UNIVERSITY EXAMINATIONS

FI CONCESSION APRIL 2023

MAC3702

Application of Financial Management Techniques

100 Marks
Duration 3 Hours
30 minutes for emailing (submission cut-off time at 12:30 myUnisa time)

THIS PAPER CONSISTS OF TWELVE (12) PAGES IN TOTAL.

THIS IS NOT AN OPEN BOOK EXAM! YOU ARE NOT ALLOWED TO COPY FROM ANY
SOURCES INCLUDING YOUR TEXTBOOK OR TUTORIAL LETTERS.

EXAM QUESTION PAPER - INSTRUCTIONS:

Please note:
1. This paper consists of THREE (3) questions.
2. You are strongly advised to carefully read the required before attempting the questions
concerned.
3. All questions must be answered.
4. All calculations must be shown.
5. Each question section attempted, must commence on a new (separate) page.
6. Include (write/type) your student number in the document/answer file.

PROPOSED TIMETABLE FOR THIS EXAM:

CONTENTS
TIME
QUESTION TOPICS MARKS
Minutes
1 Analysis of financial and non-financial information; Capital
50 90
budgeting, Sources of finance and environmental factors
2 Dividend Decision and policy 25 45
3 Short questions 25 45
Converting your answers to a PDF file and successfully
emailing your one PDF file. You must successfully email
your PDF file on myUnisa before 12:30 South African time,
30
1 March 2023. The submission platform will automatically
close at 11:30 (1 March 2023, South African time) and no
submission can be made henceforth.
TOTAL 100 210

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 Page 2 of 12 MAC3702
FI CONCESSION S1 2023

QUESTION 1 (50 marks; 60 minutes)

This question consists of Part A to Part D

PART A (25 marks; 30 minutes)

Soda Pop Limited (Soda Pop)

You were recently hired as a financial analyst by Soda Pop. The company is not listed and is in the
business of manufacturing and selling soft drinks.
The following information is available on 31 March 2023.

Statement of comprehensive income for the year ending 31 March 2023

2023 2022
Rand Rand
‘000 ‘000
Turnover 1 500 000 1 800 000
Cost of sales 1 050 000 1 500 000
Opening inventory 250 000 400 000
Production 1 200 000 1 350 000
Less: Closing inventory (400 000) (250 000)
Gross profit 450 000 300 000
Marketing and administrative expenses (150 000) (180 000)
Operating profit 300 000 120 000
Interest received 80 000 60 000
Profit before taxation 380 000 180 000
Taxation expense (106 400) (50 400)
Profit after taxation 273 600 129 600

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FI CONCESSION S1 2023
QUESTION 1 PART A (continued)

STATEMENT OF FINANCIAL POSISITION AT 31 March 2023

2023 2022
Rand Rand
‘000 ‘000
Assets
Non-current assets 1 200 000 1 050 000
Property, plant and equipment 1 000 000 850 000
Long-term financial assets 200 000 200 000
Current assets 1 470 000 1 300 000
Inventory 400 000 250 000
Trade receivables 320 000 400 000
Other current assets 150 000 150 000
Cash balances and investments 600 000 500 000

Total assets 2 670 000 2 350 000

Equity and liabilities

Equity 1 375 000 1 160 000
Ordinary share capital (250 000
ordinary shares) 500 000 500 000
Accumulated reserves 225 000 125 000
Retained earnings 650 000 535 000

Non-current liabilities 682 000 710 000

Long-term loan 550 000 600 000
Debentures 12 000 10 000
Deferred taxation 120 000 100 000

Current liabilities 613 000 480 000

Trade payables 350 000 250 000
Provisions and accruals 263 000 230 000

Total equity and liabilities 2 670 000 2 350 000

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 Page 4 of 12 MAC3702
FI CONCESSION S1 2023
QUESTION 1 PART A (continued)

Historical financial ratios of Soda Pop Ltd and industry averages for 2023

Historical financial ratios Industry averages

Ratio
2021 2022 2023 2023
Current ratio 1,9 2,7 (i) 2,2

Acid test ratio 0,9 2,2 (ii) 1,6

Debt/equity ratio 58% 52,59% (ii) 31%

Gross profit percentage 11% 16,66% (iv) 22%

Return on total assets 2,88% 3,67% (v) 12%

Inventory turnover 8 times 6 times (vi) 4,10 times

Additional information

• Credit terms for the purchases of the company was 30 days from invoice date and increased to
45 days from invoice date.

• The company’s target debt/equity ratio is 30%. Management hopes to meet this target by paying
off a substantial amount on the long-term loan in the near future.

• The company has revised the inventory policy in order to keep inventory holding to a minimum
resulting in cost savings. They have decided to introduce the JIT (Just in Time) basis for producing
inventory.

• The closing inventory includes inventory delivered for a special order that starts the first week of
April 2022.

• One of the main ingredients was purchased from a new supplier in 2022 at a discounted rate.

