FUNDAMENTAL ANALYSIS

COMPONENT 3: FUNDAMENTAL ANALYSIS

ADDITIONAL EXERCISES

Question 1
A company which only sells on credit is considering changing to cash sales only. The mark-
up of 80% on credit sales will be reduced to 40% on cash sales, in order to make this
attractive for customers. During the period of credit sales, inventory on average was sold
within 15 days, but the debtors only paid at the end of the month. New inventory could only
be bought after the debtors have paid. The owner immediately withdraws the profit from the
company and only reinvests the original capital. With cash sales the company aims to sell its
inventory on average within 10 days. Will it be advantageous for the company to change to
cash sales? In answering the question, provide the following: (Accept a capital investment of
R200 and that a month has 30 days).
a) Turnover ratio of inventory per month
b) Profit per month
c) Monthly return on initial capital
d) What amount of capital is required in order to generate R600 gross profit per month
under similar circumstances?

Question 2
Indicate whether the following statements are correct or incorrect:
a. If an enterprise’s rate of return (return on total assets) is greater than the cost of its
borrowed capital, then a greater percentage of borrowed capital will harm the
enterprise.
b. Liquidity refers to the measure of coverage of all debts by the assets of the enterprise.
c. The fundamental analyst has to rely on data generated by the stock exchange itself.
d. Gross profit reflects the profit from the primary activities for which the enterprise was
established.
e. Liquidity ratios determine if an enterprise can meet its short-term liabilities.
f. Ratios portray financial information to the extent that companies can be compared
with one another.
g. The higher the value of the debt-to-assets ratio, the weaker the solvency.
h. The book value per share and the price earnings ratio both form part of the solvency
ratios and provide the investor with an indication of the portion of the earnings to
which he / she can lay claim.
i. Liquidity refers to the ability of the company to honour its long-term obligations.
j. If an enterprise’s rate of return (return on total assets) is greater than the cost of its
borrowed capital, then a greater percentage of borrowed capital will benefit the
enterprise.
k. Fundamental analysis is concerned with correct timing.
l. Profit before tax can be calculated by subtracting the operating expenses from gross
profit.

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COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Question 3
Enter the missing words.
a. In a trading company ........ is the difference between the direct purchase price of the
stock sold and the turnover (sales).
b. The ........ is the number of times per time-unit (month, week, day) that the amount
which was originally invested becomes available again for reinvestment.
c. ........ refers to the ability of the company to meet all its financial obligations over the
long-term.
d. ........ is that portion of shareholders' equity which is also the owners’ share - not
necessarily contributed by them - and which has been generated mainly through the
company’s activities.
e. This ratio indicates the relative status of the share from the viewpoint of investors,
given that the market price per share is divided by the earnings per share.
f. Which ratio gives an indication of the ease with which the dividend per share can be
paid out of the available earnings per share?

Question 4
A company which only sells on credit is considering changing to cash sales only. The mark-
up of 80% on credit sales will be changed to a gross profit percent of 25% on cash sales.
During the period of credit sales, inventory on average was sold within 10 days, but the
debtors only paid at the end of the month. New inventory could only be bought after the
debtors have paid. The owner immediately withdraws the profit from the company and only
reinvests the original capital. With cash sales the company aims to sell its inventory on
average within 6 days. Will it be advantageous for the company to change to cash sales? In
answering the question, provide the following: (Accept a capital investment of R300 and that
a month has 30 days).
a) Turnover ratio of inventory per month
b) Profit per month
c) Monthly return on initial capital
d) What amount of capital is required in order to generate R900 gross profit per month
under similar circumstances?

Question 5
You own shares in “Riches Ltd”. Your stockbroker gave you a note containing some
important information in connection with your share investment. This note however landed in
the water and some of the information was lost. The following information is still readable:
Market price per share 160c
Dividend yield 7,5%
Price-earnings ratio of industry 7
Dividend coverage 1,7 times
Use these bits of information and your knowledge of fundamental analysis and calculate the
following.
a. The dividend per share
b. The earnings yield
c. A realistic market price for the share
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 FUNDAMENTAL ANALYSIS

Question 6
Name the three (3) requirements that financial ratios must meet in order to evaluate the
financial performance of an enterprise effectively.

Question 7
James Ltd.'s Statement of financial position on 31 December 20X8 and 20X7 appears below:
STATEMENT OF FINANCIAL POSITION 20X8 20X7
Issued ordinary share capital (20X8 = 100 000; 20X7 = 90 000) 120 000 100 000
General reserves 4 000 3 000
Debentures (7%) 6 000 6 000
Trade payables 14 000 10 000
10% Preference shares 5 000 5 000
Mortgage loan (5%) 10 000 16 000
Long-term loan (8%) 10 000 9 000
Bank overdraft (10%) 8 000 11 000
Dividends payable 2 000 1 000
Retained earnings 21 000 19 000
Inventory 17 000 16 000
Cash and Cash equivalents 7 000 13 000
Goodwill 4 000 4 000
PPE at cost price 170 000 145 000
Accumulated depreciation 40 000 35 000
Prepayments 1 000 2 000
Long-term loans granted (6%) 16 000 16 000
Trade receivables 25 000 19 000

Some items from the Statement of profit or loss appear below:

Operating expenses (includes depreciation of R7 000) 21 715
Gain on the disposal of PPE 1 400
Profit after tax 6 500
Ordinary dividends 3 000

ADDITIONAL INFORMATION
1. The mark-up = 60%.
2. The company was taxed at a rate of 20%.
3. Calculate all interest and preference dividends on closing balances.
4. The market price of the ordinary shares = R2,40.
5. Assume 360 days per annum.
Compile the complete Statement of financial position and Statement of profit or loss.

Question 8
A company which only sells on credit is considering changing to cash sales only. The mark-
up of 50% on credit sales will be reduced to a gross profit percent of 10% on cash sales, in
order to make this attractive for customers. During the period of credit sales, inventory on
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COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

average was sold within 10 days, but the debtors only paid at the end of the month. New
inventory could only be bought after the debtors have paid. The owner immediately
withdraws the profit from the company and only reinvests the original capital. With cash sales
the company aims to sell its inventory on average within 5 days. Will it be advantageous for
the company to change to cash sales? In answering the question, provide the following:
(Accept a capital investment of R300 and that a month has 30 days).
a. Turnover ratio per month
b. Profit per month
c. Monthly return on initial capital
d. What amount of capital is required in order to generate R900 gross profit per month
under similar circumstances?

