Use the data provided to answer the questions that follow relating to Newtech Ltd for 2014: Abbreviated Balance Sheet:

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Mervin Dorsey
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POST GRAD DIPLOMA IN MANAGEMENT FINANCIAL MANAGEMENT REVISION QUESTIONS QUESTION 1 Use the data provided to answer the questions that follow relating to Newtech Ltd for 2014: Abbreviated Balance

(R2 shares) 4 200 000 4 000 000 Retained Income 600 000 300 000 Long term Debt 250 000 200 000 Payables 1 700 000 600 000 6 750 000 5 100 000 The abbreviated Income Statement for the year ended 2014:

1 POST GRAD DIPLOMA IN MANAGEMENT FINANCIAL MANAGEMENT REVISION QUESTIONS QUESTION 1 Use the data provided to answer the questions that follow relating to Newtech Ltd for 2014: Abbreviated Balance Sheet: Assets Non Current/Fixed Inventory Receivables Cash Equity and Liabilities Share Capital (R2 shares) Retained Income Long term Debt Payables The abbreviated Income Statement for the year ended 2014: Sales (10% on credit) Cost of sales (80% on credit) Expenses Net Income after Tax Dividends Retained Income NB: Shares are currently trading at R2, 80 per share.

2 Required 1.1. Calculate the net profit on turnover for (2) 1.2. Calculate the earnings yield and dividend yield for 2014 and explain their significance to (prospective) shareholders. (8) 1.3. Accounts Payable Turnover Calculate the accounts payable period (in days), noting that Newtech Ltd has, after tough negotiations secured a 90 day account with all its creditors. Note: Use average accounts payable for this calculation. (4) Is this an ideal situation? Offer constructive advice to Newtech Traders. (3) 1.4. Calculate the return on equity. Would shareholders be happy with the current return? Why/why not? (4) 1.5. Calculate the inventory turnover ratio (use average inventory) and explain the significance of this ratio. (4) QUESTION 2 Netforce Security (Pty) Ltd Balance Sheets for 2014 and 2013 financial years are below: Assets Non Current/Fixed Inventory Receivables Cash Equity and Liabilities Share Capital (R2 shares) Share premium Retained Income Long term Debt Payables

3 The abbreviated Income Statement for the year ended 28 February 2014: Sales (50% on credit) Cost of sales Depreciation Interest Expense Net Income before Tax Dividends Retained Income Notes: a. Shares are currently trading at R2.30 per share. b. The new shares were issued at the beginning of the year. Required: 2.1. Calculate the following ratios for 2014 and comment. Ratios for 2013 are given in brackets Current ratio (0,89:1) (3) Acid test ratio (0,56:1) (3) The debtors collection period (81 days) [all debtors are on 60 days accounts] (4) 2.2. Share capital and equity Calculate the earnings per share and dividends per share for (4) How many shares were issued in 2014? (2) Were the shares issued at a premium? If so what was the premium per share? (2) 2.3. Calculate the market to book ratio. Explain the significance of this ratio. (3) 2.4. Calculate the return on equity using the Du Point Identity/Formula Will management be happy with this return? (4)

4 QUESTION 3 Golden Arrow Ltd s Balance Sheets for 2014 and 2015 financial years are below: R R Assets Non Current Assets Inventory Receivables Cash Equity and Liabilities Share Capital (R2 shares) Share Premium Retained Income Long term Debt Payables Abbreviated Income Statement for the year ended 2015 R Sales Cost of sales Depreciation Interest expense Net Income before Tax Tax (30%) Dividends Retained Income NB a. Shares are currently trading at R2,60 per share. b. The new shares were issued at the beginning of the year.

5 Required 3.1. Calculate the current ratio for 2015 and comment. The ratio for 2014 was 1,65:1. (4) 3.2. Calculate the dividend yield for 2015 and explain the meaning/significance of your answer. (5) 3.3. Share Capital: Calculate the number of new shares issued. (2) Calculate the premium per share. (2) 3.4. Calculate the Price Earnings (PE) ratio for What does this ratio mean? (4) 3.5. Calculate the market to book ratio and state the significance of this ratio. (3) QUESTION 4 Analyse the 3 building projects for Propy Ltd below: Year Project A Project B Project C 0 (R ) (R ) (R ) 1 R R R R R R R R R R R R Assume cash flows are equal the profits. Required: 4.1 Determine which of the above projects has the shortest payback period (10) 4.2 Determine which of the above projects has the highest net present value (NPV) Assume the cost of capital to be 10% (10) 4.3 Determine which of the above projects will have the highest ARR? 4.4 Briefly discuss the merits of the NPV method (5)

6 QUESTION 5 As the financial manager of Spoornet Limited, you have to make an investment decision. The net cash inflows for each year are as follows: Year Cash Flow 0 (R ) 1 R R R R R Required: Calculate the following: 5.1 Payback period (4) 5.2 Net present value (NPV) at 12% cost of capital. (10) 5.3 Accounting rate of return (ARR). (Assume there is no depreciation.) (4) 5.4 Should the investment be accepted? Give reasons for your answer. (3) 5.5 Discuss an advantage and a disadvantage of the payback period (4) QUESTION Briefly discuss the role of the Financial Manager. (4) 6.2. Explain the key difference/s in approach when using the CAPM or Dividend Growth Model to calculate return on equity. (4) 6.3. Tembela Manufacturers, operates in the plastic industry. They feel that one of their machines needs to be replaced. They seek your help in order to calculate their cost of capital, and decide whether such a project is viable. Their present capital structure is as follows: R2 ordinary shares now trading at R2.30 per share preference shares trading at R2.60 per share (issued at R3 per share). 10 % p.a. fixed rate of dividend.. A bank loan of R at 11 % p.a. (payable over a five year period)

