3.2

REQUIRED

The information provided below refers. Suppose Ascot Limited wants to earn an operating profit of R2 700 000 from the battery sales. How much can it afford to spend on the variable manufacturing costs per unit, if the production and sales equal 40 000 units? (4 marks)

INFORMATION

Ascot Limited is confident that it can make and sell a new battery with a prolonged life for cellular phones. The management anticipates the market demand for the new battery to be 40 000 units per year if the battery is priced at R450 per unit. Variable administration and marketing costs are expected to amount to R120 per unit. The companys accountants and engineers estimate that fixed costs to be R1 350 000.

QUESTION 4 (20 MARKS)

REQUIRED

Prepare the Pro Forma Statement of Financial Position as at 31 December 2023 from the information given below.

INFORMATION

The financial position of Remo Limited as at 31 December 2022 is reflected in the following statement:

REMO LIMITED

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2022

	R
ASSETS
Non-current assets	1 500 000
Property, plant and equipment	1 350 000
Other non-current assets	150 000
Current assets	11 500 000
Inventories	7 000 000
Accounts receivable	2 700 000
Cash and cash equivalents	1 800 000
Total assets	13 000 000
EQUITY AND LIABILITIES
Equity	4 100 000
Ordinary share capital (1 200 000 shares)	2 350 000
Retained earnings	1 750 000
Non-current liabilities	900 000
Mortgage bond	900 000
Current liabilities	8 000 000
Accounts payable	2 250 000
Other current liabilities	5 750 000
Total equity and liabilities	13 000 000

Additional information:

Operations for 2023 were projected using the following working assumptions:

All sales are on credit and are expected to amount to R10 000 000.

The profit margin (net profit margin) is expected to be 10%.

Old equipment with a cost price of R200 000 and accumulated depreciation of R150 000 is expected to be sold for R60 000. New equipment with a cost price of R500 000 will be purchased to replace it.

Depreciation is expected to be R300 000 for the year.

Other non-current assets remain unchanged.

Inventories are expected to be 10% higher than in 2022.

Accounts receivable would be based on a collection period of 73 days.

A cash balance of R1 750 000 is desired.

The ordinary share capital balance is expected to remain unchanged.

Dividends of 50 cents per share are expected to be paid during 2023.

Mortgage bond payments amounting to R190 000 including interest of R90 000 are expected to be made.

Accounts payable are forecasted to be 20% of sales.

Other current liabilities will be allowed to fluctuate with seasonal needs (balancing figure).

QUESTION 5 (20 MARKS)

Note: Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after QUESTION 5.

5.1

REQUIRED

Use the information provided below to calculate the following:

5.1.1 Payback Period of Option A (expressed in years, months and days). (2 marks)

5.1.2 Accounting Rate of Return (on initial investment) of Option B (expressed to two decimal places). (4 marks)

5.1.3 Net Present Value (NPV) of the two investment alternatives (expressed to the nearest Rand.). (8 marks)

INFORMATION

Toni Limited is planning a new business venture. With R1 000 000 available funds to invest, it is investigating two options:

Option A is to acquire an exclusive contract to provide and operate parking meters in a small town for four years. The contract requires the firm to pay the municipality R700 000 cash at the beginning of the contract. R200 000 is also required to install the parking meters. The firm expects cash revenues from the operations to be R1 125 000 per year and cash expenses to be R625 000 per year.

Option B is to operate a copy shop in a shopping mall. This option would require the company to spend R900 000 on equipment that has a useful life of four years, with a salvage value of R100 000. The cash revenues are expected to be R1 075 000 per year and cash expenses are expected to be R600 000 per year.

The company requires a 12% rate of return on its investment projects. The firm uses the straight-line method of depreciation.

5.2

REQUIRED

Use the information provided below to calculate the cost (as a percentage expressed to two decimal places) of ordinary share financing, preference share financing and the loan. (6 marks)

INFORMATION

Gypsey Limited intends investing in a project and is considering using the following three sources of finance:

Ordinary shares

The market price of an ordinary share of Gypsey Limited is R200 and the total ordinary share capital is R2 000 000. The shares were initially sold for R160 each. The dividend per share at the end of the previous year was R30. The expected growth rate in dividends is 10%. The dividend growth model is used to estimate the cost of the ordinary shares.

Preference shares

Gypsey Limited intends issuing 8 000 15% preference shares at R210 per share. The cost of issuing the shares is estimated at R10 each.

Long-term loan

Gypsey Limited intends obtaining a long-term loan. The loan of R1 160 000 is expected to be obtained at an interest rate of 12%. The marginal tax rate of Gypsey Limited is 28%.