MAC 3702 Assignment 2: 2021

Department of Management Accounting

MAC3702

APPLICATION OF FINANCIAL
MANAGEMENT TECHNIQUES

ECP and SEMESTER 2

IMPORTANT INFORMATION:

 Please activate your myLife email address and ensure you have regular access to the
myUnisa module site for MAC3702, since this is a blended module.
 As a blended module, some of the study material will only be available online (myUnisa)
 MAC 3702 Assignment 2: 2021

MAC3702
APPLICATION OF FINANCIAL MANAGEMENT
TECHNIQUES
ASSIGNMENT 02 FOR
ECP and
SECOND SEMESTER

DUE DATE ECP: 21 JUNE 2021

DUE DATE SEMESTER 2: 30 JUNE 2021
UNIQUE NUMBER: 748062

Assignments submitted after DUE DATE will not be accepted. The system will close exactly at midnight
and you are advised to submit earlier than the due date to avoid any technical issues you may experience
on the due date. Keep proof of your submission.

The assignment consists of two 50 mark questions.

No multiple-choice questions (MCQs) will be asked in the examination; therefore, you must prepare
yourselves to answer scenario type of questions for all the topics in this module.

This assignment is a written assignment and can either be written or typed, converted to a PDF document
and submitted online on myUnisa. It is your responsibility to submit the correct, complete and clearly
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ASSIGNMENT BOXES. YOU WILL RECEIVE 0% IF YOUR UPLOADED PDF DOCUMENT IS READ-
ONLY OR PASSWORD-PROTECTED.
 MAC 3702 Assignment 2: 2021

PLAGIARISM:

 Please refer to Unisa’s policy on plagiarism (para 6.7 of TL101). You are reminded that your
assignment must be your own work. If any section of your assignment is considered to be
significantly similar (in a form of wording, layout, logic and thought process) to other students’, you
will get 0% for the assignment. You are encouraged to keep your assignment workings in the event
that you are required to submit proof for your assignment workings.

 In the event that 0% has been given for your assignment and you want to dispute the matter; it is
your responsibility to provide evidence showing all your workings and providing relevant
references to all your answers.

Please note that it is the practice of the Department to only mark selected sections of the written
assignment. You must therefore attempt all the questions in this assignment. Refer to paragraph 7.1 of
TL101
 MAC 3702 Assignment 2: 2021

ONLY SUBMIT ONLINE, OTHERWISE, YOUR ASSIGNMENT WILL NOT BE MARKED

QUESTION 1 (35 marks, 63 minutes)

Tech-Savvy Limited (TSL) is a technology innovation company based in Cape Town. The company
focuses on developing technological solutions which are key to making modern workers more productive.
TSL is listed on the Johannesburg Stock Exchange and has several branches across the SADC region.

During 2020 TSL identified several areas where blockchain technology can be used (use cases) in the
health, property, education, supply chain and other sectors. Blockchain is a system of recording
information in a way that makes it difficult or impossible to change, hack, or cheat the system. It is
essentially a digital ledger of transactions that is duplicated and distributed across the entire network of
computer systems on the blockchain. Any change made in the ledger has to be accepted by all the other
users across the network, making it virtually impossible for fraudulent transactions to be effected.
TSL has received support and interest from the government of South Africa by way of a grant from the
Technology Innovation Agency, for the research and development of a pilot solution for the Department of
Health for the recording of patient information.
Following the success of the pilot project TSL has pitched the adoption of the blockchain technology to
several potential users and received very positive feedback. TSL plans to set up a blockchain development
unit in order to deliver on the blockchain revenue stream. The following information was sourced from the
integrated annual report of TSL.

Extract from the statement of financial position at 31 May 2021

Rand

Equity and Liabilities

Ordinary shares (80 cents each) 500 000
Retained income 720 000
Shareholders’ capital and reserves 1 220 000
15% Preference shares (R100 each) 120 000
Long term loan – FNB Bank (16,67%) 680 000
Total equity and liabilities 2 020 000

Additional information

1. Ordinary share dividends declared and paid in the previous five (5) years were as follows:
Year Dividend per share
2017 72 cents
2018 80 cents
2019 91 cents
2020 95 cents
2021 105,2 cents

The TSL Board intends to maintain the average growth in dividends.

