Question 2

2.2) Shocks Ltd sells shock absorbers to mechanical workshops on credit only. The management of the company estimated that it could increase sales by offering better credit terms. Currently, the days sales outstanding (or average collection period) is 12 days. It is expected that this will change to 30 days under the new standards. Sales are expected to increase from R120 million to R180 million. No discounts are offered and bad debts are currently 1% of the sales, but the company expects it to increase to 3% under the new terms. The company can borrow short-term funds at a rate of 7%, invest at the same rate and has a gross profit margin of 15%. Determine whether it would be worthwhile for the company to change its credit terms. Note: Show only the change in gross profit, the change in bad debts, the change in the cost of carrying receivables and the final effect on net profit. Also indicate whether it would be worthwhile to change the credit standards or not.

2.3) Tuna Canneries Ltd is planning for 2021 and wants to estimate the funds they will require. The company has total assets of R1 500 million, total liabilities of R1 000 million, sales of R125 million with a net profit margin of 15% and a dividend pay-out ratio of 50%. The company expects sales of R250 million in the 2021 financial year. All assets and liabilities are considered spontaneous and increase in line with sales. Assets, however, are currently underutilised at only 90% of the total capacity and the excess capacity first needs to be exhausted before new assets are required. Estimate the companys need for funding for 2021. Note: Show only the changes in assets, liabilities, net profit, the dividend pay-out and the additional funds needed.

2.4) Briefly argue for what you believe the main driver of the capital structure decision is, remembering to substantiate your position by the way of extant theory. Please keep your answer to maximum half a page.

2.5) If a company wishes to raise R1m through a rights issue at a subscription price of R200 while its 10 000 outstanding shares currently trade at R300 each, what will the theoretical value of its shares after the issue be?

2.6) Wilikens Ltd manufactures and sells bespoke shoes in their own retail outlets. The company can be considered as mature and is past its growth phase. Wilikens Ltd has been retaining cash reserves over the past few years, leading to a debt/equity ratio that is much lower than its target ratio as declared in the companys integrated report. The management of Wilikens Ltd also believes that the shares of the company are under-priced at the moment and is planning a share buy-back programme for the coming three years. Some of the managers, however, argued that the company should rather increase their dividends or pay out a special dividend. Briefly provide an argument in favour of a share buy-back for Wilikens Ltd opposed to an increase in dividends or a special dividend, ignoring any tax implications.