You were supplied you with the following information for the year ended $31$st March $2024$ : $-$

$1.$ Sales had totalled R$4,320,000,$ all of which had been made on credit.

$2.$ The share capital account stood at R$80,000,$ the original $8,000$ shares Nicci had issued to

herself when she set up the company.

$3.$ Cost of Sales equalled $70\%$ of the sales value.

$4.$ Sales and Marketing expenditures accounted for $5\%$ of Sales, and General and Administrative

expenses amounted to R$160,200$ for the year.

$5.$ Nicci was taking an average of $67\mathrm{.}7$ days to pay Edutoys$$ creditors, but they had started to

complain and said that they would be demanding quicker settlement in the future.

$6.$ Retained Earnings on the balance sheet as at $31$st March $2023$ were R$750,680.$

$7.$ The prevailing corporate tax rate was $35\%,$ and Nicci$$s policy was to pay out $80\%$ of all EAT

as dividends.

$8.$ A graduate of a lesser$-$known business school had told Nicci that if she depreciated her fixed

assets over as long a period as possible, she could enjoy better profits and not pay any more

tax. She didn$$t fully understand this, but thought it sounded great. Thus she decided to

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depreciate all fixed assets $($consisting of delivery vehicles, a computerised ERP system and

some packaging and assembly equipment$)$ over $20$ years. The depreciation charge for the year

ended $31$st March $2024$ was R$60,800,$ and the NBV of fixed assets at the end of that year was

R$760,300.$

$9.$ Nicci had a long$-$term debt of R$100,000$ that she had gotten from her parents when she started

the company and had never gotten around to repaying it$.$ They were adamant that they would

not accept any interest on the loan but would like the capital amount back at some stage.

$10.$ As of March $31,2024,$ stock holdings were way too high at R$490,461,$ and accounts

receivable totalled R$410,543.$

$11.$ At year$-$end, the bank account was overdrawn $($as usual$)$ by R$80,165,$ and the interest charged

for the year was R$10,155.$ Nicci knew there was cash on hand but had forgotten to count it at

year end.

Year ended $31$st March $2025$

Lindsey and Nicci sat down with you to try and predict what the combined new business would

achieve in the year ahead. The following was eventually agreed upon : $-$

$1.$ Sales would grow to R$6,200,000($all on credit$)$ and the lack of competition would allow them

to grow the gross profit to $40\%.$

$2.$ The ownership deal would look like this $$

a$.$ Lindsey was to have an effective $(1)/(3)$ share in Edutoys. To achieve this $4,000$ new

shares would be issued for the agreed value of R$1,000,000.$

b$.$ Mind$-$Muscle's assets were to be brought onto the Edutoys books at their NBV of

R$600,000$; the remaining R$400,000$ was to be raised as goodwill.

c$.$ This meant that the whole transaction could be concluded by book entry and no cash

needed to change hands at all.

$3.$ The depreciation policy was to remain unchanged. The new assets would push up the charge

for the year to R$90,800.$ Goodwill was to be amortised over $20$ years and a full year would be

charged for $2025.$

$4.$ Start$-$up problems with the ERP system had been ironed out and greater efficiency in stock

management was expected for the year ahead. Stock days were expected to come down to

$42\mathrm{.}5$ days.

$5.$ Pressure from suppliers meant that Nicci would have to start settling her accounts sooner.

Creditor days were reduced to $45$ days.

$6.$ General & Admin costs would grow to R$300,000,$ but the reduced competition would allow

Nicci to lower her marketing spend to about $3(1)/(2)\%$ of Sales.

$7.$ Neither the corporate tax rate of the dividend policy was to be changed for the forthcoming

year.

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$8.$ Nicci had no plans to pay her parents back this year as she felt she would need the cash to

fund the higher levels of business.

$9.$ Debtors were expected to amount to R$790,326$ by the end of March $2025.$

$10.$ Nicci felt that about R$20,300$ worth of cash on hand was required to keep the business liquid.

$11.$ The overdraft was expected to be reduced, but the budgeting exercise would expose the exact

value at year$-$end. The reduced overdraft was predicted to bring the interest bill for the year

down to R$15,300.$

QUESTIONS

$1)$ Analyse the performance of the operations using RONA $=$ Po x A

$2)$ Analyse the performance of the business from a shareholders perspective using

ROE $=$ Pa x A x L

$3)$ Analyse the effect buying Mind$-$Muscle will have on Edutoys$$ profitability

$4)$ What effect will the purchase have on FA turnover? and comment on Nicci$$s depreciation &

amortisation policy

$5)$ Analyse Edutoys's Capital Structure. While the purchase without using cash was certainly

clever, was it the best thing for Edutoys$$s gearing?

$6)$ Consider the case and offer any additional advice that may help Nicci plan for the future and

maximise the business's potential.