Thank you in advance, the question is complete I double checked ??
Investment B Invest the R180 000 in ShopSmart, a retail company which has been outperforming other investments. Unfortunately, the COVID_19 restrictions have impacted the observed returns of all investments. With the current uncertainty about the future state of the economy, future expected returns are uncertain. Victor has done some research and has noted the following risk/return profile relating to ShopSmart: Economic state Probability Rate of return High 0. 15 45% Normal 0.50 25% Low 0.35 -5%Question 3 (70 marks) Mr. Victor Moloto was recently hired by South African Solution Airplanes ("SASA") to assist with its financial planning and to evaluate the company's performance. Victor graduated from university five years ago with a finance degree. Company and Industry Background SASA was founded ten years ago by friends Michael and Thokozani. The company manufactures and sells light aircrafts. The manufacturing of aircrafts is quite specialised and stringent global regulatory pressure makes operations difficult but SASA is consistent with meeting regulations and has received good reviews for safety and reliability of its products. The aircrafts manufactured by SASA include gliders, helicopters, target drones, ultra-light aircraft and unmanned and robotic aircrafts. By using prefabricated parts sourced from a supplier in China, SASA is able to complete the manufacture of aircrafts. Aircrafts are only manufactured based on orders. The company receives a deposit on each order, as well as another partial payment before the order is complete. Upon delivery of the aircraft, customers are given 60 days to pay the remaining outstanding balance which is due. In recent years, global aircraft manufacturers started using machine-learning technology to improve safety, productivity and quality of aircrafts. These technological systems optimize manufacturing operations and costs. Most of the large aircraft manufacturers have been able to maintain their competitive edge and are experiencing the benefits of using these systems. In order to remain competitive SASA has negotiated to purchase a system from an international IT company. Once the new system has been installed, SASA will be faced with the decision to downsize their workforce. The system is expected to cost USD 2 million which is payable once the system has been installed. SASA will take out a loan equivalent to USD 2 million to meet this payment. Unfortunately, due to COVID-19 import restrictions, installation of the system was delayed but SASA is hoping to have the system installed in the new year. The technological system upgrade is not the only delay that has been experienced during 2020. SASA's supplier of prefabricated parts in China was shut down in an attempt to contain the pandemic. While lockdown restrictions have since been eased, demand for aircrafts is still low.Light aircraft manufacturing industry ratios Lower quartile Median Upper Quartile SASA Current ratio 0.5 1.43 1.89 ?? Quick ratio 0.21 0.38 0.62 0.44 Cash ratio 0.08 0.21 0.39 0.16 Total asset turnover 0.68 0.85 1.38 ?? Inventory days 74.6 59.3 33.5 18.99 Receivable days 58.2 37.2 25.9 Total debt ratio 0.44 0.52 0.61 0.31 Debt/equity ratio 0.79 1.08 1.56 Equity multiplier 1.79 2.08 2.56 ?? Interest cover 5.18 8.06 9.83 7.96 Interest cover excl depreciation 5.84 3.43 10.27 9.77 Profit margin 4.05% 6.98% 9.87% Return on assets (after tax) 6.05% 10.53% 13.21% ?? Return on equity 9.93% 16.54% 26.15% ?? Investing in shares Victor has advised Michael and Thokozani to invest in shares, which will generate stable returns with the least amount of risk. After much consideration, Michael and Thokozani, who are risk averse, have agreed to invest R180 000. Victor has put together two potential investment options. Investment A Company Industry Annualised Expected historic returns returns Variance GoldRush Holdings Ltd Mining 3% 20% 2.61% Silver Star Mining Holdings Ltd Mining 14% 5% 0.39% Invest R150 000 in GoldRush Holdings and the balance in Silver Star Mining Holdings. The covariance and correlation coefficient between GoldRush Holdings and Silver Star Mining Holding is 0.29 and 0.8 respectively.Dale and Tumelo, the accountants, have provided Victor with the following draft company financial information. South African Solution Airplanes Statement of Comprehensive Income for the year ended 31 December 2020 R'000 Sales 128 700.00 Cost of goods sold 90 700.00 Other expenses 15 380.00 Depreciation 4 200.00 Profit before interest and tax 18 420.00 Interest 2 315.00 Profit before tax 16 105.00 Tax (40%) 6 442.00 Net profit after tax 9 663.00 Dividends 2 898.90 Retained profits 6 764 South African Solution Airplanes Statement of Financial Position as at 31 December 2020 R'000 ASSETS Net non-current assets 72 280 Inventory 4 720 Accounts receivable 4 210 Cash 2 340 TOTAL ASSETS 83 550 EQUITY Ordinary shares 1 000 Retained profits 41 570 LIABILITIES Long-term debt 25 950 Accounts payable 4 970 Short-term debt 10 060 TOTAL EQUITY & LIABILITIES 83 550 Victor has gathered the industry ratios for the light aircraft manufacturing industry.b) Calculate the sustainable growth rate and the Du Pont identity for SASA and advise Mr. Victor Moloto on the meaning of the numbers. 9 Sustainable Growth Rate (5 marks) Du Pont Analysis (4 marks) c) Discuss the key risks applicable to SASA. 8 . Clarity of expression (1 mark)
