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:

answer

Hire the best accounting assignment help experts of Student Life Saviour to get answers to all the above questions on financial management.


Content Removal Request

If you believe that the content above belongs to you, and you don’t want it to be published anymore, then request for its removal by filling the details below. It will only be removed if you can provide sufficient evidence of its ownership.