MAC2602 Assignment 3 (DETAILED ANSWERS) Semester 2 2024 - DISTINCTION GUARANTEED

MAC2602 Assignment 3 (DETAILED ANSWERS) Semester 2 2024 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references .. 1.1 Select one example of what should be reflected in a mission statement. a) We are a distribution organisation that provides fresh produce and high-quality produce to a network of independent retailers who trade under our brands. We are not in the grocery business; we are in the people business. b) Nothing means more to us than our valued customers, and we believe in going the extra mile to give them the very best. From sourcing the finest products to providing willing, efficient, and effective staff who take a personal interest in our customers’ needs. c) The principles that guide our organisation are entrepreneurship, family values, and passion. d) We are a part of the community, and the community is like family. We strive to give you the highest quality produce, and the freshest meats, all at the right price, each time, every day. e) Despite having operations in many countries around the African continent, with different national cultures, we operate as one company, with one dream and one culture to unite us, and a clear focus on having the right people in the right place at the right time. (2) 1.2 Select examples of actions relating to secondary stakeholders influencing an organisation's strategy. (1) Black Economic Empowerment legislation. (2) An increase of taxation on alcoholic beverages. (3) Banning of smoking in public areas. (4) NUMSA demanding an increase in salaries for mine workers. (5) Customers that boycott a company due to its employment policy restricting employing or promoting a certain race. a) Statement (1) and (2) b) Statement (1), (2), and (3) c) Statement (1), (2), (3), and (4) d) All of the above statements (2) MAC2602 ASSESSMENT THREE (3) S2-2024 4 QUESTION 1 (continued) 1.3 Apply cash flow principles and select an example that does not represent a sunk cost. a) SENWES Ltd paid R800 000 to a market research company to research the proposed new financial product for small-scale farmers. b) BMW PLC invested R in imported parts used in the assembly of electric vehicles at the beginning of production of these vehicles. c) Big Pharm Ltd paid R100 000 to a legal firm for the protection of intellectual rights of the food-and-mouth vaccine it developed. d) Solar Galore Ltd spent R5 000 000 on research and development relating to the latest technology used in solar inventors. (2) 1.4 Select an alternative that is not a reason why stakeholders can influence the future strategies of an organisation. a) The organisation is in existence for more than ten years and is in its maturity phase. b) The organisation has a large institutional shareholder that expects high returns from their investment. c) The company has cash flow problems and needs an overdraft facility or loan from its bank. d) The main customer of the organisation expects special discounts. (2) 1.5 You observed the following at a company you recently started a new job at: (1) All staff have access to a wide range of information including details of client accounts, to enable good client service. (2) The organisation has a graduate program, whereby they offer bursaries to students and then employ them as trainees once they have completed their studies. (3) A free annual holiday is given to all directors, and this is not declared as it is not in the form of a cash payment. (4) Sometimes, but not very often, if there is a large expense the company will capitalise it, but only it if is over R100 000. Which of the above actions adhere to good corporate governance? a) All of the above statements b) Statements (1) (2) and (3) c) Statement (1) and (2) d) Statement (2) only (2) MAC2602 ASSESSMENT THREE (3) S2-2024 5 QUESTION 2 (33 marks; 40 minutes) This question consists of two parts: PART A and PART B PART A (6 marks; 7 minutes) The following three scenarios of capital expenditure are given to you: a) Transco Ltd is a logistics company with operations in countries in the Southern African Development Community (SADC) region. While delivering to one of the countries, a truck was filled with contaminated diesel. The truck could not drive further, and the mechanic’s report, stated that the diesel damaged the truck’s engine beyond repair. As the cost to replace the truck’s engine was much higher than the book value of the truck, the company decided to buy a brand-new truck. b) Gate-Motors Ltd is a manufacturer of electric- and boom gate motors and it has few machines used in its assembly process. One of the machines broke down and