• The company has a target weighted average cost of capital (WACC) of 12%.

• VAT is levied at 14%.

• The company’s tax rate is 28%.

• Assume there are 365 days in a year.

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 Page 5 of 12 MAC3702
FI CONCESSION S1 2023
QUESTION 1 PART A (continued)

REQUIRED:
(a) Calculate ratios (i) to (vi) for 2023. Show all your workings and round your final answer to the
nearest two decimal places. (13)

(b) Compare the ratios for 2023 as calculated in (a), to the prior year (2022), and provide reasons for
the improvement/deterioration. Take both the information included in the financial statements and
the additional information into account when providing your reasons. (12)

Use the following format when compiling your answer:

Ratio Ratio given for Possible reason(s) for
Ref to
calculated in 2022 and improved the improvement /
calcu- Ratios
(a) to (f) for / deteriorated in deterioration from
lation
2023 2023 2022

(i) Current ratio 2,7

improved /
deteriorated
(ii) Acid test ratio 2,2
improved /
deteriorated
(ii) Debt/equity ratio 52,59%
improved /
deteriorated
(iv) Gross profit percentage 16,66%
improved /
deteriorated
(v) Return on total assets 3,67%
improved /
deteriorated
(vi) Inventory turnover 6 times
improved /
deteriorated

QUESTION 1 PART A [25]

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 Page 6 of 12 MAC3702
FI CONCESSION S1 2023
QUESTION 1 (continued)

PART B (15 marks; 18 minutes)

Soda Pop Limited (Soda Pop)

Use the same set of financial information as set out in Part A and consider the following
additional information.

Additional information
According to the long-term strategic plan the company needs to expand its operations. Management is
considering expanding the product range by adding another flavor to the current product lines. The
production line needs to be tailored to accommodate the additional flavor and Soda Pop has
R35 000 000 available for this capital expansion.
Management has investigated a number of projects and the following information is available for the
different possibilities. Note that these projects are independent from each other.

Project Very Project Project Coconut Project

Berry Lemon & Pine Bubblegum
Lime
Investment (R 20 000 000) (R35 000 000) (R23 000 000) (R15 000 000)
NPV R2 200 000 R3 680 000 (R2 750 000) R1 400 000
IRR (%) 14 12 9 17
NPVI (PI) ? ? ? ?

REQUIRED:
(a) Prepare an analysis based on NPV, IRR and PI rankings to identify the project / projects in which
the company should invest in the near future. (11)

(b) Prepare a memorandum addressed to the management team and advise them in which
project/projects they should invest. Base your answer on the analysis done in part (a) above and
substantiate your answer with proper reasons. (4)

QUESTION 1 PART B [15]

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 Page 7 of 12 MAC3702
FI CONCESSION S1 2023
QUESTION 1 (continued)

PART C (5 marks; 6 minutes)

Soda Pop Limited (Soda Pop)

The following additional information in respect of Soda Pop Limited applies to Part C:
Soda Pop Limited will need to consider which sources of finance it should use for the capital
investment that was recommended in Part B before. Consider the following two sources of finance
available to the company for the capital investment:

(i) Incur a long-term loan from AB Bank with a 12% interest rate

OR

(ii) Issue additional ordinary shares in Soda Pop Limited

REQUIRED:
Recommend which one of the two sources of finance available to the company, should be used in
order to finance the investment. Provide valid arguments for your recommendation.
(You do not need to include the impact of WACC in your argument and also note that you do not need
to calculate the amount of debt or equity for finance purposes.) (5)

QUESTION 1 PART C [5]

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 Page 8 of 12 MAC3702
FI CONCESSION S1 2023
QUESTION 1 (continued)

PART D (5 marks; 6 minutes)

Soda Pop Limited (Soda Pop)

Name five (5) environmental factors Soda Pop will need to consider in addition to the qualitative
reasons as discussed in Part B when deciding on a project to invest in. (5)

QUESTION 1 PART D [5]

TOTAL QUESTION 1 [50]

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 Page 9 of 12 MAC3702
FI CONCESSION S1 2023

QUESTION 2 (25 marks; 30 minutes)

You are presented with the following abridged balance sheets for Car rentals (Pty) Ltd and Truck
rentals (Pty) Ltd:
Car rentals Truck rentals
(Pty) Ltd (Pty) Ltd

R ‘000 R ‘000
Total Assets 91 380 143 300
Property, plant and equipment 54 880 96 000
Investments 20 000 9 000
8 mil shares in Truck rentals (Pty) Ltd 20 000
3 mil shares in Car rentals (Pty) Ltd 9 000
Other Assets 10 300 25 000
Current Assets 6 200 13 300

Equity and Liabilities 91 380 143 300

Issued capital (ordinary shares of R1 each) 60 000 80 000
Retained earnings 19 000 45 100
Long-term borrowings 10 000 8 000
Current liabilities 2 380 10 200

Additional information
1. Both companies are in the vehicle rental industry and have decided to expand on the services
they deliver to the client as both have lost some income due to the fact that they were not
diversified enough.

