DEPARTMENT OF ACCOUNTANCY

FINANCIAL MANAGEMENT 3B

ASSESSMENT OPPORTUNITY 2: 14 OCTOBER 2017

TIME: 130 Minutes MARKS: 100

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ASSESSORS: Mr S Modiba
Ms M Dolamo

MODERATOR: Ms W Mabuto

INSTRUCTIONS TO CANDIDATES

1. This paper consists of 11 pages.

2. You are reminded that answers may NOT be written in pencil. NO tippex may be used.
3. The marks shown against the requirement(s) for every question should be regarded as an
indication of the expected length and depth of your answer.
4. The total of 130 Minutes comprises of 10 minutes reading time and 120 minutes writing
time.
6. The reading time will be before the writing time begins during which you should read the
question paper and, if you wish, highlight and/or make notes on the question paper.
However, you will not be allowed, under any circumstances, to open the answer book and
start writing or use your calculator during this reading time.
7. Show all calculations clearly.
8. Silent, non-programmable financial calculators may be used, unless otherwise instructed.
9. All open spaces must be crossed out with a pen. Failure to cross out the open spaces will
disqualify you from handing in your script for a remark.

Question Marks Time allocated (minutes)

Reading -- 10
1 25 30
2 10 12
3 15 18
4 25 30
5 25 30

Total 100 130

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MODULE: Financial Management 3B (BSR3B01) (AO2 – OCTOBER 2017)

SECTION A [25 marks]

QUESTION 1
[Where applicable, round all answers to the nearest rand]

Select the correct option by WRITING the corresponding letter of the answer on the answer sheet.

Question 1.1

The process of valuing an investment by applying the time value of money to its
future cash flows is called:

A discounted cash flow

B balance sheet approach
C multiples approach
D earnings capitalization (1)

Question 1.2

The underlying assumption of the dividend growth model is that a share is worth:

A the same amount to every investor regardless of their desired rate of return.
B the present value of the future income which the share generates.
C an amount computed as the next annual dividend divided by the market rate of
return.
D the same amount as any other share that pays the same current dividend and (1)
has the same required rate of return.

Question 1.3

Assume that you are using the dividend growth model to value shares. If you
expect the market rate of return to increase across the board on all equity
securities, then you should also expect the:

A market values of all shares to increase, all else constant.

B shares that do not pay dividends to decrease in price while the dividend-paying
shares maintain a constant price.
C market values of all shares to decrease, all else constant.
D market values of all shares to remain constant as the dividend growth will offset (1)
the increase in the market rate.
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MODULE: Financial Management 3B (BSR3B01) (AO2 – OCTOBER 2017)

Question 1.4

When considering the valuation of equity shares that represents a minority

shareholding, the most appropriate valuation methodology is:

A Gordon’s dividend growth model / dividend discount model

B Price/Earnings (PE) ratio
C Net asset value (NAV)
D Free cash flow methodology (1)

Question 1.5

Transpax Limited just paid R10.50 to their shareholders as the annual dividend.
Simultaneously, the company announced that future dividends will be increasing
by 4%. If you require an 8% rate of return, how much are you willing to pay to
purchase one share?

A R262.50
B R131.25
C R136.50
D R273.00 (2)

Question 1.6

Tapcon currently has a profit before interest after tax (PBAT) of R1 125 000.
Depreciation is expected to be R55 000 next year. Tapcon plans to spend R230
000 on new equipment next year. The profit is expected to grow by 10% per
annum. Working capital, currently at R60 000 will also grow at 10% per annum.
Tapcon’s free cash flow for next year will be:

A R1 056 500
B R996 500
C R944 000
D R884 000 (2)

Question 1.7

The market price of a share is R15 and the EPS is R2.10. The Price/Earnings
(P/E) ratio is:

A 0.14
B 31.5
C 7.14
D None of the above. (2)
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MODULE: Financial Management 3B (BSR3B01) (AO2 – OCTOBER 2017)

Question 1.8

Which of the following is/are incorrect regarding the accounting treatment for a
financial lease?

I. The lessor is obligated to transfers ownership of the asset to the lessee

at the end of the lease term.
II. The lease term is at least 50% of the economic life of the asset.
III. The lease term is approximately the same as the useful life of the asset.

A II only
B III only
C I and II only
D I and III only (1)

The following information applies to question 1.9 – 1.10

Ultra solar Ltd is deliberating on whether to lease or buy new equipment. The equipment
costs R200 000. The lease period is for 5 years and SARS allows wear and tear on
equipment over 3 years. The applicable after tax interest rate is 10%. Assume the South
African Corporate tax rate is applicable and annual lease payment is R15 000

Question 1.9
The after tax lease payments can be calculated as:

A R 10 200
B R 10 300
C R 10 500
D R 10 800 (2)

Question 1.10

Calculate the annual wear and tear tax shield.

