MAC3702 Assignment 2 (QUALITY ANSWERS) Semester 2 2025

This document contains workings, explanations and solutions to the MAC3702 Assignment 2 (QUALITY ANSWERS) Semester 2 2025. For assistance whats-app us on 0.6.8..8.1.2..0.9.3.4... QUESTION 1 (72 marks) GlucoCare Limited is a healthcare technology and pharmaceutical company based in Johannesburg, Gauteng. The company is dedicated to making diabetes management more affordable and accessible to patients across South Africa. In early 2024, GlucoCare identified that one of the biggest barriers for diabetic patients is the high cost of continuous glucose monitoring (CGM) systems and insulin delivery devices. In response, the company developed GlucoTrack-Lite, a compact, wearable glucose monitor that pairs with a smartphone app and provides real-time blood sugar readings at a fraction of the cost of traditional CGM devices. The device also incorporates a smart alert system to notify users — and their doctors — of dangerous fluctuations, potentially preventing severe complications. Remarkably, early testing showed that patients using GlucoTrack-Lite improved their average glucose stability within 3–5 days of use — far quicker than the several weeks usually required for behavioural and dosage adjustments to show measurable benefits. GlucoCare Limited’s mission is to become the leading provider of affordable diabetes management solutions in South Africa, believing that effective monitoring and timely intervention can significantly reduce hospital admissions and long-term complications for diabetic patients. The breakthrough attracted the attention of the National Department of Health, which awarded GlucoCare a grant to roll out a national pilot project. During the pilot phase, the company distributed GlucoTrack-Lite devices to public clinics, endocrinology practices, and select pharmacies nationwide, receiving overwhelmingly positive feedback from patients and healthcare providers. The pilot phase cost is R575 000. The following financial information was sourced from GlucoCare Limited’s integrated annual report: The earnings before tax for the year ending 31 May 2025 were correctly calculated at R (2024: R). The industry norm for return on assets is 8%, the debt-to-equity ratio norm is 1:1, and the total assets-to-total liabilities norm is 4 times. Extract from the Statement of Financial Position at 31 May 2025: Notes R’000 Ordinary shares 1,2 575 000 Retained income 2 828 000 Shareholders’ capital and reserves 1 403 000 14,5% Preference shares 3 138 000 Long term loan – FNB Bank (13,50%) 782 000 Total equity and liabilities 2 323 000 Additional information 1. The ordinary shares were issued at R9,20 per share. The current market price for ordinary shares is R172,50 per share. New issues will have no effect on this price, although ordinary share issue costs will be 3,45% of the current market price. 2. An ordinary share dividend of 121,28 cents was paid for the 2024 financial year-end (2023: 110,25 cents; 2022: 100,22 cents). The GlucoCare Limited Board intends to maintain the average historical growth in dividends of 10%. ASSIGNMENT 2 SEMESTER 2 - 2025 4 3. The preference shares were issued at R92 per share. Preference shares in the same risk class currently yield 13,42%. Preference shares carry a dividend payout rate of 16,10% and will be redeemed at a 5,75% premium after four years. The premium is paid one year after the redemption date. 4. GlucoCare Limited aims to maintain a debt:equity ratio of 1:1 going forward (based on book values). 5. To meet rising demand for GlucoTrack-Lite, GlucoCare plans to purchase automated assembly machinery for R690 million (project start date: 1 June 2025). The company will use this infrastructure for 5 years in full production before scrapping it for R57,5 million. Depreciation is R138 million per year. The required working capital is R115 million, with 80% recovered at the end of the project. 6. Expected annual production units (devices) for which demand exists is calculated at per annum. 7. The budgeted fixed costs for production are R34,5 million per month, and the selling price for the first year is R180 per device. Selling price growth is expected to match the inflation rate of 3% per annum for the project’s duration. The contribution margin is fixed at 35% on sales. 8. Financing options for the new machinery: o Issue new ordinary shares (retained earnings cannot be used). o Loan from Centra Bank of R460 million at prime rate. o Top-up loan from FNB Bank of R126 million at 13,50%, the same as the existing loan rate (considered fair market). o Loans must be taken in the full amounts available. 9. The corporate tax rate is 27%. Capital allowance on manufacturing machinery is 25% per annum. The prime lending rate is 10,50% and is expected to remain unchanged. REQUIRED (a) Advise GlucoCare Limited’s board of directors whether the new machinery should be purchased by calculating the net present value of the project. Assume an expected rate of return of 16%. You may assume tax is payable in the same year as calculated and accrued. [Round answers to the nearest rand]. (17) (b) Discuss any other quantitative, qualitative and strategic factors that the board of GlucoCare Limited should consider before deciding whether to invest in the new machinery. (5) (c) Calculate the weighted average cost of capital (WACC) of GlucoCare Limited based on market values at 31 May 2025 before the acquisition of the new automated assembly machinery. [Round rand amounts to the nearest cent and other numbers to two decimal places] (15) ASSIGNMENT 2 SEMESTER 2 - 2025 5 (d) Determine and advise GlucoCare Limited on how the new machinery should be financed if it is working towards its target capital structure. You should consider the funding options available as well