Question 1

1.1 C 1
1.2 B 1
1.3 B 1
1.4 B 1
1.5 C 1
1.6 A 1
1.7 D 1
1.8 A 1
1.9 A 1
1.10 C 1
1.11 A 2
1.12 B 2
1.13 A 2
1.14 B 2
1.15 A 2
1.16 C 2
1.17 B 2
1.18 D 2
1.19 A 2
1.20 A 2
 Question 2
2.1 Debt = 0.40
Equity = 1

After tax profits = R1 600 000 * 0,72 = R1 152 000 1

Equity portion of the investment

1 400 000 * 1/1.4 = 1 000 000 2

Residual Dividends
1 152 000 - 1 000 000 ü 2(1P)
Therefore dividend of 152 000 üp 1p
Max 6

2.2 Stable Dividend policy 1

•This method attempts to pay a level of dividends that is sustainable 1
Constant dividend/earnings method 1
•This method pays shareholders a dividend which is calculated as a percentage
of earnings 1
Max 4
 Question 3
3.1 Exchange risk
Exchange rate risk is the risk related to having international operations in a world
where relative currency values vary. 1

Mark only 3 of the following:

Transaction Risk/Short Run 1
Risk from day-to-day fluctuations in exchange rates and the fact that companies have
contracts to buy and sell goods in the short-run at fixed prices 1

Translation Risk 1
Income from foreign operations has to be translated back to rand for accounting
purposes, even if foreign currency is not actually converted back to rand
1

Economic Risk/ Long Run 1

Long-run fluctuations come from un-anticipated changes in relative economic
conditions 1

Political risk 1
Changes in value that arise as a consequence of political actions 1
Max 7

3.2 change annual inflation rates to nominal rates

SA= 0,06 * (4/12) = 2% 1
USA = 0.02 * (4/12)= 0.67% 1

R14.50ü * (1+2%)/(1 + 0.67%) = R14, 69 ü 2

Max 4

3.3 R14,96 - 14.69 P = 0,27 ü 1

0,27 * 500 000 ü 1
(135 000) LOSS 2 (1p)
Max 4
 Question 4
4.1
Net Asset value = R867 000 2

D0= 48750 1
D1= (D0*1.105)= 53,869 1
R 15%
g 10.50% 1
Value 1,197,083.33 2(1P)
Max 7

4.2

Net Asset value advantages and Disadvantages

Easy to use. 1
Ignores the effects time value of money. 1
Ignores risk. 1
looks at historical amounts and ignores growth 1

Dividend Growth Model advantages and Disadvantages

Assumes a constant growth rate. 1
Only applicable for valuing minority shareholding. 1
Can be used to compute an equity price at any point. 1
Requires the growth rate to be less than the required return 1
Max 8
Accept any other valid points
Question 5
Part 1
0 1 2 3 4 5
Plant -1,250,000 1
Wear and Tear tax shield 70,000 70,000 70,000 70,000 70,000 2
After tax recoupment 198,000 2
Maintenance Expense -43,200 -43,200 -43,200 -43,200 -43,200 1
Contribution 1,080,000 1,080,000 1,080,000 1,080,000 1,080,000 2 (1P)
Fixed Costs -684,000 -684,000 -684,000 -684,000 -684,000 1
Total -1,250,000 422,800 422,800 422,800 422,800 620,800 1P

Rate 15% 1
NPV 265,732 1P
Therefore manufacture 1P
Market research-Sunk 1

SP 80
VC (40-10) -30 1
Contribution 50

Number of units 30,000

Total Contribution 1,500,000
Max 15

Part 2
0 1 2 3 4 5
Plant 1,250,000 1
Recoupment -198,000 1P
Wear and Tear tax shield -70,000 -70,000 -70,000 -70,000 -70,000 1P
Maintenance Expense 43,200 43,200 43,200 43,200 43,200 1
Lease Payments -250,000 -250,000 -250,000 -250,000 -250,000 1
Tax on maintenance 70,000 70,000 70,000 70,000 70,000 1
Total 1,000,000 -276,800 -276,800 -276,800 -276,800 -224,800 (1p)

After tax cost of debt 7.56% 1

NAL (81,998) 1P
Therefore buy asset 1P
Max 10
Question 6
Profitability 2019 2018
Note: Half a mark for each ratio
GP 31.12% 12.44% 1
Net profit percentage ratio 16.88% 7.80% 1
GP percentage has more that double as compared to the previous year 1
This is significant considering the fact that turnover increased by 64.7% from 2018 to 2019 due to the policy of aggressive
growth 1
However increase in sales appears to be financing partly using long term debt. 1
Also, the increase in sales might be funded through credit sales which have increased in 2019 1
This might suggest that sales have increased but there is no positive impact on cash flows as credit sales could largely be
from non paying debtors 1
The substantial increase in the net profit percentage ratio is due to the high GP% ratio 1

Return on assets = Net income before tax and interest / FA + CA 40.20% 23.00% 1
Return on equity 62.69% 27.45% 1
Fixed Asset turnover 6.28 7.85 1P
The return on assets has increase from 2018 to 2019 due to the significant increase in profit and sales 1
However the slight decrease in fixed asset turnover seems to suggest an inefficient use of assets. 1
The fact that ROE is still greater than ROA suggest that the company is achieving positive financial leverage 1
This suggest that debt is being used effectively to the benefit of shareholders

Solvency ratios
Debt : Equity 1.41 0.48 1
Total debt Ratio 0.58 0.32 1P
Times interest earned 4.60 4.37 1
the company has gone from a predominantly equity-financed company to a debt-financed company 1
Profits have increased substantially, but so has financial risk 1
The level of debt is not yet a concern since the interest cover is still high 2
The times interest earned ratio has improved marginally from previous year 1
This is due to the high earnings and low interest rates 1
However a change in interest rates might have a negative impact on the cover 1

Liquidity ratios
Current ratio 7.13 7.84 1
Acid test ratio 4.45 4.24 1
The current ratio is marginally down, but very strong 1
This is mainly due to high increase in debtors and inventory 1
Asset management ratios
Inventory days 113.63 64.03 1
Or
Inventory Turnover 3.21 5.70 1

Debtors collection 129.39 64.48 1

Or
Debtors turnover 2.82 5.66 1

The collection period has increased significantly 1

This strongly suggests that debtor payment is going to be a problem 1
If a large number of debtors were to default, future sales as well as losses through bad debts will be severely affected 1
Debtors are also being financed via long-term debt, which is a problem and increases risk. 1
The stock turnover ratio has increased. 1
This is partly due to the increased sales and the need to adopt an aggressive approach. 1
This is could also be symbolic of bad inventory management techniques 1

Max 25