UNIVERSITY OF THE FREE STATE

SCHOOL OF ACCOUNTANCY

EMNF2724

SEMESTER TEST 1: 31 AUGUST 2018

Marks: 60 Minutes::90

INSTRUCTIONS

1. Answer all questions.

2. Answers may not be written in pencil or erasable pen.

3. Tippex may not be used.

4. Calculators may be used.

5. Show all calculations clearly with cross references.

6. Read the “REQUIRED:” properly before answering the question.

7. Start every new question on a new page of your answer sheet.

8. Marks will be deducted if the instructions aren’t followed.

Disclaimer: All names of persons, places and business entities mentioned in this paper
are fictitious and any resemblance to real persons, living or dead, places and business
entities are purely coincidental.

Page 1 of 8
QUESTION 1 (12 marks; 18 minutes)

1. Which of the following persons are considered to be a primary user of financial

statements?
a. Shareholder
b. South African Revenue Services
c. Creditors
d. All of the above (1 mark)

2. In what statement would you find the following line item: “Cash generated from
operating activities”?
a. Statement of Cash Flows
b. Statement of Comprehensive Income
c. Statement of Financial Position
d. Statement of Changes in Equity (1 mark)

3. The agency problem and related agency costs are as a direct result of:
a. Agencies charging a fixed percentage for services rendered
b. Unethical individuals being employed by agencies
c. Managers not always acting in the best interest of staff
d. Managers not always acting in the best interest of shareholders
(1 mark)

4. The following is considered a source of debt financing:

a. Ordinary shares
b. Prepaid expenses
c. Trade receivables
d. Bank overdraft (1 mark)

5. Wendy is planning on going to visit her family in America and the total cost of
the trip has been quoted as R75 000. If she receives 8% interest per annum
compounded monthly and she can make a payment of R3 000 at the end of
every month, how many months will it take her to save the amount if she already
has R10 000 available to deposit? (Round answer to the nearest month)
a. 18
b. 20
c. 22
d. 24 (2 marks)

Page 2 of 8
 6. You are planning to purchase a second-hand vehicle from a recognised car
dealership in Bloemfontein. The bank has offered you an interest rate of 16%
per annum compounded monthly over a five-year repayment period. You can
afford monthly instalments of R1 800 at the beginning of each month and you
have a deposit of R20 000. What is the maximum price you can pay for a
vehicle?
a. R75 006
b. R95 006
c. R74 019
d. R94 019 (2 marks)

7. Jack takes a loan of R400 000 from Capital Bank in order to purchase a new
sports car. The term of the loan is 6 years and the interest rate is 15% per
annum compounded monthly. Instalments will be paid at the end of every month
for the period of the loan agreement. What is the interest component of the 15th
instalment?
a. R4 343.13
b. R8 458.01
c. R4 114.88
d. R6 127.54 (2 marks)

8. What is the nominal interest rate if the effective rate is 14.5% compounded
quarterly?
a. 15.27%
b. 13.77%
c. 13.62%
d. 14.01% (2 marks)

REQUIRED Marks

(a) Indicate the correct answer to the multiple choice questions above 12
by writing only the letter next to the corresponding number on your
answer sheet.

Page 3 of 8
QUESTION 2 (28 marks; 42 minutes)

Builder Ltd (Builder) is a JSE listed construction company that was started in
Bloemfontein by Mrs. Johnson in 1995. Although the company originally focussed on
commercial projects, it has recently re-aligned its strategic direction to focus on
government projects, especially the construction of RDP housing projects. This new
direction has resulted in significant expansion for the company and considerable
growth in the share price despite the increase in risk as a result of the bad reputation
that government departments have with regards to payment terms.

The CEO, Mr Zuma, is growing increasingly nervous with regards to the ability of the
company to maintain the growth that has been achieved in the last few financial
periods and has approached you to help him perform a detailed financial analysis of
the company. He has also shared with you that inefficiencies in the operations of the
company have been on the rise and he is growing increasingly concerned regarding
the effect of these on profitability.

The financial statements for the company for the last two financial periods that were
made available to you are included below:

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED

31 MARCH
2017 2018
R R
Revenue 4 842 584 5 648 713
Cost of sales (2 882 436) (3 415 627)
Gross profit 1 960 148 2 233 086
Administrative expenses (541 497) (532 778)
Other expenses (267 184) (312 982)
Investment income 702 133 568 978
Finance costs (425 888) (367 821)
Profit before tax 1 427 712 1 588 483
Income tax expense (463 403) (397 682)
PROFIT AFTER TAX FOR THE YEAR 964 309 1 190 801

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH

RETAINED EARNINGS
2017 2018
R R
Opening balance 01 April 2 871 872 2 851 428
Profit for the period 964 309 1 190 801
3 836 181 4 042 229
Dividends (984 753) (1 324 891)
Closing balance 31 March 2 851 428 2 717 338

