Subject:Financial Management and Management Accounting

Use the caselet below to answer Question 1.

Organisation:Start Enterprise

Start Enterprise is a listed company and its ordinary shares are trading at R25 per share( 500 000 shares in issue), which is currently trading at R750. The bonds mature in 20 years and pay a 10% coupon. As an advisor to the company you have been informed that the before tax cost of debt is 9.5 % and you also know that a 25% tax rate applies to the company. with respect to the ordinary shares, the following applies: risk-free rate 5% Market risk premium =11% Beta coefficient =1.4

You are also aware that the company's board is considering a new project that requires an initial investment of R250 000 for new equipment, which is expected to generate a net cash flow of R35 000, R60 000, R80 000 and R100 000 at the end of the first, second, third and fourth year, respectively. The equipment has a salvage value of R50 000 at the end of the fourth year and a discount rate of 12% applies. Although, the company is considering new projects, senior management has recently expressed concern about its working capital management. The following information has been supplied to you in this respect:

Inventory turnover=15 times Debtors turnover=12 times Average payment period=25 days

Question 1 (40 Marks)

1.1 By giving relevant examples from the caselet, clearly discuss the basic types of financial management decisions( 9 marks)

1.2 Using the information supplied in the caselet, calculate and interpret Starc's weighted average Vost of Calutal(13 Marks).

1.3 During your discussions with senior management, one of the managers mentioned the following about the company's capital structure: "The cost of debt is typically lower than the cost of equity and we should therefore use more debt financing than equity." in light of the statement above, argue either in favour or against the view expressed by the manager. (4 marks).

1.4 Advise senior management on whether they should pursue the project as discussed in the caselet. your decision must be informed by the net present value of the investment. show all your calculations (8 marks).

1.5 Calculate how long it takes the company to recover cash used to purchase raw material(assume 360 days in a year). Also explain how this period to recover cash can be minimized(8 marks).

Question 2 (40 Marks)

2.1 Consider the following information for SCE Enterprises( for 10 00 units of output) and calculate the total cost for 35 000 units of output, as well as the cost per unit: Variable cost :R85 000 Fixed cost: R40 000 Semi-variable cost (30% fixed): 95 000 (9 marks)

2.2 SPP Enterprise provide you with the following: Total Liabilities:R3000 00p Total Assets:R4 200 000 8 % preference shares:R250 000 Net profit after tax:R280 000 Use the information provided and calculate the: Return on total equity ratio Return on common equity ratio (9 marks)

2.3 Obtain the financial statements (annual reports) of any two listed companies and Critically calculate the liquidity and profitability of the two companies. The following is required: Detailed introduction of your chosen companies(I.e nature of their business activities) Identify two ratios(show formulas) that will enable you to assess the liquidity of the chosen companies. Identify two tatios(show formulas) that will enable you to assess the profitability olof the chosen companies. Ocerall assessment(I.e Compare the two companies in terms of liquidity and profitability).

Be sure to attach all supporting documents such as the statements that were used for calculations purposes.

Question 3 (20 marks)

As a specialist on procurement and tendering, critically discuss the procurement process.