FMA101 Financial Management Online Assignment Solutions

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Question 1 [30]

Novo (Pty) Ltd specialises in electronics and is a supplier to various industries. Company management is considering an expansion programme to increase its capacity and market share. As a first step, company management wants to consider the company’s performance and profitability. For this purpose, the following information is made available:

Statements of Comprehensive Income for Novo (Pty) Ltd for the years 2021 and 2022

 

	2021Rand		2022Rand
Revenue	10 200 000		8 450 000
Cost of goods sold	6 630 000		5 915 000
Gross profit margin	3 570 000		2 535 000
Other expenses	2 050 000		1 480 000
Administrative expenses	1 100 000		880 000
Selling and distribution expenses	950 000		600 000
Operating profit margin	1 520 000		1 055 000
Finance charges	150 000		180 000
Net profit before taxes	1 370 000		875 000
Taxation (28%)	383 600		245 000
Net profit for the year	986 400		630 000

 

Additional information:

• The company did not increase the prices of its products from 2021 to
• The company replaced some of its suppliers of product components at the end of

Required

Note: Round all calculations off to the nearest whole number

• Use the information provided and prepare a set of common-size statements of comprehensive income. Indicate next to each item in the common-size statements, whether the company’s performance “Improved”, remained “Unchanged” or “Worsened” when comparing the 2022 to the 2021 (17)
• Explain to the company’s management the causes for any changes in its gross profit, operating profit and net profit margins based on the information in the common size (13)

Question 2 [23]

Mabel, the owner of Mabel’s Bridal Boutique, is concerned about the current and future cash flow position of her business. While attending a business seminar she learnt about cash budgets and their value. She contracted you to help her prepare a cash budget for the months of October – December 2023 .

She provided the following information for this purpose:

 

Month	September	October	November	December
Estimated sales	4 100 000	4 800 000	5 400 000	6 600 000
Estimated purchases	2 800 000	6 200 000	6 300 000	5 700 000

 

Seventy percent (70%) of monthly sales is cash sales and the rest of monthly sales are credit sales. Credit sale customers must settle their accounts by repaying 60% of their purchases in the month following the sale and the remaining balances two months after the sale.

Mabel pays cash for forty percent (40%) of her monthly purchases, the balances being credit purchases that she must pay for, one month after making the purchase.

Mabel expects to incur the following expenses as well:

• She plans to replace all furnishings and display cabinets in November at an estimated cost of R800
• The monthly property rental is R15 000 per month, but the rent is set to increase by 20% in
• Monthly municipal services are fixed at R5 000 per month and her tax consultant informed her that she will have to pay R30 000 in provisional tax in
• Salaries and wages are R50 000 per month, increasing by 10% as from December

At the end of September 2023, the cash balance in the bank account was R50 000 and she requires a minimum cash balance of R100 000 per month.

Required:

Prepare a cash budget for Mabel’s Boutique for the period October – December 2023, using the detailed format for a cash budget as presented in the prescribed textbook.

Question 3 [30]

• Define the following concepts:
  • The return on an (2)
  • The standard deviation of an investment (2)

• Vortex Manufacturing needs to replace one of its machines. There are two different machines, Bendit and Twister, on the market, which management is considering. Based on Vortex’s business activities, the manufacturer of the Bendit machine has done an analysis of the risk and return on the machine for Vortex The manufacturer estimates that the expected return per R1 000 invested is R80.00 with a standard deviation of R13.00.

Similar information is not available for the Twister machine. To compare the risks and return of the two machines, Vortex’s accountant prepared the following information for the Twister machine:

 

Scenario	Probability	Return
Pessimistic	20%	R60
Most likely	50%	R90
Optimistic	30%	R110

 

Required:

Note: Show all your calculations and round off all final answers to the nearest whole number.

• Calculate the expected return for the Twister machine using the information (4)
• Calculate the standard deviation for the Twister (5)
• Based on the expected returns and standard deviations for the two machines, which machine should Vortex management purchase? Motivate your

Question 4 [27]

Highveld Construction (Pty) Ltd is considering replacing two of its Front End Loader vehicles with a new, modern high-tech computer controlled Front End Loader that can be operated by remote control and does not require a human operator.

Management has identified such vehicle, the Humanoid. They have collected the following information about this this vehicle:

 

Year	Cash flows
1	R1 400 000
2	R1 350 000
3	R1 200 000
4	R950 000
5	R650 000

 

The initial required investment is R3 300 000, and the company’s cost of capital is 16%.

Required:

Note: Show all your calculations and round off all calculations to the nearest whole number.

• Use the information provided to calculate the Net Present Value and Internal Rate of Return for this proposed (Use 25% as the alternative cost of capital.) (22)
• Should the company invest in this new machine? Motivate your (5)