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Outcomes addressed in this assignment

Learning outcome 1: Develop a working understanding of how financial statements and reports are prepared and evaluate them in order to provide insightful interpretation

Learning outcome 2: Motivate for the need for regulating financial reporting by entities

Learning outcome 4: Critically analyse the fundamental financial decision-making theories and evaluate these for decision-making

Learning outcome 5: Evaluate the capital structure of organisations and the cost of capital

BIL Limited: Capital Investment Appraisal and Discount Rate Considerations

BIL Limited (BIL) is a company listed on the Johannesburg Securities Exchange (JSE). BIL specialises in a various entertainment and gaming operations. BIL is in the process of considering investing in two new projects.

Below are the details pertaining to the two projects:

Details	Investment 1	Investment 2
Before tax annual cash flows	R500 000	R750 000
Original Cost	R1 million	R1.5 million
Expected life of the project	5 years	5 years
Tax rate applicable	27%	27%
Cost of Equity	13.5%	13.5%

The financial accountant has already prepared a net present value (NPV) calculation using the annual cash flows stated above and the original cost of the projects. The financial accountant stated that these cash flows include revenues and variable costs expected to be generated by the investments, depreciation on the various assets used by these investments (Investment 1 is R200 000 and Investment 2 is R50 000), and finance costs amounting to R50 000. The financial accountant discounted the cash flows using the cost of equity and the details are as follows:

Investment 1 NPV = R650 000

Investment 2 NPV = R975 000

The accountant stated “Investment 2 has a higher NPV so is the investment we should select. Note: I didn’t use WACC of 16% as the discount rate doesn’t matter much.’

Required

Critically evaluate the statement made by the financial accountant around which investment should be selected. Where necessary, relevant calculations should be provided to support/reject the financial accountant’s statement.

Ordinary Shares

The dividend declared for 2024 is R250 000 and the dividend yield of MRFSA is estimated to be 11%. There are 100 000 ordinary shares in issue.

Preference Shares

These are 10% preference shares convertible into ordinary shares in 2027. The offer for conversion is one ordinary share for every four preference shares held. It is estimated that these preference shares have a market rate of 18%. The book value of the preference shares is R4 million and the price per preference share is R5.

Debentures

These debentures are non-convertible and non-redeemable and their current yield to maturity is 20% and their market value is R14 million.

 

	2024	2023	2022
	R	R	R
Profit after tax	650 000	601 800	557 200

Required

Calculate the Weighted Average Cost of Capital of MRFSA.

Required

• Respond to each query listed 1 to 3 in the scenario (12)
• Prepare the journal entries to account for the revaluation of the You must make use of the Net Replacement Value Method (NRVM) and can

ignore the effects of taxation. Journal narrations are not required.                         (13)

Optimising Working Capital and Cash Management at IDK Limited

IDK Limited (IDK) is a JSE listed company that specialises in the manufacturing of various plastic-based products. IDK’s working capital is managed by their treasury department.

For the current financial year, the accounts receivable days and turnover need to be maintained at 33 days and 12 times respectively. Inventory turnover needs to be 3 times for the financial year. Accounts payable days need to be around the 35 – 38-day mark. This will ensure that the relevant target profits are achieved through efficient working capital management techniques.

The final step in the process is to manage excess cash for investment. What this will do is generate short-term returns on cash-based securities which will contribute to the profitability of IDK. IDK’s treasury department needs to determine their target cash level over the next 12 months.

Below are the expected daily cash balances and the respective probability distributions:

Cash Balance (R)	Probability
8 000	0.1
9 000	0.2
10 000	0.4
11 000	0.2
12 000	0.1

Additional information:

• Rate on excess cash investments is 20% per
• Buying and selling cash-based securities is R50 per
• The effective tax rate of the company is 27%.
• Lower cash limit is R2

Required

Calculate what IDK’s target cash level should be for the financial year.