MBA_Accounting_and_Finance_Jan_2024_Assignment

The extracts of the financial statements of TBN Limited for 2023 are provided below: Extract of the Statement of Comprehensive Income for the year ended 31 December 2023 R Sales (credit) 988 000 Less cost of sales 400 000 Gross profit 560 000 Less Operating expenses 160 000 Operating profit 400 000 Less interest expense 70 000 Profit before tax 330 000 Profit after tax 280 000 Extract of Statement of Financial Position as at 31 December 2023 Non-current assets Inventories 266 000 Debtors 300 000 Bank 220 000 Total assets Ordinary share capital Retained earnings 482 000 Non-current liabilities 240 000 Creditors 215 000 Total liabilities Required: Calculate the following ratios for 2023: (Where applicable, answers must be rounded off to two decimal places.) 1.1 Profit margin (3) 1.2 Interest cover (4) 1.3 Debtors collection period (4) 1.4 Current ratio (4) 1.5 Acid test ratio (4) 1.6 Return on total assets (2) 1.7 Inventory turnover (Inventory 1 January 2021: R204 000) (2) 1.8 Comment on the acid test ratio (2) QUESTION TWO [25] You have been appointed as a financial consultant by the directors of Iato Ltd. They require you to calculate the cost of capital of the company. The following information is available on the capital structure of the company: • Ordinary shares, with a market price of R3 per share. The latest dividend declared was 90 cents per share. A dividend growth of 13% was maintained for the past 5 years. • %, R1 Preference shares with a market value of R2 per share. • R Debentures due in 7 years with a current market value of R 951 356 and a before tax cost of 10%. • R700 000 (14%) Bank loan. Additional information: 1. The company has a tax rate of 30%. 2. The beta of the company is 1.6, a risk free rate of 7% and the return on the market is 15%. Required: 2.1 Calculate the weighted average cost of capital (WACC). Use the Gorden Growth Model to calculate the cost of equity. (22) 2.2 Calculate the cost of equity, using the Capital Asset Pricing Model. (3) QUESTION THREE [25] Eldy Ltd has a choice of two projects to invest in. The following details relate to these projects: Project AA Project ZZ Investment required R 85 000 R 80 000 Expected economic lifetime 6 years 6 years Minimum required rate of return 12 % 12 % Net annual cash inflows 1st year R 20 000 R 22 000 2nd year R 22 000 R 22 000 3rd year R 24 000 R 22 000 4th year R 26 000 R 22 000 5th year R 23 000 R 22 000 6th year R 21 000 R 22 000 Use the following discount factors: Year Discount Factor 1 2 3 4 5 6 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 Required: 3.1 Use the Net Present Value (NPV) method to determine which project should be choosen. (17) 3.2 Discuss the merits of using the NPV method. (2) 3.3 Calculate the Payback Period for both projects. (4) 3.4 Describe the advantages and disadvantages of using the payback method. (2) QUESTION FOUR [25] The following information for the 2021 financial year is available for ABH Enterprises Ltd: MAR APR MAY JUN JUL AUG Cash sales 350 000 Credit sales 600 000 Total purchases 460 000 Salaries and wages 000 000 Other expenses 59 000 Additional information: (a) Credit sales are collected as follows: • 50% within 30 days (the next month) • 25% within 60 days • 15% within 90 days • 10% uncollectible (bad debt) (b) The following discount is given on sales: • 10% on all cash sales • 5% on credit sales paid within 30 days • Salaries, wages and other expenses are paid in cash. (c) Other expenses include depreciation of R4 000 per month. 55% of all purchases are on credit and are paid for in the following month. The rest represents cash purchases. The bank balance on 1 June 2021 is R200 000. A dividend of R3 000 will be declared on 31 August 2021. Required: Prepare the cash budget for the period 1 June to 31 August 2021.