QUESTION 1 (65 marks) Level Up Ltd (Level Up) is a construction entity with offices strategically located in Johannesburg, Port Elizabeth, Cape Town, and Durban. The entitys construction activities are conducted in the same way and traditional format as most mainstream construction entities. Level Up is listed on the main board of the Johannesburg Stock Exchange (JSE) in the industrial sector and its shares are currently trading on the exchange at R119 per share. The financial yearend of the entity is 31 July, and the entity has recently published its audited 2023-financial year annual financial statements. The following are extracts of Level Ups 2023 financial statements: Level Up Ltd Statement of Financial Position as at 31 July 2023 Notes 2023 Rm 2022 Rm ASSETS Non-Current Assets Property, plant and equipment 10 261 10 581 Total Non-Current Assets 10 261 10 581 Current Assets Inventory 230 243 Receivables 161 182 Cash and bank 188 157 Total Current Assets 579 582 Total Assets 10 840 11 163 EQUITY AND LIABILITIES Equity Ordinary shares capital 3 120 3 120 ANNEXURE I: FORMATIVE ASSESSMENT 2 97 HFMN331-1_Jul-Dec2023_FA2_V4_ES_17072023 Retained earnings 2 864 2 263 Total equity 5 984 5 383 Non-Current Liabilities Long-term borrowings 1 2 989 3 985 Total Non-Current Liabilities 2 989 3 985 Current Liabilities Trade and other payables 2 871 799 Short-term borrowings 1 996 996 Total current liabilities 1 867 1 795 Total Equity and Liabilities 10 840 11 163 Singular Singular Number of shares in issue 52 000 000 52 000 000 Level Up Ltd Statement of Changes in Equity as at 31 July 2023 Retained earnings Notes 2023 R m 2022 R m Opening balance 2 263 1 832 Profit for the year 3 601 535 Dividends 3 0 (104) Closing balance 2 864 2 263 Level Up Ltd Statement of Comprehensive Income for the year ended 31 July 2023 2023 R m 2022 R m Revenue 2 332 2 179 ANNEXURE I: FORMATIVE ASSESSMENT 2 98 HFMN331-1_Jul-Dec2023_FA2_V4_ES_17072023 (Cost of sales) (618) (578) Gross profit 1 714 1 601 (Selling and marketing expenses) (187) (176) (Administration expenses) (201) (189) (Other operating expenses) (346) (323) Profit before interest and tax expenses 980 913 (Finance costs) (115) (122) Profit before tax expense 865 791 (Income tax expense) (264) (256) Profit for the year 601 535 Note 1 Level Up obtained a R4 980 000 five-year loan from Delta National Bank precisely two financial years ago. According to the loan agreement, interest compounds annually at 3.2% above the South African government bond rate. Instalments are payable annually on the anniversary of the loan. The effective interest rate for a 5 year South African government bond is currently 8.34%. Note 2 Trade and other payables consist of suppliers that provide material and other equivalent utilities to Level Up in order for Level Up to perform its business activities and services. These suppliers do not charge interest for credit purchases as long as the agreed repayment periods are met. Note 3 After carefully analysing and evaluating the financial statements, internal management reports, budgeted cash flows and future plans; the Directors of Level Up has determined that R28 000 000 is available which the entity wish to give back to shareholders. This value can either be distributed to shareholders as dividends or by repurchasing shares from the current shareholders. The Directors of Level Up are currently evaluating both options. Draft a report to the directors of Level Up Ltd in which you advise them whether the entity should distribute value back to the shareholders by Option 1: Declaring a dividend, or Option 2: Through a repurchase of shares from the shareholders. Separately for each option, include the effect that each option will have on the following 2023 financial year figures, in your report: Share price per share Earnings per share Price earnings ratio Dividend per share Net asset value of Level Up Ltd per share. Calculations 21 marks Interpretation and advice 7 marks (28 marks)