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Colatonic Ltd is a marketer of a range of non - alcoholic beverages. It commenced operations a few years ago with an authorized share capital
Colatonic Ltd is a marketer of a range of nonalcoholic beverages. It commenced operations a few years ago with an authorized share capital of ordinary shares and by eighty percent of the shares had been issued. Its product mix includes soft drinks, juices, energy drinks and flavoured water. These products are marketed under various brands. The company has distribution outlets in all the provinces in South Africa, with the headquarters in Pretoria. It negotiated with its suppliers for all purchases to be made on credit terms of days and it was able to sell all its products to its customers on credit terms of days. Colatonic Ltd experienced a great dela of success in the recent years because of its excellent sales strategy and the clever use of social media. However the entry of cheap energy drinks and flavoured water into the South African beverage market from China and other countries led to a downturn in the financial performance in The company did, however, pay an interim dividend of R to the shareholders during A final dividend was also declared at the end of The market price of each share of Colatonic Ltd was R on December
This following are the financial statements for the past two years:
COLATONIC LTD
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER:
R
R
Sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating profit
Interest on investment
Interest expense
Profit before tax
Company tax
Profit after tax
STATEMENT OF FINANCIAL POSITION AS AT DECEMBER:
R
R
Assets
Noncurrent assets
Investment maturity date June
Inventories
Accounts receivable
Cash
Equity and liabilities
Equity
Longterm loan
Accounts payable
Bank overdraft
Dividends payable
Company tax payable
The financial manager of Colatonic Ltd read about the plight of the local child welfare organisation which aimed to supplement its funds by making and selling cooking bags which can slowcook meals or keep food warm for long periods. The financial manager approached the board of directors who agreed that the company should assist the organisation. After discussions with the president and treasurer of the welfare organisation the following budgeted information for was gathered to assist with trying to improve the profitability and breakeven quantity for the year:
The fixed and variable manufacturing costs are estimated to be R per annum and R per unit respectively. The selling price of the cooking bags will be R each. The selling and distribution costs are expected to total R per month plus of sales. The administration costs are estimated at R per month plus R per unit sold. cooking bags are expected to be sold.
In keeping with its plans for expansion, the company is appraising the production and sale of a new designer energy drink. This would involve the acquisition of a new machine with a purchase price of R which is expected to have a useful life of six years and a salvage value of R The installation cost of the machine is R units are expected to be sold annually. The net profit is expected to be R per unit. The straightline method of depreciation is used by Colatonic Ltd The companys cost of capital is If approved, the implementation date would be January QUESTIO
REQUIRED
Use the relevant information provided in the case study to answer the following questions with ratios expressed to two decimal places in respect of
Note: Use the formulas provided in the formula sheet only that appear after QUESTION
Comment on the liquidity of the company. Calculate TWO appropriate ratios to support your answer.
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Comment on the efficiency of the company regarding the collections from credit sales. Motivate your answer by using a suitable ratio.
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Did the company make good use of the credit period allowed by the suppliers? Motivate your answer with a relevant ratio and offer a recommendation, if necessary.
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Comment on the return that the company made on its own and borrowed capital. Support your answer with the use of a relevant ratio.
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Calculate the price earnings ratio.
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Was any provision made by the company to fund its future growth? Motivate your answer by using an appropriate ratio.
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