MAC3702 Assignment 2
Semester 2 2024 - DUE 12
September 2024
QUESTIONS WITH ANSWERS
[School]
[Course title]
,MAC3702 Assignment 2 Semester 2 2024 - DUE 12 September 2024
QUESTION 1 (25 marks; 45 minutes)
Lesidi Limited, a company listed on the Johannesburg Stock Exchange (JSE), specialises in
manufacturing paint. Their flagship product, Yizo, has been rated the best paint by the South
African Paint Association for the past ten years. This top award has driven Lesidi's success and
challenged them to innovate continuously to maintain Yizo's quality standards. The company has
developed various Yizo product variations and is always looking for innovative ways to improve
and expand the range. Recently, Lesidi identified a promising spray paint product that could
complement the Yizo product line without compromising its brand quality. They are considering
acquiring Bafifi (Pty) Limited, as they are impressed with the high-quality spray paints Bafifi
produces. Bafifi manufactures spray paint and primer products. Over the past five years, Bafifi
has experienced significant growth, driven primarily by its innovative product development.
Recently, Bafifi introduced an all-in-one, single-coat application spray paint. This new product
allows customers to apply just one coat for both priming and painting, eliminating the need for
separate primer and paint applications. Lesidi is considering making a bid for Bafifi. Bafifi has
10 million shares in issue. The following information relating to Bafifi is provided: Year 1 Year
2 Year 3 Year 4 2023 2024 2025 2026 R’000 R’000 R’000 R’000 Actual Forecast Forecast
Forecast Revenue 260 000 291 200 * * Cost of Sales (125 000) (174 720) * * Gross Profit 135
000 116 480 * * Other Operating expenses (40 000) (46 000) * * Depreciation (23 000) (23 000)
(23 000) (23 000) Profit from Operations 72 000 47 480 * * Finance Costs (24 000) * * * Profit
before tax 48 000 * * * Taxation – 27% (12 960) * * * Profit after tax 35 040 * * * QUESTION
, 1 (continued) 1. Forecast for 2024 to 2026 Bafifi’s forecast was prepared using the following
assumptions
• Sales prices are projected to increase by 12% in 2024 and thereafter by a constant growth of
7%.
• Bafifi’s gross profit percentage is expected to decrease in 2024 due to the introduction of a new
product thereafter increase by 5% in 2025 and then return to the 2023 levels in 2026.
• Bafifi’s expects to increase its operating profit margin by limiting the increase in other
operating expenses, to only 5% per year from 2025.
• Assume that depreciation amount equals tax allowances.
• Bafifi took out a loan with Buzz bank of R100 million at the beginning of 2023 to finance the
development of the new spray product. The loan bears an interest rate of 10% with interest
payable annually on the last day of the year. The loan capital amount is repayable in 2025. The
interest payments for 2023 included interest payments on another loan with Buzz Bank, which
was fully settled in 2023.
• The marginal tax rate is 27% payable in the year in which the liability arises. Continuing Value
• Using year 3 as the base year, Free cash flows beyond year 3 are expected to grow at a constant
rate of 5%.
• Bafifi’s current weighted average cost of capital (“WACC”) equals 17% and its target WACC
is 16.5%.
• Lesidi’s current WACC is 16% and its present capital structure is close to a target capital
structure for a company of its nature and size
Semester 2 2024 - DUE 12
September 2024
QUESTIONS WITH ANSWERS
[School]
[Course title]
,MAC3702 Assignment 2 Semester 2 2024 - DUE 12 September 2024
QUESTION 1 (25 marks; 45 minutes)
Lesidi Limited, a company listed on the Johannesburg Stock Exchange (JSE), specialises in
manufacturing paint. Their flagship product, Yizo, has been rated the best paint by the South
African Paint Association for the past ten years. This top award has driven Lesidi's success and
challenged them to innovate continuously to maintain Yizo's quality standards. The company has
developed various Yizo product variations and is always looking for innovative ways to improve
and expand the range. Recently, Lesidi identified a promising spray paint product that could
complement the Yizo product line without compromising its brand quality. They are considering
acquiring Bafifi (Pty) Limited, as they are impressed with the high-quality spray paints Bafifi
produces. Bafifi manufactures spray paint and primer products. Over the past five years, Bafifi
has experienced significant growth, driven primarily by its innovative product development.
Recently, Bafifi introduced an all-in-one, single-coat application spray paint. This new product
allows customers to apply just one coat for both priming and painting, eliminating the need for
separate primer and paint applications. Lesidi is considering making a bid for Bafifi. Bafifi has
10 million shares in issue. The following information relating to Bafifi is provided: Year 1 Year
2 Year 3 Year 4 2023 2024 2025 2026 R’000 R’000 R’000 R’000 Actual Forecast Forecast
Forecast Revenue 260 000 291 200 * * Cost of Sales (125 000) (174 720) * * Gross Profit 135
000 116 480 * * Other Operating expenses (40 000) (46 000) * * Depreciation (23 000) (23 000)
(23 000) (23 000) Profit from Operations 72 000 47 480 * * Finance Costs (24 000) * * * Profit
before tax 48 000 * * * Taxation – 27% (12 960) * * * Profit after tax 35 040 * * * QUESTION
, 1 (continued) 1. Forecast for 2024 to 2026 Bafifi’s forecast was prepared using the following
assumptions
• Sales prices are projected to increase by 12% in 2024 and thereafter by a constant growth of
7%.
• Bafifi’s gross profit percentage is expected to decrease in 2024 due to the introduction of a new
product thereafter increase by 5% in 2025 and then return to the 2023 levels in 2026.
• Bafifi’s expects to increase its operating profit margin by limiting the increase in other
operating expenses, to only 5% per year from 2025.
• Assume that depreciation amount equals tax allowances.
• Bafifi took out a loan with Buzz bank of R100 million at the beginning of 2023 to finance the
development of the new spray product. The loan bears an interest rate of 10% with interest
payable annually on the last day of the year. The loan capital amount is repayable in 2025. The
interest payments for 2023 included interest payments on another loan with Buzz Bank, which
was fully settled in 2023.
• The marginal tax rate is 27% payable in the year in which the liability arises. Continuing Value
• Using year 3 as the base year, Free cash flows beyond year 3 are expected to grow at a constant
rate of 5%.
• Bafifi’s current weighted average cost of capital (“WACC”) equals 17% and its target WACC
is 16.5%.
• Lesidi’s current WACC is 16% and its present capital structure is close to a target capital
structure for a company of its nature and size
