QUESTION ONE [25]

The following balances/data was extracted from the accounting records of Benta Ltd on 28 February 2020, the end of their financial year: R Share capital (900 000 shares at R2 par value) 1 800 000 Retained income 160 000 Non Current Assets 1 750 000 Inventories 220 000 Receivables 600 000 Cash/Bank 300 000 Payables 730 000 Loans at 15% p.a. 180 000 Net profit after tax 765 000 c Market price of share 270 Dividends per share 65 Required:

1.1. Calculate and comment on the following ratios:

1.1.1. Current ratio (last year 2,33 : 1) (4)

1.1.2. Acid test ratio (last year 1.58 : 1) (4)

1.2. Calculate the PE (Price Earnings) ratio and explain what a low PE ratio might mean. (4)

1.3. Calculate the earnings per share. Will shareholders be happy with this? Why? (4)

1.4. Calculate the market to book ratio and explain the significance of this ratio. (4)

1.5. Calculate and comment on the debt equity ratio. (3)

1.6. Calculate the retained income for the year. (2)

QUESTION TWO [25]

2.1. Explain the rationale behind the Internal rate of return (IRR) (4)

2.2 Malda Ltd have just made an investment of R550 000 in a new delivery vehicle. This vehicle will be used for deliveries and generate revenues from such activities. Further details:

Expected useful life 5 years (straight line depreciation)

Salvage value 50 000

Cost of Capital 10% after tax

Tax rate 30% Year Cash flows 1 220 000 2 200 000 3 120 000 4 110 000 5 50 000 Required:

2.2.1 Calculate the payback period and the accounting rate of return. (8)

2.2.2 Malda Ltd requires a payback period of no more than 3 years and a return of at least 30%. Purely on the basis of these criteria, should this project be accepted. Explain. (5)

2.2.3 The payback period method makes a crucial omission in the calculation, namely the time value of money. Complete the above computation using a method that accounts for the time value of money? On the basis of this calculation, should the project be accepted? Explain. (8)

QUESTION THREE [25]

3.1. Analyse the meaning of the term residual dividend policy / strategy? (4)

3.2 Senten Ltd is deciding whether to pay out R60 000 in excess cash in the form of an extra dividend or a share repurchase. Current profits are R3.00 per share and the share sells for R30. Their abbreviated balance sheet before paying out the dividend is: R R Equity 240 000 Bank/Cash 60 000 Debt 60 000 Other assets 240 000 300 000 300 000 Evaluate each alternative (i.e: pay the dividend or repurchase the shares) by calculating:

3.2.1 The number of shares in issue. (5)

3.2.2 The dividends per share (for the first alternative, i.e. pay the dividend). (5)

3.2.3 Calculate: 3.2.3.1 The New share price (4)

3.2.3.2 The Earnings per share (4)

3.2.3.3 The Price-earnings ratio (3)

QUESTION FOUR [25]

4.1 What value does the weighted average cost of capital (WACC) serve to decision makers? (5)

4.2 At a board meeting a director remarks selling preference shares with a return of 9% or debentures with a return of 9% is really one and the same thing. The company has the option of raising the R400 000 through either: a. The sale of 40 000 preference shares at R10 per share or b. 4 000 debentures of R100 each.

NB: the tax rate is 30% Do you agree with the directors assertion? Discuss with aid of calculations. (10)

4.3 Otad Mining and Manufacturers shares have a beta of 1.40. At present government bonds/treasury bills present a return of 6% and the market return is 12%. Otads dividend was R2.20 per share last year and they expect dividends to grow at 5%. Their shares sell for R30 per share at present (par value R20). Calculate Otads cost of equity using:

4.3.1. The Dividend Growth model (3)

4.3.2 The Capital Asset pricing model. (3)

4.3.3 Explain the reason/s for each method presenting different answers. (4)