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AMA811S-ADVANCED MANAGEMENT ACCOUNTING-1ST OPP-JUNE 2022 |
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nAm I BIA un IVE RS ITV
OF SCIEnCE Ano TECHnOLOGY
FACULTY OF COMMERCE, HUMAN SCIENCESAND EDUCATION
DEPARTMENT OF ACCOUNTING, ECONOMICS & FINANCE
QUALIFICATION: BACHELOR OF ACCOUNTING (HONOURS}
QUALIFICATION CODE: 08BOAH
COURSE CODE: AMA811S
LEVEL: 8
COURSE NAME: ADVANCED MANAGEMENT
ACCOUNTING
SESSION: JUNE 2022
DURATION: 3 HOURS
PAPER: PRACTICAL AND THEORY
MARKS: 100
FIRST OPPORTUNITY EXAMINATION QUESTION PAPER
EXAMINERS:
Kuhepa Tjondu
MODERATOR: Mr. L. Shinkeva
INSTRUCTIONS
• This question paper is made up of FOUR(4) questions.
• Answer All the questions and in blue or black ink.
• Show all your working in the answer sheet.
• Start each question on a new page in your answer booklet and show all your workings.
• Questions relating to this paper may be raised in the initial 30 minutes after the start of
the paper. Thereafter, candidates must use their initiative to deal with any perceived error
or ambiguities and any assumption made by the candidate should be clearly stated.
PERMISSIBLE MATERIALS
Non-programmable calculator/financial calculator
THIS QUESTION PAPER CONSISTS OF 9 PAGES (Including this front page)
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QUESTION 1
[25 MARKS]
MFP (Mutual Farm Products) was formed in 1910 as a co-operative shop network
owned by farmers in the country of Azania. It progressively opened small shops across
the country selling products produced by Azanian farmers. Over time its expanding
network of shops began to offer non-farming products from a wide range of suppliers,
but it has remained true to its co-operative roots. All employees are shareholders and
receive annual dividends. Customers can also become shareholders and are
rewarded with dividends which reflect the value of their spending in the shops. An
increasing number of customers are becoming shareholders, reflecting a renewed
interest in the country in mutual organisations, such as co-operatives. MFP only
operates in Azania and it has no plans to expand overseas. Azania itself is a wealthy,
industrialised country which continues to grow.
Supermarkets in Azania
When supermarkets were first introduced in Azania, MFP reflected this trend by
opening its own supermarkets. However, its supermarkets tended to be (and continue
to be) smaller than its well-known competitors and its network of smaller shops was
largely retained. In contrast, other supermarkets focused on developing large out-of-
town sites serving a large catchment population. In the top-ten supermarkets of
Azania, only MFP has, in addition, a network of smaller shops.
In 2017 MFP was the eighth largest shop and supermarket chain in Azania. It reported
revenues of N$10bn, compared to the N$40.5bn revenue of the market leader,
HypCo. By 2021, MFP was the ninth largest shop and supermarket chain in the
country, with revenues of N$11bn, compared with HypCo's N$45bn. During this
period, two new supermarket chains have entered the Azanian market. These two
new entrants, Super24/7 and Letta, already have a combined revenue of N$50bn and
are fourth and eighth respectively in the top ten Azanian supermarket chains. Both of
these companies are overseas-based supermarkets operating a no-frills approach to
retailing. Overall, the revenue of the top ten supermarket chains has increased from
N$300bn to N$350bn in the last five years.
Margins in the sector are always under pressure and the large supermarkets continue
to aggressively market their goods, highlighting price savings. They also provide
customer incentives, such as loyalty cards and account discount schemes in an
attempt to retain customers. For many products and services, price comparison
websites show consumers the prices charged by competing supermarkets.
With the exception of MFP, all supermarkets are quoted companies with their shares
largely owned by institutional investors who look for significant dividends and capital
appreciation. MFP is the only co-operative in the top ten Azanian supermarket chains.
Generally, suppliers to supermarkets are relatively small companies. Supermarkets'
control of consumer spending is so great that many suppliers aggressively compete
to have their products stocked by the supermarket chains.
MFP has continued to promote and follow its ethical principles. It ensures that new
shops and supermarkets are energy efficient. It also continues to pay its employees
significantly more than its competitors. This concern for its employees' welfare
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appears to lead to excellent customer service performance. For example, in a recent
independent survey of supermarket customers, MFP was ranked first for personal
customer service.
There is some evidence that people in Azania are becoming disillusioned with their
supermarkets and this is reflected in Appendix A, an extract from an article by the
journalist Liz Bones in the influential daily newspaper, Arbor Today. Appendix B is an
extract from an information sheet issued by the government to companies trading in
Azania.
Management at MFP
Management at MFP is aware that the company has certain weaknesses. For
example, it acknowledges that it needs to streamline its supply chain and achieve cost
savings. It also recognises that it has failed to exploit technological advances in
product control, movement and storage.
However, before making changes, the management wishes to better understand the
strategic position of MFP and the models used to assess this position. It has asked for
a report which includes:
-An explanation of the purpose and value of PESTEL analysis and Porter's five forces
framework.