Question 9
Wimpie Ltd.'s Statement of financial position on 31 December 20X8 and 20X7 appears
below:
SATEMENT OF FINANCIAL POSITION 20X8 20X7
Issued ordinary share capital (20X8 = 20 000; 20X7 = 15 000) 55 000 30 000
General reserves 2 000 2 000
Debentures (7%) 40 000 35 000
Trade payables 4 000 7 000
10% Preference shares 20 000 20 000
Mortgage loan (4%) 50 000 37 000
Long-term loan (9%) 20 000 18 000
Bank overdraft (10%) 14 000 12 000
Dividends payable 2 000 1 000
Retained earnings 43 000 28 000
Inventory 25 000 18 000
Cash and Cash equivalents 21 000 13 000
Patents and licences 8 000 8 000
PPE at cost price 240 000 180 000
Accumulated depreciation 70 000 50 000
Prepayments 1 000 2 000
Share investments 7 000 6 000
Long-term loans granted 5 000 4 000
Trade receivables 13 000 9 000
Some items from the Statement of profit or loss appear below:
Gross profit 75 000
Operating expenses (includes depreciation of R24 000) 35 000
Investment income 1 200
Loss on the disposal of PPE 200
Retained earnings 15 000
ADDITIONAL INFORMATION
1. The mark-up = 50%.
2. The company was taxed at a rate of 33⅓%.
3. Ordinary share dividends of R5 000 was declared.
4. Calculate all interest and preference dividends on closing balances.
5. The market price of the ordinary shares = R5,60.
6. Assume 360 days per annum.
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 FUNDAMENTAL ANALYSIS

a. Compile the Statement of financial position and the Statement of profit or loss.
b. Calculate the following:
● Return on total assets
● Turnover time of current assets
● Gross profit margin
● Acid test ratio
● Turnover time of inventory
● Finance cost cover
● Price-earnings ratio

Question 10
The financial statements of Prime Dot Limited for the year ended 28 February 20X9 is as
follows:
STATEMENT OF FINANCIAL POSITION 20X9 20X8
PPE at cost price 47 500 40 000
PPE at carrying value 32 500 28 000
Trade receivables 22 000 18 000
Prepayments 1 000 2 000
Long-term loans granted (5%) 6 000 3 200
Cash and cash equivalents 10 000 4 000
Share investments 3 000 2 300
Inventory 14 000 11 000
Patents & licenses ? 1 500
Debentures (8%) 4 500 3 000
Retained earnings 4 000 5 000
Bank overdraft (10%) 8 900 6 000
Trade payables 9 000 6 000
Long-term loans (7%) 5 000 4 000
Mortgage loan (6%) 25 000 22 000
Current tax liabilities 900 600
Preference shares (12%) 2 000 2 000
Dividends payable 700 1 400
Issued ordinary share capital 30 000 20 000
(20X9 = 5 000; 20X8 =4 000)
Some items from the Statement of profit or loss for 20X9:
Dividends received 300
Loss on the disposal of PPE 500
Profit before tax 1 110
ADDITIONAL INFORMATION
1. Calculate preference share dividends and interest on the closing balances.
2. The company’s mark-up percentage amounts to 66⅔%.
3. The company is taxed at a rate of 33⅓%.
4. Ordinary share dividends declared = R1 500.
5. Depreciation of R4 000 is included in the operating expenses of R35 890.
6. 50% of sales were for cash, whilst cash purchases = 60%.
7. Sales during 20X8 was 20% less than the sales during 20X9.
8. Market price of ordinary shares on 28 February 20X9 = R12.
9. Assume 360 days per annum.

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COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

a. Compile the financial statements.

b. Calculate inventory purchased in 20X9.

Question 11
Assume 360 days per annum.
a. The dividend cover = 3,5 and the dividend per share = 14c. How much is the
earnings per share?
b. The debt/equity ratio = 150%. What is the debt-to-assets ratio? (Debt ratio)
c. The turnover time of current assets = 48 days. What is the turnover ratio of current assets?

Question 12
First Years’ Limited’s Statement of financial position on 31 December 20X9 and 20X8
appears below:
STATEMENT OF FINANCIAL POSITION 20X9 20X8
Issued ordinary share capital (20X9 = 25 000; 20X8 = 20 000) 63 500 46 000
Accumulated depreciation 47 000 40 000
Inventory 18 000 15 300
Trade payables 12 100 11 400
Goodwill 8 000 8 000
Trade receivables 16 400 21 100
Mortgage loan (6%) 40 000 50 000
Bank overdraft (10%) 7 500 10 100
8% Preference shares 5 000 8 500
Current tax liabilities 400 500
Retained earnings 6 500 4 500
Cash and Cash equivalents 10 300 9 400
PPE at cost price 150 000 135 000
General reserve 10 000 9 000
Prepayments 300 200
Long-term loan (9%) 25 000 20 000
Long-term loans granted (6%) 14 000 11 000
Some items from the Statement of profit or loss appear below:
Revenue 150 000
Operating expenses (includes depreciation of R7 000) 13 300
Ordinary share dividends 5 000
ADDITIONAL INFORMATION
1. Calculate all interest and preference dividend calculations on closing balances.
2. The mark-up = 25%.
3. The company was taxed at a rate of 30%.
4. A vehicle with a cost price of R16 000 and a carrying value of R9 500, was sold for
R9 360.
5. The market price of the ordinary shares = R4,00.
6. Assume 360 days per annum.
a. Compile the complete Statement of financial position and the Statement of profit or loss.
b. Calculate all the ratios.
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 FUNDAMENTAL ANALYSIS

Question 13
A struggling first-year student had to do a number of calculations in his/her test. The student was
quite efficient with a calculator and calculated the correct answer every time, which was 8,47.
However, the student had no idea WHAT he/she had calculated. Please help him/her by selecting
the correct answer for each question from the list. An option can be used more than once.
A 8,47 none B 8,47 times
C 8,47% D 8,47c
E 8,47 F 8,47 days
G 8,47 : 1 H R8,47c
a. Calculate the earnings per share
b. Calculate the turnover ratio of inventory
c. Calculate the price-earnings ratio
d. Calculate the dividend cover
e. Calculate the return on total assets
f. Calculate the acid test ratio

