𝒆 = 17,5%
INSTRUMENT MARKET VALUE COST OF PREF.
Preference shares 𝑲𝒑 = 8%
R255 000 000 (given)
INSTRUMENT MARKET VALUE (FINANCIAL CALC METHOD) COST OF DEBT
PV of interest + capital
Loan: Ifafa Bank FV - 570 000 000
PMT -37 962 000 (570 m x 9,25%ßx0,72) 𝑲𝒅𝟏 = 6,48%
N 2
I 6,48%
Comp 571 868 484
PV
ß 8,25% + 1% = 9,25%
INSTRUMENT MARKET VALUE (MARKET YIELD METHOD) COST OF DEBT
INTEREST
Loan: Netbank 𝑲𝒅𝟏 𝑲𝒅𝟐 = 6,30%
380m x (8,25% + 1,25%)x 0,72

=
0,063
= R412 571 429
INSTRUMENT MARKET VALUE (FINANCIAL CALC.) COST OF DEBENTURES
PV of interest + capital + premium

Debentures: JPM FV - 141 750 000 (135 000 000 x
1,05) 𝑲𝒅𝟑 = 6,12%
PMT - 8 748 000 (135mx 9%x0,72)
N 3
I 6,12%
Comp 141 944 431
PV
Max: 12 marks
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g) Calculate weighted average cost of capital (MV)
Market values Cost of Capital

Instrument Weight (A) (B) WACC
Ordinary shares 2 400 000 0,63 17,50% 11,03%

Preference shares 255 000 0,07 8,00% 0,56%
Ifafa Bank loan 571 868 0,15 6,48% 0,97%
Netbank loan 412 571 0,11 6,30% 0,69%
JPM Debentures 141 944 0,04 6,12% 0,25%
Total 3 781 383 1/100% 13,50%
Max: 4 marks
TOTAL: 50 MARKS
206
MAC3761/QB002
5.15. SOLUTION 15: SANRAL
e-TOLL SYSTEM
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
CAPEX  (20 562 322)
Working capital (1 677 123) 1 677 123
Operational costs–ETCC (1 300 000) (1 300 000) (1 300 000) (1 300 000) (1 300 000)
e-toll collections  5 796 000 6 143 760 6 512 386 6 903 129 7 317 316
(22 239 445) 4 496 000 4 843 760 5 212 386 5 603 129 7 694 439
Discounted at 7% 1,0000 0,935 0,873 0,816 0,763 0,713
(22 239 445) 4 203 760 4 228 602 4 253 307 4 275 187 5 486 135
Net present value  207 546
 ALTERNATIVE (using HP10bII+ financial calculator)
-22 239 445 CFj
4 496 000 CFj
4 843 760 CFj
5 212 386 CFj
5 603 129 CFj
7 694 439 CFj
7i
SHIFT DOWN NPV 208 639
207
MAC3761/QB002
FUEL LEVY SYSTEM

CAPEX  (23 429 684)
Working capital (234 187) 234 187
Fuel levy  5 775 000 6 121 500 6 488 790 6 878 117 7 290 804
Operational costs (650 000) (650 000) (650 000) (650 000) (650 000)
(23 663 871) 5 125 000 5 471 500 5 838 790 6 228 117 6 874 991
Discounted at 7% 1,0000 0,935 0,873 0,816 0,763 0,713
(23 663 871) 4 791 875 4 776 620 4 764 453 4 752 054 4 901 869
Net present value  323 000
 ALTERNATIVE (using HP10bII+ financial calculator)
-23 663 871 CFj
5 125 000 CFj
5 471 500 CFj
5 838 790 CFj
6 228 117 CFj
6 874 991 CFj
7i
SHIFT DOWN NPV 324 235
208
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Note  – CAPEX e-toll system

Roads 17 884 002
Gantries (civil works) 393 867
IT Systems 1 837 480
Control centre – Paarl 229 756
Customer centre 217 217
*20 562 322
Note  – e-toll collection
Year 1 e-toll collection = 2 300 000 x 70% x R3,60
= R5 796 000
Year 2: 5 796 000 x 1,06 = 6 143 760
Year 3: 6 259 680 x 1,06 = 6 512 386
Year 4: 6 760 454 x 1,06 = 6 903 129
Year 5: 7 301 291 x 1,06 = 7 317 316
OR
e-toll registered (2,3m x 70%) 1 610 000 1 706 600 1 808 996 1 917 536 2 032 588
Toll fee of R3.60 x R3,60
5 796 000 6 143 760 6 512 386 6 903 130 7 317 317
OR
Due collections (2,3m x R3,60) 8 280 000 8 776 800 9 303 408 9 861 613 10 453 309
Unregistered/unpaid (2 484 000) (2 633 040) (2 791 022) (2 958 484) (3 135 993)
5 796 000 6 143 760 6 512 386 6 903 129 7 317 316
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Note  – CAPEX fuel levy
Roads 17 884 002
IT Systems 5 545 682
*23 429 684
Note  – Fuel levy collection
Year 1 fuel levy income = 35 000 000 litres x 30%
= 10 500 000 x R0,55
= R5 775 000
Fuel esc at 6% 10 500 000 11 130 000 11 797 800 12 505 668 13 256 008
Fuel levy per litre 0,55 0,55 0,55 0,55 0,55
5 775 000 6 121 500 6 488 790 6 878 117 7 290 804
Conclusion: SANRAL should invest in the fuel levy system as it yields a higher NPV.
TOTAL: 20 MARKS
210
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5.16. SOLUTION 16: MASHESHA (PTY) LTD
PART A
INVESTMENT DECISION
0 1 2 3 4 5
Fleet of vehicles (4 800 000)
Cancellation fee ( 100 000)
Resale value 1 200 000
Contract fees – variable (w1) 474 000 508 536 545 272 662 291 713 019
Contract fees – fixed (w1) 5 718 600 6 055 997 6 413 301 6 791 686 7 192 395
Maintenance (yr 2: 2%; yr 3: 4%
etc) ( 336 000) ( 342 720) ( 356 429) ( 377 815) ( 408 040)
Salaries (264 000 x 12) (3 168 000) (3 389 760) (3 627 043) (3 880 936) (4 152 602)
Other costs ( 65 000) ( 68 835) ( 72 896) ( 77 197) ( 81 752)
Fuel costs (w2) ( 498 000) ( 532 752) ( 575 905) ( 894 798) ( 969 706)
Tax (w3) ( 326 368) ( 355 730) ( 382 564) ( 353 705) ( 709 328)
(4 900 000) 1 799 232 1 874 736 1 943 736 1 869 526 2 783 987
I/YR = 15% CF0 CF1 CF2 CF3 CF4 CF5
Net Present Value 1 813 198
OR
(4 900 000) 1 799 232 1 874 736 1 943 736 1 869 526 2 783 987
1.000 0.870 0.756 0.658 0.572 0.497
(4 900 000) 1 565 332 1 417 300 1 278 978 1 069 369 1 383 642
Net Present Value 1 814 621
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a) CONTRACT FEES
0 1 2 3 4 5
Rand per km (0.75 x 1,059) 0.75 0.79 0.84 0.89 0.94 1
X
Total km 600 000 605 400 612 665 704 565 713 019
=
Total variable fees 474 000 508 536 545 272 662 291 713 019
Total fixed fees 5 718 600 6 055 997 6 413 301 6 791 686 7 192 395
(450 000 x 12 months x 1,059)
b) FUEL COSTS
0 1 2 3 4 5
Fuel increase (per litre) 0.5 0.7 0.75 0.8 0.9
Fuel cost per litre 11.41 11.91 12.61 13.36 14.16 15.06
X
Litres used per km (7 and 9/100) 0.07 0.07 0.07 0.09 0.09
=
Fuel cost per km (A) 0.83 0.88 0.94 1.27 1.36
Total km (B) 600 000 605 400 612 665 704 565 713 019
Total fuel costs (A x B) 498 000 532 752 575 905 894 798 969 706
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c) TAXATION
0 1 2 3 4 5
Taxable income 2 125 600 2 230 466 2 326 300 2 223 231 2 293 315
Wear & Tear ( 960 000) ( 960 000) ( 960 000) ( 960 000) ( 960 000)
Recoupment 1 200 000
1 165 600 1 270 466 1 366 300 1 263 231 2 533 315
Tax @ 28% 326 368 355 730 382 564 353 705 709 328
Conclusions:
MASHESHA should accept the proposal as the project yields a positive NPV.
TOTAL: 20 MARKS
213
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PART B
• Possible disruptions of current operations and loss of existing business (capacity)

• Possible use of existing fleet or enter into a lease agreement
• Reliability of economic forecast data especially on fuel price and exchange rate
• Insurance and liability on theft/hacking, hijacking while distributing airtime
• Costs relating monitoring the movement of fleet & security features required
• Possible increase in its transportation footprint (as more areas and clients are accessed)
• Breakdowns, backups to avoid disruptions
• Accessibility and quality of roads (wear & tear and maintenance costs)
• Additional road tariffs (e-toll or fuel levies increased)
• Delayed monthly payments from Moya
5 MARKS
PART C
• Reputation / image of MASHESHA (reliability & improving client relations)

• Impact on staff (strikes, retrenchment) when shutting down the delivery section
• Possible lawsuits from clients where MASHESHA has not acted appropriately
• Access to sensitive corporate information and premises by MASHESHA
• Control over time management of deliveries
• MASHESHA’s inability to service the clients (MASHESHA’s financial position)
• Immediate cancellation of contract
• Validity check of claims (on distance travelled) by MASHESHA
5 MARKS
TOTAL: 30 MARK
214
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5.17. SOLUTION 17: PICTURE PERFECT LIMITED
a) Evaluate existing and new printer
Net present value of the existing printer:
Description Note Year 0 Year 1 Year 2 Year 3 Year 4
Opportunity cost: (Current (180 000)

realisable value forfeited)
Cash flows  200 000 200 000 200 000 200 000
Sale at end of useful life 40 000
Taxation  22 400 (42 000) (42 000) (56 000) (67 200)
Net cash in-/outflow (192 600) 158 000 158 000 144 000 207 800
NPV @ 15% 1,000 0,870 0,756 0,658 0,571
NPV per annum (192 600) 137 460 119 448 94 752 118 654
NPV for existing printer 277 922
 Cash flows = R350 000 – R50 000 – R100 000

 Taxation on exiting printer:
Description Calculation Year 0 Year 1 Year 2 Year 3 Year 4
Opportunity benefit: R180 000 – (80 000)

realisation allowance R100 000
forfeited
Tax recoupment on sale 40 000
Cash inflows 200 000 200 000 200 000 200 000
Wear and tear allowance 100 000 / 2 (50 000) (50 000)
Taxable income (80 000) 150 000 150 000 200 000 240 000
Taxation at 28% (22 400) 42 000 42 000 56 000 67 200
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Net present value of the new printer:

Description Note Year 0 Year 1 Year 2 Year 3 Year 4
Investment (250 000)
Cash inflows  230 000 230 000 230 000 230 000
Sale at end of useful life 60 000
Taxation (Refer to  - (46 900) (46 900) (46 900) (63 700)
separate calculation
below)
Net cash in-/outflow (300 000) 183 100 183 100 183 100 276 300
Fair rate of return @ 1,000 0,870 0,756 0,658 0,571

15%
Fair value per periods (300 000) 159 297 138 424 120 480 157 767
NPV for new printer 276 245
 Cash flows = R450 000 – R70 000 – R150 000
 Taxation on exiting printer:

Description Calculation Year Year 1 Year 2 Year 3 Year 4
0
Cash inflows - 230 000 230 000 230 000 230 000
Wear and tear 250 000 / 4 - (62 500) (62 500) (62 500) (62 500)
Tax recoupment on - - - - 60 000

sale
Taxable income - 167 500 167 500 167 500 227 500
Taxation at 28% - 46 900 46 900 46 900 63 700
Conclusion:
It is evident from the calculations that the NPV of existing printer is higher than the NPV
of the new printer; therefore, we would advise management to continue with the existing
printer.
12 MARKS
216
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b) Two qualitative factors to consider when evaluating if the existing printer should be
replaced or not (you may mention any two of the factors listed below):
• The reliability of printer
• The lifespan
• Guarantees given by the manufacturer and supplier
• The reliability of the supplier
• Quality of the printer
• Quality of the parts i.e. the cartridge
• Ease of operating
• Training of staff
• Availability of spare parts
• Ethical consideration i.e. purpose of products manufactured
2 MARKS
c) Mutually exclusive projects are projects where only one of several alternatives
may be chosen at a time. Therefore, if two projects are mutually exclusive, the
acceptance of one will automatically lead to the rejection of the other.
For independent projects, the acceptance or rejection of one project has no

bearing or influence on the acceptance or rejection of any other project.
1 MARK
TOTAL: 15 MARKS
217
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5.18. SOLUTION 18: CITY OF NKANDLA
a) Investment decision

Purchase price –
buses (1) (25 080 000)
Modification (a) (5 320 000)
Working capital (b) (4 000 000) 4 000 000
Ticket sales – adult
(2)
11 250 000 11 700 000(4) 12 168 000 12 654 720 13 160 909
Ticket sales – child
(3)
1 250 000 1 300 000(4) 1 352 000 1 406 080 1 462 323
Running costs –
fixed (5) (4 000 000) (4 000 000) (4 000 000) (4 000 000) (4 000 000)
(34 400 000) 8 500 000 9 000 000 9 520 000 10 060 800 14 623 232
Discount factors 1,000 0,909 0,826 0,751 0,683 0,621

(34 400 000) 7 726 500 7 434 000 7 149 520 6 871 526 9 081 027
NPV (@10%) 3 862 573
ALTERNATIVE (Using HP10bII+ calculator)
-34 400 000 CFj

8 500 000 CFj
9 000 000 CFj
9 520 000 CFj
10 060 800 CFj
14 623 232 CFj
10 I/YR
NPV 3 869 344
Conclusion:
The NPV of the project is positive and therefore I would support the decision of the Council to
invest in the fleet.
16 MARKS
218
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WORKINGS
(1)
$48,000 x 50 x 10,45 (actual payment rate) = R25 080 0000
(2)
No of buses x ticket price x no of days x no of tourists
50 x R30 x 250 x 30 = R11 250 000
Tourists = 50 (capacity) x 80% x ¾ (ratio)
(3)
No of buses x ticket price x no of days x no of tourists
50 x R10 x 250 x 10 = R1 250 000
Tourists = 50 (capacity) x 80% x ¼ (ratio)
Ticket = R30 x 1/3
(4)
Increase at an annual rate of 4%
(5)
Contract amount / 5 years = R4 000 000
(a)
Mark allocated if amount and year are both correct
(b)
Mark allocated if both year 0 and year 5 are correctly shown
b) Discounted payback period
Cash flows Cash flows Cumulative

(part A) PV (part A) Balance
Year 0 (34 400 000) (34 400 000) (34 400 000)
Year 1 8 500 000 7 726 500 (26 673 500)
Year 2 9 000 000 7 434 000 (19 239 500)
Year 3 9 520 000 7 149 520 (12 089 980)
Year 4 10 060 800 6 871 526 (5 218 454)
Year 5 14 623 232 9 081 027 3 862 573
5 218 454
The discounted payback period is 4,57 years: that is 4 full years and = 0,57 years ( it
9 081 027
will take just over 6 months to generate R5 218 454 based on R9 081 027 that will be made
in the entire year 5).
4 MARKS
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c) Qualitative factors
• Economic climate – due to economic recession and high unemployment rate, few
people are going on holiday
• Location of the City of Nkandla (access and attractions)
• Reliability of the buses
• Maintenance and repairs (spare parts and service agreements)
• Public liability & insurance
• Drivers’ proper & fitness test
• Weather – open top busses in the event of bad weather
• Reliability and track record of the SAFE
• Additional licensing requirements
• Any valid qualitative factor

5 MARKS
TOTAL: 25 MARKS
220
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5.19. SOLUTION 19: PURIFIED H2O (PTY)
SANDTON MARKET
w1 Sales
Sandton Conference Centre (20 rooms x 50 bottles x 26 days x 12 months x R4.00) =

R1 248 000a
Good Life restaurant (200 000 x R4.50) = R900 000 b

Walk-in customers:
3x +½x = 105 000
3,5x = 105 000
x = 30 000
500ml: 30 000 x R5 = R150 000
1l: 30 000 x R7,5 = R225 000
5l: 30 000 x R25 = R750 000
10l: ½ x (30 000) x R50 = R750 000
Walk-in customers R1 875 000 c
TOTAL: R4 023 000 (a + b + c)
w2 Fixed costs
Total Fixed costs R975 000
Less: Depreciation R 75 000 (R600 000 / 8 years)
Net Fixed costs R900 000
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w3 Income tax (Sandton)
PIETERMARITZBURG MARKET
w4 Income tax (Pietermaritzburg)
Conclusion/Recommendation:
The Sandton market should be invested in as it yield a higher NPV (+R4 966 822) than the
Pietermaritzburg market (+R3 952 864).
TOTAL: 20 MARKS
222
MAC3761/QB002
5.20. SOLUTION 20: AFRICAN FISH & CHIPS

a. Financial analysis (a – e)

> Increase in produce prices due to
Gross Profit Margin: dry season
105 744 > Increase in fuel prices for
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 242 455 transportation to different stores
𝑆𝑎𝑙𝑒𝑠 (especially inland stores)
= 43,6% = 48,2% > Possible depreciation of rand
against the dollar for any
ingredients sourced outside the
country
> Improved relations with labour

EBIT Margin: 38 600 union, stable and harmonious
242 455 labour practice in place
𝐸𝐵𝐼𝑇 > Effective campaigns and media
𝑆𝑎𝑙𝑒𝑠 = 15,9% = 13,6% platforms in place to market the
company (marketing costs)
> Increase franchise income as a
result of additional stores opened
in the previous year
> Experience by staff leading to
less expenses
> Review of depreciation policies
and possible sale of ineffective
assets
> Improved relations with labour

EBITDA Margin: union, stable and harmonious
38600 + 8150 + 1046 labour practice in place
𝐸𝐵𝐼𝑇𝐷𝐴 242 455 > Effective campaigns and media
𝑆𝑎𝑙𝑒𝑠 platforms in place to market the
= 19,7% =17,0% company (marketing costs)
> Increase franchise income as a
result of additional stores opened
in the previous year
> Experience by staff leading to
less expenses
> Review of depreciation policies
and possible sale of ineffective
assets
Net Profit Margin: 19 820 > Increased operating costs due

242 455 severe dry season and limited
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 rainfall, leading to price increase
𝑆𝑎𝑙𝑒𝑠 = 8,2% = 8,5% > Possible decrease in franchise
income in 2017 compared to the
success in 2016
> Possible increase in interest
rates due to downgrades
> Possible reduction in other
income (interest) due to invested
cash withdrawn to repay loans
223
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Admin & marketing as % of 1 326 > More effective campaigns in the

operating expenses: 67 144 + 15 076 marketing department and better
controls in managing day to day
𝐴𝑑𝑚𝑖𝑛 & 𝑚𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠 = 1,6% = 2,0% costs in running the stores
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 > Increased brand awareness
and well established entity
requiring less promotion
Income per franchise store: 15 076 000 > Royalty fee might have been
114 increased during the year
𝐹𝑟𝑎𝑛𝑐ℎ𝑖𝑠𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 > Effective marketing campaign
𝐹𝑟𝑎𝑛𝑐ℎ𝑖𝑠𝑒 𝑠𝑡𝑜𝑟𝑒 = R132 246 = R128 806 led to more sales by franchises
> Capacity (size of) franchise
stores increased
Average salary per employee: 69 880 000 > Annual salary adjustments
312 (above inflation rate)
𝑆𝑎𝑙𝑎𝑟𝑖𝑒𝑠 𝑎𝑛𝑑 𝑤𝑎𝑔𝑒𝑠 > Bonuses (and other incentives)
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 = R223 974 = R202 714 paid to enhance company
revenue
Sales per store: 242 455 Slight increase (as opposed to

75 revenue increase of 15%)
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 > New stores may not be fully
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑜𝑟𝑒𝑠 = R3 232 733 = R3 197 442 operational or are not situated in
best locations
> Stores opened in the current
year towards the end of the year
Sales per day: 242 455 000 > Stores opened in the current
360 year towards the end of the year
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 > Stores opened on public
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 = R673 486 = R681 486 holidays and more weekends (but
not busy)
Effective tax rate: 8 128 > Delayed tax payments may lead
27 948 to extra tax charges and penalties
𝑇𝑎𝑥𝑎𝑡𝑖𝑜𝑛 > Some of the company’s
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 = 29,1% = 27,6% expenses are not tax deductible
(or may be credited to
franchisees)
> Possible special levy charged
for sale of “junk” food
Capital gearing ratio: > Repayment or conversion of

126 500 loans during the year (R145m at
𝐼𝐵𝐷 126 500 + 68 666 start of the year)
𝐼𝐵𝐷 + 𝐸𝑞𝑢𝑖𝑡𝑦 > Some profits of the company
= 64,8% = 74,1% are retained to increase the net
IBD: 20 000 + 48 000 + 58 500 worth of the company (equity)
= 126 500
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IBD: EBITDA > Repayment or conversion of

𝐼𝐵𝐷 38600 + 8150 + 1046 start of the year)
𝐸𝐵𝐼𝑇𝐷𝐴 > Increase in operating profits
= 2,7: 1 = 3,2: 1 during the year, due to the
IBD: 20 000 + 48 000 + 58 500 reduction/containment of costs
= 126 500
Debt-equity ratio: > Repayment or conversion of

𝐼𝐵𝐷 68 666 start of the year)
𝐸𝑞𝑢𝑖𝑡𝑦 > Some profits of the company
= 1,8: 1 = 2,2: 1 are retained to increase the net
= 126 500
Debt-equity ratio (net): > Repayment or conversion of

126 500 − 40 490 loans during the year (R145m at
𝐼𝐵𝐷 − 𝑐𝑎𝑠ℎ 68 666 start of the year)
𝐸𝑞𝑢𝑖𝑡𝑦 > Some profits of the company
= 1,3: 1 = 1,5: 1 are retained to increase the net
= 126 500
Compare CURRENT/TARGET: Current: Target: > Long-standing commitment on

Use capital gearing ratio 126 500 debt means the company not able
126 500 + 68 666 to speedily reach the target
𝐼𝐵𝐷 structure
= 64,8%: 35,2% = 60%: 40%
𝐼𝐵𝐷 + 𝐸𝑞𝑢𝑖𝑡𝑦 > Increase in retained income
(and low dividend repayment)
moves the company closer to its
target capital structure
Total debt ratio: > Repayment or conversion of

𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 228 866 start of the year)
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 > Possible revaluation of PPE or
= 70% = 72,1 mark-to-market of investments
LIABILITIES: 228 866 – 68 666 and loans
= 160 200
Interest cover (TIE): 38 600 > Possible increase in interest

14 138 rates leading to higher finance
𝐸𝐵𝐼𝑇 costs
𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 = 2,7 times = 3,3 times > Repayment of loan made closer
to the end of the year (effectively
paid higher interest rate
throughout the year)
> Possible decline in operating
profit due to high operating costs
(sufficient information not
provided)
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Net Interest cover: 38 600 > Possible increase in interest

14 138 − 1 826 rates leading to higher finance
𝐸𝐵𝐼𝑇 costs
𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 = 3,2 times = 3,9 times > Less interest income generated
due to cash used to repay loan
> Repayment of loan made closer
to the end of the year (effectively
paid higher interest rate
throughout the year)
> Possible decline in operating
profit due to high operating costs
(sufficient information not
provided)
Effective interest rate: 14 138 > Possible increase in interest

140 000 rates leading to higher finance
𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 costs
𝐼𝐵𝐷 (𝑜𝑝𝑒𝑛𝑖𝑛𝑔) = 10,1% = 9,6% > Extra costs/premiums paid at
termination or reduction of the
OR funding facilities
IBD (average): 126 500 + 140 000
= 133 250
Current ratio: 20 874 + 40 490 > Increase in cash reserves as a

27 451 result of profits generated (sales
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 on cash basis)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 2,2: 1 = 1,9: 1 > Early repayment of creditors on
cash excesses
Liabilities: 20 176 + 4 101 + 3 174
Cash ratio: 40 490 > Increase in cash reserves as a

𝐶𝑎𝑠ℎ + 𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 on cash basis)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 1,5: 1 = 1,3: 1 > Early repayment of creditors on
cash excesses
Liabilities: 20 176 + 4 101 + 3 174
Quick ratio: > Increase in cash reserves as a

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 27 451 on cash basis)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 > Early repayment of creditors on
= 1,5: 1 = 1,3: 1 cash excesses
Liabilities: 20 176 + 4 101 + 3 174
Inventory turnover (days): 20 874 > Reduced levels of stock to

𝑥 360
136 711 avoid holding costs and spoilage
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 (better inventory management)
𝑥 360
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 > Changes in policy/valuation
= 55,0 days = 64 days method of stock
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MAC3761/QB002
Creditors’ payment period: > Changes in credit terms by

20 176 suppliers to enforce early
𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑥 360
136 981 repayment
𝑥 360 > Early repayment of creditors
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
= 53 days = 58 days due to excess cash in hand
Business cycle: > Reduced levels of stock to

avoid holding costs and spoilage
Inventory days–creditors’ days = 55,0 – 53,0 = 64 – 58 (better inventory management)
> Changes in policy/valuation
2 days 6 days method of stock
Inventory turnover (times): 136 711 > Reduced levels of stock to

