REQUIRED: 1. Value of one ordinary share of the company using the free cash flow method (a reasonable test is not required). (30) 2. Write a report to Mr. Banderker (assume he understands the basics of Capital Budgeting) using financial analysis and some key ratios to highlight and discuss potential problems for the company over the next few years. The following key ratios should be calculated: 2.1 Debt-Equity ratio 2.2 Interest cover 2.3 Current ratio 2.4 Return on capital employed (after tax) 2.5 EBIT/Sales (2) (2) (2) (2) (2) Discussion Layout, neatness and logic (8) (2) (Source: Correira & Flynn) 4 0 10 EBIT Net interest payable Profit before tax Tax Profit after tax Retained earnings at beginning of year Dividends Retained earnings at end of year 602.6 - 131.1 471.5 -142.6 328.9 2044.3 1059.8 -181.0 878.8 -246.1 632.7 2189.2 1208.2 -190.9 1017.3 -284.8 732.5 2479.0 938.5 -214.3 724.2 -202.8 521.4 2814.5 994.9 -257.7 737.2 -206.4 530.8 3053.3 11 -184.0 2189.2 -342.9 2479.0 -397.0 2814.5 -282.6 3053.3 -287.7 3296.4 Notes 1. Land and buildings are operational factories countrywide. 2. Investments represent non-interest bearing strategic assets, which support the company's normal operations. 3. The company has estimated that R200 million in cash balances at the end of June 2019 is surplus to the company's needs and will use this to reduce its financing requirements in 2020. Mr. Banderker estimated that operating cash will amount to 1% of sales revenue from 2020 onwards. 4. The reduction in ordinary share capital in 2022 reflects the effect of a projected share buy-back. 5. Short-term loans and overdrafts tend to be "long-term" of nature. The interest rates applicable is variable. 6. The provisions relate to the company's ongoing operations. 7. The interest rate on long-term borrowings is a fixed rate of 10% until 2023. Thereafter the interest rate becomes a variable market related interest rate. The current market rate on similar long-term borrowings is 11%. The company is planning to reduce its long-term borrowings by R400 million at the end of 2022 8. The company is expecting a significant increase in revenue in 2020, but thereafter the company is expecting to experience a fall in sales growth in each year. The growth rate that the company will be able to achieve in 2023 is projected to be the sustainable growth rate that the company will be able to achieve each year after 2023. This is a nominal growth. 9. Depreciation equals the wear and tear allowances for tax purposes. 10. Interest for any year is based on the opening balances of short-term debt and long-term debt. 11. The corporate tax rate is 28%. 12. The company has a loan covenant that the debt-equity ratio will not exceed 80% and the company's weighted average cost of capital is estimated to be 12%. lo Share Favorite Delete Edit More o QUESTION 1 (50 marks) Abdullah Manufacturers (Pty) Ltd manufacture diverse products, which is distributed and sold worldwide. The following projected statements were produced by Mr. Banderker the financial manager: Actual 2019 Forecast Forecast Forecast Forecast 2020 2021 2022 2023 Notes Rm Rm Rm Rm Rm Statements of Financial Position as at 30 June 2019 Non-current assets Land and buildings Plant and machinery (net) Investments 1 713.0 2327.6 713.0 2746.6 713.0 3131.1 793.0 3444.2 793.0 3650.8 2 73.6 3114.2 32.0 3491.6 32.0 3876.1 82.0 4319.2 82.0 4625.8 Current assets Inventories Receivables Cash in hand and short- term deposits 1030.4 1297.2 246.0 1215.9 1530.7 44.5 1386.1 1745.0 50.7 1524.7 1919.5 55.8 1616.2 2034.7 59.1 3 2573.6 5687.8 2791.1 6282.6 3181.8 7057.9 3500.0 7819.2 3710.0 8235.8 Total Assets 4 550.0 550.0 550.0 400.0 400.0 Equity Share capital (5500m shares in issue) Retained earnings 2189.2 2739.2 2479.0 3029.0 2814.5 3364.5 3053.3 3453.3 3296.4 3696.4 5 529.0 638.6 899.1 1825.5 1902.7 Current Liabilities Short term loans and overdrafts Accounts payable & provisions 6 1085.6 1281.0 1460.3 1606.4 1702.8 1614.6 1919.6 2359.4 3431.9 3605.5 7 Non-current liabilities Borrowings Total Equity and Liabilities 1334.0 5687.8 1334.0 6282.6 1334.0 7057.9 934.0 7819.2 934.0 8235.8 Statements of Comprehensive Income for the year ended 30 June Turnover Operating costs before depreciation EBITDA Depreciation 8 3769.7 -2817.5 4448.2 -3113.8 5071.0 -3549.7 5578.1 -4295.1 5912.8 -4552.8 952.2 -349.6 1334.5 -274.7 1521.3 -313.1 1283.0 -344.4 1359.9 -365.1 9 2 