-An analysis which identifies external factors from the perspective of four elements
of the PESTEL analysis: political, sociocultural, environmental and legal.
- An analysis of the market place using Porter's five forces framework.
- The potential role of critical success factors (CSFs), key performance indicators
(KPls) and integrated reporting on formulating and monitoring strategy at MFP. The
company does not currently use such concepts.
Appendix A: Have Azanians fallen out of love with the supermarket? By Liz
Bones
For many years, the trend towards supermarket shopping has seemed unstoppable.
The high streets of our towns have become increasingly deserted as grocers,
butchers, toy shops and bookshops have disappeared under the combined onslaught
of online retailers and expanding supermarkets. For example, ten years ago in the
high street of Milton Magna there were three grocers, four butchers, two toy shops,
one bookshop and only two supermarkets. Now, only one grocer and one butcher
survive on the high street and both supermarkets have moved to out-of-town locations.
In fact there are now five out-of-town supermarkets serving the people of Milton
Magna.
However, there is increased evidence that shoppers are becoming disillusioned with
supermarkets and yearn to return to the days when shops were smaller and service
more personal.
Fiona McLean, of the department of sociology MidShire University, says that, 'our
research suggests that there is a significant number of consumers, commonly called
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green consumers, who are increasingly concerned about the environmental impact of
food and other products that they are purchasing. This is not only in terms of the
excessive and elaborate packaging of the goods, but also in terms of the 'food miles'
that the product has travelled before it reaches the shelves of the shop or
supermarket.'
In general, these green consumers have higher than average disposable income and
they are prepared to pay a price premium for products which have been ethically
sourced. Fiona also suggested that such consumers are part of a group who are
increasingly angered by what they consider as the excessive profits of the large
supermarket chains, the high remuneration packages paid to senior management and
the large dividends paid to their institutional shareholders. 'There is a feeling that
supermarkets are run by fat-cat managers, exploiting small suppliers to reduce costs
to create a margin for dividends that pacify demanding institutional investors', she said.
Even the newer entrants, Super24/7 and Letto, are under threat. There is a consumer
reaction against these overseas-based supermarkets which have followed a low-cost,
no frills approach, with shelves stacked intensively with low priced products and where
customer service is both impersonal and kept to a minimum. The low wages paid to
staff in these supermarkets is also an issue for the green consumer.
So, perhaps Azania is on the brink of a supermarket revolution! Television
personalities such as Alexis Piazzio urge us to 'think local' and 'shop local'. Perhaps
after all, small is beautiful when it comes to shopping!!!
Appendix B: Azanian government information sheet 4560 (extract)
Disability legislation (The Access Act)
The recent extension of disability access legislation requires shops and supermarkets
to help all disabled customers to access all shelf areas within the store. The previous
legislation just required shops and supermarkets to provide disability access to the
store areas. However, many disabled customers found that goods were out of reach
when they were actually in the store. This extension to the legislation addresses this
issue. So, for example, all products held within the store must be reachable for a
person who is in a wheelchair and, if not, a store attendant must help. Failure to adhere
to this legislation will lead to a fine of up to N$1,000 per incident.
Pension reform
The new government recognises that the current state funded schemes will lead to a
significant pension shortfall in the future. Consequently, it has declared its intentions
to make it mandatory for employees to pay 5% of their gross pay into a pension
scheme of their choice. The amount paid in will be matched by that paid in by the
employer. So, for example, an employee earning N$10,000 per year will pay N$500
per year into his or her pension fund and the employer will also be required to pay
N$500 per year into the same fund. It proposes that the employer will be responsible
for ensuring that pension payments are correctly made into government authorised
schemes and to accurately process these payments, through automatic payroll
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deductions, every month. These proposals for pension reform are currently under
discussion.
Required:
Write the report required by MFP management which:
(a) Analyses external factors from the perspective of FOUR elements of the PESTEL
analysis: political, sociocultural, environmental and legal. The analysis should include
an assessment of the likely effect of such factors in the context of the strengths and
weaknesses of MFP. It should also include an explanation of the purpose and value
of a PESTEL analysis.
(13 marks)
(b) Analyses the market place (industry) using Porter's five forces framework,
assessing its implications for MFP.This analysis should also include an explanation of
the purpose and value of the five forces framework.
(12 marks)
QUESTION 2
[25 MARKS]
The directors of Kairaratjo Co are considering a planned investment project costing
N$25m, payable at the start of the first year of operation. The following information
relates to the investment project:
Sales volume (units/year)
Selling price (N$/unit)
Variable costs (N$/unit)
Fixed costs (N$/year)
Year1
520,000
30·00
10·00
700,000
Year2
624,000
30·00
10·20
735,000
Year3
717,000
30·00
10·61
779,000
Year4
788,000
30·00
10·93
841,000
This information needs adjusting to take account of selling price inflation of 4% per
year and variable cost inflation of 3% per year. The fixed costs, which are incremental
and related to the investment project, are in nominal terms. The year 4 sales volume
is expected to continue for the foreseeable future.