20 874 avoid holding costs and spoilage
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 (better inventory management)
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 > Changes in policy/valuation
= 6,5 times = 5,6 times method of stock
Return on Assets (RoA): 38 600 > Inventory levels still significantly

228 866 high for the nature of the business.
𝐸𝐵𝐼𝑇 > Excess cash in hand not quickly
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 = 16,9% = 19,2% invested in viable business
ventures
> Revaluation of assets during the
year or changes in accounting
policies
> Increase in operating costs due
to climate change, exchange rates
> Breakdown or major disruption
in the operations during the year
Return on Equity (RoE): 19 820 > General increase in profits

68 666 during the year without much
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 change in shareholders’ funds
𝐸𝑞𝑢𝑖𝑡𝑦 = 28,9% = 26,2% > Shareholders’ funds invested
wisely / in projects that generate
significant returns
Return on Capital Employed > Repayment or conversion of

(RoCE): 38 600 loans during the year (R145m at
126 500 + 68 666 start of the year)
𝐸𝐵𝐼𝑇 > Better containment of operating
= 19,8% =17,8% costs and robust sales team to
transfer costs to consumer
IBD: 20 000 + 48 000 + 58 500
Non-current asset turnover: 242 455 > Devaluation of assets during the
167 502 year or changes in accounting
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 policies
𝑁𝑜𝑛 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 = 1,5 times = 1,3 times > Overtime and longer hours of
operation during the year
> Major service / maintenance of
NCA: 117 870 + 28 270 + 21 362 machine during the year
227
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Earnings per share: > General increase in profits

19 820 (sales, other income, etc.) during
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 20 000 the year without changes in
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 shares issued
= 99 cents = 92 cents
Dividend per share: > General increase in profits

4 520 (sales, other income, etc.) during
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 20 000 the year leading to more dividend
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 declared
= 22,6 cents = 18,8 cents > Meeting expectations from
shareholders (or maintaining the
dividend cover)
Dividend cover: 19 820 > Reduced needs for funds for

4 520 capital expansion programmes
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 > Reduction of excess cash
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 reserves
= 4,4 times = 4,9 times > Increase in dividend promised
to shareholders not linked to the
dividend cover
Dividend pay-out ratio: 4 520 > Reduced needs for funds for
19 820 capital expansion programmes
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 > Reduction of excess cash
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 reserves
= 22,8% = 20,4% > Increase in dividend promised
to shareholders not linked to the
dividend cover
228
MAC3761/QB002
f. Key risks faced by African Fish & Chips (Pty) Ltd
• Risk: High levels of stock may be lead to products getting damaged or expiring
Mitigation: Implement systems (manual/IT) that monitors levels of stock (optimum)
• Risk: New competitors may enter the market due to low barriers to entry (including
overseas players, “heat & eat” products, franchise businesses venturing out)
Mitigation: Embark on proactive strategy to deter new entrants through expanding
franchises and identifying key locations to occupy
• Risk: Department of Health may impose health regulations that will affect the pricing
and running of the business
Mitigation: Consider introducing “healthier” options on the menu (grilled fish, 100%
juice, water, etc.)
• Risk: The company is highly geared and runs a risk of defaulting on its debt obligations
Mitigation: Consider injecting more capital into the business or offer option to convert
some debt to equity (especially to non-redeemable preference shares)
• Risk: Department of Agriculture (re chips, rolls, etc.) & Fisheries may impose
conditions not suitable for business (e.g. issue of fishing licenses, land expropriation)
Mitigation: Enter into forward contracts/binding agreements with suppliers to supply
a fixed number of products
• Risk: Changes in interest rates may increase financing costs and cash flows of the
business (including credit ratings, economic climate and eating out)
Mitigation: Negotiate fixed rate terms and enter into relevant derivatives to avoid
movements in interest rates. Reduce the levels of debt and switch to equity to finance
future projects
• Risk: Labour unrest / protests for better pay and working conditions may affect the
bottom line of the business
Mitigation: Enter into negotiations with bargaining unions early in the prior year to
avoid possible disruptions, and include incentives and benefits to keep employees
committed to the business
229
MAC3761/QB002
• Risk: Contaminated or spoilt products may be sold to customers, leading to possible

reputational damage and lawsuits
Mitigation: Employ independent person (or upskill managers) to regularly test the
quality of products served to customers
• Risk: Supply to inland stores may be interrupted due road accidents and increased
transportation costs
Mitigation: Enter into long-term contracts with logistics companies to fix prices in the
near future and take insurance policies to ensure no additional costs are incurred
• Risk: Customers may become more health conscious and shy away from AFC
products (including social activists campaigning against deep fried food)
Mitigation: Consider introducing “healthier” options on the menu (grilled fish, 100%
juice, water, etc.)
• Risk: Climate change and severe weather conditions will directly impact the input costs
of the business
Mitigation: Consider overseas suppliers and continue to monitor weather forecasts to
ensure that necessary stock levels are maintained to avoid major losses
• Risk: Cash businesses face risk of inappropriate handling of cash by staff and possible
robbery
Mitigation: Segregation of duties to ensure that cash is handled separately from the
serving of the order, and introduce safes that cannot be opened by premises staff
• Risk: Operation of franchise businesses may affect the image of AFC if franchisees
do not strictly adhere to AFC’s terms and conditions
Mitigation: Regular inspections and surprise site visits and impose severe penalties
for infringements
• Any other valid point/s
230
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g. Decision to invest in Project Franchise 2023
i). Net present value
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 7

2017 2018 2019 2020 2021 2022 2024
Description
Industry research
-
– sunk cost
Setup costs (1 500 000)
Mobile inspector
(500 000)
(MI)
Rent deposit (2 000 000) 3 221 020
Rent adjustment (200 000) (220 000) (242 000) (266 200) (292 820)
Franchise income 600 000 636 000 674 160 714 610 757 486 802 935
Inspection costs (70 000) (70 000) (70 000) (70 000) (70 000) (70 000)
Sale of MI 50 000
Taxation  420 000 (127 400) (137 480) (148 165) (159 491) (355 718)
Net cash-flows (4 000 000) 750 000 218 600 224 680 230 245 235 175 3 648 237
INPUT keys: CF0 CF1 CF2 CF3 CF4 CF5 CF6
I/Y = 10,5%
Net Present
(674 474)
Value
Taxation
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
2017 2018 2019 2020 2021 2022 2023
Description
Setup costs (1 500 000)

Wear & Tear (75 000) (75 000) (75 000) (75 000) (75 000) (75 000)
Franchise income 600 000 636 000 674 160 714 610 757 486 802 935
Inspection costs (70 000) (70 000) (70 000) (70 000) (70 000) (70 000)
Scrapping
-
allowance
Taxable income (1 500 000) 455 000 491 000 529 160 569 610 612 486 657 935
Taxation @ 28% 420 000 (127 400) (137 480) (148 165) (159 491) (171 496) (184 222)
231
MAC3761/QB002
WORKINGS
RENT
Rent expense 2 000 000 2 000 000 2 200 000 2 420 000 2 662 000 2 928 200
Escalation 0 200 000 220 000 242 000 266 200 292 820
Total rent 2 000 000 2 200 000 2 420 000 2 662 000 2 928 200 3 221 020
FRANCHISE
Gross sales 15 000 000 15 000 000 15 000 000 15 000 000 15 000 000 15 000 000
Escalation 0 15 900 000 16 854 000 17 865 240 18 937 154 20 073 384
Royalties (at
600 000 636 000 674 160 714 610 757 486 802 935
4%)
INSPECTION
Given 145 000 145 000 145 000 145 000 145 000 145 000 145 000
Depreciation (75 000) (75 000) (75 000) (75 000) (75 000) (75 000)
Inspection
70 000 70 000 70 000 70 000 70 000 70 000
costs
Vehicle cost 500 000 Sale 50 000

Tax base (50 000)
SCRAP 0
ii). Net present value index
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝑁𝑃𝑉

𝑁𝑃𝑉𝐼 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
4 000 000 − 674 474

𝑁𝑃𝑉𝐼 =
4 000 0000
NPVI = 0,831
iii). Internal rate of return
Net cash-flows (4 000 000) 750 000 218 600 224 680 230 245 235 175 3 648 237
INPUT keys: CF0 CF1 CF2 CF3 CF4 CF5 CF6
COMP IRR: 6,12%
232
MAC3761/QB002
iv). Payback period
Cash flows Cumulative

Period
Balance
0 (4 000 000)
1 750 000 (3 250 000)
2 218 600 (3 031 400)
3 224 680 (2 806 720)
4 230 245 (2 576 475)
5 235 175 (2 341 300)
6 3 648 237 -
Time required in 2 341 300 ÷

0,64 years
Year 6 3 648 237
Payback Period 5,64 years
Conclusion: Based on the evaluation methods used, the company should not invest in Project
2023 for the following reasons:
o The net present value is negative and the net present value index is below 1,
o The internal rate of return is far below the required rate of return and
o It would take the company 5,64 years to recover its initial investment (this period is as
long as the duration of the project).
233
MAC3761/QB002
h. Factors to consider before investing in PROJECT FRANCHISE 2023
• Impact on existing franchise businesses should be assessed to avoid unhealthy

competition
• Rapid growth (addition of ten stores) may lead to difficulty in managing the franchise
business
• Possible lawsuits and complaints from existing franchisees, possibly interdicting the
launch of the planned franchise stores
• Franchisees may breach the conditions of the lease and eviction or financial impact
will be borne by AFC
• Availability of resources to run with the setting up and inspection of the new stores
• Ability to integrate the new stores into the company’s system interface
• Clarity on the role and involvement of AFC in the businesses of the franchisees without
interference (independence)
i. Different types of projects and business case examples

• INDEPENDENT PROJECTS: The acceptance or rejection of one project has no
bearing or influence on the acceptance or rejection of any other project (you can
choose or reject either or both projects). Example – SABMiller opening a distribution
outlet in Botswana (project 1) is unlikely to affect the decision to buy a new machine at
one of its local plants in South Africa (project 2).
• MUTUALLY EXCLUSIVE PROJECTS: Only one of several alternatives may be

chosen at a time (acceptance of one project immediately leads to the rejection of the
other). Example – Netcare Group deciding on either setting up a debtors’ collection
department (project 1) or outsourcing the debtors’ collection function to specialised
debt collectors.
• DIVISIBLE PROJECTS: The whole project or a fraction thereof may be initiated

(project can be increased or reduced in size). Example – City of Cape Town building
a stadium can decide to erect a 40 000-seater or increase it to a 60 000-seater.
• INDIVISIBLE PROJECTS: The whole project must be undertaken in its entirety or not
at all (project cannot be scaled up or down). Example – ClearVu Fencing company
contracted to fence the Gautrain railway.
TOTAL: 130 MARKS
234
MAC3761/QB002
5.21. SOLUTION 21: KGORONG (PTY) LTD
a) Determining value of company using the fair rate of return provided
2014 2015 2016 2017

YEAR 0 (P1) (P2) (P3) (P4)
Rand Rand Rand Rand Rand
Expected dividend to be paid
2014 550 000 x 1,10 605 000
2015 605 000 x 1,15 695 750
2016 695 750 x 1,20 834 900
2017 834 900 x 1,25 1 043 625
Gordon's dividend growth model
2018 and onward  43 484 375
605 000 695 750 834 900 44 528 000
Fair rate of
return (or your
rate) 28,00% 0,781 0,610 0,477 0,373
Net present
value 17 904 104 472 505 424 408 398 247 16 608 944
Using financial calculator: NPV is R17 883 392
 Calculation
D5
P4 =
ke -g
R1 043 625 x 1,25

=
28% - 25%
R1 304 531,25
=
3%
= R43 484 375
235
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The value of 100% of Kgorong (Pty) Ltd is R17 904 104
Therefore, the value of 10% = R17 904 104 x 0,10
= R1 790 410
Alternative if financial calculator is used:
= R1 788 339
ALTERNATIVE SOLUTION
(a) Determining value of company using the fair rate of return provided
2014 2015 2016

YEAR 0 (P1) (P2) (P3)
Rand Rand Rand Rand
Expected dividend to be paid
2014 550 000 x 1,10 605 000
2015 605 000 x 1,15 695 750
2016 695 750 x 1,20 834 900
Gordon's dividend growth model
2018 and onward  34 787 500
605 000 695 750 35 622 400
Fair rate of
return (or your
rate) 28,00% 0,781 0,610 0,477
Net present
value 17 888 798 472 505 424 408 16 991 885
Using financial calculator: NPV is R17 883 392
236
MAC3761/QB002
 Calculation
D4
P3 =
ke -g
R 834 900 x 1,25

=
28% - 25%
R1 043 625
=
3%
= R34 787 500
The value of 100% of Kgorong (Pty) Ltd is R17 888 798
= R1 788 880
Alternative if financial calculator is used:
= R1 788 339
12 MARKS
b) More reliable results will be obtained when the following conditions are met:
• The business enterprise is a going concern

• The source of the value to the shareholder is essentially only the future stream of
dividends
• The dividends are expected to grow by a constant rate that is likely to be sustainable in
future
• Expected dividend growth rate is lower than the discount rate
MAX 3 MARKS
TOTAL: 15 MARKS
237
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5.22. SOLUTION 22: AFRICAN BAG (PTY) LTD
Calculate estimated EPS at 30 September 2015
No of shares in issue pre-sale to Jimmy Marcus 1 000 000

Valuation of African Bag (620 000 - 200 000) 420 000
Amount to be invested by Jimmy Marcus (x / (x + R420 000) = 30%) 180 000
No of shares to be issued to Jimmy Marcus (R180 000 / (R420 000 / 1 000 000))1 428 571
Total number of shares after issue (1 000 000 + 428 571) 1 428 571
Operating profit after tax - 30 Sep 2015 (68 054 x 1,05) 71 457
Finance costs (200 000 x 0,1 x 9/12 x 0,72) (10 800)
Interest income (180 000 x 0,05 x 3/12 x 0,72) 1 620
Net profit for the period 62 277
Earnings per share (62 277 / 1 428 571) – cents 4,36
Note 1
Alternative calculation:
Assume 30% of shares = x
𝑥
30% =
(𝑥 +1 000 000)
0,3 (x+ 1 000 000) = x
x = 0,3x + 300 000
0,7x = 300 000
x = 428 571
TOTAL: 12 MARKS
238
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5.23. SOLUTION 23: FAST & QUICK
a) The total number of shares issued to Quick Ltd will be = 60 000 000 ÷ 5 x 4
= 48 000 shares in Fast Ltd

2 MARKS
b) The suggested purchase price per Quick Ltd share is (5 124 x 4) ÷ 5 =4 099,20 cent
2 MARKS
c) Acceptance of Fast Limited offer?
Combined
Fast Ltd Quick Ltd
1 008 000 000 168 000 000

EPS in cent
248 000 000 60 000 000
= 406,45 = 280
Total dividends (earnings x payout ratio) 302 400 000 67 200 000
302 400 000 67 200 000

DPS in cent (dividend/number of shares)
248 000 000 60 000 000
= 121,94 = 112
7 420 000 000 1 020 000 000

NAV (cent)
248 000 000 60 000 000
= 2 991,94 = 1 700
239
MAC3761/QB002
Combined Quick Ltd

Fast Ltd
Market value of Quick Ltd 2 459 520

(60 000 x R40,992)
Market value of Fast Ltd before transaction 10 248 000
(200 000 x R51,24)
Market value of combined entity 12 707 520

Number of shares of combined entity 248 000 000
Fast Ltd price per share (combined entity) 5 124
(cents)
5 124 3 920
P/E ratio [price/EPS]
406,45 280
Earnings (cents) 406,45 x 4 280 x 5

= 1 625,8 = 1 400
Dividends (cents) (406,45 x 30%) x 4 (280 x 40%) x 5

5112 x 5
121,94 x 4
= 487,76 = 560
Net asset value (cents) 2 991,94 x 4 1 700 x 5

= 11 967,76 = 8 500
Cash value if shares are disposed of 5 124 x 4 3 920 x 5

(cents)
= 20 496 = 19 600
On the basis of increased earnings, book and cash value, we recommend that they proceed
and accept the offer from Fast Ltd.
240
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Other factors to consider:
• Fast Ltd has a much higher risk as a result of its dividend to earnings ratio of 2:1, and
this is reflected in its lower P/E ratio of 12,2 before the transaction (10 248 ÷ 840 000).
• What are the respective future growth rates of the companies?
• At what date will the transaction take place?
14 MARKS
d) Will an additional R1 influence your initial recommendation?
• additional R5 for every 4 shares

• revised cash values (R204,96 vs. R196)
Recommend to proceed as in c above.
2 MARKS
TOTAL: 20 MARKS
241
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5.24. SOLUTION 24: FAZEBOOK LTD
(a) Present value of synergies and related costs
Year 0 Year 1
R R
1. Sale of land and buildings 1 000 000
2. Wage savings 825 000

• Wage savings – year 1: R750 000 x (1+ (2 x 5%) PV = 698 775
• Wage savings – years after:

P0 = Cf1/(WACC-g) {in year 1: P1 = Cf2/(WACC-g)}
P1 = R825 000 x (1+0,05) / (0,18 – 0,05) 6 663 462
(“continuing value”)
PV = 5 643 952
3. Fixed advertising & distribution cost savings
• Cost savings from year 1 (fixed – R200K all years):
P0 = Cf1/(WACC-g)
Cf1 = R200 000 x (1 – 28%)
= R144 000
P0 = R144 000 / (0,18 – 0,05) 1 107 692
4. Legal and other acquisition-related costs (2 500 000)
Totals (392 308) 7 488 462
Discount factors of 18% 1,000 0,847
Discounted values (392 308) 6 342 727
PV of all synergies between FazeBook and Wassup R5 950 419 Max: 10 marks
The present value of all specific synergies between FazeBook & Wassup, net of associated
costs is R6 million.
242
MAC3761/QB002
(b) Value of proposed bid
Number of shares in issue:

FazeBook shares (R270m ÷ R1,50) 180m shares
Wassup shares (R150m ÷ R1,50) 100m shares
Number of FazeBook shares to be issued (100m ÷ 4) 25m shares
Earnings per share – FazeBook (R93m ÷ 180m) 51,67c
Share price – FazeBook (R0,5167 x 20) R10,33
Fair value of Wassup (R10,33 x 25m) R258m Max: 5 marks
ALTERNATIVE
Market value of FazeBook (R93m x 20) R1 860m
Share price of FazeBook (R1 860 ÷ 180) R10,33
Fair value of Wassup (R10,33 x 25m) R258m
(c) Payment method: Shares vs Cash The points below can also be made
to address “benefits” of choosing one
Consider the following: method over the other.
• P/E ratio (future earnings growth)

Use shares when the acquirer has a high or higher PE ratio than the target company
(the acquirer is expected to generate better earnings than the target company).
• Synergy risks
Use shares when the acquiring shareholders want the target company shareholders
to share the synergy risks (if cash, the acquirer takes the entire risk in the event that
the synergies do not materialise).
• Cash levels
Use shares when cash reserves of the acquirer are low.
• Control
Use cash when the acquirer does not want to change its shareholding structure
• Covenants / cash restrictions

Use shares when there are covenants in place to restrict the use of cash of the
acquiring company.
• Capital structure
Use cash/shares when the acquiring company is moving/maintaining its capital
structure
• Costs
Use cash to avoid share issue costs (and possible tax liability for a cash offer – as
profit may be taxable immediately).
243 Max: 5 marks

MAC3761/QB002
(d) Post-takeover EPS of FazeBook
Earnings of FazeBook R93m

+ Earnings of Wassup R21m
+ Cost savings R1m
Wage savings (R0,8m)
Advertising & distribution cost savings (R0,2m)
= Projected post-takeover earnings R115m
FazeBook shares in issue post takeover (180m+25m): 205m
EPS (R115m ÷ 205m): 56,10c
Max: 5 marks
(e) The investigation which FazeBook would be expected to have carried out before
the takeover attempt would include:
• Examination of financial results of Wassup over recent times – insight into the
past and current performance which gives an indication of their stability /future
prospects
• An assessment of the future trading prospects of Wassup.
• An assessment of the quality of the staff/management styles of Wassup.
• A valuation of the shares of Wassup.
• An assessment of potential synergistic benefits of the takeover.
• Wassup strategies and culture – will it align with FazeBook?
• An evaluation of the amount of risk involved.
• An assessment of full disclosure of liabilities and/or pending lawsuits of
Wassup.
• An assessment of technology and intellectual property of Wassup.
• An assessment of customer base and relationship of Wassup.
• An evaluation of environment and social impact of Wassup.
• Any other valid point(s).
Max: 7 marks
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(f) Defensive tactics which Wassup might use to resist the take-over include:
• Action to increase the Wassup share price, including the release of new
information and promises of increased dividends.
• Persuading the Wassup shareholders that the bid price is too low in view of the
company’s prospects.
• Making Wassup less attractive to FazeBook by selling or destroying key assets
(scorched earth defences).
• Making Wassup less attractive to FazeBook by such means as giving senior staff
new contracts which guarantee large compensation payments in the event of the
takeover (golden parachute).
• Inserting clauses in the Memorandum of Incorporation (MOI) that would make it
difficult to approve the takeover (e.g. 80% of shareholders to approve the merger
may be required)
• Any other valid point(s).
Max: 3 marks
TOTAL: 35 MARKS
245
MAC3761/QB002
5.25. SOLUTION 25: BOXER CASH & CARRY
a) Calculate the market capitalisation of Brains Limited.
Market capitalization = No of shares x Share price

= (15 000 000 x 80%) x R185
= R2,2 billion
3 MARKS
b) Determine offer price for Boxer Cash & Carry (net asset value).
Item Calculations Value

Land & buildings R300m x 95% - R20m R265m
Equipment and fittings R110m
Investments R50m
Inventory R45m
Trade receivables R60m x 85% R51m
Cash R20m
Total liabilities R150m + R90m (R240m)
Cancellation fees (R7m)
Net asset value R294m
Offer price R294m x 70% R206m
7 MARKS
c) Determine offer price for Boxer Cash & Carry (earnings multiple method).
Average P/E multiple of similar listed companies 21
Entity level (e.g. SWOT)

“Strong presence” in rural areas (two very populous provinces) 1
High growth rate (currently 22% p.a.) 1
New and young management team (inexperience) -3
Customer concentration high in rural areas (diversity) -1
Adjusted P/E multiple 19
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Valuation (Owner level) R million

Value of 100% equity in Boxer (19 x R120m) R2 280
Add: Control premium (assume 9,64%) R220
OR Less: Minority discount -
R2 500
Less: Marketability discount (assume 12%) (R300)
Value of Boxer Cash & Carry R2 200
Offer price (70% of R2 200) R1 540
8 MARKS
d) Calculate the value of Boxer Cash & Carry (free cash flow).
Annual cash flows
Market value =
WACC−g
(120m+(20m x 0,72)+2m)x 1,03

Market value =
(12,5%−3%)
Market value = R1,479bn (approx.)
Not required: Offer price based on FCF should be R1 035m (R1 479m x 70%)
5 MARKS
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e) Calculate ratios for 2016 and provide reasons for change:
Ratio Formula Calculation 2016 2015
Net debt to equity ratio IBD−cash R150m−R20m
(A) Equity R240m 54,17% 47,34%
Increase due to:

Additional funds borrowed during the year
Possible interest capitalised into the loan balance
Employee costs as % of Salaries & wages R130m
revenue (B) Sales R2 100m 6,19% 5,83%
Increase due to:

Hiring & training of additional employees for new stores
Poor incentive scheme in rewarding employees
EBIT margin (C) EBIT R180m

Sales R2 100m 8,57% 10,20%
Decrease due to:

Possible increase in salaries and wages
Possible increase in operating (and marketing) costs for new stores
Cash R20m
Cash Ratio (D)
Current liabilities R90m 0,22: 1 0,41: 1
Decrease due to:

Possible decrease in cash reserves due to store expansion
Gearing ratio (E) IBD R150m

IBD+Equity R150m+R240 38,46% 33,67%
Increase due to:

Additional funds borrowed during the year
Possible interest capitalised into the loan balance
Inventory Turnover Cost of sales R1 660m
(F) Inventory R100m 16,60 times 12,30 times
Increase due to:

More aggressive approach in inventory management
Efficient systems in the buying department
12 MARKS
TOTAL: 35 MARKS
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5.26. SOLUTION 26: LION BRANDS LTD
PART A
Operating profit margin: 30 317 > Increase in input costs

178 381 (especially agriculture
products)
𝐸𝐵𝐼𝑇
𝑥 100 = 17%
𝑆𝑎𝑙𝑒𝑠 = 20,2%
Return on capital employed 30 317 > Continued increase in

(40 000 + 144 876) profits (80% of inflation
𝐸𝐵𝐼𝑇
𝑥 100 rate) coupled with
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 = 16,4% = 14,5% reduced debt levels
Asset turnover: 178 381 > Decline might indicate

275 157 poor utilisation of assets
𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 = 0,6 times = 0,8 times > Accounting policies
and estimates to be
reviewed
> To take into account -

assets not recorded at
MV and industry
average
Inventory turnover: 1 831 > Improved inventory

𝑥 366
102 572 control systems
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝑥 366 (especially for perishable
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 goods)
= 6,5 days = 8,8 days > Difficulty in sourcing
raw material could have
pushed the company to
keep low levels in stock
IBD to EBITDA: 40 000 >Reduced debt levels

33 309 during the year (lowered
risk of default)
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡
> Continued increasing
𝐸𝐵𝐼𝑇𝐷𝐴 = 1,2: 1 = 1,5: 1 profits to ensure ability
to repay debt
Net interest cover: 30 317 > Increase in prime rate

4 712 might have led to
𝐸𝐵𝐼𝑇
increase in interest
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 = 6,4 times = 7,2 times expense
Total: 18 marks
249
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PART B
R 000
Description 2016 2017 2018 2019
Cash profits – 2016 (18 948+(2 992x0,72)) 21 102
Cash profits – 2017 & 2018 (increase by 20%) 25 322 30 386
Cash profits – 2019 (30 386 x 1,05) 31 905
Continuing value (31 905 x 1,05)/(0,15 – 0,05) 𝐶𝐹𝑖 335 002

WACC − g
Social development (1 000) (1 000)
Expected cash flows 24 322 29 386 366 907
Discount factors (at 15%) 0,870 0,756 0,658
Present values 21 160 22 216 241 425
Value of business 284 801
Alternative (Financial calculator)
Amount Key Display
0 CF0
24 322 CF1
29 386 CF2
366 907 CF3
15 I/Y
NPV 284 620
The value of Ellerine Cookies' business at 31 December 2016 is R285 million.
Total: 12 marks
250
MAC3761/QB002
PART B (ALTERNATIVE)
R 000
Description 2016 2017 2018 2019
Cash profits – 2016 (18 948+(2 992x0,72)) 21 102
Cash profits – 2017 & 2018 (increase by 20%) 25 322 30 386
Cash profits – 2019 (30 386 x 1,05) 31 905
Continuing value (31 905)/(0,15 – 0,05) 𝐶𝐹𝑖 319 050

WACC − g
Grant (1 000) (1 000)
Expected cash flows 24 322 348 436
Discount factors (at 15%) 0,870 0,756
Present values 21 160 263 418
Value of business 284 578
Alternative (Financial calculator)
Amount Key Display
0 CF0
24 322 CF1
348 436 CF2
15 I/Y
NPV 284 617
The value of Ellerine Cookies at 31 December 2016 is R285 million.
Total: 12 marks
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PART C
Test of reasonableness:
R 000
Net asset value as per balance sheet (275 157 – (40 000 + 90 281)) 144 876
Add: revaluation of non-current assets (300 000 – 164 124) 135 876
Total value 280 752
The value of Ellerine Cookies using the net asset value model is R281 million (about R4 million
below the FCF model valuation). Not enough information has been provided to substantiate
the difference between the two valuations.
Assumptions/limitations:
o Taxes and other relevant costs might have been overestimated and therefore decreasing
the market value of the non-current assets.
o Other assets and liabilities will be realised and settled at carrying values (viz CVs =
realisable values).
o The financial implication of transferring assets to other divisions of Sasco Limited is the
same as selling these assets to a 3rd party.
o Any other valid point
Total: 5 marks
PART D
1. Determine maintainable earnings of Twista.

