MAC3702 Assignment 2
(COMPLETE ANSWERS)
Semester 2 2024 - DUE 12
September 2024
CONTACT:
,MAC3702 Assignment 2 (COMPLETE ANSWERS)
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 REQUIRED: For each
question below, remember to: • Clearly show all your
calculations in detail; • Where necessary, indicate
irrelevant amounts/adjustments with a R0 (nil-value); and
, round all your workings to two decimals • Amounts must
be presented in R’000 a) Complete the table by
calculating Bafifi’s forecast from 2024 to 2026 taking into
account the forecast information provided. (8) b)
Calculate the value of the company Bafifi (Pty) Ltd using
the Free cash flow valuation method. (10) c) Justify with
reasons why the Free cash flow valuation method was a
more appropriate valuation method for determining the
company value of Bafifi (Pty) Ltd. (4) d) Justify with
reasons your choice of the discount rate factor used in
discounting the future free cash flows to present values.
(3) Total marks for the Question 1 (25)
Let's break down how to approach each sub-question:
Part a) Forecast for 2024 to 2026
We need to complete the table using the given forecast assumptions. Here's how:
Step 1: Forecast Revenue
2024: Revenue increases by 12%.
o 2023 revenue = R260,000
o 2024 revenue = R260,000 × (1 + 0.12) = R291,200
2025: Revenue increases by 7%.
o 2025 revenue = R291,200 × (1 + 0.07) = R311,584
2026: Revenue increases by 7%.
o 2026 revenue = R311,584 × (1 + 0.07) = R333,385
Step 2: Forecast Cost of Sales
2023 Gross profit margin = Gross Profit / Revenue = 135,,000 = 51.92%
Assumed gross profit margin drops in 2024, then increases by 5% in 2025, and returns to
2023 level in 2026.
o 2024: Gross Profit margin = (116,,200) = 40%
o 2025: Gross Profit margin = 40% + 5% = 45%
o 2026: Gross Profit margin returns to 51.92%
Then calculate Gross Profit and Cost of Sales:
(COMPLETE ANSWERS)
Semester 2 2024 - DUE 12
September 2024
CONTACT:
,MAC3702 Assignment 2 (COMPLETE ANSWERS)
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 REQUIRED: For each
question below, remember to: • Clearly show all your
calculations in detail; • Where necessary, indicate
irrelevant amounts/adjustments with a R0 (nil-value); and
, round all your workings to two decimals • Amounts must
be presented in R’000 a) Complete the table by
calculating Bafifi’s forecast from 2024 to 2026 taking into
account the forecast information provided. (8) b)
Calculate the value of the company Bafifi (Pty) Ltd using
the Free cash flow valuation method. (10) c) Justify with
reasons why the Free cash flow valuation method was a
more appropriate valuation method for determining the
company value of Bafifi (Pty) Ltd. (4) d) Justify with
reasons your choice of the discount rate factor used in
discounting the future free cash flows to present values.
(3) Total marks for the Question 1 (25)
Let's break down how to approach each sub-question:
Part a) Forecast for 2024 to 2026
We need to complete the table using the given forecast assumptions. Here's how:
Step 1: Forecast Revenue
2024: Revenue increases by 12%.
o 2023 revenue = R260,000
o 2024 revenue = R260,000 × (1 + 0.12) = R291,200
2025: Revenue increases by 7%.
o 2025 revenue = R291,200 × (1 + 0.07) = R311,584
2026: Revenue increases by 7%.
o 2026 revenue = R311,584 × (1 + 0.07) = R333,385
Step 2: Forecast Cost of Sales
2023 Gross profit margin = Gross Profit / Revenue = 135,,000 = 51.92%
Assumed gross profit margin drops in 2024, then increases by 5% in 2025, and returns to
2023 level in 2026.
o 2024: Gross Profit margin = (116,,200) = 40%
o 2025: Gross Profit margin = 40% + 5% = 45%
o 2026: Gross Profit margin returns to 51.92%
Then calculate Gross Profit and Cost of Sales:
