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 1.10. b 1.11. c 1.12. a 1.13. c 1.14. c 1.15. a 1.16. d 1.17. b 1.18. b 1.19. b 1.20. d 1.21. e 1.22. c 1.23. c 1.24. a 1.25. b
Page 2 of 6 QUESTION 2 [25] 2.1 a. = R36 000 000 (R5 000 R3 250) = 20 571 units b. 1 Best case break-even point = R36 000 000 (R5 000 R3 250) = 20 571 units 2 Worst case break-even point Sales = R5 000 20% = R4 000 Costs = R3 250 + 8% = R3 510 = R36 000 000 (R4 000 R3 510) = 73 469 units 3 Sales price = R5 000 Variable cost = R3 510 = R36 000 000 (R5 000 R3 510) = 24 161 units 4 Sales price = R4 000 Variable cost = R3 250 = R36 000 000 (R4 000 R3 250) = 48 000 units c. In the best case scenario, the break-even point is 20 571 units. d. In the worst case scenario, the break-even point is 73 469 units.
Page 3 of 6 2.2 a. Q = FC/(P VC) = 380 000/(63.50 16) = 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 144,000 160,000 176,000 Less: Fixed costs 380,000 380,000 380,000 EBIT R47,500 R95,000 R142,500 Change in unit sales -1000 0 +1,000 % change in sales -1,000 10,000 = -10% 0 1,000 10,000 = +10% Change in EBIT -R47,500 0 +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, 000-50 -10 = 5 50 10 = 5 QUESTION 3 [20] Statement of financial position Assets 2009 Property, plant and equipment (PPE) at cost price 470 000 Accumulated depreciation (110 500) PPE at carrying value 359 500 Investment in associates 9 500 Non-current assets 369 000 Inventories 65 000 Trade receivables 33 000 Cash and cash equivalents 19 000 Current assets 117 000 Total assets 486 000 Equity and liabilities Share capital 220 000
Page 4 of 6 Reserves 21 500 Retained earnings 108 000 Ordinary shareholders equity 349 500 Preference shares 25 000 Shareholders equity 374 500 Total equity 374 500 Long-term debt 40 000 Non-current liabilities 40 000 Trade payables 58 500 Tax payable 6 000 Short-term debt 7 000 Current liabilities 71 500 Total equity and liabilities 486 000 Statement of comprehensive income 2009 Turnover 290 000 Cost of sales and services rendered (204 000) Gross profit 86 000 Operating expenses (28 000) Operating profit 58 000 Investment income 3 500 Finance cost (6 500) Profit before tax 55 000 Tax (16 500) Profit after tax 38 500 Preference share dividends (2 000) Attributable earnings 36 500 Ordinary dividends (17 500) Retained earnings (for the year) 19 000 QUESTION 4 [30] 4.1 a. Margin (%) Turnover = ROA (%) FL Multiple = ROE (%) 2009 Johnson 4.9 2.34 = 11.47 1.85 = 21.21 Industry 4.1 2.15 = 8.82 1.64 = 14.46 2008 Johnson 5.8 2.18 = 12.64 1.75 = 22.13 Industry 4.7 2.13 = 10.01 1.69 = 16.92 2007 Johnson 5.9 2.11 = 12.45 1.75 = 21.79 Industry 5.4 2.05 = 11.07 1.67 = 18.49
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 2009. 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.
Page 6 of 6 4.2 a. b. Home Health Ltd Ratio 2008 2009 Difference Proportional difference Current ratio 3.25 3.00 0.25 7.69% Quick ratio 2.50 2.20 0.30 12.00% Inventory turnover 12.80 10.30 2.50 19.53% Average collection period 42.6 days 31.4 days 11.2 days 26.29% Total asset turnover 1.40 2.00 0.60 42.86% Debt ratio 0.45 0.62 0.17 37.78% Times interest earned 4.00 3.85 0.15 3.75% 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% 101.90% Price/earnings ratio 10.7 9.8 0.9 8.41% Market/book ratio 1.40 1.25 0.15 10.71% 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 101.90% 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.