Case studyPROGRAMMEBachelor of Business Administration HonoursPostgraduate Diploma in Business ManagementPostgraduate Diploma in Family Business ManagementMODULE Accounting and Financial ManagementYEAR One $(1)$INTAKE July $2023$TOTAL MARKS $100$ marksAnswer ALL questions. $[100$ MARKS$]$Read the case study and answer the questions that follow:CAPRI LIMITED: PERFORMANCE EVALUATION AND PLANNINGFor many years Capri Limited has delivered on its quality products promise to consumers, ensuring continuedaccess to an ever$-$growing range of established and well$-$loved brands. Through a spirit of innovation, thecompany continues to deliver new and exciting products in response to the evolving needs of its customers.Despite its success the management has noted areas for improvement. This is evident in the followingfinancial statements for the past two years:CAPRI LIMITEDSTATEMENT OF CASH FLOWS FOR THE YEAR ENDED $31$ DECEMBER $2021$RCash flows from operating activities $756000$Profit before interest and tax$/$Operating profit $900000$Adjustments to convert to cash from operations $?$Add: Depreciation $252000????$Profit before working capital changes $?$Working capital changes $194400$Decrease in inventory $288000$Increase in receivables $(396000)$Increase in payables $302400$Cash generated from operations $1346400$Interest income $72000$Dividends paid $?$Company tax paid $(388800)$Cash flows from investing activities $(1368000)$Non$-$current assets purchased $(1476000)$Proceeds from sale of vehicles $($sold at a profit of R$150000)540000$Increase in long$-$term investments $(612000)$Disposal of long$-$term investments $($disposed at a loss of R$150000)180000$Cash flows from financing activities $720000$Proceeds from issue of ordinary shares $720000$Net increase$/$decrease in cash and cash equivalents $?$Cash and cash equivalents at beginning of year $792000$Cash and cash equivalents at end of year $?$CAPRI LIMITEDSTATEMENT OF FINANCIAL POSITION AS AT $31$ DECEMBER $2022$RASSETSNon$-$current assets $5040000$Property, plant and equipment $($cost$)4980000$Accumulated depreciation $(1260000)$Investments $1320000$Current assets $6120000$Inventory $2100000$Accounts receivable $2460000$Bank $156000011160000$EQUITY AND LIABILITIESEquity $7500000$Ordinary Share Capital $5118000$Retained Income $2382000$Non$-$current liabilities $2700000$Loan $2700000$Current liabilities $960000$Accounts payable $576000$Dividends payable $38400011160000$CAPRI LIMITEDSTATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED $31$ DECEMBER $2022$RSales $8400000$Cost of sales $(5304000)$Gross profit $3096000$Operating expenses $(1596000)$Operating profit $1500000$Interest expense $(324000)$Interest income $120000$Profit before tax $1296000$Company tax $(390000)$Profit after tax $906000$In addition to the above, the following information is available:Interim dividends paid in $2022$ amounted to R$456000.511800$ shares were in issue during $2022.$ Themarket price per share was R$17\mathrm{.}25$ on $31$ December $2022.$During $2022$ the management of Capri Limited considered the acquisition a new machine for purchase andinstallation during the second quarter of $2024$ with a desired rate of return of $15\%.$ The machine will costR$6000000$ excluding import duties of R$250000$ and will have a useful life of five years. The machine isexpected to increase cash inflows by R$2000000$ per year but cash expenses will increase by R$300000$ peryear. Depreciation is calculated using the straight$-$line method.At the end of December $2022$ the company was approached by a group of previously disadvantaged womenwho had opened a service station on $01$ July $2022,$ selling only diesel. They needed assistance in improvingthe financial performance of the service station. Diesel was sold at R$16$ per litre and the variable costs totalledR$14$ per litre. The fixed costs were R$135000$ per month. After six months of opening, the sales achieved was$540000$ litres and the sales were almost the same each month. To improve the performance, the CapriLimited considered the following proposals:Proposal $1$Customers will be allowed to purchase diesel on credit. It is estimated that $60\%$ of the average monthly sales$($in litres$)$ will be to customers who would take advantage of this opportunity. Sales to these customers shouldincrease by $25\%$ as they are expected to buy exclusively from this service station. Sales volumes tocustomers who do not take advantage of the credit policy are expected to remain unchanged. Additional costsarising from this proposal are expected to be: Bad debts of $1\%$ of the sales value in respect of customers who use the credit facility. Fixed administrative costs of R$7500$ per month.Proposal $2$An operating profit of R$25000$ per month would be the target. To achieve this the following changes aresuggested: The selling price is reduced by R$0\mathrm{.}30$ per litre. A sales commission of R$1\mathrm{.}50$ per $10$ litres sold will be granted to the diesel attendants. R$5075$ per month will be spent on advertising.Proposal $3$The possibility of only operating from $06$:$00$ to $22$:$00$ is being considered. This earlier closing time is expectedto result in a loss of sales on average of $12500$ litres per month. It is hoped that the saving in fixed costsresulting from the reduction in operating hours will enable the entrepreneur to achieve an average monthlyoperating profit of R$30000.