Question 14
The following information is provided for No Limits Ltd. The financial year ends on 31 December.
Dividend per share for 20X8 (according to ratio) 11,20c per share
Attributable earnings for 20X8 R36 857
Attributable earnings for 20X7 R30 000
Issued ordinary share capital at the end of 20X8 R423 100
Number of issued ordinary shares at the end of 20X8 260 000 shares
Number of issued ordinary shares at the end of 20X7 240 000 shares
Earnings yield 4,21%
Goodwill at the end of 20X8 R3 300
Ordinary shareholders’ equity at the end of 20X8 R496 750
Preference share capital at the end of 20X8 R100 000
Calculate the following for 20X8:
a. Earnings per share
b. Market price per ordinary share
c. Average issue price per ordinary share
d. Ordinary dividends declared
e. Book value per share

Question 15
The following information is an extract from the financial statements of Zero Tolerance Ltd.
whose financial year ends on 31 December.
Inventory at the end of 20X7 R54 700
Average inventory for 20X8 R60 350
Percentage credit sales for 20X8 50%
Operating profit for 20X8 R66 350
Purchases of inventory for 20X8 R320 000
Profit before tax for 20X8 R60 510
Trade receivables at the end of 20X7 R48 250
Tax rate 30%
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COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Trade receivables at the end of 20X8 R83 600

Finance cost for 20X8 R13 600
Gross profit for 20X8 R151 750
Preference share capital (5.5%) at the end of 20X8 R100 000
Ordinary dividends declared for 20X8 R28 000
Days per annum 360
Calculate the following for 20X8:
a. Cost of sales
b. Turnover ratio of trade receivables
c. Finance cost coverage
d. Income tax expense (Statement of profit or loss)
e. Ordinary dividend coverage
f. Attributable earnings

Question 16
A company which only sells on credit is considering changing to cash sales only. In order to
make this attractive for customers the mark-up of 40% on credit sales will be replaced by a
gross profit percent of 20% on cash sales. During the period of credit sales, inventory on
average was sold within 20 days, but the debtors only paid at the end of the month. New
inventory could only be bought after the debtors have paid. The owner immediately
withdraws the profit from the company and only reinvests the original capital. With cash sales
the company aims to sell its inventory on average within 10 days. Will it be advantageous for
the company to change to cash sales? In answering the question, provide the following:
(Accept a capital investment of R500 and that a month has 30 days).
a) Turnover ratio of inventory per month
b) Profit per month
c) Monthly return on initial capital
d) What amount of capital is required in order to generate R900 gross profit p.m. under
similar circumstances?

Question 17
Some items from the financial statements of Schumann Ltd. appear below:
STATEMENT OF FINANCIAL POSITION 20X9 20X8
Issued ordinary share capital (20X9 = 20 000; 20X8 = 15 000) 55 000 30 000
General reserves 12 250 9 500
Debentures (6%) 40 000 35 000
10% Preference shares 20 000 20 000
Mortgage loan (4%) 50 000 37 000
Long-term loan (9%) 10 000 9 000
Bank overdraft (10%) 11 000 12 000
Dividends payable 2 000 1 000
Retained earnings 45 500 28 000
PPE at cost price 240 000 180 000
Share investments 7 000 6 000
Long-term loans granted (5%) 8 000 6 000

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 FUNDAMENTAL ANALYSIS

Some items from the Statement of profit or loss for 20X9 appear below:
Gross profit 75 000
Operating expenses (includes depreciation of R23 000) 33 000
Dividends received on share investments 2 000
Loss on the disposal of PPE 500
Ordinary share dividends declared 4 000
ADDITIONAL INFORMATION
1. The mark-up = 50%.
2. The company was taxed at a rate of 30%.
3. Calculate all interest and preference dividend calculations on closing balances.
4. Assume 360 days per annum.
a. Compile the complete Statement of profit or loss.
b. Determine the issue price during the rights issue.

Question 18
The following information is applicable to XYZ Ltd.:
Intrinsic (book) value per share 500 cents
Average issue price per ordinary share 300 cents
Market price per share 560 cents
Earnings per share 35 cents
Dividend cover 7 times
Attributable earnings R5 250 000
Calculate the following correct to 2 decimals:
a. The company’s price-earnings ratio.
b. The earnings yield.
c. The dividend per share.
d. The average number of ordinary shares issued.

Question 19
STATEMENT OF FINANCIAL POSITION OF LARM LTD as at 28 FEBRUARY:
ASSETS 20X8 20X7
PPE at cost price 85 000 73 000
- Accumulated depreciation (25 000) (18 000)
Total PPE at carrying value 60 000 55 000
Goodwill 4 000 4 000
INTANGIBLE ASSETS 4 000 4 000
Share investments 13 000 8 000
Long-term loans granted 3 000 3 000
FINANCIAL ASSETS 16 000 11 000
NON-CURRENT ASSETS 80 000 70 000
Inventory 12 000 7 000
Trade receivables 11 000 8 000
Cash 13 000 10 000
Prepayments 4 000 5 000
CURRENT ASSETS 40 000 30 000
TOTAL ASSETS 120 000 100 000
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COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

EQUITY AND LIABILITIES 20X8 20X7

Ordinary share capital (20X8 = 22 500; 20X7 = 20 000) 45 000 40 000
Retained earnings 20 000 15 000
Ordinary shareholders’ equity 65 000 55 000
10% Preference shares 5 000 5 000
Shareholders’ equity 70 000 60 000
EQUITY 70 000 60 000
Debentures (7%) 20 000 24 000
Mortgage loan (5%) 15 000 6 000
NON-CURRENT LIABILITIES 35 000 30 000
Trade payables 6 200 5 300
Bank overdraft (8%) 6 200 3 500
Current tax liabilities 2 600 1 200
CURRENT LIABILITIES 15 000 10 000
TOTAL EQUITY AND LIABILITIES 120 000 100 000
STATEMENT OF PROFIT OR LOSS of LARM Ltd for the year ended 28 FEBR. 20X8
REVENUE (sales)
- Cost of sales
GROSS PROFIT
- Operating expenses (includes depreciation = R7 000) (18 000)
OPERATING PROFIT
+ Investment income 1 400
+ Gain on the disposal of PPE 246
- Finance costs (interest paid)
PROFIT BEFORE TAXATION
- Income tax expense (5 000)
PROFIT AFTER TAXATION
- Preference share dividends
ATTRIBUTABLE EARNINGS
- Ordinary share dividends
RETAINED EARNINGS
Further information:
1. Calculate finance costs (interest paid) and preference share dividends on the closing
balances.
2. Taxation is paid at a rate of 33⅓%.
3. The gross profit percentage = 40%.
4. Market price of ordinary shares = 500c
5. Assume 360 days per annum.

a. Complete the Statement of profit or loss.

b. Calculate all the ratios.

