FMA101 FIM262 (STADIO) Assignment 1 (QUALITY ANSWERS) Semester 1 2024 - DUE 22 April 2024

This document contains workings, explanations and solutions to the FMA101 FIM262 Assignment 1 (QUALITY ANSWERS) Semester 1 2024 - For assistance call or Whats-App us on 0.6.8...8.1.2...0.9.3.4........ Question 1 (28 marks) Stealers (Pty) Ltd is a company that provides a wide variety of steel products to both the industrial and domestic markets. The company has been in operation for 25 years but due to the economic conditions locally and internationally, company management is concerned about its ability to meet its short-term obligations. The company accountant collected some information about the liquidity status of the steel industry and Stealers’ liquidity status in 2022. She requested your assistance with an analysis of Stealers’ 2023 liquidity position compared to 2022 and that of the industry. The following extracts from Stealers 2022 and 2023 financial statements were provided: Extracts from the Statements of Comprehensive Income for 2022 and 2023. (R000) (R000) Revenue Cost of goods sold Gross profit Operating expenses 735 732 Distributable profit 400 550 Extracts from the Statements of Financial Position for 2022 and 2023: (R000) (R000) Total non-current assets Current assets: Inventory Trade receivables Cash & cash equivalents Total assets Total equity Non-current liabilities Current liabilities: Trade payables 800 650 Short-term borrowing 540 480 Total liabilities Total equity and liabilities ©STADIO Assignment – 2024 Semester 1 FMA101 Financial Management Page 4 of 7 Additional information: Stealers 2022 Stealers 2021 Industry 2022 Industry 2021 Current ratio 4.2 4.4 4.6 4.7 Quick ratio 2.1 2.5 2.9 3.0 Inventory turnover 2.0 2.2 2.5 2.6 Required: 1.1 Calculate the 2023 Current ratio, Quick ratio and Inventory turnover ratio for Stealers using the information provided. (10) 1.2 Analyse the results of your calculations as well as the information provided and write a short report to Stealers management that summarises Stealers liquidity position compared to its previous financial years and to the industry. Focus on the percentage changes in Stealers current liquidity position compared to that of the previous year and those of the industry for 2021 and 2022. (18) Question 2 (12 marks) Crow Retailers’ Sales Manager presented the actual sales and purchases and other expenses for January and February 2024 as well as the forecasted cash receipts, disbursements and expenses for March and April 2024 to the accountant to prepare a cash budget. January (Rand) February (Rand) March (Rand) April (Rand) Total sales Total purchases Rent of property 000 Salaries and wages 000 Municipal services 000 The company pays cash for 10% of its monthly purchases and the rest is purchased on credit. The terms and conditions of its creditors require that 45% of the outstanding balances be paid in the month after the purchase was made and the remaining 55% two months after the purchase was made. The cash balance in the company’s bank account on the first day of March 2024 was R25 000. The company’s cash policy dictates that it maintains a minimum cash balance of R50 000. The accountant started with the preparation of the pro-forma cash budget but then became ill and will be hospitalised for a while. The Chief Executive Officer requested that you step in and complete the pro-forma cash budget using the partially prepared cash budget presented below. ©STADIO Assignment – 2024 Semester 1 FMA101 Financial Management Page 5 of 7 Crow Retailers – Pro-forma cash budget for the period March – April 2024 March (Rand) April (Rand) Cash sales Receipts: Lagged 1 month Receipts: Lagged 2 months Total cash receipts Cash purchases Payments: Lagged 1 month Payments: Lagged 2 months Rent of property Salaries and wages Municipal services Total cash disbursements Net cash flow Beginning cash Ending cash Minimum cash balance Short-term borrowing Excess cash balance Required: 2.1 Use the information provided and the partially completed cash budget to prepare Crow Retailers’ cash budget for March and April 2024 . (8) 2.2 Recommend to Crow Retailers’ management possible strategies they should consider implementing to improve the cash flow position of the business. Base your recommendations on the contents of the cash budget. (4) Question 3 (15 marks) A friend of yours is considering investing in the shares of two companies, Traders (Pty) Ltd and Sigma Ltd. Charlie collected the following investment and economic data relevant to the two companies and approached you for assistance with the analysis of the data for him to make an informed investment decision. Economy Probability Expected return Traders shares (R) Expected return Sigma shares (R) Pessimistic 0.35 4% 8% Normal 0.40 11% 16% Optimistic 0.25 15% 9% ©STADIO Assignment – 2024 Semester 1 FMA101 Financial Management Page 6 of 7 Additional information: • The expected return on Sigma shares is 11.5% with a standard deviation of 3.7%. Required: 3.1 Calculate the expected return and standard deviation for Traders shares. (6) 3.2 Which company should your friend invest in? Give reasons for your recommendation. (9) Question 4 (12 marks) The Chief Executive Officer of Strata Ltd informed you that at the next board meeting she wants to discuss the company’s current weighted average cost of capital (WACC) and requested that you calculate it in preparation for this discussion. Strata’s current capital structure is as follows: Source of capital Rand Ordinary shares issued Retained earnings Preference shares Long-term loans Additional information: • The company has issued ordinary shares. • The company’s shares currently trade at R22.70 per share. • The company has declared a dividend of R3.00 per share and expects that future dividends will grow at 6% per annum for the foreseeable future. • The preference shares are currently trading at 13%. • The company must repay the long-term loan at the end of eight (8) years and the interest. The current interest rate for similar long-term loans is 16.6%. • The tax rate is 28%. Required: Note: • Show all formulas. • Round off all final answers to the nearest whole number. • Marks are awarded for all calculations. Use the information provided to calculate the company’s current weighted average cost of capital (WACC). ©STADIO Assignment – 2024 Semester 1 FMA101 Financial Management Page 7 of 7 Question 5 (33 marks) Border Engineering (Pty) Ltd must replace one of its machines because the machine is more than 10 years old, and its maintenance costs are becoming unaffordable. The company is considering two different machines from two different suppliers. Machine P will require an initial investment of R and Machine Q an initial investment of R. Border Engineering’s cost of capital is 13% and the estimated net cash flows for each machine for a five-year time horizon are included in the table below. Projected net cash flows: 2019 – 2023: Year Project P (Rand) Additional information: • The supplier of Machine Q provided Border Engineering with the following information based on Border’s requirements: The Net Present Value (NPV) for Machine Q is R80 640 and the Internal rate of Return (IRR) is 16%. Required: 5.1 Use the information provided to calculate the net present value (NPV) and IRR for Machine P. Use an alternative discount rate of 25% to calculate the IRR. (20) 5.2 Which machine should Border Engineering’s management consider buying? Give reasons for your answer. Your reasons must include both the relevant decision criteria applicable to NPV and IRR decisions as well as the application of these criteria in the recommendations. (13)