 |
MFN710S- MANAGERIAL FINANCE 320- 2ND OPP- NOV 2023 |
|
|
1 Page 1 |
▲back to top |
nr-lffilBIA un!VERSiTY
OF SCI:En CE An D TECHn OLOGY
FA CUL TY OF COMMERCE, HUMAN SCIENCES, AND EDUCATION
DEPARTl\\flEI\\JT OF ECONOMICS, ACCOUNTING AND FINANCE
QUALIFICATION: BACHELOR OF ACCOUNTING
QUALIFICATION CODE: 07BOAC LEVEL: 7
COURSE CODE: MFN71 OS
COURSE NAME: MANAGERIAL FINANCE 320
SESSION: JANUARY 2024
PAPER: THEORY AND CALCULATIONS
DURATION: 3 HOURS
MAm<S: ·100
SECOND OPPORTUNITY EXAMINATION QUESTION PAPER
EXAMINERS
Alina Gustav and Lameck Odada
MODERATOR: Alfred Makosa
INSTRUCTIONS
1. This examination question paper consists of FOUR (4) questions
2. Answer ALL the questions in blue or black inl<only. NO PENCIL.
3. Start each question on a new page, number the answers correctly and clearly.
4. Write clearly, and neatly showing all your workings/assumptions.
5. Work with at least four (4) decimal places in all your calculations and round off only final
answers to two (2) decimal places.
6. Questions relating to this examination may be raised in the initial 30 minutes after the start
of the examination. Thereafter, candidates must use their initiative to deal with any
perceived errors or ambiguities and any assumptions made by the candidate should be
clearly stated.
PERMISSIBLE MATERIALS
" Silent, non-programmable calculators
THIS QUESTION PAPER CONSISTS OF _6_ PAGES (excluding this front page)
|
|
2 Page 2 |
▲back to top |
QUESTION 1
[25 MARKS]
Choppies is the leading supermarket chain in Africa. The supermarket retail offering includes leading
international food brands and fast-moving consumer goods (FIVICG)products as well as Choppies' own
private label for value-minded consumers. In 2008, Choppies introduced its footprint into South Africa
opening a store in Zeerust Northwest. As part of their expansion drive, 2013 saw Choppies move into
Zimbabwe where most of the Choppies stores were acquisitions of the existing Spar network. The first
distribution centre in South Africa was opened in 2014 and is located in Rusten burg. Their foresight is
to grow into East Africa, with an emphasis on Tanzania and Kenya. Choppies believes in the potential
of the African market hence the continued growth.
Choppies is forty percent equity-funded. Checkers is a company that is also operating in the retail
industry. Checkers is operating across Namibia and South Africa. Checkers is twenty percent equity-
funded and has a beta of 0.7.
Additional information:
o The market rate of return is thirteen percent
o Choppies debt consists of a bank loan at 8.5% interest per annum
o Five-year Government Bonds are currently trading at seven percent
o The tax rate in Namibia is twenty-eight percent
REQUIRED
a) Calculate a suitable beta for Choppies to the nearest whole number
b) Calculate the cost of equity of Choppies
c) Calculate the after-tax cost of debt of Choppies
MARKS
6
3
3
d) Estimate the Weighted Average Cost of Capital (WACC) of Choppies
6
Discuss the difference between systematic and unsystematic risks, giving an
7
e)
example of each and their impact on the beta of a company
1
|
|
3 Page 3 |
▲back to top |
QUESTION 2
[25 M/:\\RKS]
Game Stores (hereafter Game) is a promotionally driven discount retailer of predominantly general
merchandise and non-perishable groceries for home, ieisure, and business use. Some Game Ston~s
also stock a select range of fresh food, including fruit and vegetables, pre-packed meats, and pre-
baked goods. Game has multiple stores in 11 African countries and is continually opening new stores
across the continent. Game also specializes in continuous and aggressive marketing of its innovative
products. Game currently offers a Game card to customers, which enables consumers to purchase
Game products on credit. Game does not currently offer any early settlement discounts.