(R 000) 2012 2013 2014 2015 2016
Net profit 2 390 2 545 2 700 3 220 2 650
“Exceptional items” (400) 350
Maintainable earnings 2 390 2 545 2 700 2 820 3 000
Increasing trend, therefore use 2016 earnings (R3 million).
2. Determine the implied/adjusted P/E ratio of Twista.
P/E multiple of listed companies (1/6,25%) 16

Positive factors (decreasing risk)
Stable growth in earnings +1
Innovative and environmentally friendly production process +1
Negative factors (increasing risk)
Rife competition -2
Limited distribution network and marketing costs -1
Adjusted P/E multiple – Twista 15
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3. Determine value of Twista after adjusting for control premium and marketability discount.
R million
Price-earnings valuation before adjustments (R3m x 15) 45
Add: Control premium (R45m x 10% estimated) 5
Value before marketability discount adjustment 50
Less: Marketability discount (R50m x 10% - given) (2)
Established value of Twista 48
4. Determine the value of Twista that Lion Brands is buying (Faf Molefe’s share).
Faf Molefe’s shareholding: 2/(1+2) = 66,67%
Established value of Twista = R48m
Value of the stake being sold (66,67% x R48m) R32 million
5. Determine the number of shares to be issued by Lion Brands to Faf Molefe.

Number of shares issued by Lion Brands (34% x R10bn) 3 400 000 000
Share price of Lion Brands R850bn / 3,4 bn R250
Number of shares to be issued (R32m / R250) 128 000
128 000 shares must be issued by Lion Brands to Faf Molefe to facilitate the acquisition of a
66,67% stake (two-thirds) in Twista.
Max: 12 marks
TOTAL: 50 MARKS
253
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5.27. SOLUTION 27: PBC LTD
a) Analysis of financial statements
EBITDA margin: 279 − 156 + 71 > Increase in costs

923
> Weaker rand leads
to increase import
𝐸𝐵𝐼𝑇𝐷𝐴
costs
𝑆𝑎𝑙𝑒𝑠 = 21, 02% = 27,65%
> Poor cost control
mechanisms
Bad debt expense ratio: 9,23 >Stricter lending

923 𝑥 20% policies
> Sound debt
𝐵𝑎𝑑 𝑑𝑒𝑏𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
collection processes
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = 5,00% = 6,89%
> Improved relations
with clients
Earnings per share (for

calculation of P/E ratio)
60
22
P/E multiple: > Slow growth in

construction industry
34,40
2,73 > Negative outlook on
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
Zimbabwe economy
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
> Entry of new cement
= 12,60 =14,20
producers in market
254
MAC3761/QB002
Stock turnover: > Better inventory

management systems
644
in place
99
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
>Products
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 manufactured at the
= 6,51 times = 5,88 times back of valid orders
Debt-equity ratio: 465 > Better debt

915 management
> Interest paid
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡
annually instead of
𝐸𝑞𝑢𝑖𝑡𝑦 = 0,51: 1 = 0,58: 1
bullet payments
Price to book value: 34,40 𝑥 22𝑚 > Possible decrease

915𝑚 in share price
> Slow economic
𝑴𝒂𝒓𝒌𝒆𝒕 𝒑𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆
growth (JSE listed
𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆 = 0,83: 1 = 1,03
companies under
strain)
25 marks
b) Describe key business, currency and interest rate risks

Business risks:
• Possible machinery breakdowns and downtime
• Legal implications on environmental issues
• Health and safety issues - employees
• Labour actions and government intervention on labour relations
• Compliance risk and government interventions (BEE, carbon emissions, competition laws)
Currency risks:
• Movement in rand against foreign currencies (in sourcing goods from outside the country)
• Movement in rand against foreign currencies (in translating financial performance of
subsidiaries and other entities outside the country)
Interest rate risks:

• Increase in the prime rate (for prime linked variable loans)
• Decrease in the prime rate (yet loans are at a fixed rate)
5 marks
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c)
Projected statement of comprehensive income for the three months ending 31 January
2017
Sales 284
Existing sales (923 x 1,1 x 3/12 254
Robert Murray – Cement (26 / 8 x 3) 10
Robert Murray -Limestone (13 x 1,5) (based on cost of
sales) 20
Less: Cost of Sales (199)

Existing cost of sales (644 x 1,1 x 3/12) 177
Robert Murray – Cement (10 x 100/150) 7
Robert Murray – Limestone (4 + (4 x 1,15) + 4) 13
Robert Murray – Delivery costs (0,5 x 3) 2
Gross Profit 85
Less: Operating costs (53)
Existing operating costs (156 x 1,1 x 3/12) 43
Clearing costs – incurred before November -
Additional depreciation (200/5 x 3/12) 10
Less: Net finance costs (12)
Finance costs (50 x 3/12) + (28 x (10,5%-1,5%) x 3/12) 14
Interest income (8 x 3/12) (2)
Net profit before taxation 20
Less: Taxation (21/81 x 20) (5)
Net profit after taxation 15
25 marks
TOTAL: 55 MARKS
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5.28. SOLUTION 28: umfula.co.za
a) Calculation of net cost/benefit
Current receivables = R43m
Average collection period of current receivables:

= Accounts Receivable/Credit sales x 365
= 43/300 x 365
= 52.3
= 52.3 days
Revised receivables:
Receivables paying within 30 days = 300 x 50% x 30/365 = 12.3 = 12
Revised receivables = 12 + 11 + 10 = 33
Average collection period of revised receivables:

= Accounts receivable/Credit sales x 365
= 33/300 x 365
= 40.15
= 40.2 days
The net benefit or cost of the proposed changes in trade receivables policy:
Reduction in receivables = 43 – 33 = 10
Reduction in financing cost = 10 x 10% = 1
Cost of discount = 300 x 50% x 1% = 1.5 = 2
Net cost of proposed changes in receivables policy = 2 – 1 = 1
ALTERNATIVE:
The net benefit or cost of the proposed changes in trade receivables policy
Current receivables days = 43/300 x 365 = 52.3 days

Revised receivables days = (30 x 50%) + (45 x 30%) + (60 x 20%)
= 40.5 days
Decrease in receivables days = 52.3 – 40.5 = 11.8 days
Decrease in receivables = 300 x 11.8/365 = 9.7
Decrease in financing cost = 9.7 x 10% = .97 = 1
Cost of discount = 300 x 50% x 1% = 1.5 = 2
Net cost of proposed changes in receivables policy = 2 – 1 = 1
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Comments
• The proposed changes in trade receivables policy are not financially acceptable.
• However, if the trade terms offered are comparable with those of its competitors,
Umfula.co.za needs to investigate the reasons for the (on average) late payment of
current customers.
• This analysis also assumes constant sales and no bad debts, which is unlikely to be
the case in reality.
6 MARKS
b) Cost of current inventory policy

Cost of materials (CoM) = R54m per year (given)
Annual ordering cost

= 12 months per year x order costs
= 12 x 3 000
= R36 000 per year
Annual holding cost

= Holding cost per unit x average stock on hand
= 50 x 750 (given)
= R37 500 per year
Total cost of current inventory policy

= CoM + annual ordering cost + annual holding cost
= 54m + 36 000 + 37 500 = R54.074m per year
Umfula.co.za will need to increase its order size to 3 000 units to gain the bulk discount.
Annual demand
= 12 months per year x demand per month
= 12 x 1 500 = 18 000 units per year
Revised number of orders
= Annual demand/order size
= 18 000/3 000
= 6 orders per year
Revised ordering cost

= Orders per year x cost per order
= 6 x 3 000 = R18 000 per year
Revised holding cost

= Holding cost per unit x average stock on hand
= 50 x (3 000/2)
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= R75 000 per year

Cost of materials after bulk purchase discount
= CoM x (100% - discount %)
= 54m x 98% (100% - 2%)
= R52.92m per year
Total cost of revised inventory policy

= Cost of materials after bulk purchase discount + Revised ordering cost + revised holding
cost
= 52.92m + 18 000 + 75 000
= R53.013m per year
Evaluation of offer of bulk purchase discount

Net benefit of taking bulk purchase discount:
= 54.074m – 53.013m = R1.061m per year
The bulk purchase discount is more financially favourable.
However, this evaluation is based on a number of unrealistic assumptions:

o For example, the ordering cost and the holding cost are assumed to be constant, which
is unlikely to be true in reality.
o Annual demand is assumed to be constant, whereas in practice seasonal and other
changes in demand are likely.
6 MARKS
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c) (i) Market capitalisation of Umfula.co.za Ltd
Value of ordinary shares in the Statement of Financial Position = R40.0 m

Nominal (par) value of ordinary shares = 100 cents (R1)
Number of ordinary shares of company = R40m/R1
= 40m shares
Ordinary share price = R5.00 per share
Market capitalisation = 40m x 5 = R200m
2 MARKS
(ii) Net asset value (liquidation basis)
Current net asset value (NAV) = 282m + 168m – 142m – 50m = R258 m
Decrease in value of non-current assets on liquidation = 276m – 282m = R6 m
Increase in value of inventory on liquidation = 130m – 125m = R5m
Decrease in value of trade receivables = 43m x 20% (100% - 80%) = R8.6m
NAV (liquidation basis) = 258m – 6m + 5m – 8.6m = R248.4 m
2 MARKS
(iii) Price/earnings method
Historic earnings of Umfula.co.za Ltd = R20 m

Average price/earnings ratio of the business sector = 20 times
Adjusted price/earnings ratio of Umfula.co.za Ltd: 20 – 3 = 17
Price/earnings ratio value of Umfula.co.za Ltd = 17 x 20m = R340m
(Price/earnings ratio calculation using forecast earnings would receive full credit)
2 MARKS
(iv) Dividend growth model value (using Gordon’s Dividend Growth model)
Gordon’s growth model estimates the dividend growth rate using g = bre
Historic retention ratio (b) = (7+6+8+8) / (17+17+19+20) x 100 = 39.7%

Current return on shareholders’ funds (re) = 20/258 x 100 = 7.8%
Dividend growth rate (g)

= bre
= 39.7% x 7.8% = 3.1%
Value of Umfula.co.za Ltd

Po = D1/Ke - g
D1 = D0 x (1 + g)
= 12m x 1.031%
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= 12.4
Ke - g = 9% - 3.1%
= 5.9%
Po = 12.4/5.9%
= R 210.2m
= R210m
2 MARKS
d) Merits of the valuation methods

Net asset value is an asset-based valuation method, while the price/earnings ratio method
and the dividend growth model are both income-based methods. Market capitalisation can
be seen as an objective measure of company value provided by the capital markets.
Market capitalisation
• While market capitalisation is often seen as an objective measure of company value, it must
be recognised that market capitalisation is not fixed, but constantly changing as share
prices change with the random arrival of new information on the capital market.
• In terms of determining a purchase price for Umfula.co.za Ltd, market capitalisation
represents a minimum value that existing shareholders can currently obtain on the capital
market.
• Shareholders will therefore expect to be offered more than the current market price of their
shares if they are to be persuaded to sell their shares to a bidding company.
• Compared with other valuation methods, however, market capitalisation offers a value that
is immediately verifiable for a listed company and existing shareholders will use it as a
benchmark against which to measure any offer that is made to them.
Net asset value (liquidation basis)

• In terms of determining a purchase price for Umfula.co.za Ltd, liquidation NAV is arguably
more useful than book value NAV or replacement cost NAV, provided that information
needed to calculate it can be reliably established, since it values a course of action open
to the shareholders that is a real alternative to accepting an offer from a bidder.
• That said, it is usually found to be a value much lower than any possible purchase price
because it does not value a company as a going concern, and few companies are
purchased with the sole objective of liquidation.
Price/earnings method
• This is a widely-used valuation method and provided that appropriate information is used,
it can be useful in helping to determine a purchase price.
• Appropriate information will include expected future earnings rather than historical
earnings, since it is future income from a company that is purchased, not past income.
• In the case of Umfula.co.za Ltd, the earnings one year forward could be forecast to be
R21.1m (20m x 105.6%), using the historical earnings growth rate of 5.6% (((20m/17m)1/3
- 1) x 100). With these earnings rather than the most recent earnings of R20m, the
price/earnings ratio value becomes R358.7m (17 x 21.1), an increase of R18.7m on the
previously calculated value of R340m. This increase would need to be considered in
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MAC3761/QB002
determining a purchase price for Umfula.co.za Ltd, provided that earnings growth was
expected to continue in the future.
• Appropriate information will also include the price/earnings ratio used in the valuation, and
the origin and meaning of the applied price/earnings ratio must be carefully considered if
the calculated company value is to have any significance. Using sector average
price/earnings ratio implies that Umfula.co.za Ltd is an average company, and this may be
an inappropriate assumption to make.
Dividend growth model

• This valuation method provides a deprival value for target company shareholders, i.e. it
values what they would give up (the right to receive future dividends) if they accepted an
offer for their shares.
• Like market capitalisation, it represents a minimum value when considering the purchase
price of a company, in this case a minimum value for shareholders who do not control
dividend policy.
• While the dividend growth model has many weaknesses, the value it provides is useful in
determining a purchase price, providing its limitations are kept in mind.
8 MARKS
Presentation & layout: 2 MARKS
TOTAL: 30 MARK
262
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5.29. SOLUTION 29: HEALTH MATTERS LTD
(a) Calculate WACC – existing capital structure

𝐷1
𝐾𝑒 = +g
𝑃0 −𝑓𝑐
16,2𝑚
Ordinary R180 000 000 (given) 𝐾𝑒 = + 0,08
180𝑚
shares 𝐾𝑒 = 17%
Workings
21,6𝑚−20,0𝑚
𝑔= x 100
20,0𝑚
𝑔 = 8,0%
OR
21,6𝑚
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑐𝑜𝑣𝑒𝑟 =
15,0𝑚
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑐𝑜𝑣𝑒𝑟= 1,3333

21,6𝑚
𝐷1 =
1,3333
𝐷1 = 16,2m
INSTRUMENT MARKET VALUE COST OF DEB.

FV - 25 060 000 (25 000 000 + (120 x 500)) 𝐾𝑑1 = 8% x 0,72
PMT - 1 350 000 (25 mil x (10,5%-3%) x 0,72)
Debentures N 5
I/Y 5,8% = 5,8%
PV 24 621 723

CF0 0
CF1 - 1 200 000 (15 000 000 x 8%)
Preference CF2 - 1 200 000
𝐾𝑝 = 10,5% (given)
CF3 - 1 200 000
shares CF4 - 16 200 000 (15 000 000 + 1 200 000)
CF5 - 900 000 (15 000 000 x 6%)
I/Y 10,5
NPV 14 370 353
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INSTRUMENT MARKET VALUE COST OF LOAN

Loan – Katz
𝑀𝑉𝑑2 = 6 007 924 (given) Interest paid
Finance 𝐾𝑑2 =
Market value
390 528
=
6 007 924
6,5%
CALCULATION OF WACC – based on existing capital structure
Portion of Weighted
Market value of capital Cost of cost of
Capital structure instruments structure capital capital
Ordinary shares R180 000 000 0,80 17,0% 13,6%
Debentures R24 621 723 0,11 5,8% 0,6%
Preference shares R14 370 353 0,06 10,5% 0,6%
Long-term loans R6 007 924 0,03 6,5% 0,2%
Total R225 000 000 1 / 100% 15,0%
CALCULATION OF WACC – based on target capital structure
Portion of Weighted
capital Cost of cost of
Capital structure Allocation structure capital capital
Debentures “x + x + 2*(x + x) = 30” 0,20 5,8% 1,2%
Long-term loans 0,05 6,5% 0,3%
Total 1 / 100% 13,9%
Max: 24 marks
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ALTERNATIVE DEBENTURE CALCULATION
OR
CF0 -1 350 000 r/w (25 mil x (10,5%-3%)x 0,72)
CF1 -1 350 000 1
Debentures CF2 -1 350 000 1−
(1 + 0,058)5
CF3 -1 350 000 𝑃𝑉𝐴 = 1 350 000𝑥 ( )
(0,058)
CF4 -1 350 000
CF5 -26 410 000 (25 060 000r/w + 1 350 000)
25 060 000
PV 24 621 723 r/w 𝑃𝑉𝐹 =
(1 + 0,058)5
Annuity factor: 4,235

FV factor: 0,754
ALTERNATIVE LOAN CALCULATION

PV of capital + interest OR
FV -15 000 000
PMT - 1 200 000 (15 000 000 x 8%) 1
LOAN N 4 1−
(1 + 0,105)4
I/Y 10,5 𝑃𝑉𝐴 = 1 350 000𝑥 ( )
(0,105)
PV 13 824 053
15 000 000
PV of premium 𝑃𝑉𝐹1 =
FV - 900 000 (15 000 000 x 6%) (1 + 0,105)4
N 5
I/Y 10,5 900 000
PV 546 300 𝑃𝑉𝐹2 =
(1 + 0,105)5
PV of loan: 13 824 053 + 546 300 = 14 370 353 Annuity factor: 3,136
FV factor (capital): 0,671
FV factor (premium): 0,607
ALTERNATIVE WACC CALCULATION

𝑉𝑒 𝑉𝑝 𝑉𝑑1 𝑉𝑑2
𝑊𝐴𝐶𝐶 = x Ke + x Kp + 𝑉𝑡𝑜𝑡𝑎𝑙
x Kd1 + 𝑉𝑡𝑜𝑡𝑎𝑙
x Kd2
𝑉𝑡𝑜𝑡𝑎𝑙 𝑉𝑡𝑜𝑡𝑎𝑙
180𝑚 14,3𝑚 24,6𝑚 6𝑚

𝑊𝐴𝐶𝐶 = x 17% + x 10,5% + 225𝑚
x 5,8% + 225𝑚
x 6,5%
225𝑚 225𝑚
𝑊𝐴𝐶𝐶 = 13,6% + 0,6% + 0,6% + 0,2%
𝑊𝐴𝐶𝐶 = 15,0%
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(b) Factors to consider when deciding on financing options
Health Matters would need to consider the following factors before choosing a financing
instrument:
1. Cost consideration:
• Currently in the market the debentures are the cheapest form of finance available
to the company (at 5,8%).
• Making it even cheaper is the fact that there is a tax deduction on the interest
paid on the debentures. However, additional costs should be factored in (e.g.
premium and structuring costs that might be charged).
2. Capital structure:
• Health Matters should also consider the target or optimal capital structure first
to ensure the appropriate use of financing options.
• The company should increase debenture and long-term loan funding while
reducing share capital in working towards the target capital structure.
3. Control:
• The shareholding of the company is likely to be affected by the issue or
repurchase of ordinary shares.
• All other instruments are not convertible and do not carry any voting rights or
share in retained profits of the company – their issue will therefore not affect the
control.
4. Constraints (covenants & security):

• Loans and debenture contracts generally have certain level of profits and
liabilities that the company needs to maintain – any breach of these conditions
may lead to additional costs or facilities may be withdrawn.
• Some assets might have already been encumbered on existing loans, which
might restrict the company in taking more loans and debentures.
5. Cash flows (matching):

• Pattern of cash flows might also affect the decision to fund an expansion
project. Some pharmacies may take a number of years to recover the initial cash
outlay – therefore a form of debt that requires huge annual repayments upfront
may put the company under serious strain.
Max: 5 marks
266
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(c) Cost associated with the purchase of shares in Health Matters

R
Cash settlement (£1 800 000 / 0,0605) 29 752 066
Value of shares in Johnson & Glaxo Limited

Number of shares issued by J&G: 50 million 175 000
= 0,0035
50 000 000
Share price: R4 billion / 50 million = R80
∴value of shares: R80 x 175 000 (OR 0,0035 of R4 billion) 14 000 000
Dividend received (4% x R4 billion x 0,0035) OR 4% x R14m) 560 000
Costs borne by Johnson & Glaxo for purchase of Health Matters 44 312 066
Max: 5 marks
(d) Valuation of 25% stake in Health Matters (NAV method)
ASSETS
Non-current assets (excluding L&B) 99 000 000
Land and Building (42m x (1,045)5 –OR use of financial 52 339 641
calculator
Inventory (60m x 0,5) + (60m x 0,5) + (60m x 0,5 x 20/80) – 2 500 65 000 000
Account receivables (6,825m x 0,8) 5 460 000
Less: LIABILITIES & OTHER COSTS
Non-current liabilities (46 750 000)
Current liabilities (10 075 000)
Disposal of assets (34 641)
Estimated value of Health Matters 164 940 000
Value of stake purchased (25% x 164 940 000) 41 235 000
Minority interest discount (adjust between 0-15%) -
Max: 5 marks
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(e) Difference between the valuations and offer price
• Johnson Glaxo Limited is offering the 25% shareholders of Health Matters R44 312 066.
Health Matters is a listed company and currently has a market capitalisation of R180
million (25% of this value is R45 million).
• Johnson & Glaxo will have a significant influence in the running of the business as one of
the major shareholders with voting rights of 33% in the boardroom. This should have
motivated for a higher purchase offer (premium added to the bid price for “control” of
Health Matters).
• The pricing of the deal by referencing it to future market events can be problematic as the
assumptions made are not reasonable. The foreign exchange rates and share prices are
subject to high volatility (especially the Rand in relation to other currencies). The inevitable
movement in these will have a direct impact on the final purchase price on 31 October
2017.
• Using the NAV method, the valuation of Health Matters is approximately R15 million below
the market capitalisation (R180m – R164,94m). Considering the nature of Health Matters
business (retail sector), the NAV method as the business tends to be asset driven.
• However, the reliability of realisable values and associated costs is questionable and
detailed analysis of the data supporting these values would be required. This is
complicated further by the fact that Johnson & Glaxo Limited is not buying the entire
business, where it would have been easy to establish values that are more reliable.
• There is no information provided regarding the carrying values of loans and other liabilities
(including the deferred tax and provisions).
• The NAV method can be used to check the reasonability of the value of the company
already known (R180 million) – in this scenario R41 million under the NAV method is not
significantly different from the market based valuation of R45 million.
Max: 5 marks
268
MAC3761/QB002
(f) Qualitative factors (political, social & economic factors)
Political factors
• Political instability in Nigeria especially in the wake of Boko Haram terrorist group may
interrupt the operations of the company
• Perceptions of corruption activities may be real and have severe consequences on the
company
• Ongoing xenophobic attacks in South Africa may cause Nigerian people to boycott the
company’s products
• Nigeria’s labour policies, bilateral trade policies and strict laws (especially health-
related) imposed on foreign businesses may be detrimental to the survival of the company.
• Lack of government subsidies may prevent the company from realising decent profit
margins
Max: 2 marks
Social factors
• People without medical aid may find the medicine sold by Health Matters to be unaffordable
• The medicine may be illegally obtained and used for purposes not intended for (this may
lead to addiction and severe side effects)
• People may be more health conscious or use other forms of indigenous medicine
• The population growth may be slow, leading to tough competition for market players
Max: 2 marks
Economic factors
• The volatility of Rand to Naira will expose Health Matters to possible foreign currency losses
(on capital expansion programmes, translation of subsidiary, increasing input costs, etc.)
• Recent negative GDP growth rate may cause the company to struggle to grow its business
especially as a new player in the industry
• High inflation and interest rates will have a negative impact on the company’s cost base
and on customer affordability (disposable income)
Max: 2 marks
269
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PART A: 50 MARKS
PART B
i). Calculate NPV for Interpharm deal
2017 2018 2019 2020 2021 2022
Description
‘000 ‘000 ‘000 ‘000 ‘000 ‘000
Sales 150 000 159 000 168 540 178 652 189 372
Cost of sales (135 000) (138 600) (143 876) (148 173) (154 369)
Upfront marketing (4 000)
Printing & comm (900) (945) (992) (1 042) (1 094)
TV & radio ads (7 000) (7 350) (7 718) (8 103) (8 509)
Working capital (18 000) (1 080) (1 145) (1 213) (1 286) 22 725
Research cost-sunk
Exclusive rights (32 500)
Taxation 1 407 (1 114) (2 192) (3 698) (7 112)
Or use Net cash-flows (54 500) 7 427 9 846 12 549 16 349 41 013
factors:
Y1: 0,878
Y 2: 0,771
INPUT keys: CF0 CF1 CF2 CF3 CF4 CF5
Y 3: 0,677
Y 4: 0,594 I/Y = 13,9%
Y 5: 0,522
Net Present Value (789)
Cost of sales Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