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 FUNDAMENTAL ANALYSIS

Question 20
An extract from Aussie Ltd’s financial statements appears below:
STATEMENT OF FINANCIAL POSITION 20X9 20X8
Issued ordinary share capital (20X9 = 26 000; 20X8 = 22 000) 64 000 44 000
Mortgage loan (8%) 50 000 40 000
Debentures (9%) 10 000 8 000
Trade payables 10 000 14 000
12% Preference shares 20 000 14 500
Long-term loans (8,5%) 20 000 16 500
Bank overdraft (?%) 11 000 18 000
Current tax liabilities 2 000 6 000
Dividends payable 7 000 2 500
General reserves 21 000 14 000
Retained earnings 15 000 12 500
Inventory 35 000 20 000
Cash and Cash equivalents 29 000 19 000
PPE at cost price 146 000 120 000
Accumulated depreciation 56 000 40 000
Long-term loans granted (10%) 23 000 16 000
Goodwill 12 000 12 000
Share investments 15 000 32 000
Trade receivables 26 000 11 000
Some items from the Statement of profit or loss for 20X9 appear below:
Revenue 200 000
Operating expenses (including depreciation of R18 000) 33 000
Investment income 3 300
Gain on the disposal of PPE 1 000
Financing costs 7 700
ADDITIONAL INFORMATION:
1. The mark-up percentage = 66⅔%.
2. The company was taxed at a rate of 25%.
3. A dividend of R20 800 was declared on ordinary shares.
4. Calculate all interest and preference dividend calculations on closing balances.
5. The market price of the ordinary shares = R6.
6. Assume 360 days per annum.

a. Compile the complete Statement of financial position and Statement of profit or loss.
b. What was the issue price of the ordinary shares during the rights issue?
c. Interest on the bank overdraft was calculated at what percentage?
d. What is the percentage dividend-yield (DY) on the share investments?
e. Calculate all the ratios.

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COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Question 21
An extract from Magoo Ltd.'s financial statements appears below:
STATEMENT OF FINANCIAL POSITION 20X8 20X7
Issued ordinary share capital (20X8 = 137 000; 20X7 = 107 000) 415 000 214 000
General reserves 47 000 ?
Long-term loans (14%) 40 000 35 000
Trade payables 30 000 21 000
11% Preference shares 40 000 40 000
Mortgage loan (10%) 160 000 150 000
Bank overdraft (16%) 50 000 46 000
Dividends payable 10 000 ?
Revaluation reserve 23 000 0
Retained earnings 74 500 42 350
Inventory 44 000 39 000
Cash and Cash equivalents 214 500 94 200
Goodwill 19 000 19 000
PPE at cost price 515 000 460 000
Accumulated depreciation 141 000 120 000
Long-term loans granted (9%) 14 000 10 000
Share investments 145 000 20 000
Trade receivables 79 000 60 150
Only the following items are available from the Statement of profit or loss:
STATEMENT OF PROFIT OR LOSS FOR 20X8
- Operating expenses (includes depreciation = R28 000) (85 000)
+ Investment income 3 600
+ Gain on the disposal of PPE 1 000
- Income tax expense (32 500)
- Transfer to reserves (13 000)
ADDITIONAL INFORMATION
1. The mark-up = 25%.
2. The company was taxed at a rate of 25%.
3. A dividend of R47 950 was declared on ordinary shares.
4. Calculate all interest and preference dividend calculations on closing balances.
5. PPE with a cost price of R7 000 was sold.
6. The market price of the ordinary shares = R7,20.
7. Assume 360 days per annum.

a. Compile the complete Statement of financial position and Statement of profit or loss.
b. How many new ordinary shares were sold during the rights issue and what was the
issue price?
c. Calculate all the ratios.

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 FUNDAMENTAL ANALYSIS

Question 22
An extract from Snoekie Ltd.'s Financial Statements appears below:
STATEMENT OF FINANCIAL POSITION 20X7 20X6
Issued ordinary share capital (20X7 = 25 000; 20X6 = 20 000) 32 500 20 000
General reserves 4 000 3 000
Debentures (5%) 14 000 8 000
Trade payables 5 200 5 900
8% Preference shares 3 000 5 000
Mortgage loan (4%) 15 000 26 000
Bank overdraft (8%) 4 500 6 000
Current tax liabilities 1 200 2 600
Dividends payable 4 100 3 500
Retained earnings 16 500 10 000
Inventory 16 700 14 500
Cash and Cash equivalents 15 400 9 000
Goodwill 3 000 3 000
PPE at carrying value 49 900 40 500
Accumulated depreciation 11 600 8 300
Prepayments 400 200
Share investments 9 600 14 000
Trade receivables 5 000 8 800
STATEMENT OF PROFIT OR LOSS FOR 20X7
Revenue
- Cost of sales
Gross profit 28 000
- Operating expenses (9 200)
Operating profit
+ Investment income 1 200
- Loss on the disposal of PPE (140)
- Financing costs
Profit before taxation
- Income tax expense
Profit after taxation
- Preference share dividends
Attributable earnings
- Ordinary share dividends
- Transfer to reserves
Retained earnings
ADDITIONAL INFORMATION
1. The gross profit percent = 35%.
2. The company was taxed at a rate of 30%.
3. A dividend of R5 000 was declared on the ordinary shares.
4. Calculate all interest and preference dividend calculations on closing balances.
5. The market price of the ordinary shares = R5.
6. Assume 360 days per annum.
a. Compile the complete Statement of financial position and Statement of profit or loss.
b. What was the issue price of the ordinary shares during the rights issue?
c. Calculate all the ratios.

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COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Question 23
Cable Ltd.'s financial statements appear below:
STATEMENT OF FINANCIAL POSITION 20X8 20X7
Issued ordinary share capital (20X8 = 16 000; 20X7 = 12 000) 34 000 24 000
General reserves 4 000 3 000
Debentures (5%) 24 000 30 000
Trade payables 18 900 15 200
10% Preference shares 2 000 8 000
Mortgage loan (4%) 10 000 15 000
Current tax liabilities 1 500 1 000
Bank overdraft (10%) 1 000 1 900
Dividends payable 600 900
Retained earnings 24 000 11 000
Inventory 16 000 13 000
Cash and Cash equivalents 8 900 9 500
Goodwill 5 000 5 000
PPE at carrying value 64 000 62 000
Accumulated depreciation 48 000 39 000
Prepayments 700 900
Loans granted (4%) 11 000 8 000
Trade receivables 14 400 11 600
Some items from the Statement of profit or loss for 20X8 appear below:
Cost of sales 120 000
Operating expenses 25 360
Gain on the disposal of PPE 370
Income tax expense 6 750
ADDITIONAL INFORMATION
1. Calculate all interest and preference dividend calculations on closing balances.
2. The mark-up percentage = 50%.
3. The company was taxed at a rate of 20%.
4. A dividend of R12 800 was declared on ordinary shares.
5. The market price of the ordinary shares = R10.
6. Assume 360 days per annum.
a. Compile the complete Statement of financial position and Statement of profit or loss.
b. What was the issue price of the ordinary shares during the rights issue?
c. Calculate all the ratios.

