QUESTION 1 (58 marks)

Go-Go Growth Ltd (“GGG”) manufactures and sells various agricultural products and equipment. GGG is currently considering manufacturing a fertiliser that will be called “Germinate”.

Market research has provided insights into how long the product line Germinate is expected to remain viable and the pricing structure of the product. A favourable demand for the product is expected to last for five (5) years before it becomes unviable.

The cost of the new equipment required to manufacture the Germinate product line is R28 800 000. Thereafter, the residual value of the equipment will be R3 600 000 in year 5 of use. The equipment is to be written-off over a period of five (5) years on the straight-line basis. According to section 12C of the South African Income Tax Act, the equipment will qualify for a wear-and-tear allowance of 40% of cost in the first year and 20% of the cost in the subsequent years.

The investment in the working capital for the purposes of the Germinate product line is estimated to be 26% of the revenue over the product line’s lifespan since inception. At the end of the product line’s lifespan, the working capital invested for the purposes of the Germinate product line will be recovered.

Fixed costs of Geminate production (including depreciation) will amount to R14 300 000 per annum. GGG has spent R36 000 on the market research and will spend R11.50 on variable cost per unit. Fixed selling costs are R895 000 per year. The selling price per unit will be R56 and 3 470 100 units per year are expected to be sold.

GGG has a debt to equity of 33%. GGG’s only debt instrument is R50 par value bonds that are currently trading at R52 per bond. The coupon rate is 9% per annum and the maturity date of the bonds is in seven (7) years’ time.

10-Year South African government bonds offer a return of 7.5%.

AgriFlourish Ltd (“AgriFlourish“) is an entity similar to GGG, however AgriFlourish’s debt to equity is 24% and has a beta of 1.1.

The average yield on offer in the agriculture sector is 12.9%

The South Africa Income Tax rate applicable to companies is 27%. Germinate will be funded from GGG’s general pool of funds.
Ignore Value Added Tax (VAT).

REQUIRED:

Determine the Germinate product line’s Net Present Value and Internal Rate of Return. Advise Go-Go Growth Ltd on whether the company should proceed with the Germinate product line.

Should you purposefully exclude an item from the valuation, indicate this in your answer as well as motivation for opting to do so.
(57 marks)
Communication skill: Logical argument (1 mark)

QUESTION 2                                                                                                         (20 marks)

 ZipUp (Pty) Ltd (“ZipUp”) is a clothing retailer with branches nationwide. ZipUp is not a registered VAT vendor.

ZipUp is considering rolling out a new clothing line and is evaluating two mutually exclusive clothing lines.

Clothing line 1: “Casual Joe” Clothing line 2: “Perfecto”

The Casual Joe clothing line and Perfecto clothing line will require an initial investment of R270 400 and R310 300 respectively.

The following are the findings of market research performed by ZipUp:

The standard deviation of the Casual Joe clothing line is R138 343.42 and R103756.41 for the Perfecto clothing line.

ZipUp applies a discount rate of 8.4% to investment options with a co-efficient of variation 0.35 and lower. Thereafter, 1.1% is added to the discount rate for every 0.1 increment.

REQUIRED: 

• Assist ZipUp (Pty) Ltd and calculate the expected net cash profit per year for the Casual Joe and Perfecto clothing lines

(4 marks)

• Calculate the co-efficient of variance for the Casual Joe and Perfecto clothing lines Advise ZipUp (Pty) Ltd which clothing line should be pursued.

(5 marks)

Communication skill: Logical argument                                                           (1 mark)

• Assume both clothing lines will be part of ZipUp (Pty) Ltd’s portfolio of clothing lines on offer to customers for 12 years, and that ZipUp (Pty) Ltd applies a risk-adjusted discount Calculate the net present value of Casual Joe and Perfecto respectively and advise which clothing line should be pursued.(9 marks)

Communication skill: Clarity of expression                                                (1 mark)

QUESTION 3 (22 marks)

Bite Size Ltd (“Bite Size”) is a food manufacturer located in Cape Town, South Africa. The entity has a 31 January financial yearend and applies the International Financial Reporting Standards (“IFRS”) when preparing the entity’s accounting records.

Bite Size owns property, plant and equipment for which the sum of the respective acquisition prices amounts to a total cost price of R759 800 000 as on 31 January 2025. The only new property, plant and equipment item that was purchased during the recent financial year, was a vehicle on 1 December 2024 for R347 000. This vehicle has an estimated useful life of six (6) years and a scrapping value of R22 000. The total accumulated depreciation as on 31 January 2025, is R201 700 000. This includes the R9 330 000 depreciation (excluding depreciation on the new vehicle) for the 2025- financial year. Bite Size utilises the straight-line basis for depreciation.

Bite Size earned R61 230 000 from 1 February 2024 to 31 January 2025 from the sales of the entity’s food products. The sales of food products are considered to be Bite Size’s primary business activity. All sales are made on credit.

Bite Size has a 39% gross profit margin and utilises the perpetual inventory accounting system and a first-in-first-out basis.

According to Bite Size’s bank statement, the entity has R40 108 500 available as on 31 January 2025.

Bite Size’s inventory turnover is 2.1 times and its average collection period 32 days. During the 2025-financial year, bad debts of R42 000 has been written-off.
Bite Size has 50 000 000 authorised ordinary shares and half of them are issued at a par value of R10 each.

Bite Size also owns 3 000 ordinary shares of another entity, Beta Ltd. These shares have a value of R900 000 according to Bite Size’s 2025-annual financial statements. The external auditors have determined that this is the reasonable value of these shares.

On 31 January 2025, Bite Size’s interest cover for the recent financial year has been determined as 4.4 times.

According to Bite Size’s accounting records, Bite Size’s retained earnings balance as at 31 January 2024 is R508 000 000. Furthermore, R7 140 000 other expenses were incurred during the 2025-financial year. This amount excludes any expense item mentioned elsewhere.

The South African Income Tax rate applicable to companies is 27%. It may be assumed that all the expenses and income items are taxable/deductible for tax purposes and are of the same value according to the South African Income Tax Act.

REQUIRED:

Perform a Du Pont analysis on Bite Size Ltd for the 2025-financial year. Only perform the analysis and not interpretation thereof.

Assume 365 days and ignore VAT.(22 marks)

Answers to Above Questions on Financial Accounting

Answer 1 :

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