2017 2018 2019 2020 2021 2022
Description
‘000 ‘000 ‘000 ‘000 ‘000 ‘000
Cost in dollars ($) 10 000 10 500 11 025 11 576 12 155
Rate R13 x R13,5 x R13,2 x R13,05 x R12,8 x R12,7
Cost in Rand (R) 135 000 138 600 143 876 148 173 154 369
Working capital Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

2017 2018 2019 2020 2021 2022
Description
‘000 ‘000 ‘000 ‘000 ‘000 ‘000
12% of Sales – REQ (18 000) (19 080) (20 225) (21 438) (22 725)
(Top-up)/Reversal (18 000) (1 080) (1 145) (1 213) (1 286) 22 725
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MAC3761/QB002
Taxation Year 1 Year 2 Year 3 Year 4 Year 5

2018 2019 2020 2021 2022
Description
‘000 ‘000 ‘000 ‘000 ‘000
Upfront marketing (4 000)
Sales 150 000 159 000 168 540 178 652 189 372
Cost of sales (135 000) (138 600) (143 876) (148 173) (154 369)
Printing & Comm (900) (945) (992) (1 042) (1 094)
TV & radio ads (7 000) (7 350) (7 718) (8 103) (8 509)
W&T-Exclusive rights (8 125) (8 125) (8 125) (8 125)
Taxable income (5 025) 3 980 7 830 13 209 25 400
Taxation @ 28% 1 407 (1 114) (2 192) (3 698) (7 112)
Advice: The management of Health Matters should consider not accepting the deal with
Interpharm as the deal will yield a negative NPV.
Max: 18 marks
ii). Qualitative (non-quantitative) factors to consider before entering into

agreement
• Will the stock be received on time when shipping from the US (consider expiry date?
• Will the quality of the stock be consistent with the products sold in the US?
• Will the handling of the stock not impose health hazard and/or require extensive care
in handling?
• Will Health Matters adhere to all rules and regulations for the medicine imported into
South Africa?
• Have the products been properly tested in South Africa for any unknown side effects and
reaction?
• What recourse does Health Matters have if products are damaged?
• What recourse does Health Matters have if patients get ill from the medicine received
from Interpharm?
• What recourse does Health Matters have if some local importers (or from other countries
within Africa) start selling the products of Interpharm before the expiry of the five-year
deal?
• Will the sale of Interpharm products improve the image/reputation of Health Matters?
• Has Health Matters consider the impact of Interpharm deciding to terminate the contract
before the five-year period?
Max: 5 marks
271
MAC3761/QB002
iii). Calculate and comment on ratios for 2017:
PROFITABILITY Calculation Comments (to improve)
Change in revenue: > Consider increasing selling prices (including

the sale of new products from Interpharm)
> Increase advertising budget to promote the

𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐶𝑌 − 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑃𝑌 R285m − R260m
products offered. Increase commission given
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑃𝑌 R260m
> Extend credit lines to reliable existing
customers
= 9,6%
> Review prior year marketing strategy and
align (2016: 16% growth)
Change in net profit: > Impose strict adherence to cost centre

budgets
> Make use of derivatives to hedge foreign

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝐶𝑌 − 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑃𝑌 R20m − R18m
currency risk
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑃𝑌 R18m
> Improve controls and provide incentives in
the buying department (bulk purchases)
= 11,1%
> Renegotiate terms with suppliers, credit
providers and other service providers
Net profit margin: > Impose strict adherence to cost centre

budgets
> Make use of derivatives to hedge foreign

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 R20m
currency risk
𝑆𝑎𝑙𝑒𝑠 R285m
> Improve controls and provide incentives in
the buying department (bulk purchases)
= 7,0%
> Renegotiate terms with suppliers, credit
providers and other service providers
Max: calculation 2 marks, comment 1 mark
272
MAC3761/QB002
CAPITAL STRUCTURE Calculation Comments (to improve)
Capital gearing ratio: > Consider capital structure – if using market

values, debt is still fairly low
> Health Matters can still increase its debt (by

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 (𝐼𝐵𝐷) R25m + R15m + R6m
converting bank overdraft/short-term
𝐼𝐵𝐷 + 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 R25m + R15m + R6m + R75m borrowings into a LT loan)
= 38,0%
OR MARKET VALUES:
20% - see WACC calculation
(above)
Interest-bearing debt to > Consider capital structure – if using market

Equity: values, debt is still fairly low
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 (𝐼𝐵𝐷) R25m + R15m + R6m
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 R75m > Health Matters can still increase its debt (by
converting bank overdraft/short-term
= 61,3% (0,6: 1) borrowings into a LT loan)
ST borrowing can be
included
OR MARKET VALUES:
R24,6m + R14,3m + R6m
R180m
= 24,9% (0,2: 1)
Debt ratio: > Consider reducing bank overdraft & short-

term loan for a lower interest rate facility
𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 R46,75m + R10,075m
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 R131,825m > Review assets, provisions and deferred tax to
ensure recorded at fair values
= 43,1% (0,4: 1)
Current vs Target capital: MARKET VALUES: > Consider funding Interpharm/Nigeria deal(s)
through use of debt
(use capital gearing ratio) Current: 20%: 80%
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Target: 30%: 70% > Debentures are the cheapest and are well
below the targeted level (11% instead of 20%)
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 (𝐼𝐵𝐷) (Refer to Part A (i))
𝐼𝐵𝐷 + 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 > Explore share buyback options to reduce
ordinary shares
OR BOOK VALUES:
Current: 38%: 62%
Target: 30%: 70%
Comment if using Book

Values should be opposite of
the comment given on MV
LIQUIDITY Calculation Comments (to improve)
Current ratio: > Ratio may be considered too high

(industry figures required to put into
perspective)
Current assets: Current liabilities R66,825m: R10,075m > Reduce inventory levels to avoid stock
obsolete, expiry, theft and related holding
costs
= 6,6: 1
> Consider selling inventory at a lower
price to increase cash reserves (currently
depleted)
Quick (acid-test) ratio: > Ratio seems rather low and puts
company at risk of not meeting its short
Receivables: Current liabilities R6,825m: R10,075m term obligation
> Give more credit to customers, but

= 0,7: 1 incentivise to pay early so as not to default
on current liabilities
> Renegotiate the terms of the short-term

borrowing facilities to long-term loan
274
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Inventory days: > Days likely to be even longer as sales

figure used is total sales (and not credit
sales)
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 R60m
𝑥 365 𝑥 365 > Reduce inventory levels to avoid stock
𝑆𝑎𝑙𝑒𝑠 R285m obsolete, expiry, theft and related holding
costs
= 77 days > Analyse stock movement to identify fast

selling from slow-moving goods (including
products with a short lifespan) to manage
stock effectively.
Debtors’ collection period: > Debtors kept at extremely low levels

(consider the debtors’ policy in place)
𝑇𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 R6,825m
𝑥 365 𝑥 365
𝑆𝑎𝑙𝑒𝑠 R285m > Give more credit to customers, but
incentivise to pay early so as not to default
on current liabilities
= 9 days
RETURN ON CAPITAL Calculation Comments (to improve)
Asset turnover: > Value may be even lower as the non-current

assets were last valued few years ago
𝑆𝑎𝑙𝑒𝑠 R285m
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 R131,825m > Industry average and last year’s performance
must be taken into account
= 2,2 times
> Consider depreciation policies and prudence
OR: in accounting for assets
OR Fixed asset turnover:
R285m
> Assets should be tested for impairments and
R65m dispose unproductive/idling assets
= 4,4 times
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Dividend pay-out ratio: > Pay-out ratio fairly high and may hinder the
company’s growth/expansion plans
> Possible revisit the dividend policy in an effort

𝑇𝑜𝑡𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 R15m
to reduce dividend paid
Also under “Financial market”

= 75%
Return on Equity: > Implement robust controls to manage and

contain costs
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 R75m > Company not in a position to buy back shares
unless it raises debt capital first
= 26,7%
OR MARKET VALUES:
R20m
R180m
= 11,1%
FINANCIAL MARKET Calculation Comments (to improve)
Price Earnings ratio: > Fairly low – low investor confidence

𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 (𝑡𝑜𝑡𝑎𝑙) R180m > Consider detailing future capital expenditure to
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 (𝑡𝑜𝑡𝑎𝑙) R20m grow the business
= 9 times > Reposition the company to change investor
Earnings yield: 1/PE = 11,1% perceptions and foster aggressive growth strategy
Dividend pay-out ratio: > Pay-out ratio fairly high and may hinder the
company’s growth/expansion plans
𝑇𝑜𝑡𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 R15m
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= 75% > Possible revisit the dividend policy in an effort to

Also under “Return on capital” reduce dividend paid
Dividend cover inverse (1,33)
Price sales multiple: > Industry average/norm to be considered
> Consider detailing future capital expenditure to

grow the business
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 (𝑡𝑜𝑡𝑎𝑙) R180m
𝑆𝑎𝑙𝑒𝑠 R285m > Reposition the company to change investor
perceptions and foster aggressive growth strategy
= 0,6 times
Price/ Book value multiple: > Indicates growth over the years (increase from
R200m to R285m in 4 years)
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 (𝑡𝑜𝑡𝑎𝑙) R180m
𝑥 365
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 R75m > Consider detailing future capital expenditure to
grow the business
= 2,4 times
> Reposition the company to change investor
Dividend yield: > Industry average/norm to be considered

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 (𝑡𝑜𝑡𝑎𝑙) R15m > High yield % - may suggest depressed share price.
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 (𝑡𝑜𝑡𝑎𝑙) R180m Consider gradually dropping the dividend cover and
plough profits back into the business
> Reposition the company to change investor

= 8,3%
277
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iv). SWOT analysis – Health Matters

Strengths
• Health matters has a chain of pharmacies across South Africa representing diversification
• The company has delivered robust financial results over the past years and has a strong
brand and presence in South Africa
• Health Matters has an ability to source products at reasonable prices from the US and the
UK and passing the benefit to its customers.
Weaknesses
• Key-man dependency at executive level (Zoe Padayachee singlehandedly concluding the
Interpharm deal and working on the Nigerian deal as well)
• Limited exposure to international markets and Zoe Padayachee’s strong relationships with
Interpharm could influence her objectivity
• Low (no) cash reserves increases the financial risk of the business and the company may
not be able to carry out intended projects
• Only listed a year ago and with a market cap of only R180m, Health Matters may not be able
to compete with the major players in the sector
• Highest revenue growth in past 3 years is 16% - indicates that the business struggles to
aggressively expand its operations within the country.
Opportunities
• Advanced talks with the Nigerian government to establish its presence in Africa’s largest
economy
• Health matters can establish a long lasting relationship with Interpharm and become a big
distributor of both their product
• Health Matters and Interpharm can expand together into the rest of Africa and become the
biggest distributor and the possibility of Health Matters selling its distribution rights or
subcontracting to other retail outlets
Threats
• The fact that all products are imported from the UK and USA expose the company to
currency fluctuations (and heavy dependence on only two main suppliers)
• Expansion into the Nigerian market exposes company to foreign exchange risks
(transaction and translation)
• Risk of litigation if patients get ill from the medicine or incorrect medication is dispensed
• Health matters operates in a highly regulated environment. Failure to comply with
regulations could result in fines/penalties
• Interpharm can become Health matters’ biggest competitor in the market once its products
have been established with consumers
• Health matters recently listed and needs to adhere to all the rules and regulations of the
JSE. Max: 10 marks
278
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5.30. SOLUTION 30: DISTELL LTD

i. RATIOS
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Workings - Financial market/investor
Profit for the year

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =
Number of shares
Profit for the year
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 =
Earnings per share
R1 524 265 000
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 =
R7,26
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 = 209 953 857

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝟐𝟏𝟎 𝟎𝟎𝟎 𝟎𝟎𝟎 (rounded to nearest million)
ii. WACC
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PART B (i) – Valuations

Memorandum
To: Board of directors – Distell Group Limited
From: Eunice A Stewden
Date: 05 May 2016
Subject: Issue of shares as a purchase consideration of Namibia Breweries
Dear Sirs and Madams
In response to your e-mail request dated 28 February 2016, our team has run different models to help you
determine the fair bid price for the 100% stake in Namibia Breweries.
Based on the information provided, two valuation techniques were applied, namely Free Cash Flow (FCF)
and Price Earnings Multiple methods. These methods determined the value of Namibia Breweries as
follows:
Free Cash Flow – R25m
P/E multiple method – R18m
It should be noted that these methods yielded results that are substantially differ and therefore you are
urged to exercise your own judgment in assessing the fair value of the business.
It is therefore our recommendation that the board makes a minimum offer of 130 000 shares (R18 101 585)
in Distell Group Limited and a maximum of 180 000 shares (R25 080 777 / R140) – refer to the workings
appendix for detailed calculations.
The board will also have to look at the fluctuation of the share price especially after rumours/announcement
of the potential acquisition. Therefore, the share price might have to be adjusted for such movements.
Please do not hesitate to call us for further clarity on this valuation.
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PART B (i) – Valuations (Appendix)

Valuation of Namibia Breweries (Pty) Ltd - Free cash flow
Year 0 Year 1 Year 2 Year 3

2 015 2 016 2 017 2 018
Recurring cash items:
Turnover 20 099 245
Raw material - A [(10 138 315 x 50%) x 75%] (3 801 868)
Raw material - B [(10 138 315 x 50% x 90%) x 85 000] (4 647 242)
Old salary - given (5 911 478)
Salary increase - 5 911 478 x 12,5% ( 738 935)
Total annual cash flows before taxation 4 999 722
Taxation - 4 999 722 x 29,5% (88 824 ÷ 301 097) (1 474 918)
Total annual cash flows 3 524 804
Marketing expenses - 2017 - [(1 022 152 x 20%) x 1,05] x 1,05 ( 225 385)
Marketing expenses infinity {(CFt+3) ÷ (WACC - g)}
[(1 022 152 x 20%) x 1,05^3] ÷ (0,2 - 0,05) (1 577 692)
Distribution route levy - 2018 ( 27 000)
3 524 804 (1 803 076) ( 27 000)
Present values:
PV of annual cash flows {(FCFt+1) ÷ (WACC - g)}
(3 524 804 x 1,05) ÷ (0,2 - 0,05) 24 673 630
PV of marketing expenses - PV of [20%; 2; 0; -1 803 076] (1 252 136)
PV of distribution route levy - PV of [20%; 3; 0; -27 000] ( 15 625)
Once-off income (realised at year 0) 50 000
Once-off expense (incurred at year 0) ( 20 000)
MARKET VALUE 23 435 869
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Valuation of Namibia Breweries (Pty) Ltd - Earnings multiple
2 015 2 014 2 013
Earnings for the year 301 097 1351 369 1038 778
Taxation - (Earnigs for the year x 29,5%) ( 88 824) ( 398 654) ( 306 440)
Sustainable earnings after adjustments 212 273 952 715 732 338
Use 2014 maintanable earnings (2015 an "abnormal year") 952 715
Market P/E multiple (1 ÷ 5%) 20
Adjustments (-/+)
Market share and strong brand +1
Cash business +2 Adjustment values are subjective - however, the

adjusted P/E ratio must not materially differ (e.g.
Price restrictions -1 more than 5) from the market P/E
Lack of managerial expertise -3
Unlisted investment - ignore

Adjusted P/E multiple 19
Value of 100% equity (19 x 952 715) 18 101 585
MARKET VALUE 18 101 585
TOTAL: 100 MARKS
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5.31. SOLUTION 31: TILES & STYLES OF AFRICA
PART A
2017 2016
Change in online sales
604 − 234
234
= 13,4% (given)
= 158,1%
Possible reasons:
Significant investment in e-commerce and technology
Aggressive marketing campaigns for online purchases (including promos)
Growing brand affinity and word of mouth might have encouraged customers to buy online
Increased selling prices for online customers (premium for convenience)
Interest cover (times interest earned)
944 900
101 + 12 105 + (12/0,8)
Possible reasons:
Robust cost controls (better buying and salary freeze), leading to higher profits
Excess funds used to reduce company debt leading to reduction in interest expense
Negotiated lower rates with the lenders or decrease in repo rate (for floating instruments)
(Slight increase in gross profit also attributed – a mark can be given)
Store sales per employee
6 058 000 6 585 000

25,4 26,1
= R238 503,9 = R252 298,9
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Possible reasons:
Company might have shifted focus to online sales (incentivising walk-ins to buy online)
The company may have not retrenched the “excess” employees in the sales department
Poor incentive packages/structures implemented (“commission” to store sales agents)
Inventory days
850 838
𝑥 365 𝑥 366
3 748 3 925
= 82,8 days = 78,1 days
Possible reasons:
Company may be struggling to sell some of its goods due to declining demand/growing competition
(This is not helped by the fact that the current year is a day shorter)
Dividend cover
686 645
70 + 134 75 + 110
Possible reasons:
This could also be in line with dividend policy in place (10% increase yearly)
Return on capital employed
944 900
3 696 + 1 912 3 187 + 2077
= 16,8% = 17,1%
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Possible reasons:
Funds tied up in bank and other non-current assets
Reduction of stores and capital not injected into more profitable businesses
(Use of closing balances does distort the figures)
PART B
CALCULATION OF WACC – based on target capital structure (see workings below)
Portion of capital Weighted cost

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

amount is
increased by
Total R11 385 R5 000 100% R16 385 R5bn
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ALL 4 instruments
Conclusion: Acquisition of Tile Ses’la must be financed as follows:
• Issue of ordinary shares worth R2,020 billion – Retained income in the form cash can be
used to reduce risk of dilution of control
• Issue of debentures for R1,957 billion – Consideration should be made to borrow from
different entities due to the amount required
• Taking a new banking loan facility of R333 million and
• Issue of redeemable preference share issue to the value of R690 million
WORKINGS Max: 15 marks

1(b) workings 1(a) workings
 
(𝐑𝟐𝟎𝟒𝐦 𝐱 𝟏,𝟏𝟎)
Ordinary shares 𝑴𝑽𝒆 = R9,45 billion (given) 𝑲𝒆 = (𝐑𝟗 𝟒𝟓𝟎 𝐦 𝐱 𝟎,𝟗𝟗𝟓) + 𝟏𝟎%
𝑲𝒆 = 12,4%
INSTRUMENT MARKET VALUE (FINANCIAL CALC.) 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
I 5,2
NPV 992m (or 992 064 186)
PV given ONLY if it is greater than PMT
ALTERNATIVE MARKET VALUE (FINANCIAL CALC.) - ALT COST OF DEBENTURES

PV of capital + interest
FV - R1 000m
PMT - 48,96m (1bn x 6,8% x 0,72)
Debentures N 4
𝐾𝑑1 = 5,2% (given)
I 5,2
Comp PV 989,270m (c1)
PV of premium
FV - 3,6m
N 5
I 5,2
Comp PV 2,794m (c2)
Market value = R992m (c1 + c2)
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Interest paid 𝐾𝑑2 = 8,5% x 0,72

𝑴𝑽𝒅𝟐 =
𝐾𝑑2
Bank loan = 6,1%
55,08m x 0,72
𝑴𝑽𝒅𝟐 =
6,1%
𝑴𝑽𝒅𝟐 = 𝐑𝟔𝟓𝟎𝐦 (or R650 124 590) PV given ONLY if it is greater than PMT
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 – 612) + 21
I 7,7
NPV 293m (or 292 997 833)
PV given ONLY if it is greater than PMT
ALTERNATIVE MARKET VALUE (FINANCIAL CALC.) COST OF PREF.
FV -300m 𝐾𝑝 = 10,3% x 75%

PMT - 21m
Preference shares I 7,7 c
= 7,7%
N 4
PV 292 997 833 c
Same approach can be used for Debentures
PART D
Calculating the number of preference shares to be issued
A. Nominal value per share (R300m ÷ 600m) R0,50
B. REQUIRED funds R690 mil
Number of preference shares to issue (B ÷ A) 1 380 mil
Max: 3 marks
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PART E
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 83
Out of court settlement (20)
Insurance pay-out (40)
Maintainable earnings 828 810 860
No trend – use weighted average method 1/6 2/6 3/6
Weighted average maintainable earnings 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) -1,5
Adjusted P/E multiple – Tile Ses’la 10
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3. Determine value of Tile Ses’la after adjusting for control premium and marketability discount
R million
1 mark for the valuation
amount calculated and Price-earnings valuation before adjustments (R838m x 10) 8 380
adjusted PE (Must NOT
be a %) Add: Control premium (R8 380m x 12,17%) any % between 0% – 15% 1 020
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) 865

ONLY 1 mark if years Depreciation & amortisation for previous year (non-cash) 113
used are 2016 & 2015
Tax on depreciation & amortisation (113 x 28%) (32)
Free cash flows for 2018 946
Discounted free cash flows:

𝐶𝐹𝑖
=
WACC−g
946
=
(14%−4%)
Max: 5 marks
100% business value = R9 460 million
51% of Tile Ses’la (Pty) Ltd = R4 825 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.
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PART F
i). Valuation using the net asset value method
Rm
ASSETS
PPE (1 989 – 400 + 4 240) – (4 240 x 0,003) 5 816
Investments 732
Intangible assets (54 – 30 + 380) 404
Inventory (550 * 40%) + (550 * 60%) + (550 * 60% * 20%) 616
Cash and cash equivalents (can be netted off against price) 511
Less: LIABILITIES & OTHER COSTS
Non-current liabilities (86)
Settlement of the subordinated loan (3 773 * 0,0043) (16)
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.
Max: 7 marks
PART G
a) Types of acquisitions (general)

1. Horizontal acquisition: Two companies that are in direct competition and share the same product line
The type of and markets. Example – a beer manufacturing company buying another beer manufacturing company
acquisition
must be (AB InBev buying SABMiller).
defined
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) Type of acquisition of Tile Ses’la – VERTICAL ACQUSITION (Tile retailer buying a tile
manufacturer) Max: 7 marks
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TOTAL: 100 MARKS

5.32. SOLUTION 32: MAGNUS ORANGE LTD
PART A
RATIOS MO Ltd Ways to improve

(i). > Effective tax rate is fairly high –
consider getting tax experts to advise on
Net profit margin: 26 174 𝑥 0,705
better tax structures.
461 000
> Increase bus fares and consider
18 453
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 dropping less profitable routes.
461 000
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 > Renegotiate diesel prices with
= 4%
supplier, switch maintenance service
providers or train employees.
> Renegotiate lending rates with

providers of capital.
(ii). > Review the depreciation policy in line

with the lifespan of the fleet.
Return on assets: 26 174 + 9454 − 358
121 885 + 102 875 + 127 280 > Sell old buses that are not being fully
𝐸𝐵𝐼𝑇
35 270 utilised or potential write-offs.
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
352 040 > Apply procedures used in (i) above to
= 10% increase profitability.
(iii). > Renegotiate the interest rates and

bank charges with providers of capital.
Effective interest rate: 9 454
100 000 > Pay interest on time to avoid extra
𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡𝑠
charges.
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 (𝐼𝐵𝐷) = 9,5%
> Consider engaging economists to
OR (if bank overdraft incl.)
predict rate movements and apply
= 8,0% appropriate measures.
(iv). > Repay existing interest-bearing