REQUIRED: 1. Value of one ordinary share of the company using the free cash flow method (a reasonable test is not required). (30) 2. Write a report to Mr. Banderker (assume he understands the basics of Capital Budgeting) using financial analysis and some key ratios to highlight and discuss potential problems for the company over the next few years. The following key ratios should be calculated: 2.1 Debt-Equity ratio 2.2 Interest cover 2.3 Current ratio 2.4 Return on capital employed (after tax) 2.5 EBIT/Sales (2) (2) (2) (2) (2) Discussion Layout, neatness and logic (8) (2) (Source: Correira & Flynn) 4 0 10 EBIT Net interest payable Profit before tax Tax Profit after tax Retained earnings at beginning of year Dividends Retained earnings at end of year 602.6 - 131.1 471.5 -142.6 328.9 2044.3 1059.8 -181.0 878.8 -246.1 632.7 2189.2 1208.2 -190.9 1017.3 -284.8 732.5 2479.0 938.5 -214.3 724.2 -202.8 521.4 2814.5 994.9 -257.7 737.2 -206.4 530.8 3053.3 11 -184.0 2189.2 -342.9 2479.0 -397.0 2814.5 -282.6 3053.3 -287.7 3296.4 Notes 1. Land and buildings are operational factories countrywide. 2. Investments represent non-interest bearing strategic assets, which support the company's normal operations. 3. The company has estimated that R200 million in cash balances at the end of June 2019 is surplus to the company's needs and will use this to reduce its financing requirements in 2020. Mr. Banderker estimated that operating cash will amount to 1% of sales revenue from 2020 onwards. 4. The reduction in ordinary share capital in 2022 reflects the effect of a projected share buy-back. 5. Short-term loans and overdrafts tend to be "long-term" of nature. The interest rates applicable is variable. 6. The provisions relate to the company's ongoing operations. 7. The interest rate on long-term borrowings is a fixed rate of 10% until 2023. Thereafter the interest rate becomes a variable market related interest rate. The current market rate on similar long-term borrowings is 11%. The company is planning to reduce its long-term borrowings by R400 million at the end of 2022 8. The company is expecting a significant increase in revenue in 2020, but thereafter the company is expecting to experience a fall in sales growth in each year. The growth rate that the company will be able to achieve in 2023 is projected to be the sustainable growth rate that the company will be able to achieve each year after 2023. This is a nominal growth. 9. Depreciation equals the wear and tear allowances for tax purposes. 10. Interest for any year is based on the opening balances of short-term debt and long-term debt. 11. The corporate tax rate is 28%. 12. The company has a loan covenant that the debt-equity ratio will not exceed 80% and the company's weighted average cost of capital is estimated to be 12%. lo Share Favorite Delete Edit More o QUESTION 1 (50 marks) Abdullah Manufacturers (Pty) Ltd manufacture diverse products, which is distributed and sold worldwide. The following projected statements were produced by Mr. Banderker the financial manager: Actual 2019 Forecast Forecast Forecast Forecast 2020 2021 2022 2023 Notes Rm Rm Rm Rm Rm Statements of Financial Position as at 30 June 2019 Non-current assets Land and buildings Plant and machinery (net) Investments 1 713.0 2327.6 713.0 2746.6 713.0 3131.1 793.0 3444.2 793.0 3650.8 2 73.6 3114.2 32.0 3491.6 32.0 3876.1 82.0 4319.2 82.0 4625.8 Current assets Inventories Receivables Cash in hand and short- term deposits 1030.4 1297.2 246.0 1215.9 1530.7 44.5 1386.1 1745.0 50.7 1524.7 1919.5 55.8 1616.2 2034.7 59.1 3 2573.6 5687.8 2791.1 6282.6 3181.8 7057.9 3500.0 7819.2 3710.0 8235.8 Total Assets 4 550.0 550.0 550.0 400.0 400.0 Equity Share capital (5500m shares in issue) Retained earnings 2189.2 2739.2 2479.0 3029.0 2814.5 3364.5 3053.3 3453.3 3296.4 3696.4 5 529.0 638.6 899.1 1825.5 1902.7 Current Liabilities Short term loans and overdrafts Accounts payable & provisions 6 1085.6 1281.0 1460.3 1606.4 1702.8 1614.6 1919.6 2359.4 3431.9 3605.5 7 Non-current liabilities Borrowings Total Equity and Liabilities 1334.0 5687.8 1334.0 6282.6 1334.0 7057.9 934.0 7819.2 934.0 8235.8 Statements of Comprehensive Income for the year ended 30 June Turnover Operating costs before depreciation EBITDA Depreciation 8 3769.7 -2817.5 4448.2 -3113.8 5071.0 -3549.7 5578.1 -4295.1 5912.8 -4552.8 952.2 -349.6 1334.5 -274.7 1521.3 -313.1 1283.0 -344.4 1359.9 -365.1 9 2