QUESTION ONE [30]
You are provided with the following information relating to Drolin Ltd:
| STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2023 | |
| R | |
| Sales | ? |
| Cost of sales | (6 765 000) |
| Gross profit | 1 272 500 |
| Operating expenses | (922 500) |
| Earnings before interest and tax | 350 000 |
| Interest expense | ? |
| Earnings before tax | 227 500 |
| Company tax | ? |
| Earnings after interest and tax | ? |
| STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2023 | |
| Assets | R |
| Non-current assets | 1 462 500 |
| Current assets | 3 275 000 |
| Total assets | 4 737 500 |
| Equity and liabilities | |
| Shareholders’ equity | 1 966 500 |
| Non-current liabilities | 1 282 500 |
| Current liabilities | 1 488 500 |
| Total equity and liabilities | 4 737 500 |
Note:
• All the sales were on credit.
• Company tax is calculated at 30% of the pre-tax profit.
• Current assets include accounts receivable of R1 680 000 and inventories of R750 000.
• The issued share capital of the company consisted of 100 000 ordinary shares.
Required:
Use the information provided above to answer the following questions:
1.1 Calculate the following ratios expressing answers to two decimal places:
1.1.1 Gross profit margin (3)
1.1.2 Total asset turnover (3)
1.1.3 Return on equity (3)
1.1.4 Current ratio (4)
1.1.5 Debt-equity ratio (4)
1.1.6 Earnings per share (4)
1.1.7 Finance cost coverage (3)
1.2 Comment on the acid test ratio which was 1.12:1 in 2022 and 1.70:1 in 2023. (4)
1.3 Suggest two possible reasons for a drop in the gross profit margin ratio. (2)
QUESTION TWO
Lapti Ltd has the following capital structure: [20]
• Equity: 3 000 000 R1 ordinary shares, market price currently R1, 50
• Preference Shares: 2 000 000 @ R0.50 yielding 10%, market price currently R0.50
• Debentures: R1 000 000, 15% debentures, issued at R100, market price
currently R 106,00
• Bank loan: R1 000 000 15% bank loan
They have paid a dividend of 10c per share last year and they expect dividends to grow by 5%. The corporate tax is 30%.
Required:
Calculate their Cost of Capital, using the Dividend Growth Model as your basis for valuing equity. (16)
Discuss two disadvantages of the Capital Asset Pricing Model approach. (2)
Discuss two advantages of investing in bonds. (2)
QUESTION THREE [20]
Ooto Ltd has a choice of two projects to invest in, both of which cost R17 000. The following details relate to these projects:
| Year | Project A | Project B | Discount
factor @10% |
| 1 | R 10 000 | R10 000 | 0.909 |
| 2 | R 8 000 | R 6 000 | 0.826 |
| 3 | R 6 000 | R 16 000 | 0.751 |
Calculate the following:
Payback period for both projects (6)
Net Present Value for both projects (10)
Determine which project the company should choose. (2)
Discuss an advantage and a disadvantage of the payback period (2)
Answers to Above Questions on Financial Management
Answer 1: The calculation of different ratios in relation to Drolin Ltd is performed as follows:
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