2. The market price for ordinary shares is currently R12 per share and that of preference shares is R96
per share. New issues will have no effect on these prices, although ordinary share issue costs will
be 4% per share issued.
3. TSL aims to maintain a debt: equity ratio of 1: 1 going forward (based on book values).
4. To service the new blockchain technology clients TSL is planning to buy new high tech coding
infrastructure at a cost of R800 000 at the start of the new financial year. The company will use this
infrastructure for 5 years and then scrap it for R50 000.
5. The following options are available to finance the new initiative:
 MAC 3702 Assignment 2: 2021

 New ordinary shares can be issued (retained earnings cannot be utilised).

 A maximum of 4 000 additional 15% preference shares of R100 each can be issued.
 A loan from Crypto Bank of R200 000 at prime + 800 basis points.
 A top-up loan from FNB Bank of R50 000 at the same rate as the existing loan, which is
considered to approximate the fair market interest rate.
The loans can only be taken at the total amounts as made available by the banks.
6. The South African Income Tax Act stipulates a company tax rate of 28% and an allowance on new
coding infrastructure of 20% per annum. The prime lending rate is currently 10,5% and is expected
to stay unchanged for the foreseeable future. The required rate of return on preference shares is
11%.

REQUIRED

(a) Determine how the new coding infrastructure should be financed, considering the funding options
available to TSL as well as the current capital structure on 31 May 2021 using book values.
For this part, assume preference share are redeemable and therefore categorised as debt.
(Calculations 10 marks; comments 2 marks) (12)

(b) Calculate the weighted average cost of capital of TSL based on market values after the
financing of the new project. For this part, assume preference shares are non-
redeemable.
[Round rand amounts to the nearest cent and other numbers to the nearest two decimal
places] (13)
(c) Assuming the information below determine how long (in years) it will take TSL to recover its initial
capital investment in the new infrastructure using the discounted payback method. (5)

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Description
2021 2022 2023 2024 2025 2026
Net cash-flows (800 000) 491 200 491 200 491 200 491 200 0

(d) Discuss qualitative factors that should be taken into account by the Board of TSL before
deciding to buy the new coding infrastructure, as well as advantages for TSL of venturing into
the development of Blockchain technology (5)

QUESTION 1 TOTAL [35]

 MAC 3702 Assignment 2: 2021

QUESTION 2 (15 marks, 27 minutes)

Paw Patrol Ltd is a company that operates in the safety and security industry with a specific focus on
domestic security systems. They are retailers in security devices and appliances. The following
information is available on 28 February 2021:

Statement of comprehensive income for the year ending 28 February 2021

2021 2020
Rand Rand
Notes
Turnover 1 8 500 000 7 850 000
Cost of sales (3 850 000) (3 600 000)

Opening inventory 850 000 1 200 000

Purchases 2 4 200 000 3 250 000

Closing inventory (1 200 000) (850 000)

Gross profit 4 650 000 4 250 000

Operating expenses 3 (3 220 000) (2 180 000)

Operating profit 1 430 000 2 070 000

Dividends received 500 000 420 000
Finance charges on long term loan (net) (118 000) (98 000)
Impairment loss on goodwill (100 000) -

Profit before taxation 1 712 000 2 392 000

Taxation (372 960) (552 160)
Profit for the year 1 339 040 1 839 840

Attributable to
Ordinary shareholders 1100 500 1550 000
Non-controlling interest in subsidiaries 238 540 289 840

1 339 040 1 839 840

 MAC 3702 Assignment 2: 2021

PAW PATROL LIMITED(continued)

Statement of financial position on 28 February 2021

Notes 2021 2020

Rand Rand
Assets
Non-current assets 3 120 500 3 480 500

Property, plant and equipment 1 250 000 1 550 000

Goodwill 1 450 000 550 000
Investments in associates 850 500 850 500
Long-term financial assets 570 000 530 000

Current assets 2 698 000 2 150 000

Inventory 1 200 000 850 000

Trade receivables 1 048 000 980 000
Cash balances 450 000 320 000

Total assets 5 818 500 5 630 500

Equity and liabilities

Equity 2 525 000 2 325 000

Ordinary share capital (800 000 ordinary

shares) 1 600 000 1 600 000
Non-controlling interests 250 000 250 000
Accumulated reserves 175 000 125 000
Retained income 500 000 350 000

Non-current liabilities 2 442 000 2 558 000

Long-term loan 950 000 1 200 000

Debentures 12 000 8 000
Preference shares (250 000 shares) 1 000 000 1 000 000
Deferred taxation 480 000 350 000

Current liabilities 851 500 747 500

Trade payables 350 000 425 000

Short-term debt 501 500 322 500

Total equity and liabilities 5 818 500 5 630 500

 MAC3702 Assignment 2 ECP & Semester 2

Notes and additional information

1. Credit sales increased from 55% of turnover in 2020 to 65% of turnover in 2021.

2. In 2021, 40% of the company’s purchases were made on credit in comparison to 50% in 2020.

3. Operating expenses includes a once off expense related to expert valuation costs incurred during
the year in order to write down the value of goodwill.

