SECTION A: FINANCIAL ACCOUNTING (50 MARKS] Question 1 Phefo Ltd is experiencing challenges in 2019 as the company has incurred a R4.9 billion net loss. The loss has pushed most of the earnings measures into the negative column and the current ratio dropped below 1.0. The company's debt ratio is still only 0.27. Management is considering the following transactions: 1. Sell off a segment of the business for R30 million (receiving half in cash and half in the form of a long-term receivable). The book value of the segment is R27 million. 2. Borrow R100 million on long term debt. Requirement: (20 Marks) Top management wants to know the effects for both of these transactions separately increase / decrease or no effect) on the following ratios: a) current ratio b) debt/equity ratio c) return on equity (ROE) d) times interest earned ratio (Interest cover ratio) e) book value per ordinary shares Question 2 Take the role of an investment analyst at Pula Ltd. It is your job to recommend investments for your clients. The only information you have is the following ratio values for two companies in the graphics industry: GT.net DataD 44 50 6 10 69% 60% Ratio Days sales in receivables Inventory turnover Gross operating margin Net profit margin Times interest earned Return on equity Return on assets 13% 14% 17 11 36% 28% 15% 20% Requirement: (15 marks) Write a report to the Pula investment committee. Recommend one company's shares over the other. State the reasons for your recommendation. Question 3 Dikeledi Industries is a large conglomerate that is continually in the market for new acquisitions. The company has grown rapidly over the last ten years through buyouts of medium-size companies. Dikeledi Industries does not limit itself to companies in any one industry, but looks for companies with a sound financial base and the ability to stand on their own financially. The CEO of the company recently told his executive team that I want to impress two points on all of you. First, we are not in the business of looking for bargains. Dikeledi Industries has achieved success in the past by acquiring companies with the ability to be a permanent member of the corporate family. We don't want companies that may appear to be a bargain on paper but can't survive in the long run. Secondly, a new member of our family must be able to come in and make it on its own the parent is not organised to be a funding agency for struggling subsidiaries." Imran Booysens is responsible for acquisitions for Dikeledi Industries. He is responsible for making recommendations to the board of directors on potential acquisitions. You are one of his assistants, and he has recently asked you to analyse a possible can't miss opportunity. Summaries of the most recent comparative statement of financial position and statement of profit or loss for the company: 2017 R 215 180 24 980 0 84 120 Heavy Duty Tractors Statement of financial position for the year ending 31 December 2018 2018 ASSETS R Current assets: 324 120 Cash 48 500 Marketable securities 3 750 Accounts receivable 128 420 Inventories 135 850 Prepaid expenses 7 600 Long term investments 45 000 Property plant and equipment: 590 000 Land 45 000 Buildings, equipment less accumulated 545 000 depreciation (R385 000) 2018; (R325 000) 2017 TOTAL ASSETS 970 010 96 780 9 300 45 000 650 000 45 000 605 000 921 070 LIABILITIES AND OWNERS EQUITY R R 162 300 126 250 80 000 60 000 65 350 48 760 14 360 13 840 2 590 3 650 Current liabilities: Short term notes Accounts payable Salaries and wages payable SARS Long term bonds payable, due 2025 Owners' equity: Share capital Retained earnings TOTAL LIABILITES AND OWNERS EQUITY 275 000 275 000 532 710 519 820 350 000 350 000 182 710 169 820 970 010 921 070 Statement of profit or loss for the year ending 31 December 2018 R 875 250 (542 750) 332 500 (264 360) 68 140 (45 000) 23 140 Sales revenue Cost of goods sold Gross profit Selling, general and admin expenses Operating profit Interest expense Net profit before taxes and extraordinary items Income tax expense Net profit before extraordinary item Extraordinary gain, less taxes of R6 000 Net profit Retained earnings, January 1 2018 Dividends paid Retained earnings, December 31 2018 (9 250) 13 890 9 000 22 890 169 820 (10 000) 182 710 Requirement: (15 Marks) 1. How liquid is Heavy Duty Tractors? Support your answer with any ratios you believe are necessary to justify your conclusion. Also indicate any other information that you would want to have in making a final determination on its liquidity. (8) ) 2. In light of the CEO's comments, should you be concerned about solvency of Heavy Duty Tractors? Support your answer with the necessary ratios. (7)