[Date]
MAC3702 Assignment
2 Semester 2 2024 -
DUE 12 September
2024
QUESTIONS WITH ANSWERS
,MAC3702 Assignment 2 Semester 2 2024 - DUE 12 September 2024
QUESTION 1 (25 marks; 45 minutes)
Lesidi Limited, a company listed on the Johannesburg Stock Exchange (JSE),
specialises in manufacturing paint. Their flagship product, Yizo, has been rated the
best paint by the South African Paint Association for the past ten years. This top
award has driven Lesidi's success and challenged them to innovate continuously to
maintain Yizo's quality standards. The company has developed various Yizo
product variations and is always looking for innovative ways to improve and
expand the range. Recently, Lesidi identified a promising spray paint product that
could complement the Yizo product line without compromising its brand quality.
They are considering acquiring Bafifi (Pty) Limited, as they are impressed with the
high-quality spray paints Bafifi produces. Bafifi manufactures spray paint and
primer products. Over the past five years, Bafifi has experienced significant
growth, driven primarily by its innovative product development. Recently, Bafifi
introduced an all-in-one, single-coat application spray paint. This new product
allows customers to apply just one coat for both priming and painting, eliminating
the need for separate primer and paint applications. Lesidi is considering making a
bid for Bafifi. Bafifi has 10 million shares in issue. The following information
relating to Bafifi is provided: Year 1 Year 2 Year 3 Year 4 2023 2024 2025 2026
R’000 R’000 R’000 R’000 Actual Forecast Forecast Forecast Revenue 260 000
291 200 * * Cost of Sales (125 000) (174 720) * * Gross Profit 135 000 116 480 *
* Other Operating expenses (40 000) (46 000) * * Depreciation (23 000) (23 000)
(23 000) (23 000) Profit from Operations 72 000 47 480 * * Finance Costs (24
000) * * * Profit before tax 48 000 * * * Taxation – 27% (12 960) * * * Profit after
,tax 35 040 * * * QUESTION 1 (continued) 1. Forecast for 2024 to 2026 Bafifi’s
forecast was prepared using the following assumptions
• Sales prices are projected to increase by 12% in 2024 and thereafter by a constant
growth of 7%.
• Bafifi’s gross profit percentage is expected to decrease in 2024 due to the
introduction of a new product thereafter increase by 5% in 2025 and then return to
the 2023 levels in 2026.
• Bafifi’s expects to increase its operating profit margin by limiting the increase in
other operating expenses, to only 5% per year from 2025.
• Assume that depreciation amount equals tax allowances.
• Bafifi took out a loan with Buzz bank of R100 million at the beginning of 2023 to
finance the development of the new spray product. The loan bears an interest rate
of 10% with interest payable annually on the last day of the year. The loan capital
amount is repayable in 2025. The interest payments for 2023 included interest
payments on another loan with Buzz Bank, which was fully settled in 2023.
• The marginal tax rate is 27% payable in the year in which the liability arises.
Continuing Value
• Using year 3 as the base year, Free cash flows beyond year 3 are expected to
grow at a constant rate of 5%.
• Bafifi’s current weighted average cost of capital (“WACC”) equals 17% and its
target WACC is 16.5%.
• Lesidi’s current WACC is 16% and its present capital structure is close to a target
capital structure for a company of its nature and size
, REQUIRED: For each question below, remember to:
• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
and round all your workings to two decimals
• Amounts must be presented in R’000
a) Complete the table by calculating Bafifi’s forecast from 2024 to 2026 taking
into account the forecast information provided. (8)
b) Calculate the value of the company Bafifi (Pty) Ltd using the Free cash flow
valuation method. (10)
c) Justify with reasons why the Free cash flow valuation method was a more
appropriate valuation method for determining the company value of Bafifi (Pty)
Ltd. (4)
d) Justify with reasons your choice of the discount rate factor used in discounting
the future free cash flows to present values. (3) Total marks for the Question 1 (25)
To address the questions provided, I'll guide you through the calculations and
justifications step by step. The first part requires completing the forecast table for
Bafifi from 2024 to 2026, and the second part involves valuing the company using
the Free Cash Flow (FCF) valuation method. Let's start with each requirement.
a) Completing the Forecast Table for Bafifi (8 marks)
We need to forecast the Revenue, Cost of Sales, Gross Profit, Operating Expenses,
Depreciation, Profit from Operations, Finance Costs, Profit Before Tax, Taxation,
and Profit After Tax for the years 2024 to 2026.