You have also been provided with the following extracts from the Game Integrated report as at 29
February 2023:
Trade Receivables
Inventory
Trade payables
Bank Overdraft
Notes
2
1
2023
N$
61969 784
65 580 906
25 270 622
9 929 334
2022
N$
64072 399
79 531209
33 326 469
13 284 957
Revenue
3
Cost of Sales
Gross Profit
Operating profit before finance income and
.finance expenses
Finance income
Finance expenses
Profit for the year from continuing operations
430 798 744
(257 862 994)
172,935,750
17 829 811
1785130
(6 467 307)
9 265 281
415,373,764
(246 502 223)
168,871,541
18108 223
2 376 303
(3 480 089)
11994 013
Note 1
Inventories
Merchandise
Merchandise in transit
Impairment of inventory
Inventory
2023
N$
66620149
2 966 753
(4 005 996)
65 580 906
2022
N$
75 335 866
8 350 022
(4154 679)
79 531 209
Note 2
Trade receivables
Impairment (Bad debts)
Trade & Other receivables
2023
N$
62 611923
(642 139)
61969 784
2022
N$
64176 924
(104 525)
64072 399
The impairment allowance has been raised against trade receivables that are considered to be
impaired due to uncollectable amounts and credit claims.
2
|
|
4 Page 4 |
▲back to top |
Credit risk
The group's exposure to credit risk is influenced mainly by the individual characteristics of each
customer. The group's most significant customer, a domestic retailer, accounts for N$50 681 081
(2022: i'l$51 199 656) of the trade receivables carrying amount at 29 February 2023. Even though
Game has significant credit risk exposure to this client, it was noted that this retailer has a great
attitude towards paying their debts, and currently always settles their accounts within the credit terms
as stipulated. Normal trading terms are 50 days, these are however not always adhered to. Credit
clients are not required to provide collateral for credit products purchased on credit.
The group has policies to ensure that sales of products are made to customers with an appropriate
credit history. An established credit policy exists under which each new customer is analysed
individually for creditworthiness before the group's standard payment and delivery terms and
conditions are offered. The group's review of creditworthiness includes external ratings when
available and in some cases bank references.
Note 3
27% of sales relate to cash sales, while the remaining 73% are conducted using the Game card. Game
does not offer any early settlement discounts currently.
Future growth strategy
In order to improve their current cash flow position, Game is planning to actively start marketing the
Game card to customers. In order to remain competitive in this market, they are pondering credit
terms in line with the current RCS** card offering, and other related credit providers:
0 5% early settlement discounts, if accounts are settled within 7 days (which corresponds
to the cooling off period for online purchase agreements). It is expected that 20% of
credit sales will be paid Vvithin 7 days.
" 30 days credit if not taking the discount.
0 It is expected that bad debts will increase to 5% of trade receivables.
c It is expected that credit sales will increase by 10% should the Game card be marketed
more actively, whereas cash sales will remain unaffected.
0 Gross profit percentages will remain constant.
0 Money market investments in Namibia currently offer 6% interest per annum. It is
expected that the increase in credit sales, as well as a quicker debt collection period, will
result in a positive cash balance in the future.
Another alternative avenue for improving the current cash flow situation of Game is to consider
factoring the company receivables with a banking institution. Game is hoping that by factoring their
debtors' books, the collection of debt will also improve.
3
|
|
5 Page 5 |
▲back to top |
Assumptions
., Assume all payrnents on credit are received at the end of each month.
,. Round all values to the nearest whole number.
" Assume that there are 365 days in a calendar year.
uRCS is a retail shopping network, which enables cardholders to purchase on credit from the following retailers who form
part of the RCSstore card network: Due South, Adidas, Outdoor Warehouse, Aldo, American Swiss,The Body Shop, Checkers,
Incredible Connection, Builders Warehouse, Spar, MTN, Mica, Samsung to only list a couple
REQUIRED
MARKS
Advise the Executive Management of Game on whether to adopt the new credit
20
a)
policy by determining the effect of the change in credit policy
List any five (5) advantages of factoring a debtor's book to a financial institution
5
b)
from the perspective of Game.
QUESTION 3
[25 MARKS]
Shilongo Leather Works (hereafter SLW) is a family-owned business conceived out of a great passion
for crafting durable products that would not only create an appreciated brand but also build the
Shilongo family legacy. Launched in 1986 by Sakeus and Selma Shilongo; SLW is embedded with a rich
history of tenacity and honesty that brought about the existence of a now renowned handcraft
leatherworks company. Presently, the company has a workforce of over seventy (70) employees. SLW
has also been a pioneer in starting a school shoe production line and entering the school shoe supply
industry. Below is the summarized statement of the financial position of SLW and the statement of
comprehensive income for the year ended 31 December 2022.
