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    Bfe 425 Assignment 3 2023

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    Chikarakara Lloyd
    The document provides information for two questions regarding financial analysis of Moyo Ltd: Question 1 involves a horizontal common-size analysis of Moyo's statements of financial position from 2017-2021 and journal entries for an interest rate swap, while Question 2 calculates leverage and debt ratios for Moyo from 2020-2022 and discusses limitations of using ratios for financial analysis.

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    Bfe 425 Assignment 3 2023

    Uploaded by

    Chikarakara Lloyd
    24 views3 pages
    The document provides information for two questions regarding financial analysis of Moyo Ltd: Question 1 involves a horizontal common-size analysis of Moyo's statements of financial position from 2017-2021 and journal entries for an interest rate swap, while Question 2 calculates leverage and debt ratios for Moyo from 2020-2022 and discusses limitations of using ratios for financial analysis.

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    BFE 425 ASSIGNMENT 3 2023

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    The document provides information for two questions regarding financial analysis of Moyo Ltd: Question 1 involves a horizontal common-size analysis of Moyo's statements of financial position from 2017-2021 and journal entries for an interest rate swap, while Question 2 calculates leverage and debt ratios for Moyo from 2020-2022 and discusses limitations of using ratios for financial analysis.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    24 views3 pages

    Bfe 425 Assignment 3 2023

    Uploaded by

    Chikarakara Lloyd
    The document provides information for two questions regarding financial analysis of Moyo Ltd: Question 1 involves a horizontal common-size analysis of Moyo's statements of financial position from 2017-2021 and journal entries for an interest rate swap, while Question 2 calculates leverage and debt ratios for Moyo from 2020-2022 and discusses limitations of using ratios for financial analysis.

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    of 3

    GROUP ASSIGNMENT 3 DUE DATE: 14 APRIL 2023

    Question 1
    a) Below are the partial statements of financial position for Moyo Ltd for the past
    five years:

    Table 1: Partial statements of financial position


    Assets ($ Millions) 2021 2020 2019 2018 2017
    Cash and cash equivalents 39 29 27 19 16
    Short-term marketable securities 1 7 7 6 4
    Accounts receivable 44 31 47 67 79
    Inventory 15 25 36 25 27
    Non-Current Assets, Net 1 2 6 9 8
    Total Assets 100 104 113 126 134

    Perform a horizontal common-size analysis and comment. [8]

    b) Dejong Ltd obtained a loan of R2 000 000 from Best Bank Ltd on 1 April 2020
    at a fixed market related interest rate of 12% per year. Interest on the loan is
    payable bi-annually on 30 September and 31 March and the loan capital is
    repayable in one payment on 31 March 2023.
    On 1 April 2021, one year after the loan was obtained, Dejong Ltd expects a
    decrease in market interest rates. As the loan was obtained at a fixed interest
    rate, Dejong Ltd will not benefit from any future decreases in market interest
    rates.
    In order to take advantage of any future decreases in interest rates, Dejong Ltd
    decides to enter into an interest rate swap in terms of which it will receive
    interest at a fixed rate and pay a variable rate. On 1 April 2021 Dejong Ltd
    enters into the interest rate swap for two years with Friendly Bank Ltd for a R2
    000 000 notional amount in terms of which Dejong Ltd will receive interest at a
    fixed rate of 11.5% per year and pay interest at JIBAR + 3% bi-annually on 30
    September and 31 March (JIBAR is the Johannesburg Interbank Agreed Rate).
    The variable interest rate on the interest rate swap is pre-fixed, post-paid which
    means that the variable interest rate will be fixed for each six-month period at
    the beginning of that six-month period and interest will be paid at the end
    thereof.

    Table 2: Market Interest rates


    Market interest rates JIBAR JIBAR+3%
    1 April 2021 7.50% 10.5%
    1 October 2021 7% 10%

    Fair value of the loan


    Table 3 shows the fair value of the loan on 30 September 2021 and 31 March
    2022.

    Table 3: Fair value of the loan


    Fair Value
    30 September 2021 2 020 185
    31 March 2022 2 018 460

    Assume that the total movement in the fair value of the loan relates to a change
    in JIBAR (all other risks such as credit risk are excluded).

    Table 4 shows the fair value of the interest rate swap (AFTER settlement
    of the swap)

    Table 4: Fair value of the interest rate swap


    1 April 2021 -
    30 September 2021 24 635 (favourable)
    31 March 2022 23 317 (favourable)

    Dejong Ltd has elected to apply hedge accounting from 1 April 2021 and the
    hedge meets all the hedging criteria. Dejong Ltd designated the interest rate
    swap as the hedging instrument and the changes in the fair value of the loan
    as a result of changes in JIBAR as the hedged item. You may assume that the
    hedge was 100% effective over the period of the swap agreement. The financial
    year end of Dejong Ltd is 31 March. Ignore any tax implications.

    Required
    Provide the journal entries for Dejong Ltd for the financial year ended 31 March
    2022. [14]
    Question 2
    A credit analyst is evaluating the solvency of Moyo Ltd based on financial
    statements for the year ended 31 March 2022. The following data are gathered
    from the company’s 2022 annual report:

    Table 5: Extract of annual report


    $ 000 $ 000 $ 000
    2022 2021 2020
    Total Assets 710 009 663 170 559 688
    Short Term Debt 18 530 15 688 19 976
    Long Term Debt 336 770 306 970 277 458
    Total Liabilities 534 067 480 818 441 269
    Total Equity 175 942 182 352 118 419
    a) Calculate the company’s financial leverage ratio for 2022 and 2021. [4]

    b) Interpret the financial leverage ratio calculated in Part a). [3]

    c) Calculate the following ratios for the three years:


    i. debt-to-assets. [3]
    ii. debt-to-capital. [3]
    iii. debt-to-equity. [3]

    d) Using c) above, comment on any discernable trend over the three years. [4]

    e) Explain any four limitations of using ratios in financial analysis to Moyo Ltd. [8]

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