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QUESTION 2 [70 Marks] KG Entertainment plans to build and open two new theatres to be used for theatrical productions ( 400 seats in each) during the 2023 financial year. KG Entertainment plans to build and own its theatrical theatres in the future and diversify into the movie theatre market. This change in strategy is motivated by the high cost of leasing theatrical premises and establishing some form of diversification. The company has historically leased premises and lease agreements are generally for 10-year periods with five-year renewal options. Commercial banks have adopted the view that theatre buildings provide limited security for loans due to their specialised nature and use. Shareholders and the executive board are unwilling to provide personal suretyship to secure loans. In addition, they consider the interest rate to be very high in comparison to normal property finance rates. The cinema and theatre industry has been facing stiff competition from digital streaming platforms such as Netflix, which offers a wide variety of content at an affordable price. Notes: 1. KG sells the majority of its ticket sales through an independent ticketing agent (Compu-see), which has a national call centre and internet-based infrastructure. 2. Commission of 4% is paid to Compu-see. Both the budgeted and actual ticketing agent commission for the 2023 financial year amounts to 4% of said face value of the tickets. Budgeted and actual attendance statistics and ticket sales are summarised below: 3. Construction costs incurred for stage props for new shows are expensed in the year in which they are incurred. 4. Buildings are depreciated over 20 years on a straight-line basis. 5. Utility, marketing, travelling and accommodation and other overhead costs are fixed in nature. 6. Budgeted rental escalations are 8% based on the terms of lease agreements. 7. The majority of the traveling and accommodation costs relate to expenses incurred by cast members traveling to different cities and their accommodation costs. 8. Finance cost is fixed in nature. 2.2 Prepare a memorandum to the Chief Operating Officer where you address the following: (40 Marks) - Financial analysis of the ticketing performance and breakeven (21 Marks) Breakdown of Marks: Calculations - 8 Marks Analysis of ticketing performance and breakeven - 13 Marks - Critically evaluate the change in strategy of KG Entertainment to build and own its theatres as opposed to leasing by discussing the risk factors inherent to this decision and indicate whether you agree with the decision by providing reasons for your conclusion. (14 Marks) Breakdown of marks: Inherent risk factors - 9 Marks Conclusion regarding the buying option - 5 Marks - Discuss any concerns that you have with the source of financing and its terms and conditions. (5 Marks) Note to student: The following should be included in the memorandum structure: To; From; Date; Subject; Background/purpose of the memo. QUESTION 2 [70 Marks] KG Entertainment plans to build and open two new theatres to be used for theatrical productions ( 400 seats in each) during the 2023 financial year. KG Entertainment plans to build and own its theatrical theatres in the future and diversify into the movie theatre market. This change in strategy is motivated by the high cost of leasing theatrical premises and establishing some form of diversification. The company has historically leased premises and lease agreements are generally for 10-year periods with five-year renewal options. Commercial banks have adopted the view that theatre buildings provide limited security for loans due to their specialised nature and use. Shareholders and the executive board are unwilling to provide personal suretyship to secure loans. In addition, they consider the interest rate to be very high in comparison to normal property finance rates. The cinema and theatre industry has been facing stiff competition from digital streaming platforms such as Netflix, which offers a wide variety of content at an affordable price. Notes: 1. KG sells the majority of its ticket sales through an independent ticketing agent (Compu-see), which has a national call centre and internet-based infrastructure. 2. Commission of 4% is paid to Compu-see. Both the budgeted and actual ticketing agent commission for the 2023 financial year amounts to 4% of said face value of the tickets. Budgeted and actual attendance statistics and ticket sales are summarised below: 3. Construction costs incurred for stage props for new shows are expensed in the year in which they are incurred. 4. Buildings are depreciated over 20 years on a straight-line basis. 5. Utility, marketing, travelling and accommodation and other overhead costs are fixed in nature. 6. Budgeted rental escalations are 8% based on the terms of lease agreements. 7. The majority of the traveling and accommodation costs relate to expenses incurred by cast members traveling to different cities and their accommodation costs. 8. Finance cost is fixed in nature. 2.2 Prepare a memorandum to the Chief Operating Officer where you address the following: (40 Marks) - Financial analysis of the ticketing performance and breakeven (21 Marks) Breakdown of Marks: Calculations - 8 Marks Analysis of ticketing performance and breakeven - 13 Marks - Critically evaluate the change in strategy of KG Entertainment to build and own its theatres as opposed to leasing by discussing the risk factors inherent to this decision and indicate whether you agree with the decision by providing reasons for your conclusion. (14 Marks) Breakdown of marks: Inherent risk factors - 9 Marks Conclusion regarding the buying option - 5 Marks - Discuss any concerns that you have with the source of financing and its terms and conditions. (5 Marks) Note to student: The following should be included in the memorandum structure: To; From; Date; Subject; Background/purpose of the memo