after contacting the supplier, it was found that the machine could be reconditioned by replacing the old engine and gearbox. c) OPPO Plc manufactures and distributes mobile cellphones and related mobile accessories. The increased use of face recognition technology in the mobile cellphone market led to the acquisition of a small company called “Face-Tech” with state-of-the-art technology in face recognition technology. This was after a strategic review revealed that they have no in-house expertise within this space. The acquisition will enable OPPO to compete better in the mobile markets. REQUIRED: Identify the correct type of capital expenditure for each of the listed scenarios, and briefly explain why it should be classified as that specific type of capital expenditure type. PART B (27 marks; 32 minutes) VolleyMasters (Pty) Ltd is a manufacturer of modern indoor and outdoor volleyball equipment. Over the last financial year, the company paid hefty fines for incorrectly dumping steel and aluminium. The company allegedly tried to bribe environmental inspectors so they could get away with the illegal dumping. The management team is currently considering investing in a new manufacturing machine with a cost price of R6 000 000. The current machine’s emissions are above the limits set on the ISO standards. The required target payback period on investments is three years for projects to be undertaken. The proposed machine has a useful life of three years and depreciation is calculated on a straight-line basis over the useful life. The Managing Director, Mr. Monster Block has so far gathered the following information: Cash flows: Year 1 Year 2 Year 3 Net cash inflow (Excluding depreciation and after-tax) R2 000 000 R3 000 000 R3 500 000 Factor at 15% ? ? ? Present values (round to the nearest rand) ? ? ? The Financial Manager, Mr. Float Serve (CA) SA has, however, suggested that the company should rather invest the proposed amount at a specific interest rate at the bank. He ferociously argued that at the end of three years the amount would have grown to R8 000 000. He is currently facing charges by SAICA for his alleged involvement in money laundering by his former client while he was still involved in statutory auditing. These two investment options are mutually exclusive. The company’s target rate of return for investment projects is 16%, and the required payback period is equal to the useful life of the long-term asset. MAC2602 ASSESSMENT THREE (3) S2-2024 6 QUESTION 2 PART B (continued) REQUIRED: a) Identify and briefly discuss three environmental, ethical, social or governance factors which are eminent from the given scenario that VolleyMasters (Pty) Ltd should consider which may affect their operations. (8) b) Calculate the internal rate of return (IRR) of the new manufacturing machine. Interpolate between 15% and 18%. Firstly, show your calculations of Present Values (PV) and Net Present Values (NPV) at 15% and at 18% before showing how you used the interpolation formula to calculate the IRR-effective cost. (9) c) (i) Determine the effective interest rate for the suggestion of Mr. Float Serve. Use the mathematical formulae method and information given in this regard. (3) (ii) Based on your calculations in (b) and c(i) and information in the scenario, recommend and motivate which investment option should be chosen. (2) For effective interest rate calculations, work to four decimals and round only your final answer to two decimals. (d) (i) Calculate the new machine’s payback period. Show all detailed workings. (4) (ii) Based on (i) above, advise management if they should invest in the new machine or not. (1) QUESTION 3 (19 marks; 23 minutes) You are currently busy with your SAICA articles/ internship at the South African National Treasury Office. The director-general at the office has identified you as the strongest trainee in financial management, particularly in capital structures and financing of companies. The following information was presented to you regarding the funding structure of the financially troubled Ithala Mutual Bank: Share Capital: Additional information 1 Long-Term Liabilities: Additional information 2 Additional information 1. Ithala Mutual Bank has 3 000 000 issued ordinary shares which were issued at R20 per share. The next dividend payable will be 300 cents per share. It is expected that dividends will have a long-term sustainable growth rate of 4%. The shares have a current market price of R30 per share. The cost of equity is 12%. The CEO recently sold all his shares just before the announcement of the financial challenges facing the mutual bank. 2. The long-term liabilities relate 500 000 debentures issued with a nominal value of R100 each which mature in 5 years’ time. These debentures pay an annual coupon rate of 8% per annum and the current market return on similar debentures with 5 years of maturity is 10% per annum (pre-tax). 