Page 4 of 8
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH
2017 2018
ASSETS R R
Non-current assets 11 362 569 10 952 460
Property, plant and equipment 8 015 184 8 872 942
Investments 3 347 385 2 079 518
Current assets 1 921 913 2 505 765
Inventories 1 120 456 1 118 462
Trade receivables 660 400 1 100 872
Cash 141 057 186 431

Total assets 13 284 482 13 458 225

EQUITY AND LIABILITIES

Equity 4 451 828 4 317 738
Share capital 1 600 400 1 600 400
Retained earnings 2 851 428 2 717 338

Non-current liabilities
Long-term borrowings 6 985 796 6 248 942
Current liabilities 1 846 858 2 891 545
Trade and other payables 1 487 500 1 981 744
Bank overdraft 359 358 909 801

Total equity and liabilities 13 284 482 13 458 225

ADDITIONAL INFORMATION

Builder has 1 000 000 shares that are publically traded. All sales that are made during
the year are on credit. Assume 365 days in the year. At 31 March 2018 Builder’s
shares traded at 10560 cents (31 March 2017 9 572 cents).

Page 5 of 8
 REQUIRED – PART A Marks

Calculate the following ratios for 2018:

i) Gross profit margin 2

ii) Return on assets 2
iii) Debt : equity 2
iv) Trade payables turnover time (days) 3
v) Inventory turnover 2
vi) Trade receivables turnover time (days) 2
vii) Current ratio 2
viii) Price-earnings (P/E) ratio 2
ix) Earnings per share 2
x) Market-to-book value 1

Show all calculations clearly. Round all calculations and your final
answer to 2 decimals, i.e. 4.138329 rounded to 4.14.

TOTAL MARKS – PART A 20

___________________________________________________________________

USE THE FOLLOWING ADDITIONAL INFORMATION TO ANSWER PART B

Assume the following ratios have been provided to you relating to the construction
industry in which Builders Ltd operates as well as for Builders Ltd for the period under
consideration:

Builders Industry
Limited Average

Gross profit margin 44% 39.5%

Operating profit margin 15% 22%

Return on assets 10.42% 7.26%

Debt : equity 2.31 1.98

Trade payables turnover time (days) 210.87 175.14

Inventory turnover 2.90 2.57

Trade receivables turnover time (days) 84.41 49.78

Page 6 of 8
 REQUIRED – PART B Marks

Briefly interpret the following ratios which have been provided to you
above. Base your discussion on the information provided in the scenario.
Do not refer to or use the ratios calculated in Part A above and do not
calculate prior year ratios.

i) Trade Receivables Turnover time (days) 3

ii) Operating Profit Margin 3
iii) Return on Assets 2

Show all calculations clearly. Round all calculations and your

final answer to 2 decimals, i.e. 4.138329 rounded to 4.14.

TOTAL MARKS – PART B 8

QUESTION 3 (20 marks; 30 minutes)

JustSaying (Pty) Ltd (“JustSaying”) is a private company that specialises in providing

advertising and marketing services to organisations in the Free State area. This
company has recently listed on the Johannesburg Stock Exchange (JSE) and has
approached you to assist them in determining their cost of capital. The following
information is applicable to the company.

Capital structure & financing

JustSaying is currently financed through:

 500 000 ordinary shares
 10 000 12% non-redeemable preference shares with a nominal value of R150 each
 25 000 9% redeemable debentures at a nominal value of R120 each
 10% Capital Bank loan

500 000 ordinary shares

JustSaying has a βeta of 1.6. The current rate of return in the market is 13%. The
R186, a government bond currently offers a yield to maturity of 10.5% per annum.

JustSaying has the following dividend per share history:

2018 R1.18

Page 7 of 8
2017 R1.11
2016 R1.10
2015 R1.00

12% R150 Non- redeemable preference shares

JustSaying has issued 10 000 12% R150 nominal value preference shares. Similar
preference shares are currently trading at R100.

9% R120 Redeemable debentures

JustSaying has issued 25 000 9% R120 nominal value debentures. The market related
interest rate for similar debentures is 8% p.a. The debentures are redeemable at
nominal value in 5 years’ time.

10% Capital Bank Loan

A loan amounting to R5 000 000 was raised from Capital bank at the beginning of the
current year. Interest of 10% is payable annually at the end of the year and the loan is
repayable in 3 equal instalments. The current market related interest rate on similar
loans is 9.5% p.a.

A tax rate of 28% is applicable to JustSaying for the financial periods under
consideration.

REQUIRED: Marks

Calculate JustSaying’s current weighted average cost of capital (WACC) 20

using market values.

Show all calculations clearly. Round all calculations and your final
answer to 2 decimals, i.e. 4.138329 rounded to 4.14.

TOTAL MARKS 20

END OF PAPER.

Page 8 of 8