as the current capital structure on 31 May 2025 using book values. (Calculations: 10 marks; comments: 2 marks) (12) (e) Calculate the following ratios of GlucoCare Limited for the year ended 31 May 2025 before the purchase of the new machinery: (i) Return on assets (ii) Total debt ratio (iii) Dividend yield (Calculations: 1 mark per ratio and 2 marks for the discussion of each answer) (9) (f) Name and discuss the three levels of working capital in a company. (3) (g) Just in time (JIT) is a management philosophy aimed at eliminating all non-value-added activities to reduce cost and time. It focuses on the principle that products should be pulled through the system by demand, rather than pushed through. Critically discuss the circumstances that would allow for successful implementation of JIT in GlucoCare Limited. (5) (h) With reference to the information given in the scenario, identify one strategic and market risk and one operational risk. Discuss the potential impact of the risk on GlucoCare Limited as well as a mitigating strategy. Present your answer in the follow manner: Strategic & market risk: Potential impact Mitigating strategy Operational risk: Potential impact Mitigating strategy Note that NO marks will be given for answers that are not presented in the exact same format. (6) TOTAL QUESTION 1 [72] ASSIGNMENT 2 SEMESTER 2 - 2025 6 QUESTION 2 (28 marks) Thabo Majola the CFO of SkyConnect Ltd (“SCL”), has sent you, Lerato Molefe, the following email: From: To: Sent: 7 February 2024 Subject: Financial analysis for strategic review Dear Lerato We are considering expanding into the satellite internet services market to complement our existing fibre and mobile network operations. Before making a decision, the Board has requested a comprehensive financial performance review of the company and an assessment of the potential impact of the proposed expansion project. The Board meeting is scheduled for Friday next week, so I will need your analysis by Wednesday morning. At present, SCL has a bank loan of R84 million at an annual interest rate of 12%. There are no other borrowings. SCL’s summary statement of profit or loss for the year ended 31 December 2024 was as follows: R’000 Operating profit 26 400 Interest paid (8 400) Profit before taxation 18 000 Taxation (3 600) Profit after taxation 14 400 Ordinary dividend paid (3 600) Retained profit for the year 10 800 You can assume that SCL is listed on the Johannesburg Stock Exchange (JSE) with an issued share capital of 2 million ordinary shares, most held by large pension funds and asset managers. Earnings and dividends are expected to grow at a constant rate of 5% per year indefinitely. Dividends are paid on 31 December each year. The proposed expansion involves launching two medium-orbit satellites and establishing satellite connectivity hubs across Southern Africa. This high-capital, high-risk project is expected to increase the company’s annual growth rate in earnings and dividends from 5% to 8%. The project will be financed through a 1-for-5 rights issue at an issue price of R20 per share, to be implemented on 31 December 2025. ASSIGNMENT 2 SEMESTER 2 - 2025 7 The current required return by equity shareholders is 11%, but management anticipates this will rise to 13% if the project proceeds, reflecting the higher business risk. One non-executive director, Fatima Karim, has expressed concern about the possible dilution effect on earnings per share (EPS) and its impact on SCL’s market value. She believes a fall in EPS could trigger a negative investor reaction. I would like you to compile a report that provides a clear assessment of our current performance and examines the potential impact of the proposed satellite expansion project, with particular emphasis on the financial analysis and valuation aspects. I plan to share this report with the Board so that we can carefully consider all implications before making a decision. If possible, please format the document using my signature and personalised logo so it appears as though I have prepared it myself. I will acknowledge your contribution to these reports at a later stage, but for now, I’d prefer that the Board not perceive me as lacking in this area. Thanks again for your support — I know I can rely on you to deliver. Kind regards Thabo Majola Chief Financial Officer SkyConnect Ltd REQUIRED Write an e-mail to the CFO addressing the following: (a) Ignoring the impact of the new project, calculate the following at 31 December 2024: 1) Price per share (P0) (using the dividend growth model) (4) 2) Earnings per share (2) 3) Price-earnings ratio (1) 4) Dividend cover (1) 5) Capital gearing ratio (using market value for equity) (2) (10) Question (b) continuing next page ASSIGNMENT 2 SEMESTER 2 - 2025 8 (b) Prepare a brief report for the Board, as far as the information permits, evaluating the expected impact of the proposed satellite expansion project at 31 December 2025, focusing on: (i) the value of the company (with and without the new project). (Note, take the finance needed into account). (ii) the earnings per share (EPS) of the company (with and without the new project). Include any relevant calculations to support your arguments. You do not need to discuss the risk profile in detail. (13) Note: In all relevant calculations, assume the financial markets believe the directors’ estimates of future dividends and cost of equity. Calculations (8 marks); discussion (4 marks); communication and layout (1 mark) (c) In a direct response (e-mail) to the CFO, outline any ethical concerns that you have regarding his request. (3) (d) Based on the information provided about SkyConnect Ltd and its proposed satellite expansion project, identify and discuss one key business risk that the company may face if it proceeds with the project. (2)