ASSIGNMENT MEMORANDUM : FINANCIAL MANAGEMENT 2 (FM202)

Transcription

1 Page 1 of 6 ASSIGNMENT MEMORANDUM SUBJECT : FINANCIAL MANAGEMENT 2 () ASSIGNMENT : 2 nd SEMESTER 2012 QUESTION 1 [25] 1.1. e 1.2. a 1.3. b 1.4. b 1.5. a 1.6. b 1.7. d 1.8. a 1.9. a b c a c c a d b b b d e c c a b

2 Page 2 of 6 QUESTION 2 [25] 2.1 a. = R (R5 000 R3 250) = units b. 1 Best case break-even point = R (R5 000 R3 250) = units 2 Worst case break-even point Sales = R % = R4 000 Costs = R % = R3 510 = R (R4 000 R3 510) = units 3 Sales price = R5 000 Variable cost = R3 510 = R (R5 000 R3 510) = units 4 Sales price = R4 000 Variable cost = R3 250 = R (R4 000 R3 250) = units c. In the best case scenario, the break-even point is units. d. In the worst case scenario, the break-even point is units.

3 Page 3 of a. Q = FC/(P VC) = /( ) = 8000 units 9,000 units 10,000 units 11,000 units b. c. d. e. Sales R571,500 R635,000 R698,500 Less: Variable costs 144, , ,000 Less: Fixed costs 380, , ,000 EBIT R47,500 R95,000 R142,500 Change in unit sales ,000 % change in sales -1,000 10,000 = -10% 0 1,000 10,000 = +10% Change in EBIT -R47, R47,500 % Change in EBIT - R47,500 95,000 = - 50% 0 R47,500 95,000 = +50% % change in EBIT % change in sales DOL [ Q ( P VC)] [ Q ( P VC )] FC [10,000 (R63.50 R16.00)] DOL [10,000 (R63.50 R16.00) R380,000] R475, 000 DOL 5.00 R95, = = 5 QUESTION 3 [20] Statement of financial position Assets 2009 Property, plant and equipment (PPE) at cost price Accumulated depreciation ( ) PPE at carrying value Investment in associates Non-current assets Inventories Trade receivables Cash and cash equivalents Current assets Total assets Equity and liabilities Share capital

4 Page 4 of 6 Reserves Retained earnings Ordinary shareholders equity Preference shares Shareholders equity Total equity Long-term debt Non-current liabilities Trade payables Tax payable Short-term debt Current liabilities Total equity and liabilities Statement of comprehensive income 2009 Turnover Cost of sales and services rendered ( ) Gross profit Operating expenses (28 000) Operating profit Investment income Finance cost (6 500) Profit before tax Tax (16 500) Profit after tax Preference share dividends (2 000) Attributable earnings Ordinary dividends (17 500) Retained earnings (for the year) QUESTION 4 [30] 4.1 a. Margin (%) Turnover = ROA (%) FL Multiple = ROE (%) 2009 Johnson = = Industry = = Johnson = = Industry = = Johnson = = Industry = = 18.49

5 Page 5 of 6 b. Profitability: Industry net profit margins are decreasing; Johnson s net profit margins have fallen less. Efficiency: Both industry s and Johnson s asset turnover have increased. Leverage: Only Johnson shows an increase in leverage from 2008 to 2009, while the industry has had less stability. Between 2007 and 2008, leverage for the industry increased, while it decreased between 2008 and As a result of these changes, the ROE has fallen for both Johnson and the industry, but Johnson has experienced a much smaller decline in its ROE. c. Areas that require further analysis are profitability and debt. Since the total asset turnover is increasing and is superior to that of the industry, Johnson is generating an appropriate sales level for the given level of assets. But why is the net profit margin falling for both industry and Johnson? Has there been increased competition causing downward pressure on prices? Is the cost of raw materials, labour, or other expenses rising? An ordinary-size statement of comprehensive income could be useful in determining the cause of the falling net profit margin. Note: Some management teams attempt to magnify returns through the use of leverage to offset declining margins. This strategy is effective only within a narrow range. A high leverage strategy may actually result in a decline in share price due to the increased risk.

6 Page 6 of a. b. Home Health Ltd Ratio Difference Proportional difference Current ratio % Quick ratio % Inventory turnover % Average collection period 42.6 days 31.4 days 11.2 days 26.29% Total asset turnover % Debt ratio % Times interest earned % Gross profit margin 68% 65% 3% 4.41% Operating profit margin 14% 16% + 2% 14.29% Net profit margin 8.3% 8.1% 0.2% 2.41% Return on total assets 11.6% 16.2% 4.6% 39.65% Return on ordinary equity 21.1% 42.6% 21.5% % Price/earnings ratio % Market/book ratio % Ratio Proportional difference Company s favour Quick ratio 12.00% No Inventory turnover 19.53% No Average collection period 26.29% Yes Total asset turnover 42.86% Yes Debt ratio 37.78% No Operating profit margin 14.29% Yes Return on total assets 39.65% Yes Return on equity % Yes Market/book ratio 10.71% No c. The most obvious relationship is associated with the increase in the ROE value. The increase in this ratio is connected with the increase in the ROA. The higher ROA is partially attributed to the higher total asset turnover (as reflected in the DuPont model). The ROE increase is also associated with the slightly higher level of debt as captured by the higher debt ratio.