FIN4801 Assignment 4 (DETAILED ANSWERS) 2025 - DISTINCTION GUARANTEED

FIN4801 Assignment 4 (DETAILED ANSWERS) 2025 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references , Mapex Ltd., a geoinformatics company is expanding into drone manufacturing to diversify its operations. This project has an initial life of 4 years and the initial costs of the machinery (which is the only significant initial cost) is R800 000 while the related installation costs is R200 000. The projects are expected to generate sales of R1 500 000 each year (expressed in real terms). Variable costs are expected to amount to 60% of sales while fixed costs are expected to be R200 000 (in real terms). The machinery for the project can be depreciated over 4 years and the tax rate is 27%. The machinery can be sold for R1 200 000 at the end of the project (in nominal terms). The company is wholly financed by equity. The risk-free rate is 10% and the market risk premium is 5%. The company currently has a beta of 1.5 while that of the drone industry is 1.5. Inflation is 4%. Required: Adjust the cash flows for inflation where necessary and identify the relevant cash flows of the project (12) Determine the most appropriate discount rate to use for the project (3) Discuss the acceptability of the project, mention how you adjusted for inflation and risk and what impact this had on the resultant NPV. (5) Question 2 (4 Marks) Miles Ltd., a manufacturer of various car products wants to estimate its funding requirements for the coming financial year. In the recent past, the company had spare production capacity, but increased sales has raised suspicions amongst management that investment in new capacity may be required soon. In the current financial year the company achieved sales of R200 million on assets worth R3 000 million and liabilities of R800m. It’s resulting net profit margin was 5% with no dividend being paid as the company is in a high growth phase. All assets and liabilities are considered spontaneous and increase in line with sales. It is expected that sales will grow by 30% in the coming year. Assets are however only utilized up to 90% of total capacity and the spare capacity can be used first before new capacity is installed. Required: Determine the amount of funds the company will require in the coming year. Question 3 (6 Marks) Wheels Ltd sells tyres and wheels on credit only. The management of the company estimated that it could increase sales by offering better credit terms. Currently, the days sales outstanding (or average collection period) is 12 days. It is expected that this will change to 30 days under the new standards. Sales are expected to increase from R200m to R230m. No discounts are offered and bad debts are negligible (zero). The company can borrow short term funds at a rate of 7% and has a gross profit margin of 8%. What would the net effect of changing its credit standards on its net profit be? Question 5 (16 Marks) Movies Ltd is preparing a cash budget for the first six months of the coming year, 2025. The company’s financial manager has gathered all of its sales estimates and past sales data for the next six months and the past four months, respectively. Sales over the last four months of 2024 were as follows: September October November December R20 000 R15 000 R25 000 R60 000 Sales for the first 6 months of 2025 were estimated as follows: January February March April May June R40 000 R20 000 R30 000 R50 000 R60 000 R80 000 20% of sales are cash while the remainder are on credit. The ageing analysis indicates that on credit sales, payments are usually made as follows for any given month’s sales: 1 month 2 months 3 months 50% 30% 20% Every month, the company has purchases and other expenses that equal 40% of its total sales for the month. The company also has fixed costs of R10 000 per month. In February, the company expects to pay a bonus to staff which will cost R40 000 in total while in May, new equipment worth R100 000 will be paid for. The cash balance at the start of January is R0. The company can finance any cash deficits using a line of credit at a cost of 1% of the outstanding balance of the previous month paid during the next month (ie. A balance of -R100 in January, will have interest payments having to take place in February). Required: Compile a cash budget for Movies limited for January to June 2025 and clearly indicate any financing costs. Also, provide a brief overview of the company’s cash flow situation over the period. Question 6 (2 Marks) Zincsupp Pty (Ltd) is expecting a cash shortfall of R80 000 in March and one of R90 000 in April. The financial manager of the company has arranged for an overdraft facility with a local bank at a cost of 12% per annum, paid on the outstanding balance at the end of each month. It is expected that during May, the company will receive a large payment and will repay the balance on the facility and not experience another shortfall in the financial year. Determine the total cost of financing the shortfall over March and April. Question 7 (2 Marks) Company X hired a consultant to determine a sales growth function. The consultant gathered past monthly sales data and came up with the following regression equation: Y = 0.1x + 15. Where Y is the sales level in millions and X is the nth data point. Use the equation to estimate sales for the coming month which will be the 22nd data point (ie. Point 22 on the x – axis if represented on a chart with y being sales).