Question 24
A company which only sells on credit is considering changing to cash sales only. The gross
profit percent of 37,5% on credit sales will be changed to a mark-up of 30% on cash sales, in
order to make this attractive for customers. During the period of credit sales, inventory on
average was sold within 15 days, but the debtors only paid at the end of the month. New
inventory could only be bought after the debtors have paid. The owner immediately
withdraws the profit from the company and only reinvests the original capital. With cash sales
the company aims to sell its inventory on average within 10 days. Will it be advantageous for
the company to change to cash sales? In answering the question, provide the following:
(Accept a capital investment of R500 and that a month has 30 days).
a. Profit per month
b. Monthly return on initial capital
c. What amount of capital is required in order to generate R2 700 gross profit per month
under similar circumstances?
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 FUNDAMENTAL ANALYSIS

Question 25
Assume 360 days per annum.
a. The dividend cover = 4 and the dividend per share = 12c. How much is the earnings
per share?
b. The debt/equity ratio = 150%. What is the debt-to-assets ratio? (Debt ratio)
c. The turnover time of current assets = 60 days. What is the turnover ratio of current
assets?

Question 26
The following information refers to the financial statements of PIPA Limited for the year
ended 28 February:
STATEMENT OF FINANCIAL POSITION 20X1 20X0
PPE at cost price 85 000 79 000
Accumulated depreciation (15 000) (11 000)
Total carrying value of PPE 70 000 68 000
Goodwill and Patents 4 000 4 000
INTANGIBLE ASSETS 4 000 4 000
Long-term loans granted 6 000 5 000
FINANCIAL ASSETS 6 000 5 000
NON-CURRENT ASSETS 80 000 77 000
Trade receivables 8 000 7 000
Inventory 7 000 4 000
Cash and cash equivalents 5 000 2 000
CURRENT ASSETS 20 000 13 000
TOTAL ASSETS 100 000 90 000
Ordinary share capital (# = 20 000) 40 000 40 000
Retained earnings 6 000 5 000
Ordinary shareholders' equity 46 000 45 000
Preference share capital (10%) 4 000 3 000
Shareholders' equity 50 000 48 000
EQUITY 50 000 48 000
Debentures (9%) 8 000 3 000
Mortgage (5%) 22 000 25 000
NON-CURRENT LIABILITIES 30 000 28 000
Trade payables 9 000 8 000
Bank overdraft (15%) 3 000 4 000
Short-term loan (8%) 7 000 1 500
Dividends payable 1 000 500
CURRENT LIABILITIES 20 000 14 000
TOTAL EQUITY AND LIABILITIES 100 000 90 000

27
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

NOTES
1. Calculate all interest and preference dividend calculations on closing balances.
2. The gross profit margin = 40%.
3. The company was taxed at a rate of 20%.
4. The market price of the ordinary shares = R6.
5. Assume 360 days per annum.

STATEMENT OF PROFIT OR LOSS 20X1

Revenue (sales)
- Cost of sales
Gross profit 18 000
- Operating expenses (9 260)
Operating profit
+ Investment income 260
+ Gain on the disposal of PPE 80
- Finance costs (Interest paid)
Profit before tax
- Income tax expense (1 250)
Profit after taxation
- Preference dividend
Attributable earnings
- Ordinary dividend (3 600)
Retained earnings for the year 1 000

Calculate the following ratios:

a. Return on equity
b. EBIT margin
c. Turnover ratio of PPE
d. Return on financial assets
e. Dividend yield
f. Mark-up percentage

28
 FUNDAMENTAL ANALYSIS

CORPORATE ACTIONS:

Question 27

Enter the missing words.

a. When a listed company decides to buy-back its shares, it does not have to acquire
permission from its ___________. Furthermore, the buy-back is limited to a maximum of
_________ the company’s issued shares per financial year.

b. The price at which the shares are bought back may not exceed the weighted average
market price of the preceding five business days by more than __________.

c. The quantity and price at which buy-backs were done, must be announced with every
__________ that is bought back.

d. Decisions made by the management of a company that have an effect on the securities
issued by the company are referred to as _____________.

Question 28

A company’s total share capital consists of ordinary shares to the value of R1 million
(1 million shares) and reserves of R2 million. The company decides on a rights issue and
issues a further 1 million shares at 150 cents each. Immediately thereafter, a stock split is
announced, in the ratio of 10 new shares for every one existing share. Answer the following
questions:
a. After the rights issue the company’s total shareholders’ equity is R…. .
b. After the stock split the company’s total shareholders’ equity is R…. .

Question 29

Indicate whether the following statements are correct or incorrect:

a. The market price of a share increases after dividends have been paid out.

b. Dividend income is not tax-free in South Africa.

c. A stock split refers to the process through which a large financial institution agrees to buy
all unsold shares in case of a rights issue at the issue price.

d. A voluntary corporate action is an event initiated by the board of directors where a

shareholder does not need to do anything to partake in it.

e. A stock split can lead to a wider distribution of the shares of a company which in return
could prevent possible hostile takeovers.
29
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

f. A share consolidation refers to the process through which a large financial institution
agrees to buy all unsold shares in case of a rights issue at the issue price.

g. A capitalisation issue is a good alternative for a company who wishes to give its
shareholders a “dividend” but does not have sufficient cash.

h. A board of directors never has to get permission from their shareholders to buy back
shares.

i. It takes five business days for a security transaction on the JSE to settle.

j. The increase in the market value of an investor's portfolio through a rights issue of a
sound company is usually greater than the capital required to exercise those rights.

k. The listing requirements of the JSE require that during share buy-backs the quantity and
price at which buy-backs were done, must be announced with every 3% that is bought
back.
l. Underwriting refers to the process through which a large financial institution agrees to
buy all unsold shares in the case of a rights issue at the market price.
m. A company’s assets need to exceed its liabilities after a share buy-back transaction has
taken place.
n. A stock split refers to the process through which a large financial institution agrees to buy
all unsold shares in case of a rights issue at the market price.
o. Shareholders are compelled to respond to mandatory corporate actions.
p. The final dividend is the sum of the interim dividend plus the end dividend.
q. A company may buy back all of its issued shares in a share buy-back.
r. Underwriting refers to the process through which a large financial institution agrees to
buy all unsold shares in case of a rights issue at the issue price.
Question 30

