Question 1 [27 marks](12 marks)
Briefly explain the term exchange rate and discuss the four factors that cause a change in a floating exchange rate.(15 marks)
Future Ltd is a coal mining company situated Bloemfontein in South Africa. The company is not as large as some of their competitors, but because of their prime location on a large placer deposit containing coal in the earth’s crust, they are able to cope well with the demands of production and competition from other, larger mining corporations.
Lately, several incidents resulting from labour disputes between mine management and the miners themselves have resulted in prolonged strikes. These strikes disrupt production and result in a drop in output that causes significant financial turmoil within the firm. Future Ltd are forced to sell off several prime acres above the rich deposit in order to ensure that they remain solvent.
The CFO for Future Ltd calls an urgent meeting of the executive board. Several of Future’s newer shareholders have expressed their dismay at the drop in their equity and want to know why their share value is not as it was when they originally invested. The CEO tasks the CFO with explaining to the shareholders why their equity has dropped and why their claims are being labelled as ‘residual’ by the company.
Required:
Discuss some of the reasons that the CFO might use to justify the drop in shareholder equity to their shareholders. (15 marks)
Question 2 [23 marks]
Tops Ltd presents you with the following extract from their books for the year ended 28 February 2023.
| Sales | 19 000 000 | Rent paid | 30 000 |
| Inventory (1 March 2022) | 110 000 | Telephones | 125 600 |
| Purchases | 7 148 000 | Water and electricity | 191 200 |
| Inventory (28 February 2023) | 1 550 000 | Interest expense | 20 200 |
| Advertising | 300 000 | Non-current assets | 15 000 000 |
| Salaries and wages | 1 950 000 | Ordinary shares | 12 187 000 |
| Insurance | 145 000 | Retained earning | 1 500 150 |
| Depreciation | 800 000 | Cash | 150 681 |
| Maintenance | 215 000 | Accounts receivables | 1 581 265 |
| Fuel | 180 100 | Inventory | 1 540 310 |
| Printing | 150 100 | Accounts payable | 1 110 541 |
| Postage and courier expense | 9 000 | Long-term liabilities | 1 315 315 |
Additional information:
• Assume no secondary tax is payable
• Taxation charged at 28%
Required:
Prepare statement of financial performance for the year ended 28 February 2023.
(23 Marks)
Question 3 [26 marks]
3.1
Kim lives in South Africa where the following Consumer Price Index CPI) levels for the entire county were recorded across two years:
• January 2021 – December 2021 = 47.3
• January 2022–December 2022 = 44.5
Required:
Using these figures, calculate the increase or decrease in the inflation rate across these two years to 3 decimal places. Based on calculations above, what effect might be expected on the nominal rate of interest.
3.2
ABC Ltd runs a successful company in small town in Durban. The company’s cash flow statement for the year ended 28 February 2023 is as follows:
| Notes | ||
| Cash flows from operating activities | (a) | |
| Cash receipts from customers | 6 186 880 | |
| Cash paid to suppliers and employees | (4 879 000) | |
| Cash generated from operations | 1 | (b) |
| Interest received | – | |
| Interest paid | (9 500) | |
| Dividends received | – | |
| Dividends paid | (140 500) | |
| Taxation paid | (650 000) | |
| Cash flows from investing activities | (c) | |
| Purchase of non-current assets | (750 000) | |
| Proceeds from non-current assets | 15 000 | |
| Cash flows from financing activities | (d) | |
| Proceeds from the issue of share capital | 480 000 | |
| Proceeds from long-term borrowings | 450 000 | |
| Net change in cash and cash equivalents | (e) | |
| Cash and cash equivalents: beginning of year | 80 470 | |
| Cash and cash equivalents: end of year | (f) | |
Required
Fill in the missing figures (from a – f) for the cash flow statement in the table above, and explain the function of the cash flow statement in contrast to the statement of financial position. (18 marks)
Question 4 [24 marks]
Lions Ltd presents you with the following extract from their books for the year ended 31 January 2023.
| Statement of financial performance for the year ended 31 January 2023 | ||
| Sales | 75 105 000 | |
| Less cost of sales | 28 142 040 | |
| Opening inventory | 1 571 000 | |
| Purchases | 28 158 154 | |
| Closing inventory | (1 587 114) | |
| Gross profit | 46 962 960 | |
| Less operating expenses | (14 210 510) | |
| Earnings before interest and taxes | 32 752 450 | |
| Less interest expense | (140 000) | |
| Earnings before tax | 32 612 450 | |
| Less tax (28%) | (9 131 486) | |
| Earnings after tax | 23 480 964 | |
| Net profit distributed as follows: | ||
| Dividends to ordinary shareholders | 5 406 005 | |
| Retained earnings | 18 074 959 | |
| 23 480 964 | ||
| Statement of financial position as at 31 January 2023 | |||
| Non-current assets | 90 158 111 | Shareholder’s interest | |
| Ordinary shares | 82 494 804 | ||
| Current assets | Retained earnings | 8 690 543 | |
| Cash | 450 000 | Long-term debt | 1 236 694 |
| Account receivable | 1 590 000 | Current liabilities | |
| Inventory | 1 114 930 | Accounts payable | 891 000 |
| Total assets | 93 313 041 | Equity and liabilities | 93 313 041 |
Additional information
- Number of ordinary shares issued 82 494 804 @ 1 000cents each
- Current market price per share 4 550 cents
Industrial averages
| Ratio | Industrial average |
| EPS | 192 cents |
| DPS | 86 cents |
| P/E | 13 |
| Debt ratio | 13% |
| Debt-equity ratio | 26% |
| Times interest ratio | 29 |
Required:
Calculate the basic debt and securities market ratios of a firm based on the above financial statements. Clearly show the formula you used as well as your calculations. (24 Marks)
Answers to Above Questions on Financial Management
Answer 1:
The concept of exchange rate can be defined as the rate at which one currency can be exchanged with that of another currency. The four factors that cause a change in the floating exchange rate are inflation, interest rates, forex rate and current account deficit. In addition to this, there are other major factors that affect the floating exchange rate and these include government debt, terms of trade, economic performance, recession etc.
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