Financial Strategy

FIS8X00

Tutorial 1

29 February 2024

Time: 1 hour 40 minutes (100 minutes) Marks: 50

Tutorial Information Source Marks Page
Question 1 – Objectives & Constraints Test 3 2011, Question 2 25 2
Question 2 – Analysis & Interpretation Test 1 2013, Question 1 25 3

TUTORIAL NOTE:
 Students should attempt the above tutorial questions as if they are test or exam questions (i.e. make
use of MS Word and MS Excel).
 Students are allowed 5 minutes reading time before attempting each question. The “required” should
be read before the scenario.
 Students are allowed 45 minutes typing time for each question. After 45 minutes students should stop
typing and make a note of where they got up to. Students can try to finish the question after the
allotted time, BUT remember that in a test or exam you will not get extra time. Seeing how much
extra time you require to finish the question is part of the learning process – you should reduce this
extra time taken with each question you practice.
 Students should upload their answer to the tutorial (MS Word and MS Excel files) onto Moodle by
12:00 on the day of the scheduled tutorial.
 Students should attend the tutorial class where the solution will be discussed. A copy of the solution
is only made available on Moodle to those students that have submitted their answers. The solution
to the tutorial questions will NOT be provided to students in any other way (i.e. e-mail, etc.).
Moodle can control the release of the solution to those students that have uploaded their answer.
 The tutorial class will also cover a suggested approach to attempting the question, some exam
technique tips as well as provide an opportunity for you to ask questions about anything you are
unsure of or that you got wrong.
 If you do not attempt the tutorial questions properly before the tutorial you will be missing out on a
huge potential benefit (as all the tutorial questions are selected from past Honours tests and exams)
and this may negatively affect your Financial Strategy mark during the year.
PROGRAMME: PG Dip (Fin. Man.) / B.Com Hnrs (Fin. Man.) Page 2 of 4
MODULE: Financial Strategy (FIS8X00) (TUTORIAL 1 – 29 FEBRUARY 2024)

QUESTION 1 [25 marks]

M&R Ltd
M&R Ltd is South Africa’s leading contracting and construction services entity listed on the JSE Ltd. It
has created employment, built infrastructure and delivered services throughout Southern Africa for 108
years, making a significant contribution to sustainable socio-economic development in the region. M&R
Ltd also operates in Southern Africa, the Middle East, Southeast Asia, Australasia as well as North and
South America from its home-base in Johannesburg.

The entity’s primary objective is to increase shareholder wealth steadily through its non- negotiable
commitment to sustainable earnings growth and value creation. M&R Ltd aspires to world class
fulfilment in everything it does, through its core competence in industrial design, luxury accommodation,
delivering major projects and services primarily to the development of emerging economies.

You are provided with the following extract from M&R Ltd’s annual financial statements for the year
ended 31 March for the past three years:
2009 2010 2011
R’ million R’ million R’ million
Operating profit 2 000 1 925 2 575
Interest expense 400 350 500
Taxation (at 28%) 448 441 581
Ordinary dividend pay-out ratio (%) 40% 45% 45%
Number of ordinary shares in issue (‘million) 300 300 350

M&R Ltd’s financial objectives formulated at the beginning of the 2009 financial year were to:
 Increase earnings per share by 12% per annum; and
 Maintain an ordinary dividend per share growth of 10% per annum.

LowCost
LowCost is a South African government-owned low cost housing entity. A substantial portion of its
funding is provided by national government. Most of LowCost’s objectives are qualitative in nature, such
as “providing simple, suitable, affordable housing to previously disadvantaged families”.

Habitat for Humanity South Africa

Habitat for Humanity South Africa (HFHSA) is a local charity and non-government organisation that
provides adequate housing for families living in informal settlements around South Africa. It relies
mainly on donations from local communities, churches, profit-making entities and international aid
organisations to be able to operate. HFHSA embraces the vision of “a world in which every person has a
decent place to live”.