A R 19 667
B R 18 667
C R 17 667
D R 16 667 (2)

Question 1.11

Which of the following stakeholders are users of both financial and non- financial
information:
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MODULE: Financial Management 3B (BSR3B01) (AO2 – OCTOBER 2017)

I. Employees
II. South African Revenue Services (SARS)
III. General Public

A Only I
B Only I and II
C None of the above.
D All of the above. (1)

Question 1.12

Which of the following is not regarded as a liquidity ratio:

A Inventory days
B Operating days
C Trade and other receivable days
D Trade and other payable days (1)

Question 1.13

Which of the following is not regarded as a profitability ratio:

A Revenue growth (change in revenue).

B Profit over Interest (Interest cover).
C Growth in operating expenses (change in operating expense).
D Net profit margin %. (1)

Question 1.14

The formula for calculation of earnings per share is:

A Net profit after tax divided by the total number of shares issued.
B Net profit after tax divided by the total number of shares authorised.
C Operating income divided by the par value of shares issued.
D None of the above. (1)
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MODULE: Financial Management 3B (BSR3B01) (AO2 – OCTOBER 2017)

The following information applies to question 1.15 – 1.17.

The following information relates to Kanana Ltd for the financial year ended June
2017:
• Revenue R916 440 (2016: R783 282)
• Gross profit margin 41% (2016: 46%)
• Profit for the year R88 160 (2016: R114 815)

Question 1.15

Growth in revenue is calculated as:

A 15%
B 16%
C 17%
D None of the above. (2)

Question 1.16

The cost of sales for 2017 is calculated as:

A R 416 000
B R 425 700
C R 540 700
D None of the above. (2)

Question 1.17

Assuming the authorised and issued shares are 150 000 and 120 000
respectively, the earnings per share in Rands for 2017 is calculated as:

A R 0.735
B R 0.588
C R 0.957
D None of the above (2)
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MODULE: Financial Management 3B (BSR3B01) (AO2 – OCTOBER 2017)

SECTION B [25 marks]

QUESTION 2 (10 marks)

Pay Software Limited just paid a dividend of R4.00 per share. The dividend is expected to grow
by at 25% for the next three years and then fall off to a constant growth 7% growth rate thereafter.
Investors currently require a 16% return on the shares.

REQUIRED:

2.1 Calculate the current share price of Pay Software Limited (6)
2.2 Criticise the use of the Dividend Growth Model in valuing shares. (4)

QUESTION 3 (15 marks)

Tin-stuff is a furniture manufacturing company. The company has decided to use scrap material
and upcycle these into trendy furniture.

This new focus towards upcycled furniture manufacturing will result in savings amounting to
R324 000 per annum. This savings will be due to the fact that material will be purchased from
scrapyards at very low costs. This new venture will require Tin-stuff to acquire a new welding
machinery, which currently costs R2 500 000. If Tin-stuff decides to purchase the machinery,
annual maintenance costs will amount to R60 000.

The operating manager at the company found a company that leases these type of machinery for
R510 000 per annum over a 5 year period. The lease payments are payable in advance. If Tin-
stuff decides to lease the machinery, the lessor will be responsible for all maintenance costs.

The machinery is depreciated over a 5 year period and Tin-stuff will receive the same wear and
tear tax allowance from SARS. Assume that the South African corporate tax rate is applicable
and that the pre-tax cost of debt is 10%.

REQUIRED:

3.1 Calculate whether Tin-Stuff should buy or lease the machinery.

(Show all workings) (10)
3.2 List five qualitative factors that Tin-stuff should be aware when considering
acquiring the welding machinery and producing upcycled furniture. (5)
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MODULE: Financial Management 3B (BSR3B01) (AO2 – OCTOBER 2017)

SECTION C [50 marks]

QUESTION 4 (25 marks)

Stickylabel is one of the largest black-owned, South African-based company with business
interests in South Africa and Botswana. Founded in 1990, Stickylabel has gained distinction in
the supply of world-class self-adhesive labels. The company specialises in flexographic, letter
press and digital print technologies, allowing it to print labels of consistently high quality on a
range of substrates with a variety of finishes.

Digigroup Ltd, a large multinational digital media group, is considering purchasing the entire
issued share capital of Stickylabel. Since the owners of Stickylabel are keen to sell, they have
provided Digigroup with the following financial information:

INCOME STATEMENT FOR THE YEARS ENDED 31 DECEMBER

(Forecast) (Forecast) (Forecast)
2018 2019 2020
R’000 R’000 R’000

Turnover 52 000 54 900 57 500

Net profit after tax 3 900 6 700 8 800

Net profit after tax was calculated after

taking the following into account:
Interest paid (Debentures) 2 160 2 160 2 160
Repairs and maintenance 1 200 1 300 1 400
Depreciation 2 300 2 600 2 900
(Profit )/Loss on sale of assets 400 (460) 570
Dividends received 200 250 290
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MODULE: Financial Management 3B (BSR3B01) (AO2 – OCTOBER 2017)

STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER

Actual (Forecast) (Forecast) (Forecast)
2017 2018 2019 2020
R’000 R’000 R’000 R’000
Ordinary Shares 20 000 20 000 20 000 20 000
Retained earnings 17 300 20 000 25 300 32 500
18% Debentures 12 000 12 000 12 000 12 000
49 300 52 000 57 300 64 500

Non-current assets 39 000 40 500 41 200 41 500

Cash 3 200 1 300 1 600 2 000
Other current assets 12 000 16 000 23 000 31 000
Current liabilities (4 900) (5 800) (8 500) (10 000)
49 300 52 000 57 300 64 500

Additional information:
Stickylabel is in a market which will be saturated in three years’ time. It is expected that free cash
flow after 3 years will be sustained at a growth rate of 5% per annum.

