Q1.
1 A 1 Theory
Q1.2 D 1 Theory
Q1.3 B 1 Theory
Q1.4 C 2
Q1.5 A 2
Q1.6 B 2
Q1.7 D 1 Theory
Q1.8 C 1 Theory
Q1.9 C 1 Theory
Q1.10 D 2
Q1.11 C 1 Theory
Q1.12 A 1 Theory
Q1.13 A 2
Q1.14 A 2
Q1.15 D 1 Theory
Q1.16 A 2
Q1.17 C 2
Q1.18 C 2 Theory
Q1.19 C 1 Theory
Q1.20 D 1 Theory
Q1.21 B 1 Theory
Q1.22 C 1 Theory
Q1.23 A 2
Q1.24 A 2
Q1.25 B 1 Theory
Q1.26 C 1 Theory
Q1.27 D 1 Theory
Q1.28 C 2
Q1.29 C 1 Theory
Q1.30 D 1 Theory
Q1.31 D 1 Theory
Q1.32 D 2
Q1.33 C 2
Q1.34 C 1 Theory
Q1.35 C 2
Total 50
2.1
FR = SR X 1 + Ra
1 + Rb
SR= 14.5 1
Ra=(6%*4/12)= 2% 2
Rb=(2%*4/14)= 0.67% 2
FR= 14.692053 1P
FEC= 14.96
Conclusion Reject as FEC rate is above predicted spot rate 1
2.2
Discount = Spot Rate-Forward Rate X 12 X100
Forward Rate N
Spot Rate= 14.5 1
Forwad rate= 14.69 2
N= 4 1
Discount -3.92% 2 (1P)
Conclusion The Rand will be qouted at an annualised discount of 3.92% to the US dollar
2 (1P)
1 New projects 10000000
Of which 100/175 57.14% is funded by equity 2
Therefore requires 5,714,285.71 equity 1
Equity available from this year's profit 8,000,000.00
less taxation 0 1
Available 8,000,000.00 1
less required -5,714,285.71
Available for dividend 2,285,714.29 1
6
2 Considerations for Majegu directors
Majegu's growth objective
Availability of alternative sources of finance other than own equity
Liquidity position to pay off dividend because profitability may not translate to cashflows
The impact of the increased withholding tax in South Africa
Any other relevant factors
1 Mark per point. Any other relevant point limited to 1 mark
1P
WACC Marks
Report Format 1
Weight Cost WACC
Debt 40 29% 5.04% 1.44% 2
Equity 100 71% 17% 12.14% 2
140 13.58% 1P
Inflation 5%
2017 2018 2019 2020 2021
Growth 8% 6% 6% 8%
Profit After tax 4,560,000 1
Profit on sale of assets -300,000 1
Depreciation 950,000 1
Interest 1,440,000 1
Insurance loss 650,000 1
7,300,000 7,884,000 8,357,040 8,858,462 9,567,139 1P
Net working capital -36,000 -29,160 -30,910 -43,686 1
Capital expenditure -997,500 -1,047,375 -1,099,744 -1,154,731 2
Free cash flow 6,850,500 7,280,505 7,727,809 8,368,723 1P
Terminal value 149,900,359 2 (1P)
6,850,500 7,280,505 157,628,168 1P
WACC 13.58%
Value 119,245,679 1P
MV of debt -28,571,429 2
Cash 200,000 1
90,874,251 1P
Conclusion 1P
Calc 1
Net working capital
Accounts receivable 100,000.00
Inventory 700,000.00
Creditors -350,000.00
Balance 450,000.00 486,000.00 515,160.00 546,069.60 589,755.17 1
Movement 36,000.00 29,160.00 30,909.60 43,685.57 1
Note to markers
Please award marks for students who give you an answer before tax and the tax seperately.
Please do not forget to award a mark for report format.
Please do not forget calculation marks for Net working capital and WACC.