4. Credit terms for the trade receivables of the company are 60 days from invoice date and for the
standard industry terms are between 45 and 60 days.

5. The company’s payment terms to trade payables are between 45 and 60 days from invoice date,
and discount of 10% is received if payment is made before 45 days. Standard payment terms for
the industry are 60 days from invoice date.

6. The average inventory turnover period for the industry is 90 days and the average business cycle
for the industry is 100 days.

7. All raw materials are purchased on the just-in-time (JIT) basis. The inventory in the statement of
financial position consists of finished goods only.

8. VAT is levied at 15% and the company’s tax rate is 28%. You may also assume there are 365 days
in a year.

REQUIRED

(a) Calculate the business cycle of Paw Patrol Limited for year 2021 in days and comment on the
performance of each subsection of the calculation included in line with the additional information.
(Use closing balances and round off your answers to two decimal places.) (15)

QUESTION 2 TOTAL [15]

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 MAC3702 Assignment 2 ECP & Semester 2

QUESTION 3 (50 marks, 90 minutes)

PART 1

PickCo Ltd (‘Pickco’) is one of the three largest supermarket chains in South Africa. The company was
founded in 2013 by Ms Jessica James CA(SA) and has a 31 December financial year end. Jessica
attributes her success to basing her business model on three foundational pillars, namely Education, Care
and Sustainability. These values form the cornerstone of the company’s business strategy during its
continued expansion in the local retail market.

PickCo’s two principal competitors, Spaar Pty and Tjeckers Pty, are of similar size to PickCo. In common
with its competitors (see below), PickCo operates three main types of store:

 City center stores – these sell food and drink and a range of small household items. PickCo’s initial
growth was based on its city stores, but it has been shutting them over the last decade, although
the rate of closure has slowed in the last couple of years.

 Artisan stores – these are smaller and sell food and drink and very few other items. Between 2013
and 2017, PickCo greatly expanded the number of artisan stores it operated. Their performance
has varied, however, since 2017, PickCo has not opened any new stores and closed a number of
the worst-performing stores.

 Out-of-town stores – these sell food and drink and a full range of household items, including large
electrical goods and furniture. The number of out-of-town stores which PickCo operated increased
significantly until 2014, but has only increased slightly since.

The majority of city center and out-of-town store premises are owned by PickCo, but 85% of artisan store
premises are currently leased.

PickCo also sells most of its range of products online, either offering customers home delivery or ‘click and
collect’ (where the customer orders the goods online and picks it up from a collection point in one of the
stores).

When its 2020 results were published in April 2021, Jessica emphasised that the group was focusing on:
 Increasing total shareholder return by improvements in operating efficiency and enhancement of
responsiveness to customer needs (Care)
 Ensuring competitive position by maintaining flexibility to respond to new strategic challenges
(Sustainability)
 Maintaining financial strength by using diverse sources of funding, including making use in future
of revolving credit facilities

Since April 2021, Spaar Pty and Tjeckers Pty have both announced that they will be making significant
investments to boost online sales. PickCo intends to fund its investments by closing all its city center and
artisan stores, although it also intends to open more out-of-town stores in popular locations.

The government of South Africa was re-elected in 2019. In the 18 months prior to the election, it eased
fiscal policy and consumer spending significantly increased. However, it has tightened fiscal policy since
the election to avoid the economy overheating. It has also announced an investigation into whether the
country’s large retail chains treat their suppliers unfairly.

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 MAC3702 Assignment 2 ECP & Semester 2

The following is an extract of the financial statements for PickCo at 30 November 2020 and other
information about it are given below:

PickCo Ltd statement of profit or loss extracts:

Year ending 30 November 2020 (all amounts in Rmillion)

2018 2019 2020

Sales revenue 23,508 23,905 24,463

Gross profit 1,018 1,211 1,514

Operating profit 204 407 712

Finance costs (125) (115) (100)

Profit after tax 52 220 468

Dividends 150 170 274

PickCo Ltd statement of financial position

extracts
Year ending 30 November 2020 (all amounts in Rmillion)