The divided received relates to an investment in Copa Limited. Similar investment currently yield
a return of 15% per annum. It is expected that the owners of Sticky limited will retain the
investment and will not include it as part of the sale of the business.

Included in the Non-current assets of sticky label is an investment in a holiday house which was
acquired in 2010 for R2 500 000. The holiday house is used by Stickylabel directors to entertain
clients. Investment in similar holiday houses currently yield a return of 12% per annum based on
rentals of R25 000 per month.

Digigroup currently has a WACC of 15% and Stickylabel has a WACC of 17%.It is expected that
non-current assets will be replaced at an annual cost equal to inflation-adjusted depreciation.
Inflation is expected to be 6% for the foreseeable future. Debentures form part of the permanent
capital structure of Stickylabel. Similar debentures currently carry a market related rate of 14%.

REQUIRED:

4.1 Prepare a report in which you advise the management of Digigroup on the
maximum price to be paid in the acquisition of Stickylabel on 1 January 2018. (25)
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MODULE: Financial Management 3B (BSR3B01) (AO2 – OCTOBER 2017)

QUESTION 5 (25 marks)

Mr. Bahumi recently won R51 million from the National Online Lottery. He is interested in buying
a controlling interest in Save-Up Limited with his earnings.

Save-Up Limited is a listed company on the JSE-AltX that is operating in the food retailing
industry. During the current financial period, the company has demonstrated consistent growth
as evidenced by the increase in its total assets and earnings.

Save-Up Limited has a unique business model in the sense that there are no similar JSE-AltX
listed companies with food print in the townships and rural areas in South Africa. Their
competitors are mainly local spaza shops.

Mr. Bahumi has approached you to analyse Save-Up's financial results over the past two years
to determine whether this would be an appropriate investment.

The abridged financial statements are attached in Appendix 1.

Additional information:

Deferred tax is considered part of debt.

Management considers all interest bearing current liabilities to form part of total debt. Non-interest
bearing current liabilities form part of assets.

All purchases are made strictly on cash except for one branch in the rural areas, which was
acquired, from a general dealer a few years ago. It is estimated that credit sales only make
up 2% of total company sales.

At 30 June 2017 the company had a Price Earnings ratio of 15. The company's tax rate is 28%.

You may assume that the year-end balances per the statement of financial position represent the
average balances for the year.

Assume 365 days in a year.

REQUIRED:

5.1 Analyse Save-Up's financial results for 2016/2017 financial year specifically in
the following areas:
• Asset Management / Efficiency ratios (6)
• Liquidity (6)
• Profitability (6)
5.2 List stakeholders that would be interested in the purchasing of Save-Up by Mr
Bahumi. (7)
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MODULE: Financial Management 3B (BSR3B01) (AO2 – OCTOBER 2017)

APPENDIX 1 : Save – Up 2017 Annual Financial statements 2017 2016

Statement of financial position as at 30 June 2017 R’000 R’000
ASSETS
Non-Current Assets
Property, plant and equipment 143 516 117 147
Investments 36 633 25 456
Total Non-Current Assets 180 149 142 603
Current Assets
Inventories 120 403 120 702
Receivables 6 990 7 052
Taxation - 147
Cash 64 103 23 423
Total Current Assets 191 496 151 324
TOTAL ASSETS 371 645 293 927

EQUITY AND LIABILITIES

Equity
Share Capital 1 956 1 956
Share Premium 10 842 10 842
Retained earnings 107 959 90 777
Total equity 120 757 103 575
Non-current liabilities
Long term borrowings 12 400 12 720
Deferred tax 2 712 2 313
Total Non-current liabilities 15 112 15 033
Current liabilities
Trade and other payables 215 305 164 460
Shareholders for dividends 12 620 10 859
Current tax payable 7 851 -
Total Current liabilities 235 776 175 319
TOTAL EQUITIES AND LIABILITIES 371 645 293 927

Statement of Comprehensive Income for the year ended 30 2017 2016

June 2017 R’000 R’000
Turnover 1 824 888 1 500 914
Cost of sales and services -1 770 684 -1 454 017
Gross profit 54 204 46 897
Interest Income 6 954 4 651
Other income 4 373 5 149
Finance Cost -1 967 -1 823
Profit before tax 63 564 54 874
Taxation -30 061 -23 405
Profit after tax 33 503 31 469

Earnings per share 171.2 cents 160.8 cents

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