QUESTION 2 (50 Marks; 90 minutes) AKHA Traders is the retailer of building materials and associated products, selling directly to only cash-paying customers through its 318 stores in South Africa, Namibia, Lesotho, Botswana, Eswatini and Malawi. Rising food price inflation, and higher than usual interest rates coupled with slow economic growth, has put pressure on consumers disposable income. Soaring unemployment rates continue to have a devastating effect on families. The financial impact of loadshedding on the national economy as well as on AKHA Traders business, has been astronomical. However, despite all these challenges, the company continues to deliver strong financial results at the back of sound acquisitions and store expansion programmes. This is evidenced by the release of the latest financial results (see further below). The company is optimistic about the 2024 financial year and the ongoing implementation of acquisition programmes. In preparation for the upcoming Management Committee 2024 planning meeting, the Chief Financial Officer (CFO), Dan Zulu, has been asked some questions relating to true financial affairs of the company. As his executive assistant, you have been tasked with providing a comprehensive report to address these questions. The following information has been made available to you to assist with the report. A. CAPITAL STRUCTURE, FINANCIAL STATEMENTS AND OTHER INDICATORS The equity and liabilities section of the statement of financial position of AKHA Traders for the year ended 30 September 2023 is provided below: EQUITY AND LIABILITIES (Rm) Notes 2023 2022 Ordinary share capital (i) 824 688 Reserves 133 133 Retained income 2 055 2 240 Preference share capital (ii) 745 745 Provisions 380 425 Long-term loan (iii) 600 940 9,75% Debentures (iv) 592 720 Short-term borrowings (v) 400 400 Deferred tax 150 194 Trade payables (vi) 277 406 Total equity and liabilities 6 156 6 891 Notes to the Statement of financial position (i) On 2 February 2023 AKHA Traders issued 2,5 million additional shares, which resulted in an increase of 6,25% in the total number of issued shares. There were no other movements in ordinary share capital during the year. (ii) Four million preference shares were issued five years ago. These redeemable preference shares (redeemable at nominal value) pay out a dividend of R85,2 million annually in arrears. Similar preference shares currently carry an annual dividend rate of 12%

(iii) The long-term loan relates to the loan received from Richard Nathan Bank (RNB) which will be repaid in full on 30 September 2026. Its current market value as at 30 September 2023 was R618 million. Interest on this loan is paid annually in arrears at an interest rate of 9%. (iv) These 10-year debentures were issued four years ago. The going interest rate for similar debentures is prime less 2%. The interest on debentures is paid annually in arrears. (v) The short-term borrowings are made up of a R350 million bank overdraft with a market interest rate of 15%, and a R50 million short-term loan of eight months taken four months ago. The bank overdraft facility is often utilised to pay creditors and the short-term loan was taken out to pay a court settlement after the company was found to have unfairly dismissed its previous Chief Operating Officer. (vi) Trade payables relate to amounts owed to creditors for inventory purchased and will be settled within a year. Below is the detailed Earnings Before Interest and Tax (EBIT) of AKHA Traders for the year ended 30 September 2023: EARNINGS BEFORE INTEREST & TAX (Rm) 2023 2022 Revenue 11 145 12 615 Cost of sales 8 216 9 226 Opening inventory 1 546 1 623 Cash purchases 6 812 6 862 Credit purchases 1 578 2 287 Closing inventory (1 720) (1 546) Gross profit 2 929 3 389 Operating expenses (875) (1 038) Earnings before interest and tax 2 054 2 351 Additional information and other economic indicators for the 2023 financial year, and comparative figures, are given below: Additional information 2023 2022 Ordinary shares closing share price (cents) 2 588 2 725 Risk-free rate (%) 5,7 6,25 Market risk premium (%) 7,5 8,0 AKHA Traders Beta 1,3 1,28 Prime lending rate (prime) (%) 11,0 9,25 Days in a year 365 365

