HFMN331-1 - Application of Financial Management Techniques Assignment

Assignment Task

QUESTION 1

Nestled Ltd (“Nestled”) is a retailer selling various household appliances.

In the recent financial periods, Nestled generated disappointing net profits. After analysing the financial figures, areas of concern were identified. One of the areas of concern was that 18% of the credit sales for which the early settlement discount was not taken resulted in bad debt.

In order to rectify this, management is considering changing Nestled ’s credit terms to 7/12 net 35 from the current 2/15 net 45. From market research, it appears that 40% of the credit sales will then not be motivated to make use of early settlement opposed to the current situation where 47% of the credit sales make use of the early settlement discount.

Although the number of customers opting to pay on credit rather than cash is estimated to stay fixed at 80%, the annual sales are estimated to change from R1 600 000 to R2 500 000. The opportunity cost is however expected to stay constant at 11.9%.

The bad debt is estimated to only change slightly to 14% of the credit sales where early settlement is not executed. The gross profit margin of Nestled will remain unchanged at 31%.

Given the higher sales expected, Nestled will have to purchase and carry more inventory. Currently on average, 7 442 units are sold annually, each with an ordering cost of R1,55. The cost of carrying 7 442 units amounts to R89 304 per annum. The current sales are expected to increase to 11 628 units annually. The ordering and carrying costs are expected to stay unchanged per unit.

Assume standard years consisting of 365 days and that Nestled utilises the economic order quantity to determine the entity’s average inventory level.

Nestled employs a moderate working capital finance policy.

REQUIRED

• Calculate the effect on the annual net profit should Nestled Ltd change the entity’s credit policy. Advise, based on this result, whether Nestled Ltd should proceed with the change in credit policy.

• Two specific financial risks arise from this part of Nestled Ltd ’s operations. Name and explain these two (2) financial risks in Nestled Ltd ’s context. Provide two (2) suggestions per financial risk to Nestled Ltd to manage the risk. 

QUESTION 2

Loqui Ltd (“Loqui”) is a South African entity listed in the telecommunication sector of the Johannesburg Stock Exchange (“JSE”). The entity has a 30 April financial yearend. The entity’s shares are trading at a cum-dividend price of R890 on 30 April 2024.

After analysing cash flow and operational budgets, Loqui has determined that the entity will be able to give R3 799 410 back to the shareholders. This can be performed through a distribution of dividends or a repurchase of shares from the current shareholders.

i. Draft a report to the directors of Loqui Ltd in which you advise them whether the entity should distribute value back to the shareholders by:

• Option 1: Declaring a dividend or
• Option 2: Through a repurchase of shares from the

ii. Base your advice on the effect that each option will have on the following 2024 financial year figures:

• Share price per share
• Earnings per share
• Price-earnings per share
• Dividend per share
• Net asset value of Loqui Ltd per

iii. Assume that Loqui Ltd decided on declaring a dividend consequently (after which) the share price decreased to R875 per. State the formal name given to the R875 share price.

• Assume that an entity has the following figures:
  • An earnings per share of R17,60;
  • A net asset value per share of R940,50;
  • Each share is trading at R880 on the

Interpret what the above figures would tell us about the entity as well as its shareholders

iv. Determine the new earnings per share and the new net asset value per share if the directors of Loqui Ltd decided to perform a capitalisation issue to the value of the funds to be

iv. Assume that the capitalisation issue will be performed based on:

• Share price
• Net asset value

vi. Determine the quantity of shares each of the current shareholders will have the right to, should Loqui Ltd ’s directors decide to perform a capitalisation issue of 57 00

vii. Briefly explain what a capitalisation issue is and provide its alternative

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