Kairaratjo Co pays corporation tax of 30% one year in arrears. The company can claim
tax-allowable depreciation on a 25% reducing balance basis.
The views of the directors of Kairaratjo Co are that all investment projects must be
evaluated over four years of operations, with an assumed terminal value at the end of
the fourth year of 5% of the initial investment cost. Both net present value and
discounted payback must be used, with a maximum discounted payback period of two
years. The real after-tax cost of capital of Kairaratjo Co is 7% and its nominal after-tax
cost of capital is 12%.
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Required:
(a) (i) Calculate the net present value of the planned investment project. (12 marks)
(ii) Calculate the discounted payback period of the planned investment project.
(4 marks)
(b) Discuss the financial acceptability of the investment project.
(3 marks)
(c) Critically discuss the views of the directors on Kairaratjo Co's investment
appraisal.
(6 marks)
QUESTION 3
[25 MARKS]
The following statement of financial position information relates to Tara Ltd, a
company listed on a large stock market which pays corporation tax at a rate of 30%.
Equity and liabilities
Share capital
Retained earnings
N$m
17
15
N$m
Total equity
Non-current liabilities
Long-term borrowings
Current liabilities
32
13
21
Total liabilities
34
Total equity and liabilities
66
The share capital of Tara Ltd consists of N$12m of ordinary shares and N$5m of
irredeemable preference shares.
The ordinary shares of Tara Ltd have a nominal value of N$0·50 per share, an ex
dividend market price of N$7 ·07 per share and a cum dividend market price of
N$7·52 per share. The dividend for 2022 will be paid in the near future. Dividends
paid in recent years have been as follows:
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Year
2021 2020 2019 2018
Dividend (N$/share) 0·43 0·41 0·39 0·37
The 5% preference shares of Tara Ltd have a nominal value of N$0·50 per share
and an ex dividend market price of N$0·31 per share.
The long-term borrowings of Tara Ltd consist of N$1Om of loan notes and a N$3m
bank loan. The bank loan has a variable interest rate.
The 7% loan notes have a nominal value of N$100 per loan note and a market price
of N$102·34 per loan note. Annual interest has just been paid and the loan notes are
redeemable in four years' time at a 5% premium to nominal value.
Required:
(a) Calculate the after-tax weighted average cost of capital of Tara Ltd on a market
value basis.
(15 marks)
(b) Discuss the circumstances under which it is appropriate to use the current WACC
of Tara Ltd in appraising an investment project.
(5 marks)
(c) Discuss THREE advantages to Tara Ltd of using convertible loan notes as a
source of long-term finance.
(5 marks)
QUESTION 4
[25 MARKS]
Dongo Ltd is an international airline which flies to destinations all over the world.
Dongo Ltd experienced strong initial growth but in recent periods the company has
been criticised for under-investing in its non-current assets.
Extracts from Dongo Ltd's financial statements are provided below.
Statements of financial position as at 30 April:
2022
2021
N$'000
N$'000
Assets
Non-current assets
Property, plant and equipment
317,000
174,000
Intangible assets (note ii)
20,000
16,000
337,000
190,000
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Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
580
6,100
9,300
490
6,300
22,100
Total current assets
15,980
28,890
Total assets
352,980
218,890
Equity and liabilities
Equity
Equity shares
Retained earnings
Revaluation surplus
3,000
44,100
145,000
3,000
41,800
Nil
Total equity
192,100
44,800
Liabilities
Non-current liabilities
6% loan notes
130,960
150,400
Current liabilities
Trade and other payables
6% loan notes
10,480
19,440
4,250
19,440
Total current liabilities
29,920
23,690
Total equity and liabilities
352,980 218,890
Other EXTRACTS from Dongo Ltd's financial statements for the years ended 30 April:
Revenue
2022
N$'000
154,000
2021
N$'000
159,000
Profit from operations
12,300
18,600
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Finance costs
(9,200) (10,200)
Cash generated from operations
18,480
24,310
The following information is also relevant:
(i) Dongo Ltd had exactly the same flight schedule in 2022 as in 2021, with the overall
number of flights and destinations being the same in both years.
(ii) In January 2022, Dongo Ltd had to renegotiate its licences with five major airports,
which led to an increase in the prices Dongo Ltd had to pay for the right to operate
flights there. The licences with ten more major airports are due to expire in December
2022, and Dongo Ltd is currently in negotiation with these airports.
Required:
(a) Calculate the following ratios for the years ended 30 April 2021 and 2022:
(i) Operating profit margin;
(ii) Return on capital employed;
(iii) Net asset turnover;
(iv) Current ratio;
(v) Interest cover;
(vi) Gearing (Debt/Equity).
Note: For calculation purposes, all loan notes should be treated as debt. (12 marks)
(b) Comment on the performance and position of Dongo Ltd for the year ended 30
April 2022.
Note: Your answer should highlight any issues which Dongo Ltd should be
considering in the near future.
(13 marks)
THE END
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