1/2 for amount before tax, other 1/2 for tax
"Lease Option"
Cash flows
0 1 2 3 4 5
Lease payments -70,000 -70,000 -70,000 -70,000 -70,000 2
Annual maintenance -10,000 -10,000 -10,000 -10,000 -10,000 1
Tax Saving 22,400 22,400 22,400 22,400 22,400
Total Cash flows -70,000 -57,599 -57,598 -57,597 -57,596 12,405 1P
Rate 8.10% 1
NPV -251,943.03
Tax flows
0 1 2 3 4 5
Lease payments -70,000 -70,000 -70,000 -70,000 -70,000 1
Annual maintenance -10,000 -10,000 -10,000 -10,000 -10,000 1
Total Tax flows -80,000 -80,000 -80,000 -80,000 -80,000
Tax @ 28% -22,400 -22,400 -22,400 -22,400 -22,400
“Cash” Option
Cash flows
0 1 2 3 4 5
Cash outflow -375,000 1
Maintenance -30,000 -30,000 -30,000 -30,000 -30,000 1
Insurance Costs -9,600 -9,600 -9,600 -9,600 -9,600 1
Salvage 6,500 0.5
Tax Benefit 37,338 37,338 37,338 37,338 9,268
Cash flows -375,000 -2,262 -2,262 -2,262 -2,262 -23,832 1
Rate 8.10% 1
NPV -398,620.16
Tax flows
0 1 2 3 4 5
Maintenance -30,000 -30,000 -30,000 -30,000 -30,000 1
Insurance Costs -9,600 -9,600 -9,600 -9,600 -9,600 1
Wear and tear -93,750 -93,750 -93,750 -93,750 2
Salvage 6,500 0.5
Total Tax flows -133,350 -133,350 -133,350 -133,350 -33,100
Tax @ 28% 37,338 37,338 37,338 37,338 9,268
Net Advantage to Leasing
NPC of Leasing -251,943.03
NPC of Normal Loan -398,620.16
Net Advantage to Lease -146,677 2 (1P)
S8(4)(a)
Cost 375,000 1
Wear and tear -375,000 (200 000 x 25% x 4)P 1
Tax Value 0
Salvage Value 6,500 1
S8(4)(a) 6,500 1
Conclusion: Lease the asset 2 1P
Available 25
Max: 25
NAL
Cash flows
0 1 2
Savings on cost of asset 375,000
Savings on Maintenance if paid by lessor after tax 21,600 21,600
Annual maintenance if paid by lessee after tax -7,200 -7,200
Savings on insurance 6,912 6,912
Lease payments in advance -70,000 -70,000 -70,000
Tax on Lease payments in advance 19,600 19,600
Wear and tear - loss on the tax savings -26,250 -26,250
Recoupment after tax
Total Cash flows 305,000 -55,338 -55,338
Cost of Debt 8.10%
NPV 146,666
Conclusion: Lease as it has a positive NPV
S8(4)(a)
Cost 375,000
Wear and tear 375,000
Tax Value 0
Salvage Value 6,500.00
Recoupment before tax 6,500.00
3 4 5
1
21,600 21,600 21,600 2
-7,200 -7,200 -7,200 2
6,912 6,912 6,912 2
-70,000 -70,000 2
19,600 19,600 19,600 1
-26,250 -26,250 2
-4,680 1
-55,338 -55,338 36,232 2 (1P)
2
2 (1P)
2 (1P)
1
(200 000 x 25% x 4) 1
1
1
Available 25
Max: 25
6.1
Liquidity 2017 2016 Marks
Current Ratio (CA/CL - exclint bearing liab) 1.45 1.60 1
Quick ratio 1.02 1.30 1
Explanation
The liquidity of Gusheshe has decreased in the current year due to a decrease in cash as cash
is used to finance capex of the new plant 1
The quick ratio may have decreased also due to increase in inventory in preparation for the
project/ production 1
4
Debt Management Debt to Equity 2017 2016
Debt equity ratio 26.80% 33.94% 1
Explanation
Interest bearing liab(incl current portion)|Total Equity The debt to equity ratio has
decreased in the current year. This is due to a decrease in the level of long term
liabilities and an increase in equity 1
It appears that the capex was financed using more equity than debt 1
Therefore reducing the financial risk of the entity 1
However, note that interest doubled, even though LT loan lower. May be that less
debt is at a higher interest rate (or debt was initially incurred halfway through
2009). 1
debt ratio 40.88% 43.62% 1
The debt ratio has decreased in the current year due to a decrease in the level of long term
debt and the increase in fixed assets (8.87%) 1
Interest Cover 8.52 29.57 1
The interest cover has reduced significantly This is due to a large decrease in the profitability
of Gusheshes resulting from increased operating expenses in the new project 1
9
Profitability
Increase in revenue 6.07% 1
1
Revenue has slighly increase in relation to inflation and not really in increase in sales volume
Gross Margin 35.79% 42.56% 1
The decrease in gross margin was due to increase in cost of good purchases and lower
revenue. 1
The increase in cost of purchases was not carried over to clients 1
Operating Profit margin 15.64% 26.13% 1
The net profit margin has decreased significantly in the current year. 1
This could be due to new staff hired for the new projects and other initial project
expenditures 1
e.g. marketing costs in preparation for production and increase in marketing the new product (
electric cars) for the project 1
New admin staff were also hired to prepare for the project Management of the new plant 1
ROE 25.01% 42.98% 1
The return on equity has decreased in the current year in line with the decreased
profit created by increased costs etc 1
ROA 13.05% 23.41% 1
The decrease in ROA is due to an increase in assets acquired in preparation of the
new project which had not yet begun making good returns yet. 1
The ROE is also higher than the ROA which shows positive financial leverage and less
financial risk. 1
15
6.2
The company is investing in an area that is new both in the market and to the
company , does it have the necessary expertise and skills to produce the electric
cars 1
The company should consider the high competition in the -new entrants industry 1
Have they costed the project properly 1
Are the suppliers reliable 1
Are they able to raised enough capital for the project, they cant affort to be out of
capital to finalise the project 1
Have they investigated the credentials and reputation of Gusheshe the company
they want to acquire 1
How about social responsibilities- e.g damage to the enviroment by the
plant;employmeny creation or the fact that they are using international
technicians will they transfer the skills 1
Can BEEMA afford the required skills from India and China, also is there a good
procedural plan to transfer skills
Any other valid points 1
Max 5
Note to markers
Please stick to the limits provided per subquestion
Max 4
MAX 6
Max 10