7 Additional data a. The company s beta is 1.3. A return on market of 14.5% and a risk free rate of 6% prevails. b. Its current tax rate is 28%. c. Their current dividend is 50c per share and they expect the dividends to grow by 7 % p.a. Required: Assuming that the company uses the CAPM to calculate their cost of equity, calculate their weighted average cost of capital. (10) A further R is needed to finance the machine replacement. Which option should they use (from ordinary shares, preference shares or loan financing) why? (2) QUESTION At a board meeting a director remarks selling preference shares with a return of 9 % or debentures with a return of 9 % is really one and the same thing. The company has the option of raising the R through either: a. The sale of preference shares at R10 per share or b debentures of R100 each. NB: the tax rate is 30% Do you agree with the director s assertion? Discuss with the aid of calculations. (10) 7.2. Izaka Mining shares have a beta of 1,40. At present government bonds/treasury bills present a return of 6% and the market return is 12 %. Izaka s dividend was R2,20 per share last year and they expect dividends to grow at 5%. Their shares sell for R30 per share at present (par value R20). Calculate Izaka s cost of equity using: The Dividend Growth Model. (4) The Capital Assets Pricing Model. (4) Explain the reason/s for each method presenting different answers. (2)

8 QUESTION 8 A motor parts supplier presents the following data in respect of their purchases: Annual demand Maximum daily requirement Average daily requirement Carrying cost Ordering cost Lead time Time needed to acquire emergency supplies units units units R1, 80 per unit R 40 per order 14 days 3 days NB: Assume that sales are even throughout the year. Required: Determine the economic order quantity (EOQ). (5) Determine the ordering point. (5) Calculate the danger level. (5) 8.2 Assume that Time Ltd are offered terms of 1, 5/10 net 30. If the embedded discount is not taken, then the full amount becomes due. Calculate the cost of forgoing the discount. (5) 8.3 Bros Ltd factors all its accounts receivables. The factoring agreement they have concluded is that a 10% reserve is held and a 3% commission is charged on the book value of the account. Further interest is charged at 2% per month (60% per annum) on advances. Bros Ltd wants to factor an account of R8 000 that falls due in 30 days Calculate the advance that Bros Ltd will receive. (7) Calculate the net cost to Bros. (3)

9 QUESTION Bull Brand Ltd has annual, non-seasonal credit sales of R Customers are expected to pay within 30 days, but in fact have been settling in an average of 42 days. Bull Brand Ltd experiences a bad-debt rate 0.8% of debtors annually. The company s current overdraft facility is 2.5% above base-rate, which is at present 12%. Unfortunately, the overdraft limit has nearly been reached, and is unlikely to be extended. Bull Brand Ltd has contacted Buck Ltd, a factoring firm, and has been quoted: a) A factor charge of 1.8% of credit sales (Bull Brand estimates that this would save R administration costs per year) b) An advance of 75% of invoices at 3% over base-rate Should Buck s terms be agreed to? (Support your answer with calculations). (15) 9.2 Bayer Ltd produces chemicals to sell to wholesalers. One of the raw materials it buys is sodium nitrate which is purchased at the rate of R22.50 per ton. Bayer s forecasts show a estimated requirement of tons of sodium nitrate for the coming year. The annual total carrying cost for this material is 40% of acquisition cost and the ordering cost is R Define economic order quantity. (2) Calculate the most economical order quantity. (5) 9.3 Study the information below and answer the questions that follow: Normal usage or average requirement Maximum usage Minimum usage Re-order period Time required to receive emergency supplies 700 units per day 800 units per day 600 units per day 25 to 30 days 4 days Calculate the following: Ordering point (3) Minimum limit/level (3) Danger level (2)

10 QUESTION 10 The Equity accounts of Mountain Ltd are shown below: Ordinary Share Capital (R2 par value) R Share Premium Retained Profits Total Shareholders Equity If Mountain s shares sell for R10 per share, and a 10% dividend is declared, how many new shares will be distributed? (2) Redraft the Equity accounts section of the balance sheet. (6) Has this been a wise decision? Explain. (2) Mountain Ltd has declared an annual dividend on 90c per share. Their after tax profits for the year was R and they have shares in issue Calculate the profit per share. (2) Determine the payout ratio. (3) QUESTION An amount of R3 100 is deposited in a bank paying an annual interest rate of 6%, compounded quarterly. Find the balance after 5 years. (3) 11.2 Your goal is to travel exactly 10 years from now. You believe that you will need R in 10 years time. How much must you invest now to have at an interest rate of 7% compounded semi-annually? (4) 11.3 An investment of R300 is made at the beginning of each year for 12 years. If interest is 7% effective, how much will the investment be worth at the end of 12 years? (4)

MTP_Intermediate_Syllabus 2012_Jun2017_Set 1 Paper 8- Cost Accounting & Financial Management

MTP_Intermediate_Syllabus 2012_Jun2017_Set 1 Paper 8- Cost Accounting & Financial Management Paper 8- Cost Accounting & Financial Management Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1 Paper-8: Cost Accounting & Financial