Debt equity ratio: 100 000 liabilities.
𝐼𝐵𝐷 121 885 > Decrease (or at least maintain)
𝐸𝑞𝑢𝑖𝑡𝑦 = 82,0% (or 0,82: 1) dividends to be declared.
> Consider issue of shares (preferably to
existing shareholders).
> Introduce share incentive schemes to
motivate employees.
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(v). > Increase the final dividend declared

(this can be done by increasing
Dividend yield: profitability in the second half of the year
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 2 744 and scaling back on some of the
𝑀𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 12 838 𝑥 13,83 projects.
Number of shares issued: 2 744

177 550
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑝𝑟𝑒𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒 = 1,6%
18 453 − (48 125𝑥0,082)
1,13
18 453 − 3 946
1,13
= 12 838 053
(vi). > Embark on capital expansion

programmes and explore new markets
Price/book ratio: 177 550
to grow investor sentiments (note impact
121 885 − 48 125 of dividend yield).
𝑀𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 2,4 times
> Restructure the business to unlock its
full potential and look at better ways to
improve efficiencies.
12 MARKS
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PART B
Calculations MO Ltd Comments
(i). > Although this is annualised, it may not be

accurate as there may be bonuses which are
∆ in Employee costs: (85 000 𝑥 2) − 182 744
only paid towards the end of the year (so they
182 744 are outstanding on 2018 first semester
Alternative calculation:
170 000 − 182 744 figures).
85 000 − 182 744 182 744
182 744 > It is, however, possible that the company
= - 7,0% might have retrenched senior personnel and
employed general workers at lower rates.
= - 53,5%
Human
(ii). > This could be as a result of gearing up for

new bus routes and links.
∆ in number of employees 769 − 719
719 > The company may have recruited more
Human black people in order to improve its BEE
= 7,0%
credentials.
(iii). 2018 (annualised): > The assumption made is that the employee
costs will be at same level for the remainder
Average salary per 85 000 𝑥 2
of the year (this does not take into account
employee 221 any salary adjustments in the next semester
Human 170 000 or any bonuses).
769 > Based on the above assumption, it would
= R221 066 seem that the company might have
restructured its business, e.g. retrenched
2017: senior management and employed more
182 744 general workers at lower salaries.
719
= R254 164
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(iv). Management: > The company seems to have made strides

in increasing the number of black managers
∆ in Black representation: 29,1 − 24,0
(through recruitment or retirement or removal
24,0 of white managers). The percentage of black
managers is still fairly low, considering that
Human the majority of the workforce is black.
= 21% (or 5,1 percent. points)
> The % of black employees to total
employees has slightly improved. The
company might have brought in people that
are more determined to change. This initiative
OR must be somehow plausible as this is only six
months into the year.
General workforce:
> However, considering the demographics of
79,9 − 78,1 the company (and the country), MO Ltd still
78,1 has a long way to go.
= 2,3% (or 1,1 percent. points)
(v). Annualised change: > It may be useful to compare first halves of

the two years to make sense of the number of
∆ in Road accidents: (42 𝑥 2) − 60
accidents.
60
Not annualised: > However, if annualised it shows that the
24
42 − 60 increase is likely to be around 40%. This
60 might be as a result of new drivers (as per
60
= 40% increase in personnel) who may not have vast
= −30% experience.
Social > The rate should be investigated further to
establish for example periods of high accident
rates (e.g. festive season or long public
holidays).
(vi). Annualised: > It may be useful to establish first whether

the spend is spread roughly equally
∆ in Supplier/enterprise (10 178 𝑥 2) − 12 145
throughout the year.
dev: 12 145
> However, the annualised % shows a
Not annualised: 8 211
significant improvement from the previous
12 145 year. Once again, this indicates the
10 178 − 12 145
12 145 = 67,6% determination by the company to positively
contribute to the economy (as seen by the
= −16,2% increase in black representation and job
creation).
Social
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(vii). Annualised change: > It may be useful to compare first halves of

the two years or to look at the revenue growth
∆ in Greenhouse gas (9 104 𝑥 2) − 17 034
to put numbers into perspective.
emission: 17 034
> However, if annualised, increase of 6,9%
Not annualised: 1 174
may be attributed to aging fleet with old
17 034 vehicle efficiency technology.
9 104 − 17 034
17 034 = 6,9%
> This may also be due to additional routes or
= −30% more time on the road to generate revenue.
Natural
15 MARKS
PART C
• Divisible project is projects where it can be taken as a whole or in part (scalability). CitiLink
is an example of a divisible project, as MO Ltd can decide to undertake the connection of
Johannesburg and Ekurhuleni metros first and then at a later stage connect Tshwane with
Johannesburg/Ekurhuleni or both. The company does not have to connect all the metros at
once (the project can be implemented on a “piecemeal” basis).
• Independent projects are projects where the acceptance or rejection of one project has no
bearing or influence on the acceptance or rejection of any other project. CitiLink and Project
Nthuseng are independent of each other. Whether MO Ltd decides to go ahead with CitiLink
or not to go ahead is irrelevant when having to decide on expanding to Mogale City.
• Mutually exclusive projects are projects where only one of several alternatives may be
chosen at a time. These three projects are not mutually exclusive – as all the alternatives can
be chosen. Projects Nthuseng and Dira are examples of mutually exclusive projects, since MO
Ltd can either purchase a stake in DIRA or enter into a joint venture with local bus operators.
• Capital rationing is when an entity is not able to undertake all identified projects due to limited
funds and as such, projects with higher returns have to be prioritised. An example would be if
MO Ltd cannot raise enough funds for both CitiLink and Project Nthuseng/Dira and therefore
has to choose one with better returns and reject the other one (or do part of it).
8 MARKS
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PART D
CAPITAL STRUCTURE / SOURCES OF FINANCE REPORT

Prepared by: Eunice A. Stoodant
Date: 10 July 2018
Subject: Company’s WACC and financing options
This report covers the following:
i. Detailed calculation of weighted average cost of capital of MO Ltd at 31 March 2018,
ii. Criteria to be used when deciding on how to finance the Mogale City expansion, and
iii. Advice on how to finance the Mogale City expansion project.
i. Detailed calculation of weighted average cost of capital of MO Ltd
INSTRUMENT MARKET VALUE (iii) COST OF EQUITY (i)
𝐾𝑒 = Rf + β (Rm – Rf) OR
Ordinary shares 𝑴𝑽𝒆 : R177 550 000 (As calculated in Part A)
𝐾𝑒 = Rf + β (Rp)#
𝐾𝑒 = (14 – 7,5)# + 0,924 (7,5)
𝐾𝑒 = 13,43%
#
Notes:
If Rp = Rm – Rf, therefore
Rf = Rm – Rp
INSTRUMENT MARKET VALUE (iii) COST OF PREF. SHARE (i)
Preference shares 𝑴𝑽𝒑 : R54 155 000 Dividend

𝑀𝑉𝑝 = OR rewrite:
Kp
Dividend
𝐾𝑝 =
MVp
385 000 x R125 x 8,2%

𝐾𝑝 =
54 155 000
3 946 250
𝐾𝑝 =
54 155 000
𝐾𝑝 = 7,29
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WACC calculation:
INSTRUMENT MARKET VALUE (iii) COST OF LOAN (i)
CF0 (2018) - 4 320 000 (100 000 000 x 6% x 0,72)

CF1 (2019) - 4 320 000
Loan CF2 (2020) - 4 320 000 𝐾𝑑1 = 5,8% x 0,72
CF3 (2021) - 100 000 000
I/Y 4,18
NPV 100 886 597 𝐾𝑑1 = 4,18%
CALCULATION OF WACC USING MARKET VALUES
Portion of
Market value of capital Cost of Weighted cost
Capital structure instruments structure capital of capital
Ordinary shares Not required 0,60 13,43% 8,06%
Preference shares Not required 0,10 7,29% 0,73%
Long-term loan Not required 0,30 4,18% 1,25%
Total 1 / 100% 10,04%
CALCULATION OF WACC USING MARKET VALUES (not required)
Portion of
Market value of capital Cost of Weighted cost of
Long-term loan R100 886 597 0,30 4,18% 1,25%
Total R332 591 597 1 / 100% 9,67%
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MAC3761/QB002
ii. Criteria to be used when deciding on how to finance the Mogale City expansion
• COST: MO Ltd should consider using an instrument which has the lowest effective cost
of capital (additional administration costs should also be considered). 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 Captec
loan bears the lowest cost of capital (4,19%) compared to equity (7,29% and 13,43%).
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. A six-year Captec loan can
be taken for the six-year duration of the project (if decision is to enter into a JV), which will
allow the company to service interest from the proceeds of the project. The company may
also prefer issuing shares (with no immediate repayment) for the acquisition of DIRA, as
the acquisition will likely generate revenue in years to come. MO Ltd will have to consider
the timing of the interest payment on the loan, as this payment is required upfront even
before the project starts yielding profits.
• CAPITAL STRUCTURE: The company has already established its optimal structure
(where WACC is lowest) and therefore, and it is operating at this overall optimal capital
structure of 30: 70 (see above). However, the use of equity is not at the ideal level where
preference share capital should be 10% of capital employed and therefore the company
should consider ways to fix this (where currently preference share capital is at 16%).
• CAPACITY (Availability): MO Ltd will have to establish from its providers of capital
(including possible new providers) whether they are able to provide the company with
required funds. It should be established if Captec and preference shareholders are willing
to increase their exposure to MO Ltd. There are 7,16 million shares (20m – 12,84m) that
can still be issued, without amending the memorandum of incorporation. 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. This is not
the case for ordinary and preference shareholders. Captec (and other lenders) may
require MO Ltd 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 MO Ltd will likely change if ordinary shares

are issued to raise funds for the project. 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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iii. Advice on how to finance the Mogale City expansion project

Since the company has a given target capital structure, the project should be funded
according to its target capital structure (30: 10: 60).
Existing capital ¤ Additional %

Capital structure structure (iii) funds required Target capital structure
Ordinary shares R177 550 000 R52 004 958 60% R229 554 958
Preference shares R54 155 000 (R15 895 840) 10% R38 259 160
Long-term loan R100 886 597 R13 890 882 30% R114 777 479
TOTAL R332 591 597 R50 000 000 100% R382 591 597
As it can be seen from (i), the company’s ratio of debt to equity remains at its required levels. It
should be noted, however, that the company aims to have 10% of its capital employed
represented by preference share capital (and currently this is 16%). To reduce preference share
would lead to an increase in the weighted cost of capital.
To reach its target capital structure immediately, the company will have to issue ordinary shares
to the value of R52 million, and take a new loan of R14 million. This will lead to company having
more than the R50 million funds required. The excess (R16 million) can then be used to buy back
preference shares. All this will be subject to shareholders’ approval and will be guided by the
terms of the Memorandum of Incorporation and other binding documents.
35 MARKS
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PART E
From: Eunice A. Stoodant
Sent: Friday, 10 July 2018, 04:38PM
To: Mancom MO
Cc: Joe Blog (Head – Finance)
Subject: Valuation of 55% stake in Dira Bus Services Company
Good day,
Following team review of the valuation performed by the associate accountant, I have, as shown
below, highlighted what I believe to be incorrect in the valuation performed. I have re-performed
the earnings-based valuation and also checked the reasonableness of this valuation by
calculating the net asset value of Dira Bus Services Company.
i. Critically evaluating the valuation performed

Average P/E ratio
The P/E ratio is expressed as a % instead of a multiple.
Positive factors: Outstanding financial performance & clean audit

Generating profits three years in a row does not make the company unique and different from the
rest. There is no information to suggest that DIRA’s competitors are making losses in some years.
The same goes for an unqualified audit opinion – this should be standard for any company.
Negative factors: Marketability

It has been established that unlisted shares trade 5% below listed shares and the adjustment for
this has also been made. Therefore, the negative factors should not include “Marketability”. Rising
prices also affect the entire sector and should not be considered (already adjusted in sector P/E).
Other factors
The low staff turnover and a 0% black representative in the executive committee should have
been factored into the valuation.
Maintainable earnings
Maintainable earnings have fluctuated during the three-year period under review and therefore,
the weighted average should have been used. The maintainable earnings for 2018 have also
been incorrectly added. The timing of the payment of the fine is irrelevant (accrual basis applies).
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MAC3761/QB002
Amount to be offered by MO Ltd

This amount is 100% of the value of the firm. The actual stake (51%) that is being bought has not
been brought into the calculation.
ii. Re-performance of the valuation of the stake in Dira Bus Services Company:
Valuation of DIRA (earnings-based)
Reviewed by: Eunice A. Stoodant Pretty Blog Review Note 1
Reported to: Mancom – MO Ltd Date: 10 July 2018
Note 2016 2017 2018

R’000 R’000 R’000
Profit for the year 10 975 9 250 11 471
Government grant 1 (2 000)
Fine 2 864
Maintainable earnings (ME) 10 975 9 250 10 335

Use weightings (fluctuating) 1/6 2/6 3/6
Weighted earnings 1 829 3 083 5 168
Maintainable earnings 10 080
Average sector P/E 10,7

Positive Factors
Low staff turnover +1
Experienced drivers and assemblers +1
Negative Factors
Aging fleet -1
Lack of transformation -2
Expected % growth – management estimates n/a
9,7
Value
ME x Adjusted P/E (10 080 x 9,7) 97 776
Less: Marketable discount (97 776 x 5% estimated) (4 889)
Plus: Control premium (97 776 x 8%) 7 822
VALUE - MO Ltd 100 709
Shareholding to be purchased 51%
Amount to be offered by MO Ltd 51 362
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iii. Reasonability check of the valuation performed above:
Net asset value:

Equity = Assets – Liabilities
Net asset value = 138 515 – 7 255 – 3 525
Net asset value = 127 735
Amount to be offered by MO Ltd = 127 735 x 51% = R65 145
Conclusion
There is difference of about R14 million between the two valuations. This may require the review
of the price-earnings based valuation, in light of many assumptions that have been made. The
company should also consider verifying the completeness and accuracy of DIRA’s assets and
liabilities.
If all of the above is considered fair, then MO Ltd should consider offering between R51m and
R65m. The company should check if they will be able to raise the required funds (which are above
what the company intends to invest).
I hope this will be of great help. Please do not hesitate to contact me for clarity on any of the
matters raised.
Kind Regards
E
25 MARKS
PART F
The implementation of e-toll system in Gauteng
The e-toll system was introduced in Gauteng in order to finance the improvements of Gauteng’s
road network of 187km. These improvements have brought so much needed relief and ease of
traffic on Gauteng’s roads. However, it would seem that very few stakeholders actually endorsed
this means of financing the infrastructure. The extent of effective consultation by SANRAL may
also be questioned as many objections have been raised. The processes of ensuring collection
of toll fees were flawed, as to this day there is more than R10 billion currently owed by road users
and the collectability of these fees remain highly improbable.
Scrapping out the e-toll system would be the best news for most road users. However, the fact
remains that R67 billion is still owed by SANRAL. Therefore, the question becomes: if the e-toll
system is scrapped, who pays the R67 billion?
Running e-toll systems come with high maintenance costs, which will be avoided the minute the
system is scrapped. Therefore, scrapping the e-tolls will immediately reduce cash outflows (legal
implications should be considered).
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MAC3761/QB002
Once the e-tolls are out of the way, it should be established exactly how much is owed on the
roads and a plan must be developed to repay the amount owed. This money should effectively
come from the government. By tackling corruption, instilling good governance at State entities,
eliminating wasteful and fruitless expenditure and reviewing of the cabinet structure, etc. may
result in money saved and then used to repay the loans.
Increasing the fuel levy would add extra burden on already financially distressed consumers who
are feeling the pinch of rising fuel prices and VAT. However, this option can be touted but this
should only be applicable to Gauteng as main road users. Non-Gauteng motorists would
somehow also indirectly pay this levy when they drive to Gauteng.
5 MARKS
TOTAL: 100 MARKS
5.33. SOLUTION 33: MBOWENI TRADING (PTY) LTD
a) Draft an email to the management of Mboweni Trading
From: A. Student
Sent: Friday, 31 August 2018, 05:45 PM
To: Mancom – Mboweni Trading (Pty) Ltd
Subject: RE: Company performance analysis
Good day,
I have worked through the files which I received from the management team, containing
the financial statements of the company with key indicators/ratios of the industry
performance. In this email I will address the differences between the company’s
performance and the industry performance. I will wrap up this email by providing some
practical ways of improving the company’s performance. Please refer to the attachment
for all the workings, and note any assumptions I have made especially where the
information I had at my disposal was not sufficient.
Below is a list of the key ratios I have computed, using the information available from the
competitors as comparison (industry average are show in brackets):
a. Revenue growth in 2018 (8,5%):

You did not provide me with the company’s growth for 2018 (or the 2017 sales figure).
However, considering the growth in dividends I assumed that the company’s sales will
grow at minimum by 5%. The company has also experienced rapid growth in profit,
which supports the notion of strong revenue growth. Sales of the new product line are
expected to grow by 10%, which might also indicate the general growth in the
business.
308
MAC3761/QB002
To improve: The company should consider increasing its selling price, while
improving its in-store and after-sales service (change of packaging material, promoting
its products via social media, YouTube, Instagram and text messages). Mboweni
Trading can also restructure its salary package (within legal framework) by
incorporating a commission portion based on sales.
b. Return on assets, using NOPLAT (15,2%)

The company’s return on asset is 13,5% (1,7% below the industry) indicating that the
company is not as efficient in utilising its assets to generate profits. This might be due
to some property (especially land and investment property) not leased out to generate
rentals. The company has a lot of cash deposited into the bank account and trade
receivables – these assets may not be generating much returns/interest.
To improve: Excess cash should be invested in projects which will generate more
profit. The same goes for trade receivables – Mboweni Trading should change its
credit policy on debtors to ensure quick collection or charge interest on overdue
accounts. You should consider selling off redundant/less productive assets.
c. Return on equity, using opening balances (28,0%):

The company outperforms the industry by far when it comes to creating value for its
shareholders (its RoE is 46,2%). In a space of a year the company has been able to
almost double its retained profits. The company’s moderate dividend pay-out ratio has
also increased shareholders’ equity funds. The rapid growth the company has
experienced is evidenced by the return the shareholders have made. This also
indicates the willingness of customers to pay a premium for Mboweni Trading’s
products, leading to higher profit margins.
To improve: Consider reducing the dividend pay-out ratio and ploughing more profits
into the business. The company can also dispose of assets (not effectively utilised)
that may be sold at more than their carrying value, leading to more realised profits.
Possibilities of cutting on marketing and administrations costs, especially by
centralising some of its activities in Gauteng where the majority of revenue is
generated.
d. Net interest cover (7,0 times):

There is no much difference between the company’s performance (6,9 times) and the
industry average, meaning that the company’s chances of defaulting on its interest
payment commitments are similar to the industry, giving it similar opportunities to raise
more funding.
To improve: Mboweni Trading should consider wisely and timeously investing its
excess cash in interest yielding products which will lead to a further reduction in net
finance costs. The company must regularly review its capital structure and where
possible renegotiate terms of the facilities received from funders.
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MAC3761/QB002
e. Dividend pay-out ratio (43,6%):

With a pay-out ratio of 32,7%, Mboweni Trading retains more profits on average than
its competitors, and this gives the company the edge to embark on capital expansion
programmes and exacerbate the growth of the business.
To improve: No information on dividend policy has been furnished to assist in
establishing how the ratio can be improved. The company should be careful that
shareholders’ expectations are considered, as some may feel the company is not
declaring sufficient dividends and therefore the company may be required to decrease
the dividend cover.
f. Creditors’ payment days (36 days):

The company pays its creditors after 48 days of credit purchase, about 12 days later
than its competitors. This may explain big cash reserves as the company seeks to
delay payments to creditors, and if no late interest is charged, the company is utilising
a cheaper form of finance. The late payment of suppliers might also be as a result of
payments to foreign creditors which might not clear on company’s account
immediately.
To improve: The company should maintain good relationships with its suppliers and
ensure that the payment terms are accepted by all the parties. The company should
review suppliers’ terms to ensure full compliance.
g. Capital gearing ratio (0,45: 1):

The company, with a capital gearing ratio of 0,47: 1, is slightly more geared than its
peers. This is also evidenced in the net interest cover ratio computed above. The
company has managed to effectively use more debt in its business to generate income
(the company has a positive financial leverage effect).
To improve: How the company should deal with the level of debt it uses in the
business will be guided by its optimal or target capital structure in place. The company
should, however consider decreasing its debt levels by using the cash reserves at
hand, as this would lower the interest expense incurred.
h. Bad debt expense ratio (0,8%):

Mboweni Trading’s bad debt expense ratio at 0,3% is lower than the industry average.
This may be owing to robust credit controls, especially credit granted to people that
can afford. The company has a collection period of 40 days, which may indicate the
effectiveness of collecting from customers.
To improve: Mboweni Trading should consider reducing the percentage of sales
made on credit. The company should impose interest on accounts not settled within
30 days.
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MAC3761/QB002
i. Fixed asset turnover (3,0 times):

The company’s low fixed asset turnover (2,3 times) might be as a result of investment
property not generating any form of revenue (e.g. rental income), but may also point
to underutilisation of its assets (e.g. excess capacity/space in the company
factory/warehouse).
To improve: Mboweni Trading should consider increasing operating hours at its retail
stores and at its factory. The company should also at disposing some of its property,
especially idling and non-core assets.
j. Effective interest rate (7,5%):

Mboweni Trading is effectively charged a higher interest rate (at 7,9%) than its peers.
One would have to consider the types of funding instruments used which might be at
different rates. The company is paying a lower rate than the going rates in the market.
To improve: Mboweni Trading should renegotiate better rates and discounted
administration costs with its providers of capital. The company should also look at
repaying the BEADvest loan which has a higher interest rate using its cash reserves,
if they can be able to negotiate a new facility at an even lower rate.
I hope this email helps to identify areas where the company is doing better than its
peers and areas that require immediate attention from the shareholders.
Regards
A. Student
Attachment – Ratio calculation and comments
RATIOS 2018
Return on assets:
𝑁𝑂𝑃𝐿𝐴𝑇 3 194 𝑥 0,735
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 17 351
= 13,5%
NOPLAT:
4 565 – 141 – 1 230 = 3 194 (EBIT) OR
Using effective tax rate: Using the corporate tax rate:
1 050 ÷ 3 958 = 26,5% 3 194 𝑥 0,72

17 351
= 13,3%
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MAC3761/QB002
Return on equity:
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 2 908
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 (𝐵𝑜𝑌) 2 400 + 750 + 3 142
Equity at Beginning of year = 46,2%
Distributable reserves at beginning of year:
5 100 + 950 – 2 908 = 3 142
Net interest cover:

𝐸𝐵𝐼𝑇 3 194
𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 607 − 141
= 6,9 times
Dividend pay-out ratio:

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 950
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 2 908
= 32,7%
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RATIOS 2018
Creditors’ payment days:
𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 868 000
𝑥 360 𝑥 360
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 6 500 000
= 48 days
Credit purchases:
13 000 ÷ 0,2% = 6 500 000
Capital gearing ratio:

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 7 444
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 7 444 + 8 250
= 0,47: 1 (or 47%)
Bad debt expense ratio:

𝐵𝑎𝑑 𝑑𝑒𝑏𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 68 000
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 (𝑜𝑟 𝑆𝑎𝑙𝑒𝑠) 20 423 000
= 0,3%
Fixed asset turnover:

𝑅𝑒𝑣𝑒𝑛𝑢𝑒 20 423
𝑃𝑃𝐸 + 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 7 245 + 1 670
= 2,3 times
Effective interest rate:

𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 584 680
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 (𝐵𝑜𝑌) 7 444 000
= 7,9%
Max: 35 marks
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b) Calculating the weighted average cost of capital

No of shares issued: D1
1st issue: 2 million x R0,75 = R1,5 million 𝐾𝑒 = +g
MV
2nd issue: R2,4 million – R1,5 million
2nd issue: R900 000 (950 000∗1,0605)
𝐾𝑒 = +0,0605
No of shares: R900 000 ÷ (0,75+2,25) 12 650 000
No of shares: 300 000 (2nd issue)
Ordinary shares 𝐾𝑒 = 14%
Let the number of shares be “x”
(5 marks) (2m*R0,75) +(x*(R0,75+R2,25)) = R2,4m
R1,5m + R3x = R2,4m
R3x = R900 000
 x = 300 000 (2nd issue)
Total number of shares issued:

