University of the Witwatersrand, Johannesburg

WITS BUSINESS SCHOOL

MANAGEMENT ADVANCEMENT PROGRAMME

ACCOUNTING & FINANCE

LECTURER: DAVID ZIDEL

MAP 107

Date: July 2013

Time Allowed: 2.5 Hours

Questions:
1. CCC Manufacturing (Pty) Ltd
(60 mins) 40 marks
a. Income statement and Balance Sheet for year ended March 2010/11
2. XYZ (Pty) Ltd
a. General Analysis
b. Discussion question
c. cash conversion cycle

(60 mins) 40 Marks

30 mins - 20 Marks
15 mins - 10 Marks
15min 10 Marks

3. Short questions
a. Break-even analysis
b. Share analysis

(30 mins) 20 Marks

15 mins - 10 Marks
15 mins - 10 Marks

Special Instructions:
This is not an open book exam. You may however, bring two A4 pages of notes with you into
the exam. Calculators may be used.

Please remember to write your full name and student number on your answer booklet, and on the
answer grids

CCC Manufacturing (Pty) Ltd

Colin Cameron was the majority shareholder and managing director of CCC Manufacturing (Pty)
Ltd. The small manufacturing unit had been in operation for four years and was now the market
leader in the production of IRAT conductors, its only product. While everything appeared to be
going well, by the end of 2010 Cameron started to suspect that the market was becoming
saturated and that further growth in sales was unlikely. He was particularly concerned, as CCC
had recently spent a large amount on a factory extension that was now operating well below
capacity. The extension had been financed primarily by borrowings, which had placed the
company in a significant amount of debt. Cameron hated owing money and was worried about
servicing the borrowings if there was no room in the market for serious sales growth.

Due to his stress and concerns Cameron had become difficult to work with, causing the financial
manager to walk out on him just prior to the Christmas break. He came to you and urgently
asked you to prepare financial statements for the year ended 31st December 2010, based on the
following information supplied by his bookkeeper :

Sales of IRAT conductors for the year had been 6 000 units. These had all been sold on
credit for R35 each and had cost the company R14 each to produce.

Debtors took an average of 41 days to settle their accounts.

CCC had an authorised share capital of R100 000 of which only 20 000 shares of R1
each had been issued when the company was started in 1997.

Admin & general expenses for the year had amounted to R10 000 and Sales &
Marketing costs were 8% of turnover.

Stock on hand as at 31st December 2010 was valued at R8 400 and suppliers still owed
for stock received amounted to R13 348.

At the end of 2010 the NBV of fixed assets was 250 000 and depreciation of 24 200 had
been charged for the year.

The prevailing corporate tax rate was 30% and was not expected to change over the next
few years.

Retained Profit brought forward from the end of 1999 was R103 207 and the
shareholders had an agreement that of all earnings after tax would be paid out as
dividends every year.

L-T Debt outstanding at year-end equalled R115 000 and the total interest paid during
the year was R13 200.

Cash on hand at the 31st December 2010 was confirmed at R2 011 and they had no bank
overdraft.

He also wanted you to help with the financial planning for 2011 and was excited about a new
business prospect he had been offered. A complimentary product had recently been developed in
the US and Cameron had been offered the patent for production in South Africa. Cameron
thought it could utilise the plants spare capacity as it was a similar product which would commit
CCC to no additional investment, retraining etc While the margins did not look as good as
those enjoyed on the conductors, he felt that they would contribute something and thus increase
overall profitability. A competitor was extremely keen on the patent and so a decision needed to
be made immediately. Cameron thought they would go for the new product and sat down with
you to prepare a set of pro-forma financial statements for the year ahead. They were based on the
following assumptions and expectations :

Expected sales of IRAT conductors would be 6 200 units these would continue to be
sold for R35 and cost R14 each to produce.

They would sell 8 000 units of the new product for R16 each. Cost of production was
calculated to be 65% of sales value.

All sales of both products would be made on credit.

Sales & Marketing expenses would remain at 8% of revenue and General & Admin
costs were budgeted to increase to R12 000.

In an effort to reduce the debt levels Cameron proposed that new shares be issued. A
deal had been organised to sell an additional 20 000, R1 shares to an investor who had
agreed to pay a total of R30 000 for them.

Most of the cash inflow from the share issue was to be used to reduce the L-T
Borrowings to R70 000. In turn, this was expected to bring down interest payments for
the year to R7 800.

Creditors had started to complain about how long CCC was taking to settle their
accounts. Thus Cameron agreed to ensure that the average time taken for payment be
reduced to 45 days in 2011.

No additional fixed asset expenditure was needed and depreciation for 2011 was to
remain exactly the same as 2010.

It was predicted that cash on hand could be restricted to 2 815.

The patent for the new product would need to be bought for R50 000 up front. This
would ensure CCC exclusive manufacturing rights in SA for a period of 5 years (No
Substitutes and imports were expected to effect the market during this time)

Most of the new product sales would be exported, so Debtors were budgeted to rise to
R50 096 by year-end.