The following items from the Statement of financial position of ABC Limited on 31 July 20XX
are provided to you.
Ordinary share capital (50 000 ordinary shares) R 5 000
Reserves R10 000
15% Cumulative preference share capital R 2 000
Shareholders’ equity R17 000
On the 1st of August 20XX the enterprise decides to expand its current activities. For this
purpose, an additional amount of R3 600 capital is required. The enterprise decides to use a
rights issue in order to obtain the necessary capital, and on the 3 rd of August an
announcement is made containing the following information:
Record date: 17 August 20XX (Friday)
Closing date: 31 August 20XX
30
 FUNDAMENTAL ANALYSIS

Issue ratio: 1 new share for each …?... existing shares

Issue price: R1,80 per share
a. The total amount (R) of ordinary share capital on the 31th of August 20XX will be?
b. How many additional ordinary shares are issued during the rights issue?
c. The issue ratio is 1 new share for each …?... existing shares.
d. The shares trade ex-rights from …… until ……
Assume that the above-mentioned rights issue took place. Since the current market
price of ABC Limited’s shares is relatively low, the board of directors decides on a stock
consolidation of the ordinary shares. The share consolidation takes place on the 14 th of
September 20XX, and entails that every existing 4 shares is consolidated into one new
share.
e. How many ordinary shares in total are issued after the stock consolidation took place?
f. What is the average issue price per ordinary share after the stock consolidation took
place?
g. What is the total amount of shareholders’ equity after the share consolidation took
place?
On October 1st 20XX the preliminary financial statements are compiled, and it is determined
that a larger than expected profit was realised (Remember: The rights issue and stock
consolidation has already taken place). As a result of this, the board of directors decides
to distribute a portion of this profit to the shareholders. However, since ABC Limited does not
have sufficient cash available to pay a cash dividend, it is decided to do a capitalisation issue
at the present market price of R2,50 to the existing shareholders. On October 5 th 20XX the
following information appeared in the financial press:
Record date: 26 October 20XX (Friday)
Capitalisation issue: 2 new shares for each 25 existing shares

h. How many additional ordinary shares are issued?

i. What is the amount of reserves on 26th October 20XX?

Question 31
Answer this question by writing down the correct INVESTMENT TERM.
You are a director of the company “High Five Ltd” which has existed since 1980. As a
director you possess shares in High Five Ltd. These shares along with other tradeable value
papers as well as insurance policies which can be used as a guarantee, are known as
….a)…. . As a discerning investor you purchased your shares with ….b)…. funds, i.e.
surplus funds/savings.
You and your co-directors decide in 20X0 to have the shares of the company listed on the
JSE. Before the company can be listed, the company must first be introduced to the general
public. This introduction is done by means of a ....c)... (document).
After listing, the activities of the company increased to such an extent that a shortage of
capital developed. The directors decided to increase the company’s capital by means of a
….d)….-issue. An announcement was made on 20 July 20X3 that each shareholder will
receive the right to purchase 4 new shares for each 100 shares they already possess. This
announcement is done by means of a ....e)..... With respect to the offer, the share register
closes on Friday, 15 September 20X3. On this day letters of allocation will be issued to
31
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

existing shareholders notifying them of how many new shares they may purchase. If
shareholders wish to purchase the new shares, they must react on or before 7 October
20X3. 15 September 20X3 is known as the …f)…. . During the period 13 September 20X3
and 7 October 20X3 the shares will be trading ….g)…. .
To ensure that the sale of the new shares will be successful, the directors of High Five Ltd
contacted a large financial institution to ….h)…. the issue at a fee. This implies that the
financial institution will purchase all unsold shares at the issue price.
Due to the positive political solutions in the country and the economic growth that followed,
share prices rose sharply over the next 8 years. The exchange is thus in a predominantly
….i)…. market (phase). The share price of High Five Ltd-shares quickly rose to an
unaffordable R890 per share. The board of directors are worried that the shares of their
company (because they are so expensive) may end up in the hands of a few large
institutional investors, therefore they decided on a ….j)…. so that the share price can be
decreased so that the general public can afford it.

Question 32
Le Jomana Limited was established in 20X0 with an issued ordinary share capital of 400 000
ordinary shares issued at an issue price of R2 each. In 20X5 you inherited 1 000 Le Jomana
shares from an uncle. By 20X8 the market price per share amounted to R42, therefore Le
Jomana Ltd. executed a stock split of 4 new shares for every 1 existing share. On 10 July
20X9 the following announcements appeared in Business Day:
Announcement 1:
Due to the positive growth in the profits of Le Jomana Ltd. a cash dividend as well as free
shares will be given to each shareholder. The cash dividend is 30c per share and each
shareholder will also receive 5 free shares for every 100 ordinary shares that he/she holds.
The dates for these allocations are as follow:
Last day of trading of the shares that qualify for the Tuesday, 28 July 20X9
dividend and free shares.
Trading without the right to the dividend and free Wednesday, 29 July 20X9
shares commences.
The record date. Friday, 31 July 20X9
The dividend is paid/deposited. Monday, 3 August 20X9
The free shares are allocated. Tuesday, 4 August 20X9
Announcement 2:
Le Jomana plans to erect a new factory in Bophethikonswethi in 201X and therefore requires
R2 520 000. To acquire the required R2 520 000, the company invites the existing
shareholders to purchase new ordinary shares at R30 each. The ordinary shares of the
company presently trade at R35 per share on the JSE. Triad Finance Ltd. has undertaken
(at a commission) to purchase all unsold shares. The dates for the sale of further shares in
the company are as follow:
Last day of trading of the shares that qualify for the right to Tuesday, 13 October 20X9
the new shares
Trading without the right to purchase the new shares Wednesday, 14 October 20X9
commences.
The record date. Friday, 16 October 20X9
32
 FUNDAMENTAL ANALYSIS

Trading on the JSE of the letters of allocation starts. Monday, 19 October 20X9
Closing date for applications to purchase the new shares. Friday, 12 November 20X9
Answer the following questions:
a. Shares trade ex dividend from 29 July 20X9 until ..... 20X9.
b. How many new shares in total may you purchase in Le Jomana Ltd. according to
announcement 2?
c. The total amount of dividends that you will receive according to announcement 1 will
amount to .......
d. How many Le Jomana shares will you possess after the allocation of the free shares?
e. The process according to which Triad Finance undertakes to purchase all unsold
shares in announcement 2 is known as ....
f. Shares trade ex rights until ............ 20X9.
g. For the dividend allocation, shares may not be dematerialised or rematerialised during
the period from 29 July 20X9 until .......... 20X9.