Non-current assets 10,056 9,577 8,869

Cash and cash Equivalents 24 709 1,215

Other current assets 497 618 747

Total assets 10,577 10,904 10,831

Equity

Ordinary Shares (R1) 800 800 800

reserves 7,448 7,519 7,627

Total equity 8,248 8,319 8,427

Non-current liabilities 1,706 1,556 1,246

Current liabilities 623 1,029 1,158

Total equity and liabilities 10,577 10,904 10,831

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 MAC3702 Assignment 2 ECP & Semester 2

2018 2019 2020

Other information
Market price per share 3.54 3.34 3.23
Market price per share at the end of 2017 3.89
Market price per share - currently 3.17
Staff working in shops ('000) 78 75 72

Segment information
Revenue (Rmillion)

City stores 5,265 5,189 5,192

Artisan stores 3,786 3,792 3,833

Out-of-town stores 10,220 10,340 10,547

Store revenue 19,271 19,321 19,572

Online stores

Online sales 4,237 4,584 4,891

Number of stores
City stores 165 157 153
Artisan stores 700 670 640
Out-of-town stores 220 224 227

REQUIRED

(a) Evaluate PickCo’s financial performance. You should indicate in your discussions areas where
further information about PickCo would be helpful. Provide relevant calculations for ratios and trends
to support your evaluation.

To assist you with the evaluation of the financial performance you should consider the following:
Profitability (2 marks)
Liquidity (1 marks)
Solvency (2 marks)
Investor (3 marks)
Other ratios and trends (2 marks)

Note: Up to 10 marks are available for calculations (21)

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 MAC3702 Assignment 2 ECP & Semester 2

PART 2

Kidzo Ltd (‘Kidzo’) is a South African retailer of babies’ and children’s clothing.

For the last five years, the company has imported most of its manufactured clothing from XingXing, a
company based in China. XingXing manufactures babies’ and children’s clothing for export and, due to
lower manufacturing costs, has provided Kidzo with a pricing advantage. This cost advantage has however
decreased in recent years because of the deterioration of the South African exchange rate relative to
international currencies.

The trading environment has been particularly difficult in the last few years due to the entry of numerous
competitors, and consumers who have become more price conscious as a result of the poor economic
growth being experienced in South Africa. Growth in government debt levels over the past decade, driven
by multiple factors that include the poor performance of the economy, has resulted in credit rating
downgrades by international credit rating agencies and higher taxes have further eroded consumers’
disposable income. Kidzo’s performance has also been impacted by frequent electricity load shedding.
The significant economic and social disruption caused by the Covid-19 pandemic has further worsened
the situation. The company has continued trading, but at lower sales levels, resulting in a deterioration of
operating margins.

During 2020 the company finds itself under extreme financial pressure, with difficult choices that need to
be made, which include potential staff lay-offs, rationalisation of the cost base and an evaluation of the
ability to continue as a going concern. The board therefore decided to undertake a strategic review of the
business.
In the middle of December 2020 the board of directors of Kidzo has requested the financial director into
looking at the working capital management for January 2021. The forecasted financial information at the
start of January 2021 is as follows:

Additional R’000 R’000

information
Dt Ct
Trade payables 1 186 700
Bank Overdraft 2 240 250
Inventory 3 455 000
Trade receivables 4 408 350

All sales are on credit and they are expected to be R3 500 000 for 2021. Monthly sales are as follows:

R’000
November 2020 (actual) 270 875
December 2020 (forecast) 300 000
January 2021 (forecast) 350 000

1. Kidzo plans to pay 70% of trade payables in January 2021 and defer the balance until the end of
February 2021. All suppliers of the company require payment within 30 days. Credit purchases from
suppliers during January 2021 are expected to be R250 000.

2. Interest of R70 000 is due to be paid in January 2021 on fixed rate bank loan. Operating cash
outflows are expected to be R146 500 in January 2021. Kidzo has no cash and relies on its overdraft
to finance daily operations. The company has no plans to raise long-term finance during January
2021.

3. Inventory is expected to increase by R52 250 during January 2021.

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 MAC3702 Assignment 2 ECP & Semester 2

4. Kidzo has a gross profit margin of 40%. Although Kidzo offers 30 days credit, only 60% of customers
pay in the month following purchase, while the remaining customers take an additional month of
credit.

5. Assume that each year has 360 days and that Kidzo pays corporation tax at a rate of 30%.

REQUIRED

(b) (i) Calculate the cash operating cycle of Kidzo at the start of January 2021. (8)
(ii) Calculate the overdraft expected at the end of January 2021. (15)
(iii) Calculate the current ratios at the start and end of January 2021. (6)

QUESTION 3 TOTAL [50]

FINAL TOTAL [100]

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UNISA 2021

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