2 million + 300 000 = 2,3 million
MVe: 2 300 000 × R5,50 = R12 650 000
INSTRUMENT MARKET VALUE COST OF LOAN 1
CF0 0
CF1 - 142 560 𝐾𝑑1 = 8,56% x 0,72
CF2 - 142 560
Netbank Loan CF3 - 2 542 560 (142 560+ 2 400 000) β
𝐾𝑑1 = 6,16%
(3 marks) I/Y 6,16
Comp NPV 2 385 928
β
FV: 142 560 ÷ (8,25%x0,72) = 2 400 000
INSTRUMENT MARKET VALUE COST OF LOAN 2
Interest paid
𝑀𝑉𝑑2 = 𝐾𝑑2 = 8,56% x 0,72
Cost of debt 2
BEADvest Loan
2,4mil x 8,4 x 0,72
𝐾𝑑2 = 6,16%
𝑀𝑉𝑑2 =
(2 marks) 6,16%
𝑀𝑉𝑑2 = R2 356 364
314
MAC3761/QB002
𝐾𝑝 = 10% - 2,7%
CF0 0
CF1 - 185 080 (R7,444m-R2,4m-R2,4m)*7%
Preference shares CF2 - 185 080 𝐾𝑝 = 7,3%
CF3 - 185 080
(3 marks) CF4 - 3 385 080 (185 080+ (1,60 x 2 mil)
I/Y 7,3
Comp NPV 3 036 759
INSTRUMENT MARKET VALUE (ALTERNATIVE) COST OF LOAN 1
PV of interest + capital
FV - 2 400 000 𝐾𝑑1 = 8,56% x 0,72
Netbank PMT - 142 560
N 3 𝐾𝑑1 = 6,16%
I 6,16
Comp PV 2 385 928
INSTRUMENT MARKET VALUE (ALTERNATIVE) COST OF PREF.
PV of dividend + capital 𝐾𝑝 = 10% - 2,7%

FV - 3 200 000 (R1,6 x 2 million)
Preference shares PMT - 185 080 𝐾𝑝 = 7,3%
N 4
I 7,3
Comp PV 3 036 759
CALCULATION OF WACC:
Portion of Weighted
Market value of capital Cost of cost of
Netbank loan R2 385 928 0,117 6,16% 0,72%
BEADvest loan R2 356 364 0,115 6,16% 0,71%
Total R20 429 051 1 / 100% 11,19%
Max: 17 marks
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c) Advice on how to finance the industrial sewing system
Amount required: R4 000 000
Loan Pref. OSC
Maximum available funds 2 000 000 1 200 000 4 000 000
Rates 1: 8,56 x 0,72 90% x 10% Given
Rates 1: Cost of capital 6,16% 9% 14%
Rates 2: (8,56+8,44) 17% x 0,72 9% 14%+4%
Rates 2: Cost of capital 12,24% 9% 18%
Option 1: If the entire R2 million loan is borrowed from BEADvest
Capital Cost WACC
6,16% loan (cheapest) 1 000 000 6,16% 1,54
Preference share (max.) 1 200 000 9% 2,70
12,24 loan 1 000 000 12,24% 3,06
14% ordinary shares 800 000 18% 3,60
4 000 000 10,90%
Option 2: If only up to R1,5 million is borrowed from BEADvest
Capital Cost WACC
6,16% loan (cheapest) 1 000 000 6,16% 1,54
Preference share (max.) 1 200 000 9% 2,70
12,24 loan 500 000 12,24% 1,53
14% ordinary shares 1 300 000 14% 4,55
4 000 000 10,32%
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Conclusion (max: 3 marks):

The company should consider funding the new project by a loan of R1,5 million from the
BEADvest Bank. Although the loan is still cheaper than the issuing shares, if the new debt
exceeds R1,5 million the shareholders will expect a higher return to compensate for the
additional financial risk. This will lead to a higher weighted average cost of capital (looking
at the project alone). Mboweni Trading will then have to issue ordinary shares to the value
of R1,3 million. The company will have to issue all the non-redeemable preference shares
(R1,2 million) as this class is cheaper than ordinary shares and the loan portion which
exceeds R1 million. However, the company should note that the preference shareholders
will always be part of the company and in the event that their dividend is missed, they
could have voting powers to some extent. Mboweni Trading will also have to consider the
entire company target/optimal capital structure to establish the best capital mix. Cash
flows going forward will also have to be planned carefully – the company may have some
flexibility of ordinary and preference dividends where they can be deferred in the event
that there are no sufficient funds. Changes to the pricing (especially bank rates – fixed vs
floating) will have to be considered as well as any legislative amendments that may affect
the tax rate.
d) Advice on investing in the industrial sewing system
Description Oct 18 Oct 19 Oct 20 Oct 21 Oct 22 Oct 23
R’000 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Initial cost ① (4 112)
Maintenance cost ① (30) (30) (30) (30) (30)
Sales ② 3 040 3 344 3 678 4 046 4 451
Cost of material ② (1 600) (1 760) (1 936) (2 130) (2 343)
Wages ③ (666) (703) (741) (782) (825)
Grant received 112 112 112 112 112
Factory overheads (85) (85) (85) (85) (85)
Sale of machine ④ 1 542
Taxation ⑤ 103 73 40 3 (759)
Net cash flows (4 000) 874 951 1 038 1 134 1 951
INPUT keys CF0 CF1 CF2 CF3 CF4 CF5
I/Y = 10,3%
NPV = R308 762
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Advice: Based on the net present value (NPV) calculated, the management of Mboweni Trading
should invest in the industrial sewing system, as the NPV is positive . There is not enough
information to apply other project appraisal techniques (especially targets set by the company).
The company will also have to consider the following qualitative factors:
Max: 4 marks
• Job opportunities that the initiative will create (directly and indirectly) – this will, to a certain
degree, alleviate poverty and tackle social challenges.
• Embarking on the project may lead to improved relations with the government, especially
the Department of Labour.
• This project is likely to upskill the current workforce and allow growth and development of
staff.
• The initiative will open new market opportunities and diversify the business and product
offering of Mboweni Trading.
• Reputation and image of the company may be positively affected by the successful
implementation of the project.
• The company will have to consider whether the products will be of the desired quality and
whether there have not been any trademark infringements.
• The reliability and the quality of machine to produce the desired quality, together with
compliance with relevant laws governing the industry and the machines (SARB, etc.).
• The assessment of the environmental impact should be carried out, especially the effect
the plant may have on the quality of lives in the area, as well as disposing of waste
material.
• The technological changes, breakdown and patch upgrades on the system, including the
availability of skilled resources to ensure continuity of operations.
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Workings
① Industrial sewing system & setup costs:
Total costs
¥2,1m + ¥0,1m ¥2,2m
Exchange rate (0,535)
Cost in Rand 4 112 150
Yearly maintenance costs: ¥15 780 ÷ 0,526 = R30 000
② Sales:
Sales
Converted material (20 000 x 95%) 19 000 kg
Kilograms that make a unit (2,5)
Number of units (19 000 ÷ 2,5) 7 600
Average selling price (R400)
Sales value (7 600 x R400) 3 040 000
Yearly sales increase: 3 040 000 x 1,10 = R3 344 000 (Y2)
Cost of material % profit Ratio Amount

Cost of material (Balancing) 100 R1 600 000
+ Mark-up (3,04m x 90/190) 90 R1 440 000
= Selling price 190 R3 040 000
Cost of material will inevitably increase with sales
③ Wages:
Normal wages = Rate p.h. x No of hours p.d. x No of days p.w. x No of weeks p.y.
Hour rate Hours Days Weeks
Normal wages (10 people) R25 8 5 52 R520 000
Rate: 100% premium
Overtime wages (10 people) R50 4 1 52 R104 000
Factory manager (excess) Salary adjust: (R16K x 12) – R150k R42 000
Annual labour costs R666 000
Yearly salary adjustment: R666 000 x 1,055 = R702 630, etc. (4,8% + 0,7%)
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④ Disposal of industrial sewing system:
Sale of machine
Cost 4 112
Depreciation (5/8 years) (2 570)
Carrying value 1 542
⑤ Taxation expense:
Taxation Oct 19 Oct 20 Oct 21 Oct 22 Oct 23

R’000 Year 1 Year 2 Year 3 Year 4 Year 5
Taxable cash flows 659 766 886 1 019 1 168
Wear and tear (1 028) (1 028) (1 028) (1 028)
Recoupment 1 542
Taxable income (369) (262) (142) (9) 2 710
Taxation rate – 28%
103 73 40 3 (759)
Taxable cash flows calculation
R’000 Year 1 Year 2 Year 3 Year 4 Year 5

Maintenance cost (30) (30) (30) (30) (30)
Sales 3 040 3 344 3 678 4 046 4 451
Cost of material (1 600) (1 760) (1 936) (2 130) (2 343)
Wages (666) (703) (741) (782) (825)
Factory overheads (85) (85) (85) (85) (85)
659 766 886 1 019 1 168
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e) Risks faced by Mboweni Trading (Pty) Ltd
• Stock theft: The company sells valuable goods which can ‘easily’ be stolen from its retail
outlets and from its plant. Delivery trucks to company’s retail stores may be hijacked.
• Mitigation: The company should install enough CCTV cameras at its shops and its
factory. Security personnel must be deployed at key areas within the premises.
Appropriate insurance cover should be in place to ensure that the company is able to
recover any financial loss as a result of theft.
• Stock obsolescence: Customers may not afford some of the expensive and fashionable
items, leading to mark down on prices, damages and the company not being able to sell
them.
• Mitigation: Appropriate training and exposure should be given to the staff in the buying
department. There should be constant engagement and surveys with customers and
competitors to keep abreast of latest trends.
• Stock quality compromise: Inferior or reject clothes may be sold to customers, leading
to the company receiving more returned goods and damage to its reputation.
• Mitigation: Material and goods purchased, especially from overseas should be subject to
extensive inspection and quality checks must be in place at the end of the production cycle
for each item produced. The company’s return goods policy should allow customers to
return the purchased items if they are not happy with the purchase.
• Credit granted to customers: Credit may be granted to customers in contravention of

NCR guidelines or to customers who later struggle to settle their accounts (economic
factors, e.g. growth, unemployment and inflation rates).
• Mitigation: The company should hire credit specialists with vast knowledge and
experience in lending to ensure full compliance to relevant credit acts, and the company
should also take insurance to cover any potential loss due to bad debts.
• Cash flow and credit risks: The company may not be able to meet its financial
obligations arising from its preference share capital and loan commitments (in the form of
dividends, interest and capital repayments).
• Mitigation: The company should reduce its debt levels should it feel the debt is excessive
(and probably slow down on its expansion programmes). Where possible, Mboweni
Trading should approach the providers of capital with the view of renegotiating the terms.
• Increasing competition: The clothing industry is very competitive and the company may
lose share market to its competitors and new market entrants.
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• Mitigation: The company should increase its level of promotional activities to combat
market share loss. Mboweni Trading should negotiate prices with its main suppliers to
push prices down while continuing to sell quality products.
• Foreign currency risk: Mboweni Trading is exposed to currency fluctuation, as the
company sources its raw material and other finished products from South America and
Asia. The Rand may weaken against these currencies, leading to goods being sourced at
a higher price.
• Mitigation: The company should consider making use of derivatives to hedge the level of
exposure, e.g. forex options, forwards, futures and swaps. Mboweni Trading may also
consider local suppliers, if their prices are comparably reasonable.
• Legislation & policy changes: The government may impose stricter conditions on grant
money given to manufacturers like Mboweni Trading. The government may also impose
tough policies on procurement and nature of raw material used in the production process,
including safety and quality standards that must be adhered to.
• Mitigation: The company should regularly review policy drafts and any other pending
government policy implementation proposals. Mboweni Trading should build up more
reserves (buffer) and implement cost cutting initiatives to prepare for a rainy day (in the
event that the government stops paying the grant to the company).
• System integration and strategy execution: Mboweni Trading may fail to implement
new projects successfully. The company may also struggle to integrate its segmented
business operations throughout the country.
• Mitigation: The company should increase its investment in information technology to
ensure that its systems countrywide are well integrated and that the business benefits
from economies of scale. The company should assess all possible outcomes of the
project, extensively test all processes, run systems parallel and provide backup systems
in the event of project launch failure.
• Labour issues (human capital): The company may not be able to recruit employees with
necessary skills to match the job profiles. The employees may also not be satisfied with
their wages and other employment benefits accruing to them and may resort to labour
action, leading to disruption in business activities.
• Mitigation: The company should make use of experienced recruitment agencies if it does
not have in-house resources and prospective employees must undergo a rigorous
screening process. Mboweni Trading management should engage trade union timeously
and on an ongoing basis to ensure that the needs of the workers are prioritised.
• Environmental risks: Mboweni Trading may fail to dispose waste (textile waste and toxic
dyeing chemicals) from its factory responsibly and may increase pollution.
• Mitigation: The company should consider investing in low carbon emitting machinery, in
renewable energy and monitor the levels of pollution and implement initiatives to reduce
carbon emission, e.g. use of degradable material in packaging and in raw material.
Max: 10 marks
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f) Calculate the foreign exchange profit or loss of Mboweni Trading

Workings
Description Amount
Actual amount paid (¥2,1m + ¥0,1m) ÷ 0,535 (R4 112 150) Max: 3 marks
Amount that should have been paid at spot: R4 230 769
(¥2,2m ÷ 0,520)
Forward exchange profit R118 619
5.34. SOLUTION 34: MONDLI GROUP LIMITED

(a) RISK ASSESSMENT [10MARKS]
Risk identification and discussion Risk mitigation
Competition:
The markets for pulp and paper products are The Group should strengthen its long-term
highly competitive and some of the competitors relationships with its existing customers by
may have advantages that adversely affect the providing terms that will be favourable to the
Group’s ability to compete favourably. customers. The Group should also consider
introducing added services e.g. including loyalty
points, delivery, etc.
Infrastructure (power):
The manufacturing operations rely heavily on The Group should increase its usage of renewable
electricity supply (“energy-intensive”) and the energy and alternative energy sources to
supply can be interrupted. In the main, the 10 minimise disruption to operations.
Southern Africa facilities will largely be impacted
by the current loadshedding)
Predominately-automated operations:
In the main, predominately automated Continuous review of the groups’ recruitment,

operations require high level technical skills to remuneration and skills retention strategies to
set-up, monitor and service the operational always remain competitive amongst its peers and
infrastructure. This might be a challenge in SA competitors. Provision of continuous upskilling
as the country is in short supply of highly programmes and on-the-job training opportunities
technical labour force. for the current labour force.
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Risk identification and discussion Mitigating factors
Global economic uncertainty:

Recession and challenges in different global markets, The Group should consider diversifying its
slow economic growth may lead to a decline in demand clientele further, especially targeting
and prices. markets not yet penetrated. It should
consider entering in long-term contracts
with its customers.
Technological advancements:
Being incorporated in 1940’s, the possibility exists that The Group should monitor and track
some of the Group’s equipment is outdated. New technological advancement and trends and
technologies emerge in the pulp manufacturing consider keeping up to date with the latest
industry and could pose serious threat to existing technologies. The Group can also consider
technologies. Failure to do adapt to rapid changes investing in small IT start-ups that have the
could render the Group less competitive. potential to disrupt business as usual.
Alternative media and changes in consumer
preferences: The Group should reconsider the extent and
Trends in advertising, electronic data transmission and composition its paper portfolio and possibly
storage, mobile devices and the internet pose a direct shift the investment focus towards the
threat to traditional print media and some other paper dissolving wood pulp which appears to be in
applications. a growing market.
Financial obligations & liquidity:

The Group makes use of debt in financing its The company should consider reinvesting
operations. This form of funding mainly requires profits back into the business to allow
periodic repayment and interest is charged on such growth and reduce the gearing. Issue of
facilities. ordinary shares can also be considered to
decrease the level of debt in the business.
Diversified and disperse staff complement:
With a staff complement of over 12,5K that is The company should consider drafting
distributed over 35 countries, the formalisation and different employment contracts based on
harmonisation of human resource policies and the labour legislative regime of a specific
procedures could be difficult if not impossible to country within which each individual staff is
achieve. This could possibly lead to employee unrest employed. Furthermore, a knowledgeable
for unfair and/or inconsistent application of the legal opinion must be sought for each of
aforementioned policies and procedures. these different employments contracts.
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Safety of employees and others:
Employees are exposed to fall-of ground, moving The Group should employ well trained safety
machinery, working at heights and with heavy officers and all employees should regularly
equipment. Employees may be injured or, even attend health and safety courses.
worse, lose their lives if safety procedures and
controls are not carried out properly. This may
further lead to shutting down of affected factories.
Strategic growth and projects:
The Group is diversified in terms of location and Mondli Group Limited should consider setting up
product offering, cutting across different cultures. a division (with representation from the different
The Group may fail to manage diversity and regions) that has relevant expertise in project
successfully implement growth projects due to the management and identifying great business
size and nature of the business. opportunities.
Macroeconomic factors and forex:
The Group has a global footprint, and the foreign The Group should make use of hedging
currency is often used with cross-border instruments to protect against movement in
transactions. With ZAR being one of the volatile currencies. It should also consider matching its
currencies in the emerging markets there exist risk inflows and outflows at currency level.
of forex losses and/or inaccurate inventory
valuation. The Group operates in more than 150
countries. Trade wars and tensions amongst some Where possible, establishing reliable local
of the economic powerhouses may possibly lead to suppliers.
decline in demand, exchange rate movements and
slowing local economy.
Socio-political unrest:
High unemployment rates, cultural differences, The Group should consider its spending in CSI,
political ideologies, and service delivery protest especially projects that bring stability to
around the country. Unrest in the community may communities where it operates. The Group
lead to the sabotage of the company’s should also invest in the empowerment of
infrastructure or difficulties in accessing the people in the community and continue to create
facilities. more jobs for the locals.
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Socio-political unrest:
High unemployment rates, cultural differences, The Group should consider its spending in CSI,
political ideologies, and service delivery protest especially projects that bring stability to
around the country. Unrest in the community may communities where it operates. The Group
lead to the sabotage of the company’s should also invest in the empowerment of
infrastructure or difficulties in accessing the people in the community and continue to create
facilities. more jobs for the locals.
Availability and cost of raw material:
Rapid changes in weather patterns mainly due to Mondli Group Limited should consider
global warming, as well as over deforestation may increasing its supplier database (especially for
lead to a decrease in supply of raw material, pulp) and increase its investment in biological
affecting the bottom line. assets.
Environmental risk:
Amount of water usage in the paper production, The Group should invest in its own reservoirs
energy consumption, use of trees and other and increase its investment in renewable
activities that may be considered harmful to the energies. Continuous monitoring of the global
environment will pose a challenge to the precipitation index (historical data and forecast)
sustainability of the business. Furthermore, global to identify the best regions for the group’s tree
warming and carbon emission could potentially plantations of the future. Monitoring and
harm the group’s tree farming ability and/or minimising the Group’s carbon emission.
reputation.
Skills availability and retention:
The economic environment continues to be The Group should aim to boost staff morale and
challenging for South African companies and thus provide employees with a conducive
makes it difficult for companies to compete globally
environment for employees to thrive. The Group
for highly skilled, experienced and technically should invest in the upskilling of its employees,
competent labour force needed for the paper as well as graduates and bursary holders who
industry. can always be brought into the employ of the
organisation.
High proportion of credit sales: The Group should consider undertaking proper
analysis and understanding of its customers and
The majority of sales are made on credit and the
put in place proper credit control procedures. It
Group is thus susceptible to high bad-debts and
must also continuously monitor the Group’s
high investment in working capital.
investment in working capital and effect changes
as and when it is necessary.
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Regulatory compliance:
As a listed and a global company, the Group is The Group should appoint and retain skilled,
exposed to the risks of non-compliance to various knowledgeable and experienced staff in the
regulatory requirements such as: JSE listing legal and compliance department to monitor and
requirement, IFRS, Companies Act, Cross-border control regulatory compliance.
taxation, Transfer pricing.
(b) CALCULATE THE WEIGHTED AVERAGE COST OF CAPITAL [15 MARKS]
Capital structure Market value of Portion of Cost of Weighted

instruments capital capital average cost
(Rm) structure of capital
Ordinary shares R3 383 0,6 15,0% 9,0%
Preference shares R869 0,2 14,0% 2,8%
Term loans R501 0,1 9,7% 1,0%
Debentures R483 0,1 9,9% 1,0%
Total R5 236 1 / 100% 13,8%
ALTERNATIVE CALCULATION OF WACC:

Formula:
𝑀𝑉𝑒 𝑀𝑉𝑝 𝑀𝑉𝑑1
x 𝐾𝑒 + x 𝐾𝑝 + x 𝐾𝑑1 +
𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1+𝑀𝑉𝑑2 𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1+𝑀𝑉𝑑2 𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1+𝑀𝑉𝑑2
𝑀𝑉𝑑2
x 𝐾𝑑2
𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1+𝑀𝑉𝑑2
OR:
(𝑀𝑉𝑒 x 𝐾𝑒)+ (𝑀𝑉𝑝 x 𝐾𝑝) + (𝑀𝑉𝑑1 x 𝐾𝑑1) + (𝑀𝑉𝑑2 x 𝐾𝑑2)
𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1+𝑀𝑉𝑑2
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3 383 1 125 501 483

WACC = x 15% + x 14% + x 9,7% + x 9,9%
5 236 5 236 5 236 5 236
WACC = 13,8%

Ordinary shares 𝐾𝑒 =Rf + β (Rm – Rf)
MVe (“Price”) = R3 383m
(given)
= (13,44% - 8,89%)
+ {1,18 (8,89%)}
= 15,04%

Preference
CF0 0
shares
CF1 (2021)
- R112,5m (200m x R4,5 x 12,5%)
𝐾𝑝 = 10%+4%
CF2 (2022)
- R112,5m
CF3 (2023)
- R1 012,5 m 𝐾𝑝 = 14%
(R900m + R112,5m)
I/Y 14
Comp NPV ≈ R869m (R868 657m)
ALTERNATIVE workings (Preference shares)

Preference
FV R900m (200 million x R4,50)
shares
PMT - R112,5m (200m x R4,5 x 12,5%)
𝐾𝑝 = 10%+4%
N 3
I/Y 14 𝐾𝑝 = 14%
Comp NPV ≈ R869m (R868 657m)
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Term loan Interest

𝑀𝑉𝑑1 = 𝐾𝑑1 = 13,5% x 0,72
𝐾𝑑1
𝐾𝑑1 = 9,72%
(R530 million x 12,75% x 0,72)
𝑀𝑉𝑑1 =
0,0972
≈ R501m (R500 555 556)
INSTRUMENT MARKET VALUE COST OF DEBENTURES

Debentures
MVd2 = R483m FV - R500m =
(1 930m – [900m + 530m])
PV R483m (given)
n 2
PMT - R39,6m (R55m x 0,72)
Comp 9,9% (post-tax)
I/YR
(c) ANALYSIS OF FINANCIAL INFORMATION [10 MARKS]
CAPITAL GEARING RATIO 2020 2019
Calculation:
1 930 1 870
(1 930 + 1 947) 3 877 1 870 + 1 747
𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 (𝐼𝐵𝐷)
= 49,78% (0,5: 1) = 51,70% (0,52: 1)
Explanation: 1 mark (P) – no mark if ratio is wrong

▪ The Group slightly decreased its gearing ratio during the year mainly because of profits
retained (75% ploughed back into the business).
▪ In this regard, a 11,4% increase in equity (with no information about changes in capital, can
only attributable to retained earnings) is considerably higher than 3,2% increase in IBD.
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ACID-TEST RATIO 2020 2019
Calculation:
(800 + 363) = 1 163 (683 + 550) = 1 233
(1 009 + 51) = 1 060 (858 + 52) = 910
𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 + 𝐶𝑎𝑠ℎ
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 1,10: 1 = 1,35: 1

▪ The acid-test ratio worsened during the year due to significant increase in current liabilities
(this could be more purchases made on credit during the year).
▪ There was also a net decrease in current assets (excluding inventory) – possibly due to
cash used to finance increased inventory and/or cash used to pay dividends).
DEBTORS’ COLLECTION 2020 2019

PERIOD
Calculations:
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 (800 + 683) ÷ 2 (683 + 697) ÷ 2
𝑥 𝑑𝑎𝑦𝑠 𝑥 366 𝑥 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 4 840 4 322
Credit sales: 741,50 690

𝑥 366 𝑥 365
4 840 4 322
x = 5 929 ÷ 1,225 = 4 840
x = 5 295 ÷ 1,225 = 4 322
= 56,1 days = 58,3 days

The debtors are paying quicker than they did a year ago, despite increase in sales made on
credit. The Group might have introduced more stringent credit approval processes. With
improved relations with customers, their businesses might have performed well during the year
leading to early settlement of their accounts.
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(d) EVALUATION OF THE GROUP’S DIVIDEND POLICY [09 MARKS]
1. PREFERENCE SHARES
Mondli Group has redeemable preference shares in issue. In substance, redeemable preference
shares are debt instruments as opposed to equity instruments. Therefore, the “dividends” payable
in relation to redeemable preference shares are in fact interest expense as opposed to preference
claim to the distributable earnings of the group (Skae 2017:254). As such, Mondli Group’s
dividend policy will not encompass these preference shares.
2. ORDINARY DIVIDEND
Details R million
2020 2019 2018 2017 2016
Profit before interest & tax 583 571 572 400 331
Net interest expense (162) (125) (149) (171) (194)
Taxation (98) (108) (104) (62) (2)
Net profit for the year 323 338 319 167 135
Ordinary dividends paid 81 59 44 28 24
Dividend pay-out ratio* 25,1% 17,5% 13,8% 16,8% 17,8%
Dividend cover* 4,0 5,7 7,3 6,7 5,6
 Given
 Dividends paid ÷ Net profit for the year
 Net profit for the year ÷ Dividends paid
* Either Dividend pay-out ratio OR Dividend cover is acceptable
Discussion points: (Maximum = 3 marks)

