QUESTION ONE [25]

Whema Ltd is interested in expanding its operations into Durban, South Africa and are looking to invest in offices there. The following information has been extracted from the reports relating to the project:

Investment Average annual profit Life span Minimum required rate of return

Net Cash flows: 1st year

2nd year 3rd year 4th year 5th year

Required:

R1 500 000 R450 000 5 years 15%

R550 000 R600 000 R680 000 R700 000 R780 000

1.1 Calculate the accounting rate of return. (Express the answer to two decimal places).

(5)

2. 1.2 Calculate the payback period (Answer in years, months and days). (5)

3. 1.3 Calculate the net present value (Round off amounts to the nearest Rand). (8)

1,4 Would the project be acceptable at a cost of capital of 17%? Motivate your answer with an appropriate calculation. (7)

QUESTION TWO [25]

2.1. At a Finance Committee 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 R400 000 through either:

1. The sale of 40 000 preference shares at R10 per share or

2. 4 000 debentures of R100 each.

NB: the tax rate is 30% Evaluate the directors assertion with the aid of appropriate calculations. (7)

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2.2. Huldi 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 %. Huldis 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 Huldis cost of equity using:

2.2.1. The Dividend Growth Model (6) 2.2.2. The Capital Assets Pricing Model (5) 2.2.3. Analyse the reasons for each method presenting different answers. (4)

2.3. Outline the disadvantages of the Capital Asset Pricing Model (CAPM). (3)

QUESTION THREE [25]

Shani Ltd manufactures product C1009T and provides the following information for the last month: Budgeted figures:

Variable manufacturing overheads Fixed manufacturing overheads Labour hours Expected production

Actual results:

Variable manufacturing overheads Fixed manufacturing overheads Labour hours worked Actual production

Required:

R20 000 R48 000 4 000 1 000 units

R19 135 R49 880 4 300 1 050 units

1. 3.1 Calculate each of the following variable manufacturing overheads variances:

   1. 3.1.1 Efficiency variance (5)

   2. 3.1.2 Expenditure variance (5)

   3. 3.1.3 Total variable overheads variance (4)

2. 3.2 Calculate each of the following fixed manufacturing overheads variances:

   1. 3.2.1 Expenditure variance (5)

   2. 3.2.2 Volume variance (4)

   3. 3.2.3 Total fixed overheads variance (2)

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QUESTION FOUR [25]

The following information has been extracted from the financial records of Relo Ltd for the year ended 31 December 2020 including the prior (2019) year:

Statement of Financial Position as at 31 December 2020:

Assets

Non Current/Fixed Inventory Receivables Cash

Equity and Liabilities

Share Capital (R2 shares) Retained Income Long term Debt Payables

2020

4 200 000 400 000

1 550 000 600 000 6 750 000

4 200 000 600 000 250 000

1 700 000

6 750 000

2019

3 000 000 600 000 1 200 000 300 000 5 100 000

4 000 000 300 000 200 000 600 000

5 100 000

Statement of Comprehensive Income for the year ended 31 December 2020:

Sales (10% on credit) Cost of sales (80% on credit) Expenses Net Income after Tax Dividends Retained Income

10 200 000 4 080 000 3 200 000 2 000 000 1 700 000 3 000 000

NB: Shares are currently trading at R2, 80 per share. Required:

4.1 Calculate the net profit on turnover for 2020. (2) 4.2 Calculate the current ratio for both years. (4) 4.3 Calculate the acid test ratio for both years. (4)

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4.4 Accounts Payable Turnover

1. 4.4.1 Calculate the accounts payable period (in days), noting that Relo Ltd has, after tough

   negotiations secured a 90 day account with all its creditors.

   Note: Use average accounts payable for this calculation. (4)

2. 4.4.2 Offer constructive advice to Relo Ltd as to whether this is an ideal situation. (3)

4.5 Calculate the return on equity. Will the shareholders be satisfied with the return? Explain why or why not. (4)

4.6 Calculate the inventory turnover ratio (use average inventory) and describe the significance of this ratio.

END OF QUESTION PAPER

(4)