Question
Good day l need assistance on the following assignment. ASSIGNMENT 02 UNIQUE NUMBER: 581513 [50 marks] Due date: 16 SEPTEMBER 2016 QUESTION 1 [25 marks]
Good day
l need assistance on the following assignment.
ASSIGNMENT 02 UNIQUE NUMBER: 581513 [50 marks]
Due date: 16 SEPTEMBER 2016
QUESTION 1 [25 marks]
Use the statement of financial position and statement of comprehensive income for Amolatina Ltd to answer the questions that follow. Assume all sales are on credit and 365 days for 2015.
STATEMENT OF FINANCIAL POSITION FOR AMOLATINA LTD AS AT 31 DECEMBER 2015
Assets
(R)
Equity and liabilities
(R)
Cash
24 000 000
Accounts payable
15 000 000
Marketable securities
14 000 000
Notes payable
21 000 000
Accounts receivables
26 000 000
Other current liabilities
10 000 000
Inventories
81 000 000
Total current assets
145 000 000
Total current liabilities
46 000 000
Non-current assets
115 000 000
Long-term debt
25 000 000
Less depreciation
9 000 000
Total liabilities
71 000 000
Net non-current assets
106 000 000
Ordinary shares
80 000 000
Retained earnings
100 000 000
Total shareholders equity
180 000 000
Total assets
251 000 000
Total liabilities and equity
251 000 000
STATEMENT OF COMPREHENSIVE INCOME FOR AMOLATINA LTD FOR YEAR ENDED 31 DECEMBER 2015
Net sales
410 000 000
Cost of goods sold
150 000 000
Gross profit
260 000 000
Selling expenses
24 000 000
Depreciation expense
5 000 000
EBIT
231 000 000
Interest expense
11 000 000
Net income before tax
220 000 000
Taxes (30%)
66 000 000
Net income
154 000 000
FIN4801 2016
4
INDUSTRY AVERAGE RATIOS
Current ratio
3:1
Sales/fixed assets
4 times
Debt/total assets
25%
Sales/total assets
5 times
Times interest earned
5 times
Net profit margin
6%
Sales/Inventory
8 times
Return on assets
11%
Days sale outstanding
20 days
Return on equity
13.5%
REQUIRED
(a) Calculate the Du Pont equation for Amolatina Ltd. [4]
(b) Compare the Du Pont equation calculated in (a) with the composite equation for the whole industry. [6]
(c) Briefly comment on a comparison between the Amolatina Ltd and industry with specific regard to liquidity, solvency and asset management. [5]
1.2 Study BRIDS Ltds statement of financial position and statement of comprehensive income are given below:
Statement of financial position for BRIDS Ltd as at 31 December 2015
R
R
Cash
75 000
Accounts payable
160 000
Accounts receivable
110 000
Notes payable
140 000
Inventory
450 000
Total current assets
635 000
Total current liabilities
300 000
Net Non-Current assets
465 000
Long-term (12%)
350 000
Ordinary shares equity (45 000 shares)
450 000
Total assets
1 100 000
Total liabilities & equity
1 100 000
Statement of comprehensive Income for BRIDS Ltd for the year ended 31 December 2015
Sales
800 000
Cost of goods sold
310 000
Earnings before interest and tax (EBIT)
490 000
Interest expense
65 000
Earnings before tax (EBT)
425 000
Taxes (10%)
42 500
Net income
382 500
The industry average inventory turnover is 8 and the interest rate on the firm's long-term debt is 12%. 45 000 shares are outstanding. BRIDS Ltd plans to change its inventory methods so as to operate at the industry average inventory turnover ratio. The funds generated from this change will be used to retire long-term debt and it is assumed that the companys sales, the cost of goods sold, and the share price will remain constant. Assume that inventory turnover is given as a ratio of sales to inventory.
FIN4801 2016
5
REQUIRED
Determine the percentage change in the BRIDSs return on equity (ROE) once these changes are effected. [10]
QUESTION 2 [25 marks]
Xola Ltd is evaluating the feasibility of introducing a new product. They would have to invest
R300 000 at time t = 0 for the design and testing of the new product. Management believes that there is a probability of 80% that this phase will be successful and that the project will continue. If stage 1 is not successful the project will have to be abandoned with zero salvage value.
The next stage, if undertaken, would consist of making moulds, and producing two prototypes. This would cost R2 500 000 at time t = 1. Production will commence if the tests are successful. The moulds and prototypes could be sold for R765 000 if the product fails the testing phase. Management estimates the probability of the product passing the testing phase as 90% and that phase 3 will then be undertaken.
Phase 3 consists of converting the unused production line to produce the new design. This would cost R3 500 000. If the economy is strong at this point, the value of sales of the final product would be R16 000 000. If the economy is weak, the sales value of the final product would be R2 500 000. Both sales values occur at time t = 3, and each state of the economy has a probability of 0.5. The required return of Xola Ltd is 8%. The firm only accepts investments if the coefficient of variation of the proposed project is less than 5.
REQUIRED
(a) Use a decision tree to determine the project's expected net present value (NPV). [10]
(b) Calculate the project's variance and standard deviation of the NPV. [7]
(c) Calculate the project's coefficient of variation (CV) of the NPV . [4]
(d) Should the project be accepted or rejected? Substantiate your answer [4]
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Fundamentals of Financial Management
Authors: Eugene F. Brigham
Concise 9th Edition
1305635937, 1305635930, 978-1305635937