SLW Statement of financial position as of 31 December 2022
ASSETS
Non-current assets
Property, plant, and equipment
Investments
Current assets
Inventories
Receivables
Cash assets
TOTAL ASSETS
EQUITY AND LIABILITIES
2022
9 450 000
9 450 000
-
36 045 000
20 925 000
12150 000
2 970 000
45 495 000
2021
8 640 000
8 640 000
-
29 632 500
14 850 000
9 990 000
4 792 500
38 272 500
4
|
|
6 Page 6 |
▲back to top |
Share capital and reserves
Share capital
Other reserves
Retained earnings
Redeemable -preference shares
Non-current liabilities: Long-term borrowings
Current liabilities
Trade and other payables
Short term borrowings
TOTAL EQUITYAND LIABILITIES
16 335 000
7 000 000
-250 000
9 585 000
2 700 000
7 425 000
19 035 000
4 860 000
14175 000
45 495 000
15 120 000
7 000 000
-250 000
8 370 000
2 700 000
7 425 000
13 027 500
4 320 000
8 707 500
38 272 500
SLW Statement of comprehensive income for the year ended 31 December 2022
2022
2021
Sales
85 320 000
74 250 000
Cost of sales
63 990 000
54 945 000
Gross profit
21330 000
19 305 000
Operating expenses
12 636 000
11070 000
Depreciation
810 000
675 000
Profit before interest and tax
7 884000
7 560 000
Finance costs
2 430 000
1485 000
Profit before tax
S 454000
6 075 000
Income tax expense
2 430 000
2 160 000
Profit from continuing operations
3 024 000
3 915 000
loss on discontinued operations
1080 000
-
Profit for the year
1944 000
3 915 000
SLW Statement of changes in equity for the year ended 31 December 2022
2022
2021
Balance on 31 December
8 370 000
5 184 000
Comprehensive income for the year
1944 000
3 915 000
10 314 000
9 099 000
Dividends-preference shares
-324 000
-324 000
Dividends-ordinary shares
-405 000
-405 000
Balance on 31 December
9 585 000
8 370 000
REQUIRED
Compute the following ratios for 2021 and 2022.
0 Current ratio
0 Acid test ratio
a)
0 Inventory turnover
., Accounts receivable period
" Accounts payable period
MARl<S
10
5
|
|
7 Page 7 |
▲back to top |
--
Cornpute the relevant ratios for 202.1 and 2022 required for an analysis of
b)
SLW's use of debt to finance its operations
--··
Compute three profitability ratios for 2021 and 2022, two of which will provide
c) information regarding operating effectiveness, and one which will assist in
establishing the effectiveness of the use of the assets.
d) Compute the return on the shareholders' equity in 2021 and 2022
e) Identify any three (3) limitations of ratio analysis
·-
4
6
2
3
QUESTION 4
[25 iVlARl<S]
Tunacor Fisheries is an established company that is looking to expand its fishing interests by
purchasing a 100% interest in Etosha Fishing. The Management of Tunacor Fisheries believes that
expected returns from the acquisition of Etosha Fishing are dependent on the state of the economy.
There is an equal chance of favourable and unfavourable states of the economy occurring and a 40%
chance that the state of the economy will be neutral. The risk-free rate is 5% and there is no company
or personal taxation. The following information is made available.
State of the economy
Favourable
Neutral
Unfavourable
Market value in million(N$)
Book value in million (N$)
Covariance with the market
Tunacor Fisheries
16
10
2
8
12
0.0024
Estimated return%
Etosha Fishing
20
12
0
12
8
0.0023
The Market
14
8
6
-
-
-
REQUIRED
MARKS
a) Calculate the standard deviation of Tunacor Fisheries, Etosha Fishing, and the
9
Market
b) Calculate the expected return together with the risk of the portfolio if Tunacor
7
Fisheries purchases a 100% interest in Etosha Fishing.
c) Determine whether Tunacor Fisheries should acquire Etosha Fishing in line with
2
portfolio theory.
d) Determine whether Tunacor Fisheries and Etosha Fishing are good investments
7
in the context of the Capital Asset Pricing Model (CAPM)
END OF EXAMINATION QUESTION PAPER
6
|
|
8 Page 8 |
▲back to top |
