Request 1

1) Calculate Sonias weighted average cost of capital.

2) Using financial ratio analysis, compare and contrast Sonias working capital

management in its FY2020 and FY2019 financial years, in relation to the

companys financial health

Request 2

1) Perform the following:

a. Calculate the Payback Period for each project. Show your

calculations.

b. Make a recommendation to Sonia based solely on your Payback

Period calculations, regarding which project Sonia should choose to

invest in. Provide reasons for your recommendation.

2) Perform the following:

a. Calculate the IRR for each project. Show your calculations.

b. Make a recommendation to Sonia based solely on your IRR

calculations, regarding which project Sonia should choose to invest

in. Provide reasons for your recommendation.

3) Perform the following:

a. Calculate the NPV for each project, using the weighted average

cost of capital calculated for Request 1 as your hurdle rate. Show

your calculations.

b. Make a recommendation to Sonia, based solely on your NPV

calculations, regarding which project Sonia should choose to invest

in. Provide reasons for your recommendation.

Sonias Limited, a company (Sonia or the company) operates a chain of restaurants

that has experienced outstanding growth for the past few 8 years. The company also

sells pre-packaged cooked meals, which customers can choose to have delivered to

their homes. The company is listed on the Johannesburg Stock Exchange (JSE)

The company has 1 million shares listed on the JSE, with a current market price of

R20 per share. The directors have decided that the company will pay an annual

dividend of R1.20 per share each year to meet shareholder expectations. The

company also has R20m of debt capital, with a market value of R30m. This debt

consists of a single long-term loan with a financial institution. The annual interest

payable on the loan is R4.2m.

The directors have also provided you with the following extract from the companys

latest financial statements, for the periods ended 31 December 2020 (FY2020) and

31 December 2019 (FY2019)

Sonia also has three other long-term capital investment projects that

it could choose to undertake. The directors want to ascertain which one of those three

projects would provide the company with the best return on investment. The

investment for these projects would be funded by a grant from a foreign NGO, which

provides grants for skills development in developing countries like South Africa. Sonia

qualifies for the grant, as the company has a training programme which trains workers

in South Africa to become restaurant managers. The grant is not repayable to the

NGO.

Sonia uses its weighted average cost of capital as a hurdle rate for evaluating capital

investments. The expected cash flows for the three projects (projects A, B, and C) are

summarised in the table below

\begin{tabular}{|l|c|c|} \hline R'000s & FY2020 & FY2019 \\ \hline Current assets & 22,743 & 33,137 \\ \hline Inventory & 13,500 & 14,436 \\ Trade receivables & 4,500 & 13,815 \\ Cash & 4,743 & 4,886 \\ \hline Current liabilities & 15,200 & 17,200 \\ \hline Trade \& other payables & 15,200 & 17,200 \\ \hline \end{tabular} \begin{tabular}{|l|c|c|} \hline R'000s & FY2020 & FY2019 \\ \hline Revenue & 85,200 & 93,894 \\ Cost of Sales & 57,630 & 62,569 \\ \cline { 2 - 3 } Gross Profit & 27,570 & 31,325 \end{tabular} \begin{tabular}{|cccc|} \hline Year & \multicolumn{3}{c|}{ Project Cash Flows } \\ & A & B & C \\ \hline 0 (i.e. now) & (160,000.00) & (160,000.00) & (160,000.00) \\ 1 & 64,000.00 & 57,600.00 & 19,200.00 \\ 2 & 24,000.00 & 84,000.00 & 96,000.00 \\ 3 & 72,000.00 & 36,000.00 & 36,000.00 \\ 4 & 60,000.00 & 36,000.00 & 168,000.00 \\ 5 & 60,000.00 & 48,000.00 & 24,000.00 \\ \hline \end{tabular}