Question 33
On 4 June 20XX Supergrow Ltd announced a dividend of 10c per share. This dividend was
paid on 31 July 20XX. Due to the dividend declaration, no shares may be dematerialised or
rematerialised from Wednesday, 24 June until Friday, 26 June 20XX. Answer the following
questions:
a. The record (registration) date is ......
b. The cum dividend period ends on ......
c. The ex-dividend period starts on .......

Question 34
Statement of financial position: Equity
Ordinary share capital (4 000 ordinary shares) R8 000
Reserves 2 000
Preference share capital 2 000
Shareholders’ equity 12 000
Giggling Gerty decides to offer shareholders the right to purchase another 20 shares for every
500 ordinary shares that they possess. The market price of the share is currently R18 and the
issue price is R14. How will the statement of financial position look after the rights issue?
Question 35
On Monday, 4 January 20XX you purchased 500 shares in Newgro Ltd at R1,20 per share.
You read in the newspaper of 15 January that Newgro is offering 20 new shares per 100
existing shares at R1,40 per share with a closing date of 15 February. Due to this offer no
shares may be dematerialised or rematerialised from Wednesday, 27 January to Friday 29
January. On Thursday, 28 January you purchase a further 400 shares at R1,80 per share
and your offer to buy the new shares during the rights issue is also successful.
In the newspaper of 4 March, you read that Newgro will consolidate their shares at a ratio of
4 for 1. The consolidation will take place on Friday, 19 March. In the same article it is stated
that a capitalisation issue (bonus share issue) of 10 shares for every 50 existing shares will
33
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

be done with the last day of cum-trading being Tuesday, 23 March. In the newspaper of 13
April, you read that a dividend of 25c per share will be paid out on Monday, 20 May. The
record date is indicated as Friday, 17 May. On Monday, 29 April you purchase a further 200
shares in Newgro Ltd at R8 per share.
Answer the following questions:
a. Shares trade ex rights from ....... 20XX until ....... 20XX.
b. The last day of cum dividend trading is ..... 20XX
c. The record date for the rights issue is ....... 20XX
d. Ex dividend trading starts on ......... 20XX
e. How many shares do you possess on 10 February 20XX?
f. How many shares do you possess on 31 March 20XX?
g. How many shares do you possess on 15 May 20XX?
h. How many free shares do you receive during the capitalisation issue?
i. What amount will your dividend payment be?
j. What is the average purchase price of all your shares that you possess on 15 May
20XX?

Question 36
Below is the Statement of financial position of Mission Limited
Equity
Ordinary share capital (100 000 issued shares) R250 000
General reserve 60 000
Preference share capital 90 000
Shareholders’ equity 400 000
Mission Ltd. intends to expand its activities. The total amount required for the expansion
amounts to R500 000. Mission Ltd. decides to do a rights issue to obtain the capital
required. The market price of the share is currently R10 and the issue price is R8. How will
the Statement of financial position look after the rights issue?
Ignore the above rights issue.
a. If Mission Ltd. has attributable earnings of R200 000, what is their current earnings
per share? (do not use averages).
b. Suppose Mission Ltd. is seeking a higher earnings per share and they decide to do a
share buy-back to achieve that. If Mission Ltd. decides to buy back 20 000 of its
issued shares, what will the new earnings per share be?

Question 37
On 1 January 20XX you possess 4 500 Lucky Duckie Ltd. shares. You read in The Business
Day of Saturday, 15 January, that the company plans a rights issue at R6,50 per share with
an issue ratio of 3 new shares for every 20 existing shares. The present market price per
share is R7. In light of the rights issue no shares may be dematerialised or rematerialised
from Tuesday, 9 February to Thursday, 11 February. You apply for your new shares and
receive the shares on Wednesday, 9 March.

34
 FUNDAMENTAL ANALYSIS

In the newspaper of Thursday, 24 March it is announced that the company plans a

consolidation of shares of 5-to-1 on Friday, 8 April. Any fraction of a share that follows from
the consolidation will be rounded to the nearest whole number.
The Business Day of Tuesday, 3 May notifies its readers that Lucky Duckie Ltd. has declared
a dividend that will be paid on Monday, 27 June. The record date for the dividend is Friday,
24 June. On Friday, 20 May you purchase a further 120 shares of Lucky Duckie Ltd.
A capitalisation issue of 1 free share for every existing 25 shares was announced on Friday,
1 July, with a record date of Friday, 15 July. Again any fraction of a share will be rounded to
the nearest whole number.
Use all this information and answer the following questions:

a. The last day on which the shares trade “cum rights” is ....
b. How much did you pay for the shares that you purchased during the rights issue?
c. If dividends to the value of R635,25 was paid into your bank account on 27 June, how
much was the dividend per share?
d. The last day on which the shares trade “cum dividend” is ....
e. How many shares do you own (possess) on 31 July 20XX?

Question 38
Below is an extract from the Statement of financial position of Dazzling Daisy for 20XX:

Ordinary share capital (4 000 ordinary shares issued) R16 000

Reserves R4 000
Preference share capital R4 000

a. The management of Dazzling Daisy decides to give shareholders another 10 shares

for every 250 ordinary shares that they already possess. The market price per share
is currently R20. How will the statement of financial position look after this
management decision has been executed?
b. Ignore question a. Dazzling Daisy decides to rather give shareholders the right to
buy 1 share for every 5 ordinary shares that they already possess. The market price
per share is currently R20 and the issue price is R16. How will the statement of
financial position look after the rights issue?
c. Which speculator will probably endeavor to make a quick profit out of the rights
issue?
d. Assume a shareholder owns 100 ordinary shares in Dazzling Daisy. How many
shares should she purchase to maintain her percentage voting right in the company?

35
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Question 39
A pie company “The Pie’s the Limit Ltd” was established in 1988 with an issued share capital
of 400 000 ordinary shares issued at an issue price of R2 each. Management decided in
1993 to have the shares of the company listed on the JSE. In August 2000 you became a
shareholder of company “The Pie’s the Limit Ltd” by purchasing 4 000 ordinary shares on the
JSE. By 2008 the market price per share was so low that the directors decided on a share
consolidation of 1 share for every 2 existing shares.

