MAC2602 Assignment 2 2021

𝑴𝑨𝑪 𝟐𝟔𝟎𝟐 𝑨𝒔𝒔𝒊𝒈𝒏𝒎𝒆𝒏𝒕 𝟎𝟐 𝟐𝟎𝟐𝟏
Question 1

a) Capital Structure

R'000
Equity 342555
Retained Earnings 9555
Share capital 200000
Non Distributable Reserves 133000

Debt 269300
Bonds 170800
Long term loan 98500

Total Capital 611855
• Capital Structure= 𝐷𝑒𝑏𝑡: 𝐸𝑞𝑢𝑖𝑡𝑦
• Capital Structure= 269300: 342555
269300 342555
• Capital Structure= 611855 × 100: 611855 × 100
• Capital Structure= 44: 56
b) To move toward the target capital structure the firm should issue 40% debt and 60% equity
• Debt= 40% × 30 000 000
• Debt= 12 000 000
• Equity= 60% × 30 000 000
• Equity= 18 000 000 𝑜𝑟 56 250 𝑠ℎ𝑎𝑟𝑒𝑠
c) Capital Asset Pricing Model
• 𝑘𝑒 = 𝑅𝑓 + 𝐵(𝑅𝑚 − 𝑅𝑓)
• 𝑘𝑒 = 8,5 + 1,1(15 − 8,5)
• 𝑘𝑒 = 15,65%
d) WACC= 𝑊𝑒𝑘𝑒 + 𝑊𝑑𝑘𝑑
• WACC= 0,6 × 15,65 + 0,4 × 13(1 − 0,28)
• WACC= 13,134%

Question 2
𝐺𝑟𝑜𝑠𝑠𝑃𝑟𝑜𝑓𝑖𝑡
a) Gross Profit Margin= 𝑆𝑎𝑙𝑒𝑠
× 100
281700
i) 𝐺𝑃𝑀𝐺𝑇 = × 100
548200
• 𝐺𝑃𝑀𝐺𝑇 = 51,39%
290340
• 𝐺𝑃𝑀𝑂𝑃 = × 100
515960
• 𝐺𝑃𝑀𝑂𝑃 = 56,27%
ii) The ratio represents the percentage of sales that represents gross profit or profit
before operating costs
iii) The gross profit margin of organic products is higher which means the firm more
profitable this year than the other one




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, iv) The ratio represents profitability of the firm in the short run and could imply that the
firm is implementing short term profitability measures on the cost sustainability for
example charging high prices
𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝐴𝑠𝑠𝑒𝑡𝑠
b) Current Ratio= 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
55602+65320+15362
i) 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜𝐺𝑇 = 45300
• 𝐶𝑅𝐺𝑇 = 3,01 𝑡𝑖𝑚𝑒𝑠 𝑜𝑟 3,01: 1
45200+68050+10220
• 𝐶𝑅𝑂𝑃 =
56200
• 𝐶𝑅𝑂𝑃 = 2,20 𝑡𝑖𝑚𝑒𝑠 𝑜𝑟 2,20: 1
ii) The ratio indicates the number of times current liabilities are covered by the
firm’s current assets, basically it represents the liquidity of the firm in question.
iii) Green tree has a higher current ratio than organic products representing a
better liquidity position for the former.
iv) The higher current ratio can however be attributed to higher inventories kept by
the Green tree limited which may have implications of higher opportunity costs
for keeping the inventory.
𝐶𝑜𝑠𝑡𝑜𝑓𝑠𝑎𝑙𝑒𝑠
c) Inventory Turnover= 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
266500
i) 𝐼𝑇𝑂𝐺𝑇 = 55602
• 𝐼𝑇𝑂𝐺𝑇 = 4,79 𝑡𝑖𝑚𝑒𝑠
225620
• 𝐼𝑇𝑂𝑂𝑃 =
45200
• 𝐼𝑇𝑂𝑂𝑃 = 4,99 𝑡𝑖𝑚𝑒𝑠
ii) The ratio indicates the number of times average inventory is converted into sales
each year and is measure of activity level of the firm
iii) The inventory turnover rate of Organic Products is higher which indicates fast
moving inventory of the firm and explains why it is more profitable
iv) The inventory turnover rate along with the net profit margin contribute to the
return on assets of the firm which means the higher the firm turns inventory into
sales the more profitable the firm is.
𝐸𝐵𝐼𝑇
d) Interest Cover Ratio=
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
164139
i) 𝐼𝐶𝑅𝐺𝑇 = 15669
• 𝐼𝐶𝑅𝐺𝑇 = 10.48 𝑡𝑖𝑚𝑒𝑠
162310
• 𝐼𝐶𝑅𝑂𝑃 =
29560
•
𝐼𝐶𝑅𝑂𝑃 = 5,49 𝑡𝑖𝑚𝑒𝑠
ii) The interest cover ratio shows the number of times the interest payments are
covered by the earnings before interest and tax and is a measure of the firm’s
financial risk profile
iii) Green tree is in better position as it has a higher interest cover ratio than Organic
products because it can meet its obligations better than Organic Product
iv) A very low interest cover ratio means the firm is at risk of not being able to pay its
interest payments. However a higher interest cover ratio may mean a very low debt
ratio, which may have a low return on equity of the firm as seen by a higher gearing
ratio for Organic Products.
e) Debt to Equity ratio= 𝐷𝑒𝑏𝑡: 𝐸𝑞𝑢𝑖𝑡𝑦
i) 𝐷𝐸𝐺𝑇 = (189203 + 45300): 789425
234503 789425
• 𝐷𝐸𝐺𝑇 = 1023928 × 100: 1023928 × 100

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