QUESTION 1 [40 MARKS]
Read this extract from Woolworths’ 2020 integrated report, and answer the questions that follow:
• Woolworths. (2020). Register of application of King IV 2020. https://www.woolworthsholdings.co.za/wp- content/uploads/2020/09/2020_King_IV_Application_Report.pdf (Retrieved April 06, 2023).
1. Assess the value of embracing of ethics and social responsibility as far as Woolworths, as a business organisation, is concerned. (8)
2. At what point and how seriously should Woolworths consider these issues when planning? (8)
3. How does your organisation (or one of your choosing) tackle these issues? (8)
4. Based on the information from Question 3, what is your advice to Woolworths in its approach to ethics and social responsibility, and why?
5. As the financial manager of a JSE-listed company, what would your responsibilities be to ensure that the King IV Code is effectively adhered to?
QUESTION 2 [30 MARKS]
You have recently been appointed executive in charge of finance for Hufflepuff (Pty) Ltd. The company is considering investing in the production of UPS machines and related products for its clientele. The junior accountant has provided you with the following information:
|Details||Year 1||Year 2||Year 3||Year 4||Year 5|
|Sales||35 000||49 000||53 200||57 400||55 200|
|Materials||5 350||7 500||9 000||10 050||9 000|
|Labour||10 700||15 000||18 000||21 000||18 000|
|Other variable overheads||500||600||650||700||750|
|Fixed overheads||12 000||?||?||?||?|
|Other operating costs||3 000||3 100||3 200||3 400||3 300|
In addition, the junior accountant informs you of the following:
• All cash flows and profits forecasts were prepared in present terms and can be adjusted based on inflation in respective years;
• Fixed overheads are expected to suffer inflationary increases of 5% per year;
• Materials and labour costs are expected to increase by 10% per annum;
• Other operating costs are expected to increase by 4% per year;
• The tax rate is 28% and payable in the year profits are made;
• The company is financed by 75% equity and 25% debt, with market values of R75m and R25m respectively. The company has an equity beta of 1,2. The rate on Treasury bills is 5% and considered to have no risk. The market risk premium is 7,5%. The company’s after-tax cost of debt is 6%;
• The following assumptions were made in preparing the financial information:
o Profits are similar to cash flows for the purposes of this project evaluation;
o All receipts and payments arise at the end of the year to which they relate, except for the project’s initial outlay of R30m, which is to be paid immediately; and
o Other operating costs figures have already adjusted for tax capital allowances and noncash depreciation adjustments. The noncurrent asset bought for the project has no residual value.
Given the information above, calculate the following:
i. Profits for the periods (12 marks)
ii. Weighted average cost of capital (5 marks)
iii. Net present value of the proposed project (10 marks)
iv. Recommendation on the acceptance or rejection of the project with justifications (3 marks)
• Adjustments must be considered before calculations are performed.
• State any assumptions you make. Your assumptions must make sense given the requirements of the questions.
• Round off rand amounts to the nearest rand.
QUESTION 3 [30 MARKS]
Credit Suisse: How the mighty fell
What was behind the shocking demise of a treasured institution – and how will the proposed rescue package play out?
When they hear the name “Credit Suisse”, my grandchildren will likely have to google (or whichever search engine exists then) these two words. For most of my contemporaries here in Switzerland, Credit Suisse is an inherent part of Swiss history and culture. The past weekend has been historical in many dimensions for Switzerland. The country used to be praised as a successful financial center due to its stability and lack of political uncertainty, but instead recent developments have prompted a combination of curiosity and panic. A too-big-to-fail institution has indeed failed, some of its bonds written off, and its remaining assets purchased by its neighbor and competitor UBS.
Why has this happened? Certainly Credit Suisse’s problems did not start last week. Its fate results from a combination of poor strategic decisions, a rotting culture, and bad luck. The power of its brand had kept the bank afloat despite corporate governance scandals, the choice of wrong partners, and a sequence of CEOs and top executives that were unable to restore confidence and lead a turnaround. And when there was turbulence in financial markets because of the default of Silicon Valley Bank (SVB), the weakest banks sunk first.
While the SVB collapse demonstrates the gaps in US banking regulation, the response of the Swiss National Bank (SNB), FINMA, the Swiss financial regulator, and the Swiss Confederation should be praised as adequate and speedy. SVB’s shareholders and depositors were the victims of a regulatory framework that allows non-systemic banks in the United States to account for fixed income securities as “held to maturity securities” – that is, accounted at cost of acquisition instead of at fair value or market value. When SVB showed financial weakness, depositors started to withdraw their money.
Being forced to liquidate such fixed-income securities at depressed values, SVB became undercapitalized and technically bankrupt.
As financial panic spread throughout the world, it reached Switzerland, and Credit Suisse wealth management clients, depositors and shareholders became concerned about the going-concern value of the bank. We heard last night in a historical press conference that survival alternatives for Credit Suisse had been considered from last Wednesday, including splitting the business into parts, nationalization, and an outright sale to UBS. The latter is what ultimately happened after a frantic weekend.
Extracted from: Bris, A. (2023). Credit Suisse: How the mighty fell.
https://www.imd.org/ibyimd/finance/credit-suisse-how-the-mighty-fell/ (Retrieved April 06, 2023).
Weigh up the pros and cons of the merger between Credit Suisse and UBS. In your expert opinion as a strategic financial expert, is this a sound business decision or does it merely prolong what will inevitably be a painful economic end for the once-giant credit institution? Provide your response in no more than 500 words, concentrating on the following discussion points:
• Consideration of capital costs as well as its associated risks and return; (10)
• The impact of different international finance options available to the bank; (10) and
• The influence of credit management and debt collection (or lack thereof) on the bank’s financial liquidity. (10)
Answers on Above Questions on Woolworth
Answer 1: An analysis of the given case study shows that it is quite important for Woolworth to consider ethics and social responsibilities in its business operation, as it would result into significant benefit to the organisation. The reason behind considering ethics and social responsibilities is the increasing awareness among people about the impact of purchasing its products and services on the environment. It is possible for Woolworths to differentiate with its competitors by way of considering ethical and social values in its processes.
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