▪ The profits for the past five years have steadily increased, with the exception of a slight decline
in 2020. There was a significantly jump in profits between 2017 and 2018.
▪ The dividends over the entire period (2016 – 2020) have increased each year, even when
there was a decline in profits (in 2020). In fact, despite the decline in profits in 2020, the
dividend went up by 37,3%, from R59m in 2019 to R81m in 2020.
▪ With the exception of the 2018 financial year, the company cash reserves have been reducing
year-on-year. As such, it appears that the increasing dividends are continuously paid from the
cash reserves.
▪ Information content or signalling effect – It is possible that the Group has created an
expectation that the dividend would be increased yearly regardless of how much profits were
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generated. This may be a problem in years where the company cannot sustain/meet the
expectation, perhaps due to (significant) decline in profits or losses made.
▪ The Group also distributes a small percentage of its profits to shareholders, which allows it to
invest more into the growth projects, while managing shareholders’ expectations. The Group
has averaged a dividend pay-out ratio (dividend cover) of 18,2% (5,7) over the 5 years, and it
should consider establishing a fixed dividend policy (dividend as a fixed % of profits). This
would allow shareholders to manage their expectations better and to plan effectively.
Comparison to industry dividend pay-out will inform whether the company’s policy of paying
dividends is generous.
(e) PROPOSE CHANGES TO WORKING CAPITAL MANAGEMENT [6 MARKS]
Item Rm
Cash discount (R6 200m x 30% x 1,5%) (28)
Decrease in bad debt expenses 35
Late payment interest 3

(R6 200m x 70% x 15% x 10% x [(108 – 90)÷365])
Holding costs saved (R740m – R620m) x 13,5% 16
Text message notification costs (2)
Pre-tax net benefit/(cost) on change of policy R24m
 Given
 (R800m+R680m) ÷ 2 = R740m
Advice:
▪ The proposed change to the working capital policy should be implemented as it will yield
an increase in profits (pre-tax) of R24 million.
▪ The Group should also consider what the financial impact of this policy would be in the
future, as there may possibly be losses going forward.
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5.35. SOLUTION 35: BLUESKY WINGS LIMITED

(a) Identify and discuss five key risks that BlueSky is confronted with; and [10]
describe how each of these risks can be mitigated.
No. Identification and discussion of risks Mitigation of the identified risk
1. Aviation regulation: ▪ Set up a knowledgeable compliance

The aviation industry is highly regulated committee to continuously review,
(for example, safety, skills, reporting etc.) monitor and report on
and contravention of regulation may lead (non)/compliance matters.
to an indefinite grounding of aircrafts. ▪ Set up an independent monitoring
team to oversee and ensure
compliance.
2. Competition: ▪ Develop and implement a suitable
Notwithstanding barriers to entry, the market penetration and maintaining
aviation market is fiercely competitive. strategy.
With only two aircrafts, BlueSky is ▪ Engage in aggressive marketing and
potentially finding it difficult to compete advertising campaigns.
with well-established airlines with larger ▪ Provide excellent customer service
aircraft fleet. and unique flight experience.
3. Safety concerns: ▪ Strict adherence to mandatory service
BlueSky’s aircraft are hardly grounded. In and maintenance of aircraft.
fact, the CEO is at the forefront of ▪ Continuous monitoring, reporting and
ensuring that the aircraft are hardly on the addressing of mechanical failures.
ground. Although this might be good for ▪ Develop and maintain an internal
business, it could potentially lead to the service and maintenance log and
undercutting of service and maintenance follow up and address identified
of the aircraft in effort to get them back deviations.
flying as quickly as possible. Servicing ▪ Set up a maintenance team that is
and maintenance of the aircraft is critical independent from operational
for the safety and lives of the cabin crew executives.
and travelers, as such BlueSky can ill ▪ Develop and adhere to health and
afford to undercut these services. safety policies and procedures
Furthermore, the undercutting of safety together with reporting and addressing
measures could result in potential deviations from policies.
lawsuits.
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4. Market diversification: ▪ Develop and implement a
BlueSky is neglecting the domestic market diversification strategy with a focus
in favour of the international market. on domestic market proposition.
Despite low margins, this strategy can ▪ Acquire and/or partner with an
potentially limit BlueSky’s growth already established domestic airline
prospects, both locally and connecting to carrier.
international routes.
5. Unsustainable pilot remuneration: ▪ Employ future new pilots on market-
The remuneration of the pilots is notably related remunerations.
above the industry norm, arguably to ▪ Negotiate a short-term salary freeze
compensate for the strenuous working with the existing pilots.
conditions. While these remuneration ▪ Benchmark BlueSky’s working
levels could attract new pilots to the environment and conditions to
company, they could potentially be industry norm.
unsustainable into the future and ▪ Set up an independent remuneration
negatively affect the company’s committee to oversee pilot’s
operational cost structure and margins. remuneration and retention
strategies and policies.
6. High pilot turnover: Pilots are critical staff ▪ Perform exit interviews with the pilots
for an airline company. High staff turnover, to diagnose and address the high
especially from critical staff with scarce turnover.
skills has the propensity to negatively ▪ Benchmark BlueSky’s working
affect business stability, staff morale, conditions and environment with
working environment and business culture. industry norms and standards.
▪ Engage staff with extra-mural
activities aimed at boosting morale.
7. Tight flight schedule: With only two ▪ Benchmark flight schedule with
aircrafts, BlueSky is operating thinly with industry norms and standards.
tight flight schedules which do not allow for ▪ Develop back-up strategies that
unforeseen delays, for example due to could include aircraft leasing aircrafts
mechanical faults, inclement weather, and customer transfer to other
airport operational emergencies etc.). The airlines (amongst others).
resulting unforeseen cancellations and/or ▪ Purchase additional aircrafts.
flight delays with little or no back-up plans
could damage the reputation of the airline.
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8. Employing inexperienced pilots: ▪ Develop head-hunting strategies

Although BlueSky’s pilots are suitably aimed at identifying experienced pilots
qualified, some of them are for hire.
inexperienced. A resulting concern is the ▪ Develop minimum pilot competency
possibility of mistakes in flight situations specifications and experience.
that calls for critical and immediate ▪ Develop and maintain compulsory pilot
decision-making. training and assessment programmes.
9. Pilot fatigue risk: ▪ Maintain a flight schedule that ensures
International flights are inherently long sufficient resting times in between
and tiring and thus require sufficiently shifts.
resting time for pilots to ensure safe ▪ Allow pilots to take extended paid
operation of the aircraft. Fatigue risk can leave.
therefore affect the safe operation of the ▪ Perform continuous medical checks
aircraft. and examinations for pilots.
10. Technology risk: ▪ Develop back-up plans and recoveries
The fact that BlueSky’s operational procedures.
activities (flight-bookings, payments, ▪ Develop manual operational plans as
check-ins and enquiries) are online puts alternatives to online operations.
the company at the risk of reliance on ▪ Maintain a 24-hour free customer care
uninterrupted internet connection which line.
is not always possible. During the ▪ Consider using more than one internet
inevitable downtimes, business will be service provider.
severely impacted to the frustration of
customers and loss of business.
With online operations, the risk of ▪ Invest in high calibre cyber security
fraudulent activities (identify theft, systems and high-quality firewalls.
fraudulent payments, hacking, ▪ Develop and use high quality
unauthorised flight schedule changes, authentication processes (for example
etc.) is amplified. BlueSky’s systems and biometrics).
customers are therefore exposed to ▪ Maintain and follow-up on
these and similar numerous risks. unauthorised system tempering logs.
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10. Technology risk (continued): ▪ Outline and understand the historical

IT challenges to establish if they
BlueSky has a history of IT challenges.
persist.
Although the company’s IT function has
since been outsourced, it is not clear if ▪ Develop and maintain standard
these historical issues were resolved. operating procedures to address
BlueSky operates online only and is thus common and prevalent IT challenges.
critically reliant on the continuous and ▪ Employ an inhouse IT team to
proper functioning of the IT systems. immediately address unplanned and
unforeseen IT challenges.
11. Unusual business practice: ▪ Investigate the prevalence of travel
deposit within the industry and
BlueSky require a “travel deposit”
benchmark BlueSky’s operation with
(insurance against flight cancellations
industry norms.
without the required 48-hours’ notice)
▪ Reduce the release time-lag to at least
from its customers. This practice is
a day after the trip.
uncommon within the airline industry. It
▪ Engage customers for feedback on the
can potentially put off potential customers
travel deposit practice.
who might not have the deposit and/or
▪ Communicate to the customers (i) the
are unwilling to put up an upfront deposit
rationale behind the travel deposit and
while being forced to wait up to 5 days for
(ii) all the related terms and conditions.
the refund which might not be honoured.
12. Absence of human element: ▪ Open a manned customer service help

desk at the airports.
Much like many hospitality services,
▪ Make use of a manned check-in
airline business tends to thrive on the
counters as an alternative for online
back of human-to-human interactions.
check-ins.
Customers tend to be at ease knowing
▪ Minimise the usage of robotics for
that should a need arise; they could
telephone enquiries.
contact customer services for personal
▪ Employ friendly front-line staff to
and immediate assistance. The absence
enhance personalised customer
of human element can dissuade
experience.
customers from flying with BlueSky.
▪ Invest in airport waiting lounges.
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13. Outsourcing of a critical function: ▪ Make use of a legally informed service
Risk of outsourcing is that a company not level agreement to agree on roles,
only losses the ability to oversee the responsibilities and obligations.
outsourced function, it also losses the ▪ Perform a periodic due diligence on the
ability to immediately hold those contracted company to establish if the
responsible accountable for non- company still provide the expected
performance or sub-standard services at the right quality and at the
performance. BlueSky’s IT function is right time.
outsourced to a remote country, this ▪ Continuously scan the market for
could negatively affect the response time comparative and/or better services and
during unforeseen downtime and/or consider switching service providers if
system failures that require immediate beneficial.
intervention and resolution. ▪ Maintain an alternative back-up plan.
The
outsourcing will further derail BlueSky’s
▪ Maintain an inhouse IT team as part of
ability to internally develop its own IT the back-up plan and for the possibility
related skills. of future insourcing of the IT function.
14. Foreign currency exposure risk: ▪ The Group should make use of
BlueSky’s market concentration is hedging instruments to protect against
predominately international travel. As movement in currencies. It should also
such, some of the company’s services consider matching its inflows and
could only be offered in various foreign outflows at currency level.
currencies. The company is therefore ▪ Where possible, BlueSky should
exposed to financial risk resulting from establish a reliable network of local
fluctuations of foreign currencies.
(South African) suppliers for some of
the services and/or goods currently
procured from foreign suppliers.
15. Environment risk: ▪ Establish aa environmental impact and
Through their use of fuel, aircraft are assessment committee to continuously
arguably regarded as one of the major monitor and report on BlueSky’s
sources of carbon emissions and emission impact and on non-
greenhouse gasses. BlueSky is therefore compliance to environmental
faced with risks of possible non- legislations,
compliance to various environmental ▪ Employ environmental experts to
friendly legislation develop, action and execute an
environmental strategy for BlueSky.
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16. Fuel/oil prices fluctuations: ▪ Make use of foreign contracts to hedge

Aircraft uses a considerable quantity of the risk of fuel/oil price fluctuations.
fuel. In fact, it is argued that fuel costs ▪ Where possible, buy fuel at lower
tend to constitute a significant portion of prices and store reserves for the future
an airline’s total costs. Because global usage.
fuel prices are not stagnant and are
primarily driven by market forces BlueSky
is thus susceptible to these price
fluctuations.
Global terrorism risk: ▪ BlueSky should join and be an active
Globally, airlines are continuously faced member of recognised and reputable
with risk of terrorism in the form of global anti-terrorism organisations to
(amongst others) aircraft highjack; and in- leverage of the global intelligence.
cabin chemical warfare. ▪ The company should continuously
train its cabin crew in measures to
identify possible suspicious behaviour
and how to behave under a volatile
situation.
▪ BlueSky should become abreast with
the activities of INTERPOL to not only
become aware of internationally
wanted criminals but to also obtain
information on how this organisation
operates in effort to thwart possible
global terrorism acts.

evaluate Ms Du Plessis’ capital budgeting working paper and comment [12]
whether the basis of her conclusion thereto is correct.
The techniques and principles applied by Ms Du Plessis in calculating the net cash flows of
R282 million and the internal rate of return (IRR) of 8,46% regarding the proposed acquisition
of the new aircraft are inconsistent with the capital budgeting principles. In this regard, the
following principle errors are noted from the working paper prepared by Ms Du Plessis:
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1. The purchase price is incorrectly reflected as R168 million instead of the Rand equivalent
of R2,4 billion ($168m ÷ $0,07)– BlueSky is a South African registered company and
therefore all its transactions should be expressed in one currency, especially in a functional
currency, which is the South African Rand (ZAR) in this instance.
2. The envisaged working capital of R88,2m (R98m x 90%) that is expected to be recouped
at the end of year 4 is not included in the working paper.
3. Operational items (Revenue, Fuel costs, Salaries and Variable overheads) were not
adjusted for the impact of annual general inflation – BlueSky’s historical operational results
reflect an impact of annual general inflation, in the absence of information to the contrary,
it therefore seems reasonable to accept that this will still be the case into the future.
4. The fixed rental costs for the aircraft hangar is incorrectly included as R12 million (R3m x 4
years). The underlying lease agreement was entered into two years ago and the hangar
(with capacity to house four aircraft) is currently used to house the existing two aircraft at a
fixed rental cost. As such, this cost will not change with the decision to purchase an
additional aircraft and therefore, irrelevant for the assessment of the financial viability of B-
737.
5. The R2,4 billion total depreciation charge for B-737 is a non-cash item and should not be
included in the working paper– A capital budgeting exercise relates to assessing the impact
of relevant cash flows and thus, does not consider non-cash items.
6. The R900m interest on long-term loan relate to a financing decision (including cost of debt)
and should not be included in the capital budgeting working paper – A capital budgeting
exercises uses cost of capital (WACC) to determine the present value of applicable future
cash flows. WACC already includes the cost of debt. Therefore, to avoid double counting
of the interest costs, all financing considerations must be ignored in a capital budgeting
exercise (Skae et al 2017:205).
7. The cash flows are incorrectly reflected at their respective nominal values. The aircraft will
be used for 4 years, as such, in calculating the relevant net cash flows this fact must be
considered by means of discounting all the relevant future cash flows using the applicable
discount rate.
8. Ms Du Plessis should have determined and used BlueSky’s WACC to discount all the
relevant cash flows of B-737– “The discount rate used in appraising a project should be the
company’s cost of capital calculated on the basis of the company’s risk profile” (Skae et al
2017:204).
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9. Where applicable, in addition to the impact of the above noted principle errors on taxable
income, the calculated taxable income (R282m) and taxation expense (R78,96m) are
incorrect because:
(i) Working capital requirement of R98m is not an allowable deduction for taxation
purposes.
(ii) Deprecation charge is not an allowable deduction, instead
(iii) Wear and tear allowance of R600 million (R2,4bn ÷ 4 years) should have been
deducted in each of the 4 years under review.
10. Ms Du Plessis calculated the internal rate of return (IRR) as “expected total net cash flow ÷
initial cash outlay”, this approach is incorrect, because it is not based on equating the
present values of the expected future cash flows with to the initial capital outlay – “The IRR
is the cost of capital that equates the present values of the expected future cash flows or
receipts to the initial capital outlay. The IRR formula is the same as the Net Present Value
formula, except that it sets the NPV at nil and solve for the discount rate” (Skae et al
2017:195).
Comment:
The conclusion reached by Ms Du Plessis that B-737 must be purchased is incorrect because:
Despite being a positive value, from a capital budgeting technique perspective, the calculated
“expected total net cash flow” (R203,04m) is not a correct measure to decide on the financial
viability of this proposed investment. Instead, the net present value (NPV) of the expected net
cash flows from the aircraft under review is the correct financial viability measure to be used –
A capital budgeting exercise not only requires the expected future cash flows to be discounted,
it also requires a comparison of the discounted total expected future net cash flows with the
initial capital outlay. This to determine whether the NPV is negative (project rejected) or positive
(project accepted). Alternatively, the internal rate of return (IRR) of the project should be
compared to the company’s WACC. If IRR > WACC (project accepted) and if IRR < WACC
(project rejected).
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(c) Discuss advantages to BlueSky’s for utilising debt as a form of finance [4]
Advantages and description
1. Interest expense on debt finance is tax deductible – In the instance that the aircraft is
funded by debt, BlueSky will benefit from a tax shield resulting from the interest expense
deduction in the calculation of taxable income. The same benefit is not available for equity
finance.
2. Debt issue costs are usually lower – BlueSky will encounter lower initiation costs relating
to debt finance. These are notably lower than the costs associated with equity finance (For
example, shares issuing costs and regulatory compliance costs).
3. Debt has no immediate impact on the control structure of the company – In funding
the aircraft with debt, BlueSky’s shareholding will not be diluted, which is the case in the
case of equity finance (issuing additional ordinary shares).
4. Interest expense on debt finance is predictable – With debt finance, BlueSky can
readily predict both the quantum and the payment date (period) of the interest expense
applicable to the purchase of the new aircraft. This predictability phenomenon will assist
BlueSky with its cash flow planning and forecasting.
Points 1, 2 and 3 are adapted from: Skae et al 2017:257
(d) Advise BlueSky whether it should purchase the new aircraft. [14]
Advice: BlueSky should not purchase the new aircraft because the aircraft is expected to
generate a negative NPV (-R575,19 million in NPV).
CF0 -R2 890

CF1 +R750
CF2 +R750
CF3 +R760
CF4 +R550
I/YR 8,61%
COMPUTE – NPV -R575,19
 Given
 Calculation of WACC
Capital Current Additions MV Weight Cost of WACC
structure (A) (B) C = (A+B) capital
component Rmil Rmil Rmil
Ordinary 1 500 1 000 2 500 0,43 9,90% 4,26%
Preference 300 680 980 0,17 11,25% 1,91%
Term-loans 800 560 1 360 0,23 5,76% 1,32%
Debentures 400 560 960 0,17 6,61% 1,12%
Total R3 000 R2 800 R5 800 1/100% 8,61%
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(d) Based on the net present value principles, advise BlueSky whether it should
[14]
purchase the new aircraft.
 4m shares x R250 = R1bn
 R1,5bn ÷ 6m = R250 market value per ordinary share
 R1,68bn less R1bn (ordinary capital funding requirement) = R0,68bn
 Equity finance: R2,8bn x 60% = R1,68bn
 Debt finance: R2,8bn x 40% = R1,12bn
 Equity: R1,8bn (R1,5bn + R0,3bn) ÷ R3bn = 60%
 Debt: R1,2bn (R0,8bn + R0,4bn) ÷ R3bn = 40%
 R1,5bn + R0,8bn + R0,3bn + R0,4bn = R3bn
 R1,12bn ÷ 2 [debt instruments (term loans and debentures) split equally] = R0,56bn
 Cost of equity
𝐾𝑒 = Rf + β (Rm – Rf) = 8,5% [7,5% + 1%] + 1,4 (9,5% - 8,5%) = 9,90%
 Cost of preference shares
𝐾𝑝 = 7,5% x 150% = 11,25%
 Cost of term loans = 8% x 72% = 5,76%
 Cost of debentures = PV = R782; n = 6; PMT = -R52 (R800 x 6,5%); FV = -R780

(R800 x 97,5%); COMP – I/YR = 6,6135% ≈ 6,61%
(e) Identity and motivate for the most appropriate valuation method that BlueSky [10]
should use to establish the value of 80% equity stake in BCC
Valuation method identification: The most appropriate method that BlueSky should use to
establish the value of 80% equity stake in Bidflest Cabin Catering (Pty) Ltd (“BCC”) is the
“Earnings multiples”/ “Price/Earnings multiple” method.
Motivation: Based on the assessment of the applicability of the below 11 conditions (which are
consistent with the PE multiple method), the earnings multiples is thus the most appropriate
valuation method to determine a reliable value for 80% equity stake in BCC:
1. The envisaged 80% equity stake in BCC represent a majority shareholding.

2. BCC is a going concern.
3. BCC is a long-established company that was incorporated in 1995 and has a history of
strong earnings✓ since the 2000 FY. The company’s recent earnings history is average
normalised annual earnings of +/- R10,77m [(-R2,05m + R13,6m) + R11,025m + R10,5m +
R10m] ÷ 4 years.
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(e) Identity and motivate for the most appropriate valuation method that BlueSky
should use to establish the value of 80% equity stake in BCC as at 31 [10]
December 2020.
4. Post the COVID-19 pandemic, after a +R13,6m adjustment to the 2020 profits, BCC is
expected to continue growing its profits at approximately 5%, as such, the earnings of the
company are therefore expected to be maintained.
5. BCC is not a loss-making entity and expectations are that the company will maintain its
operational excellence and profits well into the future. Therefore, future maintainable
earnings are expected to be positive (that is, not a loss).
6. Albeit being listed in the NYSE, Aircraft Foods Incorporation (AFI), a similar listed
comparator to BCC is available to determine a publicly listed PE multiple as part of the
valuation process.
7. As a starting point, AFI’s PE multiple is available at 12,5 ($0,75 ÷ 6%).
8. Although AFI is listed in the NYSE, it appears that there is no South African listed company
that has similar business activities to BCC. Therefore, it is acceptable to use AFI as
comparator entity because it has similar business activities to BCC.
9. The starting PE multiple of 12,5 must however be adjusted (amongst other adjustments) to
reflect country (South Africa) specific risk.
10. BCC’s only non-operating asset (administrative office block) was recently valued at R75
million separately from the company’s operational assets.
11. Where multiple-business entities are involved, each business must be treated separately –
Although the BiDFLEST Group has 25 subsidiaries, BCC operates as an independently
registered company which is separate from the group and can therefore be valued
separately.
Furthermore, the following general observations are noted:
(i) The Gordon Dividend Growth Model methodology cannot be used as the most appropriate
valuation method because (i) a controlling interest (85%) is being valued and (ii) BCC does
not have a history of dividend payout together with the continuous disagreements over
dividend payout. BCC only paid dividends once (2019) in the recent four financial years.
(ii) Market price multiples method, net asset value, and free cash flow valuation methods
cannot be used because no information thereto is available. Furthermore, BCC is not being
liquidated and is in fact expected to continue operating into the future. Therefore, the
liquidation valuation method is also not appropriate.
Adapted: Skae at el 2017:431-452
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5.36. SOLUTION 36: FAR & WIDE (PTY) LTD
(a) Ratio analysis [9]
Trade receivable 2020 2019

collection period
Calculations:
R17m R6m
𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 x 366 x 365
x 𝑑𝑎𝑦𝑠 R87m x 80% R85,5m x 80%
𝐶𝑟𝑒𝑑𝑖𝑡 𝑟𝑒𝑣𝑛𝑢𝑒
R17m R6m
x 366 x 365
R69,6m R68,4m
= 89,40 days = 32,02 days
 Given  Given
Possible reasons for the ratio movement:

FW’s collection days from corporate customers increased by +/- 57 days from the 2019
financial year to the 2020 financial year. This can be ascribed to the following among
others:
(i) FW could have relaxed the company’s collection intensity to counter against losing
corporate customers. FW’s courier deposits reduced by R200K between 2019 and
2020 financial years. The reduction in the deposit supports the assertion about FW’s
continued loss of corporate customers.
(ii) The possibility of the majority of corporate customers taking advantage of relaxed debt
collection processes (deterioration or possible lack of systematic process to collet debt
timeously).
(iii) The possibility that corporate customers could have experiencing constrained cash
flows (mainly due to subdued economic environment) and thus holding on to the cash
longer than they did historically.
(iv) Corporate customers might be highly indebted and battling to make timely payments.
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EBITDA margin 2020 2019

Calculations:
𝐸𝐵𝐼𝑇𝐷𝐴
R14,9m + R3,5m + R13,1m R19,2m + R4,5m + R13,3m
R87m R85,5m
R31,5m R37m
R87m R85,5m
= 36,21% = 43,27%
 Given  Given

FW’s 2020 EBITDA margin has deteriorated considerably from 43,27% (2019) to 36,21%
in 2020. This could be because of the following reasons (among others) that have a direct
impact on the company’s profits:
(i) Despite muted revenue growth, the cost of services increased by +/- 14,5%. This
increase could be ascribed to the following:
▪ Increase in the fuel costs for delivery vans mainly due to older fleet consuming more fuel.
▪ Above inflationary increase in fleet maintenance/service costs.
▪ Above inflationary increase in fleet insurance costs.
▪ Increasing operational claims due to lost packages, undelivered packages etc.
▪ Possibility of using old delivery vans that are not efficient (breakdowns, fuel consumption,
etc.) for deliveries.
▪ Above inflationary remuneration increases for operational staff (not administrative staff)
of the company.
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Ordinary dividend 2020 2019

payout ratio
Calculations:
R3,18m 𝒍𝒆𝒔𝒔 (R8m x 12%) R4,2m 𝒍𝒆𝒔𝒔 R0,96m
R11,1m R14,3m
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
R3,18m 𝒍𝒆𝒔𝒔 R0,96m R3,240m
R11,1m R14,3m
= 22,66%
R2,22m
R11,1m
= 20,00%
 Given  Given