Revenue Forecast:
MAC3702 Assignment
2 Semester 2 2024 -
DUE 12 September
2024
QUESTIONS WITH ANSWERS
,MAC3702 Assignment 2 Semester 2 2024 - DUE 12 September 2024
QUESTION 1 (25 marks; 45 minutes)
Lesidi Limited, a company listed on the Johannesburg Stock Exchange (JSE),
specialises in manufacturing paint. Their flagship product, Yizo, has been rated the
best paint by the South African Paint Association for the past ten years. This top
award has driven Lesidi's success and challenged them to innovate continuously to
maintain Yizo's quality standards. The company has developed various Yizo
product variations and is always looking for innovative ways to improve and
expand the range. Recently, Lesidi identified a promising spray paint product that
could complement the Yizo product line without compromising its brand quality.
They are considering acquiring Bafifi (Pty) Limited, as they are impressed with the
high-quality spray paints Bafifi produces. Bafifi manufactures spray paint and
primer products. Over the past five years, Bafifi has experienced significant
growth, driven primarily by its innovative product development. Recently, Bafifi
introduced an all-in-one, single-coat application spray paint. This new product
allows customers to apply just one coat for both priming and painting, eliminating
the need for separate primer and paint applications. Lesidi is considering making a
bid for Bafifi. Bafifi has 10 million shares in issue. The following information
relating to Bafifi is provided: Year 1 Year 2 Year 3 Year 4 2023 2024 2025 2026
R’000 R’000 R’000 R’000 Actual Forecast Forecast Forecast Revenue 260 000
291 200 * * Cost of Sales (125 000) (174 720) * * Gross Profit 135 000 116 480 *
* Other Operating expenses (40 000) (46 000) * * Depreciation (23 000) (23 000)
(23 000) (23 000) Profit from Operations 72 000 47 480 * * Finance Costs (24
000) * * * Profit before tax 48 000 * * * Taxation – 27% (12 960) * * * Profit after
,tax 35 040 * * * QUESTION 1 (continued) 1. Forecast for 2024 to 2026 Bafifi’s
forecast was prepared using the following assumptions
• Sales prices are projected to increase by 12% in 2024 and thereafter by a constant
growth of 7%.
• Bafifi’s gross profit percentage is expected to decrease in 2024 due to the
introduction of a new product thereafter increase by 5% in 2025 and then return to
the 2023 levels in 2026.
• Bafifi’s expects to increase its operating profit margin by limiting the increase in
other operating expenses, to only 5% per year from 2025.
• Assume that depreciation amount equals tax allowances.
• Bafifi took out a loan with Buzz bank of R100 million at the beginning of 2023 to
finance the development of the new spray product. The loan bears an interest rate
of 10% with interest payable annually on the last day of the year. The loan capital
amount is repayable in 2025. The interest payments for 2023 included interest
payments on another loan with Buzz Bank, which was fully settled in 2023.
• The marginal tax rate is 27% payable in the year in which the liability arises.
Continuing Value
• Using year 3 as the base year, Free cash flows beyond year 3 are expected to
grow at a constant rate of 5%.
• Bafifi’s current weighted average cost of capital (“WACC”) equals 17% and its
target WACC is 16.5%.
• Lesidi’s current WACC is 16% and its present capital structure is close to a target
capital structure for a company of its nature and size
, REQUIRED: For each question below, remember to:
• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
and round all your workings to two decimals
• Amounts must be presented in R’000
a) Complete the table by calculating Bafifi’s forecast from 2024 to 2026 taking
into account the forecast information provided. (8)
b) Calculate the value of the company Bafifi (Pty) Ltd using the Free cash flow
valuation method. (10)
c) Justify with reasons why the Free cash flow valuation method was a more
appropriate valuation method for determining the company value of Bafifi (Pty)
Ltd. (4)
d) Justify with reasons your choice of the discount rate factor used in discounting
the future free cash flows to present values. (3) Total marks for the Question 1 (25)
To address the questions provided, I'll guide you through the calculations and
justifications step by step. The first part requires completing the forecast table for
Bafifi from 2024 to 2026, and the second part involves valuing the company using
the Free Cash Flow (FCF) valuation method. Let's start with each requirement.
a) Completing the Forecast Table for Bafifi (8 marks)
We need to forecast the Revenue, Cost of Sales, Gross Profit, Operating Expenses,
Depreciation, Profit from Operations, Finance Costs, Profit Before Tax, Taxation,
and Profit After Tax for the years 2024 to 2026.
Revenue Forecast:
