MAC2602 Assignment 2 (QUALITY ANSWERS) Semester 1 2025

This document contains workings, explanations and solutions to the MAC2602 Assignment 2 (QUALITY ANSWERS) Semester 1 2025. For assistance whats-app us on 0.6.8..8.1.2..0.9.3.4... QUESTION 1 (8 Marks; 10 minutes) Please answer the following four questions by listing the question numbers below one another, from 1.1 to 1.4, with your corresponding answer next to each number, for example: 1.1. (a) 1.2. (b) The questions/scenarios are as follows: 1.1. In SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis, threats relate to external factors that are outside the organisation. Which of the following statements are all examples of threats? (1) Increasing market competition has resulted in excess supply capacity. (2) Industrial strikes by employees. (3) Excessive raw material wastage in the production process. (4) Price wars amongst serial market competitors and rivalries. (5) Insufficient investment in research and development facilities. (a) Statements (1), (2), and (3). (b) Statements (1), (2), (4), and (5). (c) Statements (1), (2), and (4). (d) Statements (2), (3), (4), and (5). (2) 1.2. Which of the following statements is incorrect regarding debt financing? (a) Debt financing requires the repayment of debt and the related interest. (b) The cost of obtaining some forms of debt is lower than the cost of issuing ordinary shares. (c) Interest expense relating to debt financing can be deducted for taxation purposes. (d) Debt financing does not influence the risk profile of an organisation. (2) 1.3. Which of the following statements is false regarding goals and outcomes of a strategic planning process? (a) Goal hierarchy deals with how an organisation allocates its available and sometimes scarce resources. (b) A principal goal when drafting a strategic plan is to develop it in such a way that it can be turned easily into action plans. (c) Goal congruency has to do with the alignment of different departments’/ units’ goals and objectives with each other and the overall goals and objectives of an organisation. (d) Goal sequencing refers to how an organisation would arrange its goals in such a manner that achieving one goal leads to working on the next goal. (2) 1.4. Inventory management refers to the methods the organisation uses to control its inventories. Which of the following methods/ models is not used by organisations to manage inventories? (a) The Economic Order Quantity. (b) The Stock Market Index. (c) Just-In-Time inventory system. (d) Re-ordering and Safety stock system. MAC2602 ASSESSMENT TWO (2) S1-2025 4 QUESTION 2 (33 marks; 39 minutes) The MTN Group Limited (“MTN”) is a South African-based multinational corporation and mobile telecommunications provider. The company is listed on the Johannesburg Stock Exchange and has a 31st December financial year-end. MTN is present in more than 20 countries in Asia and the rest of the African continent. Towards the end of December 2024, the company announced the total disposal of its investment in the Republic of Guinea due to a strategic shift and geopolitical challenges. In South Africa, the shrinking household disposable income has also resulted in increasing bad debts. Furthermore, this has led to a reduction in subscriber base growth over the last couple of years. MTN recently announced that it will slash its South African capital expenditure by up to R4,1 billion for the upcoming financial year. You received the following information regarding MTN’s 31 December 2024 financial position: Ordinary share capital Additional information 1 Debentures Additional information 2 Long-term liabilities Additional information 3 Additional information: 1. MTN has ordinary shares in issue. The shares were issued at an average price of R8 per share, and the shares were trading at R10 each on 31 December 2024. The dividend paid per share for the year ended 31 December 2024 was 345 cents. The South African government bonds’ current yield is 12%, Beta is estimated at 1,4, and the market risk premium is currently 8%. 2. Included in the long-term liabilities are debentures issued at a nominal value of R100. The debentures are redeemable at nominal value in six years and currently pay an annual coupon of 10%. The pre-tax market return on similar debentures is 8%. 3. The other long-term liabilities consist of the term-loan MTN took out to fund various capex requirements. The loan amount is R3 billion and is repayable in full in five years. The loan bears interest at 10% per annum, and the current interest rate for similar loans is 11%. 4. The current company taxation rate is 27%. REQUIRED: For each question below, remember to: • Clearly show all the formulas used; • Clearly show all your detailed calculations; and • Round percentages to two decimal places and final answers to the nearest rand. (a) Identify and briefly discuss seven (7) factors that are evident from the given scenario that MTN should consider that may affect its operations. (14) (c) Calculate the weighted average cost of capital (WACC) of MTN on 31 December 2024. (19) Total Question 2 [33] MAC2602 ASSESSMENT TWO (2) S1-2025 5 QUESTION 3 (41 marks; 49 minutes) SunTank (Pty) Limited (“ST”) is South Africa’s leading solar geysers manufacturing company. Founded in 1994, this family-owned company is still led by the first-generation members, although the owners have a bad credit rating. ST manufactures and distributes the geysers from its facility situated a few kilometers outside Phelindaba, Pretoria, in the Gauteng Province. A recent visit by a delegation from the Department of Labour Inspectors revealed that the company has in its employment illegal foreign nationals despite the unemployment crisis in the area. Furthermore, the plant does not meet the minimum requirements of the industry’s ISO 200. The owners of ST are considering investing in a new solar geyser manufacturing plant. This is based on the expected demand increase due to above-inflation electricity increases granted to ESKOM by NERSA, and the recent implementation of loadshedding throughout the country. The owners have so far gathered the following information as part of the evaluation of the investment: 1. All the cash flows (including all the relevant taxes) occur at the end of the related financial year, except for the initial capital outlay, which occurs at the beginning of the year. 2. The new plant will be built on the piece of land near where the current plant is located, which will be acquired for R1 000 000. The related property rates and taxes are estimated at R60 000 per annum and will increase at 6% annually. 3. In line with the requirements of the environmental laws, the company must conduct an environmental assessment study before the commencement of the construction of the plant, at a cost of R200 000. If relevant, these costs are not capitalised. 4. The plant will be built at an original cost price of R8 000 000. Delivery and installation of the various components will cost R2 000 000 (if relevant, these costs are capitalised). The investment will be funded by a 100% loan at an interest rate of 8% per annum (this is linked to the Repo rate as set by the South African Reserve Bank (SARB)). The SARB recently kept the Repo rate, and it is expected that the rate may start increasing in the future. The capital amount is repayable at the end of the term, and the related interest expense is repayable annually in arrears. 5. The investment in working capital is estimated at R300 000 in year one; and R400 000 in year two. There will be no investment in working capital in year three. 6. The plant will generate operating profit before interest but after depreciation as follows: Year 1: R3 000 000 Year 2: 50% increase from year one. Year 3: 80% increase from year one. 7. The plant will be sold at the end of year three (3) at an estimated selling price of R5 000 000. Depreciation is provided on a straight-line basis at 10% per annum. The South African Revenue Service will grant annual capital allowances over the useful life of the plant at 20% per annum. 8. The current company taxation rate is 27%. 9. The minimum required after-tax return on capital projects of this nature is 12%. REQUIRED For each question below, remember to: • Clearly show all your calculations in detail. • Round all your workings to two decimals, except where otherwise stated; and • Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value). MAC2602 ASSESSMENT TWO (2) S1-2025 6 QUESTION 3 (continued) (a) Identify and briefly discuss seven (7) economic, environmental, ethical, social, and governance factors that are evident from the given scenario that ST should consider that may affect its operations. (14) (b) From a quantitative perspective only, comment on whether ST should invest in the new solar geyser facility or not. ▪ Detailed Net Present Value calculation (26 marks); and ▪ Comment/conclusion (1 mark). (27) Total Question 3 [41] QUESTION 4 (18 marks; 22 minutes) PPC Limited (“PPC”) is a Johannesburg Stock Exchange-listed company that supplies construction materials and solutions in Southern Africa. The company has over 11 cement factories across SADC countries. Despite the slow growth in commercial construction activities, the company experienced revenue growth, mainly driven by demand from residential customers. However, the executive management remains concerned by electricity price increases, which are a significant component of the cost of sales. PPC operates for 300 days in a year and has a 31st of March financial year-end. The following financial statements of PPC are provided to you: EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2025 2025 2024 R’M R’M Revenue 10 000 8 500 Cost of sales Gross Profit 8 000 2 000 7 000 1 500 Operating expenses Administrative expenses 600 500 Other operating expenses 400 300 Operating profit 1 000 700 Other income 40 30 Earnings before interest and tax (EBIT) 1 040 730 MAC2602 ASSESSMENT TWO (2) S1-2025 7 QUESTION 4 (continued) STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2025 2025 2024 Rm Rm ASSETS Non-current assets Property, plant, and equipment 6 000 7 000 Other non-current assets 1 110 800 Total non-current assets 7 110 7 800 Current assets Inventories 1 300 1 200 Trade and other receivables 900 1 000 Cash and cash equivalents 800 500 Total current assets 3 000 2 700 TOTAL ASSETS 10 110 10 500 EQUITY AND LIABILITIES Capital and reserves Share capital 4 000 4 000 Retained earnings 3 130 2 450 Total equity 7 130 6 450 Non-current liabilities Long-term borrowings 1 000 1 200 Deferred tax 500 1 300 Total non-current liabilities 1 500 2 500 Current liabilities Trade payables 1 300 1 200 Current tax payable 80 50 Current provisions 100 300 Total current liabilities 1 480 1 550 TOTAL EQUITY AND LIABILITIES 10 110 10 500 Additional information: 1. The interest expense for the year ended 31 March 2025 was R130 million (2024: R123 million). 2. The prevailing company taxation rate is 27%. The taxation expense for the year ended 31 March 2025 was R230 million (2024: R150 million). 3. The company has 10 billion authorised shares of which 2 billion are issued (at R2 per share). The market price per share as of 31 March 2025 was R3 (2024: R5). The dividend paid on 31 March 2025 was R0,50 (2024: R0,40). MAC2602 ASSESSMENT TWO (2) S1-2025 8 QUESTION 4 (continued) REQUIRED: (a) Calculate the Cost of sales growth rate ratio for PPC for the year ended 31 March 2025. Briefly discuss the change in this ratio using the information given in the scenario. (2) (b) Calculate and comment on the following ratios for PPC for the financial years ended 31 March 2024 and 2025: (i) Operating profit margin; (ii) Interest cover; (iii) Current ratio; and (iv) Cash ratio.