B. BUSINESS MODEL (WORKING CAPITAL) [Also refer to information under A above] In the light of rising inflation and reduced consumers buying power, the Board of directors recently took a resolution to change its cash-only sales business model to now also sell on credit in the new financial year. The Board will oversee the implementation of sound credit vetting and credit management systems to ensure that credit is granted to creditworthy customers and that bad debts are kept at a minimum, while increasing overall revenue and profits for the company. The Board is, however, concerned that this change in business model may significantly increase the business cycle, leading to reduced operating cashflows. Proforma analysis for the 2024 financial year shows the following: Revenue will increase by R3,2 billion from 2023 revenue (R1,5 billion will be credit sales and R1,7 billion will be an increase in cash sales). Closing trade receivable balance is expected to be R234,3 million. The gross profit margin is expected to remain the same as in 2023, while bad debts will be around R240 million. Closing inventory is expected to increase by 20%. The creditors payment terms will not change as a result of the change in policy; therefore, creditors payment days will remain the same as in 2023. C. ACQUISITION: AMOS HARDWARE (PTY) LTD As part of its growth strategy, AKHA Traders has approached the owners of Amos Hardware (Pty) Ltd (Amos Hardware) with the intention of making an offer to buy a majority stake in Amos Hardware. Seeking to retire and transition into a passive role in Amos Hardware, the owners of this family business, which has been in operation for many decades, have expressed their willingness to sell at least 51% of the company. The owners of Amos Hardware founded the company in the 1970s with the opening of its first store in Harding, KwaZulu-Natal. Today they have hardware stores in many small towns in KwaZulu-Natal, as well as the Eastern Cape and Mpumalanga provinces. Despite the COVID-19 pandemic, the company has increased its revenue for each consecutive year. However, in this global economic climate the company is battling to reduce and/or limit purchasing costs. Family dynamics have also played a key part in the decision to dispose of some of the shares in the company, with clashing views about the vision and the strategy of the company. The following information relates to the financial performance of Amos Hardware for the past four financial years. STATEMENT OF PROFIT AND LOSS 2020 2021 2022 2023 Rm Rm Rm Rm Revenue 204 354 372 407 Cost of sales (60) (100) (109) (128) Operating and other expenses (68) (91) (107) (110) Depreciation and impairments (10) (14) (15) (15) Finance costs (21) (20) (31) (33) Profit before taxation 45 129 110 121 Taxation (13) (37) (29) (32) Net profit 32 92 81 89

Additional information During the 2020 financial year, the stores only operated 189 days out of the possible 253 days due to COVID-19 lockdown as the stores, classified as non-essential, had to be closed for a number of days. There were no other trading anomalies in 2020. Assume all income and expenses were earned or incurred (as applicable) evenly throughout the year. In 2021, an employee was badly injured on duty and sued the company for R50 million citing gross negligence by the company. After much deliberation and lengthy negotiations, the matter was settled out of court with Amos Hardware paying the employee a settlement amount of R10 million. The company also had to pay all legal costs which amounted to R1,2 million. Amos Hardware also applied for government tax-exempt COVID-19 relief funds in 2021 for trading disruptions which took place in that year due to the pandemic. The company did not suffer any financial losses in 2021 but still met the requirements to receive the funds. These funds amounted to R13 million and were received by the company in 2021. Amos Hardware lost some cargo carrying machine tools (trading stock) that were being shipped from Russia during its 2023 financial year. Unfortunately, the cargo never made it to South African shores and the suppliers cited ongoing Russia/Ukraine conflict as the reason for the lost cargo. The company had already paid R42 million for this inventory and after failed attempts to recover these funds, the company decided to write off this amount. The companys insurance contract excluded cover on goods shipped from countries at war, under terrorist attack or with similar political instability. Net working capital was R32 million at the end of the 2023 financial year (2022: R27 million). Capital expenditure for the 2023 financial year was R14,5 million (2022: R10,5 million). Free cashflows for the 2023 financial year are expected to increase by an average of 5,0% in 2024 and continue at that rate for the foreseeable future. Average earnings-yield for similar listed companies is 6,8%. The weighted average cost of capital of Amos Hardware is 16%. AKHA Traders is willing to offer up to 10% over and above the established value of the business if it will end up with the majority shareholding in Amos Hardware.

(a) Identify five key business risks that AKHA Traders needs to prioritise for the 2024 financial year and explain how these risks can be mitigated. [Consider the local and global economic environment in your answer.] (10) (b) Determine the capital structure of AKHA Traders based on book values at 30 September 2023, and provide possible reasons for movement in the calculations between 2022 and 2023 financial years. [Calculations 3 marks; discussion 2 marks] (5) (c) Calculate the weighted average cost of capital of AKHA Traders based on market values at 30 September 2023. (10) (d) Determine how the business cycle (cash conversion cycle) will change in the 2024 financial year, considering the proposed business model and the projected sales increase. [Only calculations are required, and use closing balances where applicable] (6) (e) Perform a valuation of the 51% equity stake in Amos Hardware (Pty) Ltd. Use any two appropriate valuation methods for reasonableness and a comparability test. (15) (f) Discuss four factors that the Management Committee will have to consider when choosing the appropriate funding facility for the acquisition of Amos Hardware (Pty) Ltd. [Your answer should consider, as a minimum, economic data, AKHA Traders financial information and the available facilities]