$QUESTION $1(25$ Marks$)$REQUIREDAnswer the questions below that are based on the Statement of Cash Flows for the year ended $31$ December$2021$ provided above:$1\mathrm{.}1$ Calculate the following:$1\mathrm{.}1\mathrm{.}1$ Dividends paid $(3$ marks$)1\mathrm{.}1\mathrm{.}2$ Cash and cash equivalents at the end of the year $(3$ marks$)1\mathrm{.}1\mathrm{.}3$ Carrying$/$Book value of the vehicles sold $(3$ marks$)1\mathrm{.}2$ Apart from depreciation $($R$252000),$ identify TWO $(2)$ other adjustments $($with theamounts$)$ that would be needed to convert to cash from operations. $(4$ marks$)1\mathrm{.}3$ Comment on the following:$1\mathrm{.}3\mathrm{.}1$ Cash flows from operating activities R$756000(4$ marks$)1\mathrm{.}3\mathrm{.}2$ Increase in receivables $($R$396000)(4$ marks$)1\mathrm{.}3\mathrm{.}3$ Cash flows from investing activities $($R$1368000)(4$ marks$)$QUESTION $2(25$ Marks$)$REQUIRED$2\mathrm{.}1$ Use the statement of financial position as at $31$ December $2022,$ statement of comprehensive incomefor the year ended $31$ December $2022$ and additional information for $2022($related to dividends andshares$)$ to calculate the ratio $($expressed to two decimal places$)$ that would reflect each of the following:$2\mathrm{.}1\mathrm{.}1$ The extent to which the claims of the short$-$term creditors are covered by assets that canbe translated into cash in the short term $(2$ marks$)2\mathrm{.}1\mathrm{.}2$ The extent to which long$-$term debt is covered by shareholders funds $(3$ marks$)2\mathrm{.}1\mathrm{.}3$ The amount of funds available relative to sales, to pay the companys expenses otherthan its cost of sales $($expressed as a percentage$)(3$ marks$)2\mathrm{.}1\mathrm{.}4$ The distributions during the period allocated to each ordinary share issued $(3$ marks$)2\mathrm{.}1\mathrm{.}5$ An indication of the percentage of the profit that has been put back into the company $(3$ marks$)2\mathrm{.}1\mathrm{.}6$ The ratio of a company's current stock price to its earnings per share $(3$ marks$)2\mathrm{.}2$ Suggest TWO $(2)$ ways of making an improvement with regard to each of the following ratios:$2\mathrm{.}2\mathrm{.}1$ Debtor collection period $(2$ marks$)2\mathrm{.}2\mathrm{.}2$ Operating margin $(2$ marks$)2\mathrm{.}3$ Comment briefly but meaningfully on the following ratios:$202220212\mathrm{.}3\mathrm{.}1$ Acid test ratio $4\mathrm{.}19$:$15\mathrm{.}53$:$1(2$ marks$)2\mathrm{.}3\mathrm{.}2$ Return on equity $12\mathrm{.}08\%8\mathrm{.}85\%(2$ marks$)$QUESTION $3(25$ Marks$)$Refer to the proposed acquisition of a new machine for purchase and installation during the second quarter of$2024$ and answer the following questions:$3\mathrm{.}1$ Calculate the Payback Period $($expressed in years, months and days$)(3$ marks$)3\mathrm{.}2$ Calculate the Accounting Rate of Return on initial investment $($expressed to two decimalplaces$).(4$ marks$)3\mathrm{.}3$ Calculate the Internal Rate of Return $($expressed to two decimal places$).$ Your answer mustinclude two net present value calculations $($using consecutive rates$/$percentages$)$ andinterpolation. $(6$ marks$)3\mathrm{.}4$ Calculate the Net Present Value if the machine is expected to have a scrap value ofR$300000.(6$ marks$)3\mathrm{.}5$ Suppose Capri Ltd funds the purchase of the new machine through the issue of $12\%$preference shares that are expected to sell for R$10$ each. If the floatation costs areestimated at R$1$ per share, calculate the cost of the preference shares $($expressed to twodecimal places$).(3$ marks$)3\mathrm{.}6$ Suppose Capri Ltd funds the purchase of the new machine through the issue of ordinaryshares. Assume that the present value of an ordinary share of Capri Ltd is R$17\mathrm{.}25,$ the nextprojected dividend is R$1\mathrm{.}80$ per share and the expected growth rate in dividends is $15\%$ p$.$a$.$Use the Gordon Growth Model to estimate the cost of the ordinary shares $($expressed to twodecimal places$).(3$ marks$)$REQUIREDQUESTION $4(25$ Marks$)$REQUIREDRefer to the three proposals that the company was considering to assist the previously disadvantaged womenand answer each of the questions independently. $($You are advised to use the expanded contribution marginmodel to present your answers.$)4\mathrm{.}1$ Based on the figures achieved for July to December $2022,$ calculate the selling price perlitre that would have enabled the service station to break even. $(5$ marks$)4\mathrm{.}2$ Based on the figures achieved for July to December $2022,$ how many litres of diesel wouldhave had to be sold to achieve an operating profit of R$2$ per litre? $(5$ marks$)4\mathrm{.}3$ Calculate the total Contribution Margin and Operating Profit$/$Loss per month if Proposal $1$ isimplemented. $(5$ marks$)4\mathrm{.}4$ How many litres of diesel need to be sold each month to achieve the operating profit ofR$25000$ per month, if Proposal $2$ is accepted? $(5$ marks$)4\mathrm{.}5$ Calculate the saving in monthly fixed costs that is necessary to yield an operating profit ofR$30000$ if Proposal $3$ is accepted. $(5$ marks$)$TOTAL : $100$ MARKS