Stock holding would remain the same % of Cost of Sales as in 2010.

Cameron had negotiated a R10 000 overdraft facility and had no idea whether he needed
it, nor if it would be enough, under the trading conditions outlined above.

42 Marks

Name: _______________________________________________

CCC Manufacturing (Pty) Ltd

Income Statement
Y/E 31 Dec 2010

Sales
Cost of Production
Gross Profit
Expenses
General & Admin
Sales & Marketing
Depreciation
Patent Amortisation
Operating Profit
Interest Paid
Profit Before Tax
Taxation
Earnings after Tax
Dividend
Retained Earnings

Y/E 31 Dec 2011

Name: _______________________________________________

CCC Manufacturing (Pty) Ltd

Balance Sheet

Capital Employed
Ordinary Shares
Share Premium
Retained Earnings
Total Equity
L-T Debt

Employment of Capital
Fixed Assets
Patent
Current Assets
Stock
Debtors
Cash
Current Liabilities
Creditors
Bank Overdraft
Net Current Assets
Net Assets

As at 31 Dec 2010

As at 31 Dec 2011

Question 2
XYZ (Pty) Ltd
Income Statement
Y/E 31 Dec 2012

Sales

Y/E 31 Dec 2013

106 600

141 000

Cost of Sales

72 200

85 000

Gross Profit

34 400

56 000

Expenses

18 200

26 300

General & Admin

4 264

5 640

Selling Costs

7 400

12 400

Depreciation

6 536

8 260

Operating Profit

16 200

29 700

7 600

3 300

8 600

26 400

Taxation

2 580

7 920

Earnings after Tax

6 020

18 480

Dividend

1 505

4 620

Retained Earnings

4 515

13 860

Interest Paid

XYZ (Pty) Ltd

Balance Sheet

Capital Employed
Ordinary Shares

As at 31 Dec 2012

As at 31 Dec 2013

5 000

10 000

25 000

Retained Earnings

21 800

35 660

Total Equity

26 800

70 660

L-T Debt

54 400

24 400

81 200

95 060

Fixed Assets

47 720

63 460

Current Assets

35 200

37 800

6 250

6 500

23 072

23 072

Cash

5 878

8 228

Current Liabilities

1 720

6 200

6 200

1 720

Net Current Assets

33 480

31 600

Net Assets

81 200

95 060

Share Premium

Employment of Capital

Stock
Debtors

Creditors
Bank Overdraft

Question 2A
Answer the following short questions about XYZ (Pty) Ltd:
1. If the PE ratio for the 2nd year was 12 and there were 10,000 shares in issue, what would the
share price be?
2. What is the value of all the profits made in all the previous years up to but excluding the 1st
year?
3. What is the gearing factor in year 2?
4. What would the EAT have been in year 2, if the cost of sales had changed to give us the
same GP% as year 1?
5. What are the following ratios for both year and have they improved or not ?
5a) Gross profit Margin
5b) Fixed asset Turnover ratio
5c) Inventory turnover rate
5d) RONA
5e) Interest cover
5f) Debtors days
6. What would we need to change to make the ROE in Year 2 to be the same as RONA in Year
2?
7. If we wanted to have the debt for the second year to be 70% of total capital, and equity to
remain the same as it is now, what would be the value of the debt?
8. If the accumulated depreciation was R266,800 in the 1st year, What was its value in the prior
year? (prior to the first year shown here)
9. What is the value of fixed assets purchased in the 2nd year?
10. What is the length in days of the self funding gap in the 2nd year?
30 Marks

Question 2b
Please answer in point form:
Provide me 5 reasons why 2012 was a better year and 5 reasons why 2013 was a better year for
XYZ (Ltd) Company.
15 Marks

Question 2c
Please discuss the cash conversion cycle, with relation to XYZ (Pty) Ltd. Has it improved or not
from the 1st to the 2nd year and if so what aspects
10 Marks

Question 3A
You are selling shirts at R390 each they cost R215. You have fixed costs of R100,000.
Please calculate the following:

* The break-even sales amount & break-even number of units

* If you are selling 2,000 units what is your margin of safety?

10 Marks

Question 3B
Given the following info about shares listed on the JSE, answer the following questions:
Company
Market Cap
PE ratio
Div. Yield
Price
Nedbank
R 99.5 Billion
11.9
3.3%
19500 cents
Firstrand
R176.6 Billion
12.1
3.11%
3133 cents
Capitec
R 22.2 Billion
15.3
2.2%
19400 Cents
1. How can the price for Capitec be over 6 times greater than that of Firstrand when clearly
Firstrand is a much bigger bank, as can be seen by looking at the Market cap?
2. What explanation could you give to the Div. Yield for Capitec being lower than the rest
of the banks?
3. What earnings per share does Nedbank have?
4. How many shares in issue does Capitec have?
10 Marks