REQUIRED:

1.1 Compare and contrast the objectives of the three different entities described
above. Consider the needs of each of their main stakeholder groups as well as
the consequences of each entity failing to meet its stated objectives. (12)

1.2 Discuss possible constraints facing HFHSA. (6)

1.3 Evaluate whether M&R Ltd achieved its financial objectives for the years ended
31 March 2009 to 2011. (7)
(Total for question 1 = 25 marks)
PROGRAMME: PG Dip (Fin. Man.) / B.Com Hnrs (Fin. Man.) Page 3 of 4
MODULE: Financial Strategy (FIS8X00) (TUTORIAL 1 – 29 FEBRUARY 2024)

QUESTION 2 [25 marks]

Background
Comflight Ltd is a leading South African aviation company that is listed on the JSE. Comflight was
established in 1946 and has been operating the local and Southern African regional services of British
Airways (BA) since 1996 as well as Africa’s first low-cost airline, Tulula since 2001.

Operations
Due to the continuous increase in operating costs, Comflight decided that it could no longer pass-on the
increased costs to customers as customers have a lot of freedom of choice between alternative airlines. In
November 2012, one of Tulula’s competitors, 2Time Airline Ltd went into liquidation, after only being in
operation for 5 years. As a result of all low-cost airlines struggling financially due to increasing costs, the
board of Comflight was concerned about the future prospects of Tulula.

In response to the increasing costs, Comflight developed a strategy in late 2011 where they focused
significant attention on re-engineering their operations to ensure an increase in profitability by December
2012. Comflight introduced a cost savings programme, which included a salary freeze for all of its
employees and this allowed them to upgrade Tulula’s entire fleet of aeroplanes to new Boeing 737-800’s.
The new Boeing 737-800 is the most fuel-efficient aeroplane available on the market currently. This
resulted in Tulula having the most fuel- efficient fleet in the local aviation industry.

Financial information
As the Financial Manager of Tulula, you have been presented with the following extract from the
financial statements for the year ended 31 December 2010 to 2012:

SUMMARISED STATEMENT OF FINANCIAL POSITION OF TULULA

AS AT 31 DECEMBER
2010 2011 2012
R’000 R’000 R’000
ASSETS
Non-current assets
Property, plant and equipment 386 000 675 000 607 500
Current assets
Inventory 3 600 5 300 7 800
Receivables 104 200 143 500 110 700
Cash and cash equivalents 56 700 19 200 53 500
TOTAL ASSETS 550 500 843 000 779 500
EQUITY AND LIABILITIES
Equity
Ordinary stated capital 25 000 25 000 25 000
Retained earnings 218 500 235 000 284 000
Non-current liabilities
10% Secured loan 85 000 228 000 198 000
Current liabilities
Payables 200 500 305 000 242 500
Current portion of secured loan 21 500 50 000 30 000
TOTAL EQUITY AND LIABILITIES 550 500 843 000 779 500
PROGRAMME: PG Dip (Fin. Man.) / B.Com Hnrs (Fin. Man.) Page 4 of 4
MODULE: Financial Strategy (FIS8X00) (TUTORIAL 1 – 29 FEBRUARY 2024)

QUESTION 2 (CONTINUED) [25 marks]

Financial information (continued)

ADDITIONAL FINANCIAL INFORMATION OF TULULA

FOR THE YEAR ENDED 31 DECEMBER
2010 2011 2012
Revenue (R’000) 800 000 630 000 850 000
Operating profit (R’000) 65 000 47 800 88 000
Finance costs (R’000) (10 000) (25 000) (20 000)
Profit for the year (R’000) 39 500 16 500 49 000
Share price (R per share) 6.65 2.50 9.50

Additional information
 Company tax is charged at a rate of 28% and has not changed over the past three years.
 Fuel is one of Tulula’s largest operating costs and is purchased on credit from suppliers.
 Other consumables (i.e. refreshments on flights) that are made available to passengers on flights are
also purchased on credit.
 The new Boeing 737-800 aeroplanes were purchased on 31 December 2011 and brought into
operation at the beginning of 2012.
 No ordinary dividends have been paid to shareholders for the last three years.
 There are currently 50 million ordinary shares in issue.

REQUIRED:

2.1 Prepare a memorandum addressed to the Board of Directors of Comflight Ltd, which
evaluates the results of Tulula for the years ended 31 December 2010,
2011 and 2012. (25)

NOTE:
• Up to 2 marks are available for structure and presentation.
• Up to 12 marks are available for appropriate calculations.

(Total for question 2 = 25 marks)

Total = 50