Ordinary dividends payout ratio reduced from 22,66% in 2019 to 22,0% in 2020. This can
be explained by the following reasons:
(i) Slightly lower ordinary dividends declared/paid mainly due to a notable reduction in
the 2020 profits (already explained in question 2(a)(ii) above).
(ii) FW might have decided to retain earnings (earnings plough-back, increase from
R10,42m to R18,34m) in effort to propel growth for the future.
(iii) The retaining of cash as a precautionary measure to fund a possibility of repeat above
inflationary increases in cost of services.
(b) Provide one possible reason why FW’s working capital management would not
[1]
include the management of trading inventory.
FW is a service organisation. The company provides courier services and thus do not trade in
physical inventory items OR as a service organisation, FW does not hold any trading inventory.
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(c) (i) Calculate FW’s weighted average cost of capital (WACC) as at 31 October
2020, and briefly explain the importance of WACC to FW in its assessment [8]
of the financial viability of the tender.
(𝑀𝑉𝑒 x 𝐾𝑒)+ (𝑀𝑉𝑝 x 𝐾𝑝) + (𝑀𝑉𝑑1 x 𝐾𝑑1)
𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1
R60,9m R7,6m R23,5m

WACC = x 11,5% + x 12,6% + x 10,08% ≈ 11,22%
R92m R92m R92m
Details Rm Weight Cost of capital WACC

Equity 60,9 0,66 11,50% 7,59%
Preference shares 7,6 0,08 12,60% 1,01%
Long-term loans 23,5 0,26 10,08% 2,62%
Total R92m 1/100 11,22%
 Given
 Equity value = (Price/Revenue multiple) x Revenue value: 0,7 x R87m = R60,9m
 FV = -R7,52m (R8m x 94%); n = 4; PMT = -R0,96m (R8m x 12%); I/YR = 12,6%
 COMPT – PV = R7,557m ≈ R7,6m
 14% x 0,72 (100% less 28%) = 10,08%
Explaining the importance of WACC in the assessment of financial viability of a tender:
“Estimation of the cost of capital is probably the most difficult area in investment appraisal.
When appraising a capital investment project, a discount rate is required. The rate used to
evaluate the capital investment must reflect the risk of the project. The target WACC [see
section 4.11 (below)] rate is the correct rate for capital appraisal, as it reflects the desired capital
structure of the firm and the return required by the shareholders after allowing for risk” (Skae
et al., 2017:120).
▪ The tender proposal will require FW to invest in 45 additional delivery vans (capital
investment).
▪ The importance of WACC in a capital investment project is that in appraising the envisaged
capital investment project, the calculated WACC is used as a discount rate to calculate the
“net present values” (NPV) of the expected future cash flows expected from a capital
investment project OR used to discount the future cash flows of the project.
▪ In this regard, FW will therefore use 11,22% (or WACC) as the discount rate to appraise
the capital investment needed for the UAZ proposed tender, and thus decide on the
financial (non)/acceptability of the UAZ tender proposal.
▪ Furthermore, FW should not consider the capital investment relating to the UAZ tender if
the expected return thereon is less than 11,22% (WACC). In this case, the company would
not be able to meet the return demanded by the capital funders, be it equity holders or debt
financiers. Used as the cost to assess the acceptability of [percentage] return of the UAZ
tender.
347
MAC3761/QB002
(c) (ii) Based on capital budgeting principles, advise FW whether it will be [12]
financially beneficial to accept the tender.
Details Cf0 Cf1 Cf2 Cf3

R’000 R’000 R’000 R’000
Investment (29 250)
Working capital (5 750) 5 750
Cost of old five vans (sunk cost) 0
Revenue 28 000 29 400 17 600
Depreciation (non-cash) 0 0 0
Stipend (9 000) (9 000) (9 000)
Fuel costs (2 187,5) (2 187,5) (2 625)
Maintenance costs (90) (90) (1 000)
Insurance costs (1 080) (1 080) (1 080)
Cash flows before tax 15 642,5 17 042,5 9 645
Taxation (739,9) (1 131,9) (0)
Net cash inflow/(outflow) (R35 000) R14 902,6 R15 910,6 R9 645
I/YR = 11,22%; COMP – NPV ≈ (R1,728m)
Advice: From a financial perspective only, the UAZ tender will generate R1,728m loss (a
negative net present value) for FW. The UAZ tender is thus not financially viable and FW should
not accept this tender.
 Given
 R650K x 45 vans = R29,25m
 R28m x 1,05 = R29,4m
 R29,40m x 1,05 = R38,87m limited to R17,6m (R75m less R28m less R29,4m)
 R150K x 60 (50 drivers + 10 logistics management interns) = R9,0m
 50 x 50K = 2 500K km ÷ 100km = 25 000km x 7 litres x R12,50 = R2,1875m
 25 000km x 7,5 litres x R14 = R2,625m
 5 vans x R18 000 (maintained at the current market rates) = R90K
 50 vans x R20 000 (maintained at the then market rates) = R1 000K
 50 vans x R1 800 x 12months = R1 080K
 Taxation calculations
Details Cf1 Cf2 Cf3
R’000 R’000 R’000
Cash flows before taxation 15 642,5 17 042,5 9 645
Less: Working capital 0 0 5 750
Less: Wear & tear 13 000 13 000 6 500
Taxable income/(loss) R2 642,5 R4 042,5 (R2 605)
Taxation at 28% R739,9 R1 131,9 R0
348
MAC3761/QB002
(c) (ii) Based on capital budgeting principles, advise FW whether it will be [12]
financially beneficial to accept the tender.
 R650K x 50 = R32,5m x 40% = R13 000K
 R32,5m x 20% = R6 500K
 Refer to question 2(c)(i) above.
5.37. SOLUTION 37: BHELL LTD
(i) EBITDA margin 2020 2019
Calculations:
𝐸𝐵𝐼𝑇𝐷𝐴 R19,345m R21,54m
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 R280m R212,5m
= 6,91% = 10,14%
 Given
 R4,817m + R8,6m + R5,928m = R19,345m
 R4,04m + R8,8m + R8,7m = R21,54m
Possible reason for the decline in EBITDA margin:

▪ Increase in operating expenses possibly be attributed to weakening Rand (against US
Dollar), increase in staff costs, marketing costs, administrative costs, etc.
▪ Possible upfront expenses relating to setting up the seven new factory shops at the
start of 2020 (e.g. advertising and promotions, staff recruitment).
(ii) Interest cover 2020 2019
Calculations:
𝐸𝐵𝐼𝑇 R4,817m + R5,928m R4,040m + R8,7m
𝐹𝑖𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 R5,928m + R3,325m R8,7m + R2,7m
R10,745m R12,74m
R9,253m R11,4m
349
MAC3761/QB002

 Given
 Alternative – 2020: R19,345m less R8,6m = R10,745m
 Alternative – 2019: R21,54m less R8,8m = R12,74m
 2020: R4,817m + R8,6m + R5,928m = R19,345m
 2019: R4,04m + R8,8m + R8,7m = R21,54m
 Alternative – 2020: R5,928m + R3,325m = R9,253m
 Alternative – 2019: R8,7m + R2,7m = R11,4m
Possible reason for the slight improvement in interest cover:

▪ Repayment of the long-term loan leading to lower interest charged.
▪ Decrease in prime rate (if variable rate loans) or rates negotiated with South African banks.
(iii) Earnings-yield 2020 2019
Calculations:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 R1,820m R1,295m
𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑖𝑠𝑎𝑡𝑖𝑜𝑛 R39,75m R37,5m
= 4,58% = 3,45%
 Given
 2020: R3,195m – R1,375m = R1,820m
 2019: R2,670m – R1,375m = R1,295m
 2020: R37,5m x 1,06 = R39,75m OR R25 x 1,06 = R26,50 x 1,5m = R39,75m
 2019: R25 x 1,5m = R37,5m
 R30m ÷ R20 = 1,5m ordinary shares
Possible reason for the increase in earnings-yield:

This change (note this would be a reciprocal decrease in P/E ratio) may be due to
negative market perception about the future earnings potential of Bhell, resulting from
concerns around:
▪ Its non-existent hedging strategy, weakening rand, declining profit margins, high
gearing; or
▪ Possible overtrading at the back of the recent opening of seven new factories
considering the market competitiveness, brand-loyalty and market saturation.
350
MAC3761/QB002
(iv) Interest-bearing debt 2020 2019

to equity ratio
Calculations:
R85m R100m
𝑇𝑜𝑡𝑎𝑙 𝐼𝐵𝐷 R42,96m R42,94m
𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦
= 1,98:1 = 2,33:1
 Given
 2020: R65m + R5m + R15m = R85m
 2019: R80m + R5m + R15m = R100m
 R30m + R0,46m + R12,5m = R42,96m
 R30m + R0,44m + R12,5m = R42,94m
 R1,375m ÷ 11% = R12,5m
Possible reasons for the improvement in IBD to equity ratio:
▪ Repayment of the long-term loan leading to lower interest charged.
▪ Slight improvement in retained earnings.
(b) Discuss how Bhell is exposed to different categories of currency risk (if any)
[5]
and how best these risks can be mitigated.
1. Discussion of currency risk categories
“Currency risk or foreign exchange rate risk can be defined as the potential for financial loss
for an enterprise due to adverse movements in the foreign exchange rate(s) when it is
involved in an international transaction” (Skae et al 2017:590).
No. Currency risk Discussion of applicability to Bhell
category
1. Transaction risk ▪ An enterprise is exposed to transaction risk from a perspective
of either a supplier (selling goods in a foreign currency) or a
customer (buying goods in a foreign currency).
▪ With regards to transactions between Bhell and BEG, Bhell is
the customer buying goods from its foreign supplier, BEG and is
invoiced in a foreign currency (US dollars).
▪ In this instance, Bhell is exposed to transaction risk because
as Bhell’s functional currency (Rand) weakens against the
currency of invoice (US dollars), Bhell will pay more rands for
less US dollars needed to settle the foreign debt.
351
MAC3761/QB002
[5]
No. Currency risk Discussion of applicability to Bhell

category
2. Translation risk Translation risk arises when an enterprise:
(i) owns assets that are located overseas;
(ii) owes overseas supplier(s) or has borrowed funds from an

overseas funder/financial institution; and
(iii) owns part of or all of the equity of a foreign operation that is

operated through an overseas based entity.
(These assets and liabilities are denominated in a foreign
currency)
The majority of Bhell’s purchases are invoiced in US dollars and

about 80% of the company’s purchases are on credit. Therefore, it
is likely that Bhell will have trade payables to BEG that will require
to be translated into South African rand (balance sheet account),
giving the company exposure to translation risk.
Source: Skae et al (2017:591)

3. Economic risk Economic risk arises when there is a change in macroeconomic
conditions in which an enterprise operates. These conditions may,
among other things, include monetary policies, supply and
demand, balance of payments, interest rates and inflation. The
change in macroeconomic conditions may lead to the weakening or
strengthening of the functional currency, which in turn, may cause
changes in the competitiveness of the entity’s goods.
Weakening rand as a result of macroeconomic factors at play in

South Africa and in the global economy will lead to Bhell paying
more rands to source goods from its suppliers (BEG in particular).
This may result in Bhell’s goods being more expensive and/or
customers switching to competitors.
Source: Skae et al (2017:591, 603)
352
MAC3761/QB002
[5]
2. Discussion of how Bhell’s exposure to currency risk can be mitigated
(i) Bhell may utilise hedging facilities to mitigate its exposure to currency risk. Generally,
hedging involves implementing a financial measure (strategy) that will reduce the extent of
possible financial losses resulting from the exposure to transaction, translation or economic
risks. Some of the hedging instrument forms include foreign exchange contracts (commonly
referred to FECs), futures, options, currency swaps and money-market hedges.
(ii) Bhell may consider approaching the subsidiary in Netherlands to invoice all goods supplied
in South African rand (fixed amount) instead of US dollars.
(iii) The company may also expand its market and start supplying customers based outside the
country and invoice them in US dollars.
(iv) Bhell may consider buying from its foreign suppliers on cash basis. The company can utilise
bank overdraft and/or other short-term funding options available from local financial
institutions to settle the supplier invoices immediately.
Source: Skae et al (2017:603 – 620)
(c) Comment on the correctness of Bhell’s management accountant that the

company will require a maximum of R1,5 million additional working capital to [8]
implement the proposed WCM changes in the 2021 financial year.
Details 2021 2020 Movement

R’000 R’000 R’000
Trade receivables 25 735 30 480 4 745
Inventory 18 638 7 458 (11 180)
Cash 5 472 (1 168) (6 640)
Total current assets 49 845 36 770 (13 075)
Trade payables (30 791) (16 900) 13 891
Working capital requirements R19 054 R19 870 R816
Comment:
Based on the above calculations, Bhell’s working capital requirements for the 2021 financial
year will reduce by R0,816 million from the 2020 financial year. The view of the management
accountant that Bhell will require a maximum of R1,5 million additional working capital is
therefore incorrect.
353
MAC3761/QB002
(c) Comment on the correctness of Bhell’s management accountant that the

company will require a maximum of R1,5 million additional working capital to [8]
implement the proposed WCM changes in the 2021 financial year.
Take note, the following liquidity ratios are important for addressing this question:
Ratio Formula
Trade receivable days 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
X 𝑑𝑎𝑦𝑠
𝐶𝑟𝑒𝑑𝑖𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
Trade payable days 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑡𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
X 𝑑𝑎𝑦𝑠
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
Inventory turnover 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
 Given
 R280m x 1,065 = R298 200K x 70% x 45 days ÷ 365 = R25 735,068K ≈ R25 735K
 R298,2m x 75% = R223,65m ÷ 12 times = R18 637,5K ≈ R18 638K
 R221 514K x 1,057 x 80% x 60 days ÷ 365 = R30 791,05K ≈ R30 791K
(d) Draft a report dated 30 June 2020 to the management of Bhell with regard
[25]
to the proposed acquisition of Tharghost Ltd
Report : Matters arising from the proposed acquisition of Tharghost® Ltd

From : Unisa student
To : The management of Bhell® Ltd
Date : 30 June 2020
We have the honour to present the following regarding the three matters you raised about
the possible acquisition of Tharghost Ltd:
1. Matter (i) – The difference between investing in equity and purchasing the net
assets
No Investing in equity (buying shares) Investing in the net assets of a business
1. When investing in equity it is easier to Investment in the net assets is preferable
obtain an investment in the business when a full control of assets is acquired.
below a 100% interest.
2. The continuation of the existing By contrast, investing in assets will
business contracts and agreements is possibly render the existing business
more certain when investing in the contracts and agreements null and void.
equity.
354
MAC3761/QB002
[25]
Date : 30 June 2020
1. Matter (i) – (continued)
No Investing in equity (buying shares) Investing in the net assets of a business
3. The buyer (Bhell) cannot “strip-out” The buyer (Bhell) is able to select and buy
any part of the net assets deemed not only the exact net assets being required.
desirable for the acquisition. As a result, the buyer can identify possible
4. The buyer may unknowingly acquire hidden and/or undesirable liabilities and
hidden liabilities. exclude those from the required net assets.
5. Taxation treatment: Taxation treatment:
▪ Wear-and-tear allowances on the ▪ Possible step-up in the tax values of the
assets will still continue as in the assets and possibly allowing Bhell a
past. higher wear-and-tear allowances.
▪ On the acquisition date, Bhell will ▪ If Tharghost had an assessed loss, it
acquire the latent capital gains tax could not be transferred to Bhell.
of Tharghost.
▪ If Tharghost had an assessed loss,
it could be transferred to Bhell.
6. Tharghost is listed on the JSE, as Bhell will enjoy sole-ownership of the
such, post the acquisition, Bhell’s acquired assets.
ownership will possibly be diluted by
other investors.
Source: Skae et at (2017:423)
355
MAC3761/QB002
(d) Draft a report dated 30 June 2020 to the management of Bhell with regard to
[25]
the proposed acquisition of Tharghost Ltd
Date : 30 June 2020
2. Matter (ii) – Reasonableness test of Tharghost’s market capitalisation
Details CF0 CF1 CF2 CF3
2024
2020 2021 2022 2023
R’000 R’000 R’000 R’000 R’000
Net profit for the year 1 511 1 692 1 861 2 068
Add: Depreciation 72 72 72
Add: Loss on sale of assets 25,2
Cash profits 1 583 1 789,2 1 933 2 068
Proceeds from sale of assets 45
Capital investments (500) 0 (250)
Working capital (55) (37) 15
Continuing value 42 118
Expected cash flows R0 R1 028 R1 797,2 R43 816
Value of Tharghost at 30/06/20 R33 616
Conclusion: Based on the free cash flow valuation technique, Tharghost’s total equity value
as at 30 June 2020 is R33,6m. This value is reasonable in relation to the company’s market
capitalisation of R37,5m as at 30 June 2020. In light of no additional information, the R3,9m
difference could be ascribed to goodwill.
For your benefit and ease reference, the below workings in support of the calculated R33,6
million value are presented to you:
 Given
 R1 374K x 1,10 = R1 511K x 1,12 = R1 692K x 1,1 = R1 861K
 R1 933K (2023: Cash profits) x 1,07 = R2 068K
 (R1,284m less R1,2m) ÷ R1,2m = 7% or
 (R1,374m less R1,284m) ÷ R1,284m = 7%
 R100K x 0,72 = R72K
 R35K x 0,72 = R25,2K
 2021: R1 280K less R1 225K = -R55K
 2022: R1 317K less R1 280K = -R37K
 2023: R1 302K less R1 317K = +R15K
356
MAC3761/QB002
(d) Draft a report dated 30 June 2020 to the management of Bhell with regard to
[25]
the proposed acquisition of Tharghost Ltd
Date : 30 June 2020
2. Matter (ii) – continued
 2023: R1 302K less R1 317K = +R15K
 Continuing value
𝐶𝐹1 R2 068K
𝐶𝑣 = = = R42 118,1263 ≈ R42 118K
𝑊𝐴𝐶𝐶−𝑔 0,1191−0,07
Tharghost’s weighted average cost of capital (WACC) at 30 June 2020
Details Market Weight Cost of WACC
values capital
R’000
Equity 37 500 0,66 14,50% 9,57%
Preference shares 4 000 0,07 12,50% 0,88%
Debentures 15 375 0,27 5,41% 1,46%
Total R56 875 1/100 11,91%
 R23m less R8m = R15m ÷ R10 = 1,5 million shares x R25 = R37,5m
 Market price: Dividend ÷ dividend yield = 150 cents ÷ 6% = R25 per ordinary share
 Cost of debentures
Key Value Calculations
PV R15 375K given
PMT -R918K R15 000K x 8,50% x 72%
FV -R15 000K given
N 4 2021, 2022, 2023 and 2024
COMP I/YR 5,41% 5,40827% ≈ 5,41%
 Value of Tharghost as at 30 June 2020
Key Value Display
CF0 R0
CF1 (2021) R1 028
CF2 (2022) R1 797,2
CF3 (2023) R43 816
I/YR 11,91%
COMP – NPV ≈ R33 616K
357
MAC3761/QB002
[25]
Date : 30 June 2020
3. Matter (iii) – advice on the possible payment methods that Bhell can use to pay for
the propose equity stake in Tharghost.
No Payment Discussion
method
1. Cash ▪ This method entails the payment of cash to the existing equity
offer holders of Tharghost in exchange for remaining 90% equity stake in
Tharghost. Bhell can negotiate any price between R30,24m (90% of
R33,6m – FCF value) and R33,75m (90% of R37,5m – market
capitalisation).
▪ With the cash offer method, Bhell will be expected to pay cash of at
least R30,24m. However, as at 30 June 2020, Bhell has no cash
reserves (instead an overdraft), therefore, this payment method can
only be possible if Bhell is willing and able to raise the required funds
of R30,24m.
▪ The required funds can be raised from money markets (generally,
this source is not advisable for financing business acquisition) or
capital market in the form of long term debt instruments or issuing
additional Bhell shares to its existing shareholders and/or general
public, subject to available number of unissued authorised shares.
▪ In this regard, some of the key considerations will be: (i) Bhell’s
liquidity position before and after acquisition, (ii) impact on Bhell’s
gearing, (iii) Bhell’s target capital structure, (iv) dilution of ownership,
(v) taxation implications, (vi) future investment opportunities, as well
as (vii) the preference of Tharghost’s shareholders, among others.
358
MAC3761/QB002
[25]
Date : 30 June 2020
3. Matter (iii) – continued
No Payment Discussion
method
2. Share-for- ▪ Bhell can make a share-for-share offer. This method entails the
share- issuing of Bhells’ shares to Tharghost’s existing shareholders in
offer exchange for their equity stake in Tharghost.
▪ By reference to Bhell’s memorandum of association, with authorised
ordinary shares of 2 million and 1,5 million already in issue, Bhell
can only issue to Tharghost’s existing shareholders, a maximum of
additional 500 000 ordinary shares as at 30 June 2020.
▪ At 30 June 2020, Bhells’ ordinary shares traded at R26,50 p/s (see
question 1(a) (iii) above). This translates into the acquisition of
R13,25m (R26,5 x 500 000 shares) equity stake value in Bhell by
Tharghost’s shareholders. This would mean a shortfall of R16,99m
(R30,24m – R13,25m). Therefore, the offer can be made to be partly
shares (to the value of R13,25m) and partly cash (R16,99m), unless
the memorandum of association is altered to increase the number of
shares that can be issued.
▪ With this payment method, the following, amongst others, are the
key considerations: (i) Bhell’s share price volatility, (ii) control dilution
in Bhell, (iii) dividend policy and dividend expectations, and (iv)
expectations from Tharghost’s shareholders.
3. Cash ▪ A consideration of all aspects discussed in points 1 and 2 for Matter
offer and (iii) above.
share-for-
share
offer
Source: Skae et at (2017:516)
359
MAC3761/QB002
[25]
Date : 30 June 2020
This concludes our report as per your request. We hope that you will find all the above
findings in order. Should there be any matter that need further clarity, you are welcomed to
contact us.
In closing, we wish to convey our vote of thanks to all our personnel that contributed to this
report in one way or the other. Last but not least, we further express our sincere gratitude
to Bhell® Ltd, its management staff and all the staff for your professionalism and the
opportunity you offered our firm to provide guidance of these various matters, we are
forever indebted to you for the confidence you showed in our firm.
A copy of this report can be found on:

https://www.valuation-experts.orgs.caz/Valuation/Bhell2Tharghost/30062020.pdf
Report compiled by: ValuationExperts

website: www.valuation-experts.orgs.caz
©
UNISA 2022
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
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Department of Management Accounting

MANAGEMENT ACCOUNTING III

© 2023 University of South Africa

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4.32. QUESTION 32: MAGNUS ORANGE LTD....................................................................... 113

5.30. SOLUTION 30: DISTELL LTD ........................................................................................... 279

2 FREQUENTLY ASKED QUESTIONS

2. Which topics are examinable?

4. Will I receive a formula sheet or do I need to know my formulas?

These formulas include the following:

1. Formulas to calculate the beta coefficient

8. In the examination, will we be given specific ratios to compute or will we be required to

11. Are preference shares to be classified as equity or liability?

Therefore, you need to EXCLUDE:

• Non-operational cash flow as non-operating assets should be valued separately

Therefore, you need to INCLUDE:

3 TOPICS-TO-QUESTIONS MAPPING TABLE

ANALYSIS OF FINANCIAL INFORMATION, STRATEGY AND RISK MANAGEMENT

4.1. QUESTION 01: EDCARS GROUP LIMITED (120 marks; 3½ hours)

Statement of comprehensive income

R million Notes 2016

Weighted average number of shares (million) 200

Statement of financial position

R million Notes 2016

Capital and reserves

2. Other income relates to dividends received from investments (marketable securities)

3. Trading expenses comprise of:

5. The corporate taxation rate is 28%.

(Calculations 16 marks & comments 8 marks)

(Calculations 10 marks & comments 5 marks)

(Calculations 16 marks & comments 8 marks)

(Calculations 18 marks & comments 8 marks)

(Calculations 18 marks & comments 7 marks)

Statement of comprehensive income of Carlo Tito Mario Africa

SALIENT INFORMATION 2017 2016

Statement of financial position of Carlo Tito Mario Africa

Inventories 850 838

EQUITY AND LIABILITIES

Short-term borrowings (bank overdraft) 651 250

(Calculation 14 marks, Comment 14 marks, presentation 2 marks)

(Calculation 14 marks, comment 14 marks, presentation 2 marks)

(Calculation 14 marks, comment 14 marks, presentation 2 marks)

(Calculation 20 marks, comment 20 marks, presentation 2 marks)

(Calculation 14 marks, comment 14 marks)

TOTAL: 160 MARKS

4.3. QUESTION 03: DRESSED FOR SUCCESS (30 marks; 54 minutes)

Statement of comprehensive income for the year ended 31 December 2X14

Turnover 908 191 814 521

Cost of sales (563 078) (553 874)

Gross profit 345 113 260 647

Statement of financial position at 31 December 2X14

Total Assets 792 621 575 157

EQUITY AND LIABILITIES

Non-current liabilities 188 386 111 579

Total equity and liabilities 792 621 575 157

Financial ratios of Dressed For Success Limited

(i) Gross profit percentage 32% ?

• You may ignore the impact of VAT.

4.5. QUESTION 05: NEW MUTUAL GROUP (30 marks; 54 minutes)

Statement of comprehensive income R million

Statement of financial position R million