Memorandum
Question 1
1.1 (d) increase in share price and cash dividends
1.2 (a) CD
1.3 (c) risk, return and the impact on share price
1.4 (iv) (b) required rate of return will increase
1.5 (c) link management compensation to the performance of the company’s share price
Question 2
No Assets Liabilities Owner’s equity
1 +R60 000 + R 60 000
2 +R20 000 + R20 000
3 +R10 000
-R10 000
4 -R4000 -R4000
5 +R20 000 +R20 000
6 -R30 000 -R30 000
7 -R10 000 -R10 000
8 -R500 -R500
9 +R12 000 +R12 000
R67 500 R22 000 R45 500
Assets (R67 500) = Liabilities (R22 000) + Equity (R45 500)
,Statement of comprehensive income as at 31 December 2017
Sales R 10 000 000
Cost of sales (2 500 000)
Gross profit 7 500 000
Operating expenses 2 000 000
Operating profit 5 500 000
Interest expense (25 000)
Net profit before tax 5 475 000
Tax (1 533 000)
Net profit after tax 3 942 000
Calculations
1. Costs of sales = R10 000 000*0.25 = R2 500 000
2. Interest expense = R100 000*0.25 = R25 000
3. Tax = R5 475 000 *0.28 = R1 533 000
4. Net profit distribution:
Dividends to ordinary shareholders R 394 200
Retained earnings R 3 547 800
R 3 942 000
, 1.1 Gross profit margin = (7 500 000 ÷ 10 000 000) × 100
= 75%
1.2 Net profit margin = (3942 000 ÷ 10 000 000) × 100
= 39.42%
1.3 Return on investment = (Net profit after tax ÷ Total assets) × 100
= (3942 000 ÷ 11 200 000)
= 35.20%
1.4 Return on equity = (Net profit after tax ÷ Total shareholders equity) × 100
= 3942 000 ÷ (2000 000 + 3 547 800) × 100
= (3942 000 ÷ 5547 800) × 100
= 71.10%
1.5 Average age of accounts receivable
= Accounts receivable ÷ (Annual sales ÷ 360)
= 500 000 ÷ (10 000 000 ÷ 360)
= 500 00 ÷ (27 777.78)
= 18 days
1.6.1 Price- earnings (P/E) ratio
Step 1: Calculate the earnings per share (EPS)
= Net profit after tax- preference share dividend ÷ number of ordinary shares
= (3942 000 – 0) ÷ 1000 000
= R3.94
, Step 2: Calculate the price-earnings (P/E) ratio
= Current market price per share ÷ EPS
= R4 ÷ R3.94
= R1.02
1.7 Quick ratio = (Current assets – Inventory) ÷ Current liabilities
= (100 000 + 500 000 +600 000 – 600 000) ÷ (1552 200 + 100 000)
= (600 000 ÷ 1652 200)
= 0.36
Question 1
1.1 (d) increase in share price and cash dividends
1.2 (a) CD
1.3 (c) risk, return and the impact on share price
1.4 (iv) (b) required rate of return will increase
1.5 (c) link management compensation to the performance of the company’s share price
Question 2
No Assets Liabilities Owner’s equity
1 +R60 000 + R 60 000
2 +R20 000 + R20 000
3 +R10 000
-R10 000
4 -R4000 -R4000
5 +R20 000 +R20 000
6 -R30 000 -R30 000
7 -R10 000 -R10 000
8 -R500 -R500
9 +R12 000 +R12 000
R67 500 R22 000 R45 500
Assets (R67 500) = Liabilities (R22 000) + Equity (R45 500)
,Statement of comprehensive income as at 31 December 2017
Sales R 10 000 000
Cost of sales (2 500 000)
Gross profit 7 500 000
Operating expenses 2 000 000
Operating profit 5 500 000
Interest expense (25 000)
Net profit before tax 5 475 000
Tax (1 533 000)
Net profit after tax 3 942 000
Calculations
1. Costs of sales = R10 000 000*0.25 = R2 500 000
2. Interest expense = R100 000*0.25 = R25 000
3. Tax = R5 475 000 *0.28 = R1 533 000
4. Net profit distribution:
Dividends to ordinary shareholders R 394 200
Retained earnings R 3 547 800
R 3 942 000
, 1.1 Gross profit margin = (7 500 000 ÷ 10 000 000) × 100
= 75%
1.2 Net profit margin = (3942 000 ÷ 10 000 000) × 100
= 39.42%
1.3 Return on investment = (Net profit after tax ÷ Total assets) × 100
= (3942 000 ÷ 11 200 000)
= 35.20%
1.4 Return on equity = (Net profit after tax ÷ Total shareholders equity) × 100
= 3942 000 ÷ (2000 000 + 3 547 800) × 100
= (3942 000 ÷ 5547 800) × 100
= 71.10%
1.5 Average age of accounts receivable
= Accounts receivable ÷ (Annual sales ÷ 360)
= 500 000 ÷ (10 000 000 ÷ 360)
= 500 00 ÷ (27 777.78)
= 18 days
1.6.1 Price- earnings (P/E) ratio
Step 1: Calculate the earnings per share (EPS)
= Net profit after tax- preference share dividend ÷ number of ordinary shares
= (3942 000 – 0) ÷ 1000 000
= R3.94
, Step 2: Calculate the price-earnings (P/E) ratio
= Current market price per share ÷ EPS
= R4 ÷ R3.94
= R1.02
1.7 Quick ratio = (Current assets – Inventory) ÷ Current liabilities
= (100 000 + 500 000 +600 000 – 600 000) ÷ (1552 200 + 100 000)
= (600 000 ÷ 1652 200)
= 0.36