2. The companies have decided that a merger would result in some synergies that will benefit both
companies and therefore they have agreed on the following terms and conditions:

a. A new company will be incorporated namely Vehicle rentals (Pty) Ltd.

b. Some of the assets for Car rentals (Pty) Ltd and Truck rentals (Pty) Ltd will be revalued as
follows before the merger takes place to reflect the current market values:

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 Page 10 of 12 MAC3702
FI CONCESSION S1 2023
QUESTION 2 (Continued)

Car rentals (Pty) Truck rentals (Pty)

Ltd Ltd

R ‘000 R ‘000
Property, plant and equipment 65 000 125 000
Goodwill 2 500 12 000
Other Assets 12 000 27 500

3. Vehicle rentals (Pty) Ltd will take over all the assets and liabilities with exception of the
intercompany shareholdings (investments) of Car rentals (Pty) Ltd and Truck rentals (Pty) Ltd at
the current market values.

4. The purchase price will be settled via the issuing of ordinary shares to the value of R10 each in
Vehicle rentals (Pty) Ltd

REQUIRED:
(a) Determine the purchase price payable to the shareholders of Car rentals (Pty) Ltd and Truck
rentals (Pty) Ltd (excluding the intercompany investments). (6)

(b) Calculate how many shares must be issued to the shareholders of Car rentals (Pty) Ltd and Truck
rentals (Pty) Ltd. (Round your answer to the nearest Rand) (14)

(c) Name five (5) forms of synergy benefits (both financial and operational) that the management of
Car rentals (Pty) Ltd and Truck rentals (Pty) Ltd should have taken into account upon deciding if
the merger should take place. (5)

TOTAL QUESTION 2 [25]

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 Page 11 of 12 MAC3702
FI CONCESSION S1 2023

QUESTION 3 (25 marks; 30 minutes)

This question consists of four questions, each question must be considered independently.

QUESTION 3(a) (12 marks; 14 minutes)

Moreleta Ltd has made a profit of R47,5 million in the current financial year. The cash reserve has
grown to R62,5 million. The company is currently considering to invest in a new capital project of R60
million. The financial manager has suggested that the new project should be funded as follows: R30
million in cash and R30 million by means of a long-term loan with a fixed interest rate of 12% per
annum.
The directors are aware that Morelata Ltd should continue paying a dividend. If this does not happen it
will negatively impact the current share price of R50 per share. The shares are currently trading at
twice the current net asset value. Moreleta Ltd paid a dividend of R1,50 per share in the previous
financial year. The 25 million (number of shares) in issue have remained unchanged for the past five
years.
The financial director is considering a number of dividend options for the current year:
(a) Growing the previous dividend by 18%

(b) Applying a dividend cover of 1,2

(c) Issuing a scrip dividend on a 1 to 25 basis assuming all the shareholders accepts the offer

(d) Repurchase 1 million shares on a pro rata basis.

REQUIRED:
Evaluate the impact of the four options above on both the per share level and on the Statement of
financial position of Moreleta Ltd. Show all your calculations. (12)

QUESTION 3(b) (3 marks; 4 minutes)

The following information is available:

Real rate of return: 15%
Inflation: 5.5%

REQUIRED:

Calculate the nominal rate of return (Round your answer the nearest two decimals) (3)

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 Page 12 of 12 MAC3702
FI CONCESSION S1 2023

QUESTION 3(c) (8 marks; 10 minutes)

A local transport company Trans (Pty) Ltd imported new truck trailers for an exclusive manufacturer in
Europe. The last order was placed on 31 March 2022 for new truck trailers to the value of €450 000.
The shipping terms are free on board (FOB), and the furniture was loaded on 15 April 2022. The
payment terms are 30 days from shipment, and Trans (Pty) Ltd makes use of forward exchange
contracts (FEC) to hedge against fluctuations in the foreign currency exchange rate.
The following rates are available:

Date Bank selling rate Bank buying rate

31 March 2022 14,0097 14,9916
15 April 2022 14,0765 14,0605
30 April 2022 14,2270 14,2411
14 May 2022 14,5570 14,5411
Forward rate (30 days) 14 May 2022 14,1582

REQUIRED:
(a) Calculate the rand amount due on the date of the transaction. (2)

(b) Assume that no forward cover was taken out to hedge the exchange rate risk. Calculate the foreign
currency gain or loss between the transaction date and the payment date. (3)

(c) Determine if it would have been to the benefit of the company had they taken out the forward
cover. (3)

[8]
QUESTION 3 (d) (2 marks; 2 minutes)

A company has the following long term ratios:

• Ploughback ratio (b) 50%

• Return on investment (r) 12%

REQUIRED:
• Calculate the potential internal long-term growth of the company. (2)

TOTAL QUESTION 3 [25]

TOTAL [100]

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