3. The prevailing company taxation rate is 28%. MAC2602 ASSESSMENT THREE (3) S2-2024 7 QUESTION 3 (continued) REQUIRED: a) Identify and briefly discuss one ethical or governance factor eminent from the scenario. (2) b) Calculate the after-tax cost of debentures for Ithala Mutual Bank. (3) c) Calculate the market value of debentures. If the financial calculator is used, show all inputs. (6) d) Calculate the weighted average cost of capital (WACC). Use the formula or Table Format. (8) QUESTION 4 (38 marks; 45 minutes) This question consists of two parts: PART A and PART B PART A (18 marks; 21 minutes) Builders Warehouse Ltd (‘’Builders”) supplies building and construction materials to both residential customers and industrial contractors. The company also sells to European-based industrial contractors. The Chief Financial Officer (CFO) raised concerns about the company’s long cash conversion cycle at the recent board meeting. The CFO emphasised the importance of shortening the cycle without hurting the operations. As a result, it was decided that actions be taken to reduce the cycle without increasing costs and/or reducing sales. This concern is on the back of reduced sales volumes due slow economic growth. There are 365 days in a financial year. The CFO presented the following information at the recent board meeting: Details Original cash conversion cycle Improved cash conversion cycle Annual sales R8 000 000 R8 000 000 Cost of sales R5 500 000 R5 500 000 Credit sales (80% of sales) ? ? Credit purchases R4 900 000 R4 900 000 Inventory conversion days 68 62 Receivables days 36 30 Payables days (55) (60) Cash conversion cycle (days) 49 32 REQUIRED: a) Identify and briefly discuss four concerns or factors which are eminent from the given scenario that Builders should consider that may affect its operations. (8) b) Identify and briefly discuss one area on which the credit policy of Builders should focus on. (2) c) Calculate the rand values of the benefit from improving each of the following elements of the cash conversion cycle. i. Inventory (2) ii. Receivables (2) iii. Payables (2) iv. Total rand value benefit in net working capital (2) For this question, your workings must be rounded to two decimal places and your final answer to the nearest rand. Show detailed calculations of each of the elements of the original situation as well as the improved situation. MAC2602 ASSESSMENT THREE (3) S2-2024 8 QUESTION 4 - PART B (20 marks; 24 minutes) Palatable Farms Ltd (“Palatable”) farms with sunflower, poultry, goats, sheep, and beef cattle in Thabazimbi, Limpopo Province. Palatable is currently a leader in the sunflower farming industry and has no significant competitors. The company is listed on the Johannesburg Stock Exchange and has a 31 July financial year-end. Sunflower is a crop that is dependent on summer rainfall, while farm animals are pasture grass-fed. The company buys supplementing grass for farm animals during the winter months. The sunflower is sold before harvest using the put-options market, whereas the farm animals are sold at highly legislated auctions. The sales are to both local and international customers. The following information for the financial year ended 31 July 2024 is provided to you: Gross profit R Net profit R Gross profit margin 60% Current assets R Non-current assets R1 Total liabilities R Long-term debt (including current portion) R Retained earnings R5 000 000 Additional information: • The company has an issued share capital of 15 million ordinary shares. • The current market price per share is 1 300 cents. • The dividend per share is 100 cents. • The company is considering investing in new farms through acquisition of neighbouring farms as part of its expansion strategy. REQUIRED: a) Identify and briefly discuss four environmental, ethical, social or governance factors that Palatable should consider which may affect their operations which are eminent from the given scenario. (8) b) Identify three kinds of information that can be included in Palatable’s strategic information. (4) c) Calculate the following ratios for the financial year ended 31 July 2024: i. Net profit margin. (2) ii. Asset turnover (2) iii. Debt to equity ratio. (2) iv. Earnings per share. (2) For each calculated ratio: • Clearly show all the formulas used. • Clearly show all your detailed calculations. • Round all your final answers to two decimals.