SECTION A [100 MARKS] Answer ALL the questions in this section. Study the information provided below and answer the following questions: (25 Marks) 1.1 Explain the changes that possibly took place during 2019 in respect of: (6 marks) 1.1.1 Financing activities (2 marks) 1.1.2 Investing activities. (4 marks) 1.2 Calculate the distribution costs for 2019. (2 marks) 1.3Of what significance is the statement of comprehensive income to potential investors? (2 marks) 1.4 If the interest rate on loans was 15% whilst the return on assets was 22%, how are the (3 marks) shareholders likely to interpret this? 1.5 Critically assess the performance of the company from the information provided. (12 marks) INFORMATION The statements of comprehensive income of Hemrock Lid for 2019 and below: 2018 are provided HEMROCK LTD STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER: 2019 (R) 2018 (R) Sales 4 500 000 4 000 000 Cost of sales (1 950 000) (1 700 000) Gross profit 2 550 000 2 300 000 Other operating income 150 000 140 000 Distribution costs ? ? Administrative expenses (600 000) (550 000) Operating profit 600 000 540 000 Interest income 5 500 2 700Interest expense (4 350) (8 800) Profit before tax 601 150 533 900 Company tax (180 345) (160 170) Profit after tax 420 805 373 730 Additional information 1. Depreciation for the year is as follows: 2019: R200 000 2018: R300 000 Answer the questions from the information provided. (25 Marks) 2.1 Use the information provided below to calculate the ratio for 2020 that would reflect each of the (17 marks) following. Where applicable, round off answers to two decimal places. 2.1.1 The extent to which the claims of short-term creditors are covered by assets that can be translated (2 marks) into cash in the short term 2.1.2The extent to which long-term debt is covered by shareholders' funds (3 marks) 2.1.3 The amount of funds available relative to sales, to pay the company's expenses other than its cost (3 marks) of sales 2.1.4 The rand amount of distributions during the period on behalf of each ordinary share issued (3 marks) 2.1.5An indication of the profit that has been put back into the company (3 marks) 2.1.6 The amount that investors are willing to pay for each rand of the company's earnings (3 marks) 2.2 Provide TWO (2) ways of making an improvement with regard to each of the following ratios: (4 marks) 2.2.1 Debtors collection period (2 marks) 2.2.2 Operating margin. (2 marks) 2.3 Comment briefly on the following ratios: (4 marks) 2.3.1 Acid test ratio (2020 4.19:1 ; 2019 (2 marks) 2.3.2Return on equity (2020 24.16% ; 2019 23.75%) (2 marks) INFORMATION\fNon-current liabilities 900 000 1 000 000 Loan 900 000 1 000 000 Current liabilities 320 000 188 000 Creditors/Accounts payable 192 000 56 000 Dividends payable 128 000 96 000 Company tax payable 36 000 3 720 000 2 960 000 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDING 31 DECEMBER 2020 R Sales 5 600 000 Cost of sales (3 536 000) Gross profit 2 064 000 Operating expenses (1 064 000) Operating profit 1 000 000 Interest income 80 000 Interest expense (216 000)\f4 Salaries and wages are expected to cost R82 500 for September 2021 after a 10% increase takes effect from 01 September 2021. 5 Advertising expenses are expected to be 5% of the monthly sales, and are paid one month later. 6. Equipment with a cost price of R200 000 is expected to be purchased during August 2021. A deposit of 10% will be paid in August and the balance payable in six equal instalments commencing September 2021. 7. A long-term loan of R180 000 at 12% per annum interest is to be raised on 01 September 2021. Interest is payable quarterly in advance with the first interest payment to be made on 01 September 2021. 8 Other expenses, including depreciation of R4 000, are expected to amount to R46 000 each month and payments are made monthly. 9. An interim dividend of 6 cents per share is expected to be paid on 31 August 2021. The authorised share capital of Hemrock Lid consists of 800 000 ordinary shares of which 500 000 shares were issued. Study the information given below and answer the following questions: (25 Marks) 4.1 Calculate the Accounting Rate of return (on initial investment) of the first alternative. (5 marks) 4.2 Determine which of the two investment opportunities the company should choose. Motivate your (15 marks) answer by comparing the Net Present Value of each alternative. 4.3 Calculate the Internal Rate of Return of the first alternative, if no salvage value is (5 expected. marks) INFORMATION The management of Hemrock Lid is considering two investment opportunities: The first alternative involves the purchase of new equipment for R440 000 which will enable the company to modernise its maintenance facility. The equipment is expected to have a useful life of five years and a R22 000 salvage value. On the day Hemrock Lid purchases the new equipment, it would also pay the equipment manufacturer R16 500 for training costs to teach the employees to operate the new equipment. The modernisation is expected to increase efficiency, resulting in a reduction of R118 250 in annual cash operating expenses.The second alternative involves purchasing a truck. Purchasing another truck will enable the company to expand its delivery area and increase revenue. The estimated cost of the truck is R632 500. Its useful life is expected to be five years and a salvage value of R165 000 is anticipated. Operating the truck will necessitate an increase in inventory of supplies, petty cash, and its accounts receivable and payable balances. These changes would add R27 500 to the company's working capital base immediately upon purchasing the truck. The working capital cash outflow is expected to be recovered at the end of the truck's useful life. The truck is expected to generate R379 500 per year in additional revenues. The driver's salary and other cash operating expenses are expected to be R176 000 per year. A major overhaul costing R110 000 is expected to be required at the end of the third year of operation. Hemrock Lid desires a rate of return of 14%. The straight-line method of depreciation is used