QUESTION 1
Use the statement of financial position and statement of comprehensive income for Amolatina Ltd to answer the questions that follow. Assume all sales are on credit and 365 days for 2015.
STATEMENT OF FINANCIAL POSITION FOR AMOLATINA LTD AS AT
31 DECEMBER 2015
| Assets |
(R) |
Equity and liabilities
|
(R) |
|
Cash
|
24 000 000
|
Accounts payable
|
15 000 000
|
|
Marketable securities
|
14 000 000
|
Notes payable
|
21 000 000
|
|
Accounts receivables
|
26 000 000
|
Other current liabilities
|
10 000 000
|
|
Inventories
|
81 000 000
|
|
|
|
Total current assets
|
145 000 000
|
Total current liabilities
|
46 000 000
|
|
Non-current assets
|
115 000 000
|
Long-term debt
|
25 000 000
|
|
Less depreciation
|
9 000 000
|
Total liabilities
|
71 000 000
|
|
Net non-current assets 106 000 000
|
Ordinary shares
|
80 000 000
|
|
Retained earnings
|
100 000 000
|
|
Total shareholders' equity
|
180 000 000
|
|
Total assets
|
251 000 000
|
Total liabilities and equity
|
251 000 000
|
STATEMENT OF COMPREHENSIVE INCOME FOR AMOLATINA LTD FOR YEAR
ENDED 31 DECEMBER 2015
|
Net sales
|
410,000,000
|
|
Cost of goods sold
|
150,000,000
|
|
Gross profit
|
260,000,000
|
|
Selling expenses
|
24,000,000
|
|
Depreciation expense
|
5,000,000
|
|
EBIT
|
231,000,000
|
|
Interest expense
|
11,000,000
|
|
Net income before tax
|
220,000,000
|
|
Taxes (30%)
|
66,000,000
|
|
Net income
|
154,000,000
|
INDUSTRY AVERAGE RATIOS
|
Current ratio
|
3:1
|
Sales/fixed assets
|
4 times
|
|
Debt/total assets
|
25%
|
Sales/total assets
|
5 times
|
|
Times interest earned
|
5 times
|
Net profit margin
|
6%
|
|
Sales/Inventory
|
8 times
|
Return on assets
|
11')/0
|
|
Days' sale outstanding
|
20 days
|
Return on equity
|
13.5%
|
REQUIRED
(a) Calculate the Du Pont equation for Amolatina Ltd.
(b) Compare the Du Pont equation calculated in (a) with the composite equation for the whole industry.
(c) Briefly comment on a comparison between the Amolatina Ltd and industry with specific regard to liquidity, solvency and asset management.
1.2 Study BRIDS Ltd's statement of financial position and statement of comprehensive income are given below:
Statement of financial position for BRIDS Ltd as at 31 December
2015
|
|
R
|
|
R
|
|
Cash
|
75 000
|
Accounts payable
|
160 000
|
|
Accounts receivable
|
110 000
|
Notes payable
|
140 000
|
|
Inventory
|
450 000
|
|
|
|
Total current assets
|
635 000
|
Total current liabilities
|
300 000
|
|
|
|
|
|
|
Net Non-Current assets
|
465 000
|
Long-term (12%)
|
350 000
|
|
|
|
Ordinary shares equity (45
000 shares)
|
450 000
|
|
|
|
|
|
|
Total assets
|
1100000
|
Total liabilities & equity
|
1100000
|
Statement of comprehensive Income for BRIDS Ltd for the year
ended 31 December 2015
|
Sales
|
800,000
|
|
Cost of goods sold
|
310,000
|
|
Earnings before interest and tax (EBIT)
|
490,000
|
|
Interest expense
|
65,000
|
|
Earnings before tax (EBT)
|
425,000
|
|
Taxes (10%)
|
42,500
|
|
Net income
|
382,500
|
The industry average inventory turnover is 8 and the interest rate on the firm's long-term debt is 12%. 45 000 shares are outstanding.
BRIDS Ltd plans to change its inventory methods so as to operate at the industry average inventory turnover ratio. The funds generated from this change will be used to retire long-term debt and it is assumed that the company's sales, the cost of goods sold, and the share price will remain constant. Assume that inventory turnover is given as a ratio of sales to inventory.
REQUIRED
Determine the percentage change in the BRIDS's return on equity (ROE) once these changes are effected.
QUESTION 2
Xola Ltd is evaluating the feasibility of introducing a new product. They would have to invest
R300 000 at time t = 0 for the design and testing of the new product. Management believes that there is a probability of 80% that this phase will be successful and that the project will continue. If stage 1 is not successful the project will have to be abandoned with zero salvage value.
The next stage, if undertaken, would consist of making moulds, and producing two prototypes. This would cost R2 500 000 at time t = 1. Production will commence if the tests are successful. The moulds and prototypes could be sold for R765 000 if the product fails the testing phase. Management estimates the probability of the product passing the testing phase as 90% and that phase 3 will then be undertaken.
Phase 3 consists of converting the unused production line to produce the new design. This would cost R3 500 000. If the economy is strong at this point, the value of sales of the final product would be R16 000 000. If the economy is weak, the sales value of the final product would be R2 500 000. Both sales values occur at time t = 3, and each state of the economy has a probability of 0.5. The required return of Xola Ltd is 8%. The firm only accepts investments if the coefficient of variation of the proposed project is less than 5.
REQUIRED
(a) Use a decision tree to determine the project's expected net present value (NPV).
(b) Calculate the project's variance and standard deviation of the NPV.
(c) Calculate the project's coefficient of variation (CV) of the NPV .
(d) Should the project be accepted or rejected? Substantiate your answer.