Business Accounting and Financial Management Assignment

Assignment Task

1. Customers will be allowed to purchase diesel on credit. It is estimated that 60% of the average monthly sales (in litres) will be to customers who would take advantage of this opportunity. Sales to these customers should increase by 25% as they are expected to buy exclusively from this service station. Sales volumes to customers who do not take advantage of the credit policy are expected to remain unchanged. Additional costs arising from this proposal are expected to be:

• Bad debts of 1% of the sales value in respect of customers who use the credit facility.
• Fixed administrative costs of R7 500 per month.

2. An operating profit of R25 000 per month would be the target. To achieve this the following changes are suggested:

• The selling price is reduced by R0.30 per litre.
•  A sales commission of R1.50 per 10 litres sold will be granted to the diesel attendants.
• R5 075 per month will be spent on advertising.

3. The possibility of only operating from 06:00 to 22:00 is being considered. This earlier closing time is expected to result in a loss of sales on average of 12 500 litres per month. It is hoped that the saving in fixed costs resulting from the reduction in operating hours will enable the entrepreneur to achieve an average monthly operating profit of R30 000.

Question

1. Required

Answer the questions below that are based on the Statement of Cash Flows for the year ended 31 December 2021 provided above:

1.1. Calculate the following:

• Dividends paid
• Cash and cash equivalents at the end of the year
• Carrying/Book value of the vehicles sold 

1.2. Apart from depreciation (R252 000), identify TWO (2) other adjustments (with the amounts) that would be needed to convert to cash from operations.

1.3. Comment on the following:

• Cash flows from operating activities R756 000
• Increase in receivables (R396 000)
• Cash flows from investing activities (R1 368 000)

2. Requried

2.1. Use the statement of financial position as at 31 December 2022, statement of comprehensive income for the year ended 31 December 2022 and additional information for 2022 (related to dividends and shares) to calculate the ratio (expressed to two decimal places) that would reflect each of the following:

• The extent to which the claims of the short-term creditors are covered by assets that can be translated into cash in the short term 
• The extent to which long-term debt is covered by shareholders’ funds
• The amount of funds available relative to sales, to pay the company’s expenses other than its cost of sales (expressed as a percentage)
• The distributions during the period allocated to each ordinary share issued 
•  An indication of the percentage of the profit that has been put back into the company 
• The ratio of a company's current stock price to its earnings per share 

2.2.  Suggest TWO (2) ways of making an improvement with regard to each of the following ratios:

• Debtor collection period
• Operating margin

3. Required

Refer to the proposed acquisition of a new machine for purchase and installation during the second quarter of 2024 and answer the following questions:

• Calculate the Payback Period (expressed in years, months and days)
• Calculate the Accounting Rate of Return on initial investment (expressed to two decimal places). 
• Calculate the Internal Rate of Return (expressed to two decimal places). Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. 
• Calculate the Net Present Value if the machine is expected to have a scrap value of R300 000.
• Suppose Capri Ltd funds the purchase of the new machine through the issue of 12% preference shares that are expected to sell for R10 each. If the floatation costs are estimated at R1 per share, calculate the cost of the preference shares (expressed to two decimal places). 
• Suppose Capri Ltd funds the purchase of the new machine through the issue of ordinary shares. Assume that the present value of an ordinary share of Capri Ltd is R17.25, the next projected dividend is R1.80 per share and the expected growth rate in dividends is 15% p.a. Use the Gordon Growth Model to estimate the cost of the ordinary shares (expressed to two decimal places). 

4. Required

Refer to the three proposals that the company was considering to assist the previously disadvantaged women and answer each of the questions independently. (You are advised to use the expanded contribution margin model to present your answers.)

• Based on the figures achieved for July to December 2022, calculate the selling price per litre that would have enabled the service station to break even. 
• Based on the figures achieved for July to December 2022, how many litres of diesel would have had to be sold to achieve an operating profit of R2 per litre? 
• Calculate the total Contribution Margin and Operating Profit/Loss per month if Proposal 1 is implemented.
• How many litres of diesel need to be sold each month to achieve the operating profit of R25 000 per month, if Proposal 2 is accepted?
• Calculate the saving in monthly fixed costs that is necessary to yield an operating profit of R30 000 if Proposal 3 is accepted.

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