problem 1:

Assets                                            2011                          2010

Non Current Assets                         4 800 000                    3 300 000
Inventory                                      500 000                      700 000
Receivables                                   350 000                      420 000
Cash                                            280 000                      140 000
                                                  5 930 000                    4 560 000

Equity and Liabilities

Share Capital (R2 shares)                2 600 000                    1 700 000
Retained Income                            500 000                       440 000
Long term Debt                              2 000 000                    1 800 000
Payables                                       830 000                       620 000
                                                  5 930 000                     4 560 000

Their abbreviated Income Statement for the year ended 2011:

Sales (75% on credit)                2 400 000
Cost of sales                            1 600 000
Depreciation                             80 000
Interest expense                       90 000
Tax (30%)                               160 000
Net Income after Tax                 300 000
Dividends                                 240 000
Retained Income                        60 000

NB: Company X is a wine retailer. Their shares are currently trading at $3 per share.

Required:

A) Compute the gross profit margin and their net profit margin.

B) Compute the EPS and DPS for the current year. Describe what occurs to the difference between the EPS and the DPS value, from an accounting perspective.

C) Compute the return on equity. Will shareholders be happy with this return? Describe.

D) Compute and comment on the acid test ratio for both years.

E) Compute and comment on the debt equity ratio for both years.

F) Compute the stock turnover rate and describe the meaning of this ratio.

G) What is the period for which they have stock on hand? Is this acceptable? Describe.

problem 2: Freshly Ground Investments have just made an investment of $550 000 in a new Toyota Hilux (with trailer) delivery vehicle. This vehicle will be used for deliveries and generate revenues from such activities. Further details:

Expected useful life 5 years (straight line depreciation)
Salvage value 50 000

Cost of Capital 10 % after tax:

Year   Cash flows
1        220 000
2        200 000
3        120 000
4        110 000
5        50 000

Required:

A) Compute the payback period and the accounting rate of return.

B) Freshly Ground Investments requires a payback period of no more than 3 years and a return of at least 30%. Purely on the basis of these criteria, should this project be accepted. Describe?

C) The payback method makes a crucial omission in the computation, namely the time value of money. Can you complete the above computation using a method that accounts for the time value of money? On the basis of this computation, should the project be accepted? Describe.

problem 3:

a) Company X is expected to maintain a constant 7% growth rate in their dividends, indefinitely. If the company has a dividend yield of 4%, determine the required return on their shares?

b) Company Y shares currently sell for $60 per share. The required rate of return is 14% on their shares. If the company maintains a constant 7% growth rate in dividends, what was the most recent dividend paid per share?

c) Company Z next dividend payment will be $3,50 per share. Dividends are expected to maintain an annual growth rate of 6% in perpetuity. If the company shares are presently selling at a market price of $55:

• Find out the required rate of return?
• Find out the dividend yield?
• Find out the expected capital gains yield?

problem 4: The Zooline Company (Pty) Ltd is an American based company that focuses on the LSM 8 -10 markets. They do vehicle interiors, raise or lower suspensions and install top end sound systems and monitors in luxury vehicles.

The company is considering expanding its operations, and it has the opportunity to acquire a Mauritian based company, LUI , or set up a new division in American in another state.

Money symbols:  $ = Dollars  and MUR = Mauritian Rupee

The relevant details for these two options are:

Acquisition (LUI, Mauritius)                   MUR

Redundancy costs                             22 000 000
Cost of license (annual Cost)              900 000
Annual sales                                    18 000 000
Consultants fees (per annum)             4 500 000
Annual variable costs                        12 000 000
Annual fixed costs                            1 500 000

Set-up division (American State)                            $

Cost of land and buildings                                   16 000 000
Cost of machinery                                             13 800 000
Annual sales                                                     15 000 000
Annual variable costs                                          7 600 000
Annual fixed costs                                              3 800 000
Share of existing head office expenses                   1 400 000

Additional information:

• Zooline’s current cost of capital is 10%
• The project is expected to have a life-span of 10-years
• The Mauritian cost of capital is expected to be 2 % points higher than in America throughout the life of these investments
• The current spot exchange rate is 1 $ = 3.6 MR.
• Ignore all taxes.

Required:

Make the necessary computations for the two options and advise Zooline Company on which is the more lucrative of the projects purely from an investment point view. (Show all workings)