23 April 2016 you read the following advertisement of “The Pie’s the Limit Ltd” in the
Business Day.

The Pie’s the Limit

Notice is hereby given of the following offers made by “The Pie’s the Limit Ltd” to all its
registered shareholders.

Announcement 1:
Due to the positive growth in the profits of “The Pie’s the Limit Ltd” a cash dividend as well as
free shares will be given to each shareholder. The cash dividend is 30c per share and each
shareholder will also receive 5 free shares for every 100 ordinary shares that he/she holds.
The dates for these allocations are as follows:

Last day of cum-dividend trading. Tuesday, 7 May 2016

Last day of trading with the right to bonus shares. Friday, 17 May 2016
The dividend is paid/deposited. Monday, 13 May 2016

Announcement 2:
“The Pie’s the Limit Ltd” decided to expand their plant in Kuruman. To acquire the required
R1,89 million, the company herewith invite the existing shareholders to purchase new
ordinary shares at R45 each. Shareholders that bought shares before or on Friday 25 June
2016, receive the opportunity to buy additional shares during the rights issue. Closing date
for this offer is 16 July 2016. You decide to exercise all your rights.
a. Shares trade ex dividend from ....... 2016 until ....... 2016.
b. The period of no re- or de-materialisation of shares during the rights issue is from
....... 2016 until ....... 2016.
c. The record date with regards to dividends are ....... 2016.
d. To how many shares do you have the right during the rights issue?
e. How many shares do you possess on 30 May 2016?
f. How many free shares are issued by the company during the capitalisation issue?
g. What amount will your dividend payment be?
h. The cum-rights period starts on ........ 2016.
i. The total number of issued shares of the company at the end of July 2016?

36
 FUNDAMENTAL ANALYSIS

Question 40

Write down the missing word/number:

Tom, Dick, Harry and Sue decided on 20 January 1960 to start a public company. After the
articles and memorandum of association of the company had been registered with the
Registrar of Companies, they issued a ..(a.).. in which the public was invited to buy shares in
the new company. The company, known as Brumbies Ltd, successfully started doing
business on 1 April 1960.

In 1980 you were elected as a director of the company “Brumbies Ltd”. As a director you
possess shares in Brumbies Ltd. These shares, along with other tradeable value papers, as
well as insurance policies which can serve as guarantee, are known as ..(b.)..

During 1985 you and your co-directors decided to have the shares of the company listed on
the Johannesburg Securities Exchange (JSE). Before the company can be listed, it (the
company) must first be introduced to the general public. This introduction is done by means
of a ..(c.).. which is published in certain newspapers.

After listing, the activities of the company increased to such an extent that, a shortage of
capital developed. Therefore the directors decided to increase the capital of the company
through a ..(d.)..-issue. On 20 July 1993 it was announced that each shareholder could
purchase another 4 shares for every 100 shares he already possessed. Allocation letters
would be sent to all shareholders listed in the share register on 15 September 1993 as all
owners of shares on that day would be entitled to the new shares. The offer to purchase the
new shares would expire on 15 December 1993. 15 September 1993 is known as the ..(e.)..

To ensure that the sales of the new shares would be a success, the directors of Brumbies
Ltd contacted a large financial institution to ..(f.).. the issue at a fee. This implies that the
financial institution would purchase all unsold shares at the issue price.

Due to the positive political trends in the country and the economic growth following this,
share prices rose sharply over the next five years. The stock exchange was therefore in a
..(g.).. market. The share price of Brumbies Ltd-shares quickly grew to an unaffordable R390
per share. The directors were worried that the shares of their company (because they were
so expensive) would end up in the hands of a small number of large investment companies,
the so-called ..(h.)... Therefore they decided on a ..(i.).. in order to decrease the price of their
shares so that the general public could afford them again.

37
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

COMPONENT 3: FUNDAMENTAL ANALYSIS

ADDITIONAL EXERCISES - SOLUTIONS

Question 1 Credit sales Cash sales

Turnover ratio of inventory per month 30 days = 1 times 10 days = 3 times
Profit per cycle 80 R200 40 R200
x = R160 x = R80
100 1 100 1
Profit per month R160 x 1 = R160 R80 x 3 = R240
Monthly return on initial capital 160 100 240 100
x = 80% x = 120%
200 1 200 1
What amount of capital is required in 200 600 200 600
order to generate R600 gross profit per x = x =
1 160 1 240
month? R750 R500

Mark-up of 80% Selling price Cost price Profit

180 100 80

Mark-up of 40% Selling price Cost price Profit

140 100 40

Question 2 a. b. c. d. e. f. g. h. i. j. k. l.
X X X X √ √ √ X X √ X X

Question 3 a gross profit

b turnover ratio
c Solvency
d Reserves
e Price-earnings ratio
f Dividend cover

Question 4 Credit sales Cash sales

Turnover ratio of inventory per month 30 days = 1 times 6 days = 5 times
Profit per cycle 80 R300 25 R300
x = R240 x = R100
100 1 75 1
Profit per month R240 x 1 = R240 R100 x 5 = R500
Monthly return on initial capital 240 100 500 100
x x
300 1 300 1
= 80% = 166,67%
What amount of capital is required in 300 900 300 900
x x
order to generate R900 gross profit per 1 240 1 500
month? = R1 125 = R540

38
 FUNDAMENTAL ANALYSIS

Mark-up of 80% Selling price Cost price Profit

180 100 80

Gross profit percent of 25% Selling price Cost price Profit

100 75 25

Question 5
Dividend per share 100 ? 100
a. DY = x = x = 7,5%
Market price 1 160c 1
Dividend per share = 12c

Earnings per share ?

b. Dividend cover = = = 1,7
Dividend per share 12c
Earnings per share = 20,4c

Earnings per share 100 20,4c 100

EY = x = x = 12,75%
Market price 1 160c 1
OR EY = DY x Dividend cover = 7,5% x 1,7 = 12,75%
Market price
c. Price-earnings ratio =
Earnings per share
Thus Market price = PE x EPS = 7 x 20,4c = 142,8c per share

Question 6 1 The comparison made must be meaningful, i.e. the relationship investigated
must be relevant
2 The value of the ratio must be a true indication of the financial performance
3 The value of a ratio must be comparable over a period of time

Question 7
Statement of financial position of James Ltd as at 31 December 20X8
ASSETS 20X8 20X7
PPE @ cost price 170 000 145 000
- Accumulated depreciation (40 000) (35 000)
Total PPE @ carrying value 130 000 110 000
Goodwill 4 000 4 000
Intangible assets 4 000 4 000
LT loans granted (6%) 16 000 16 000
Financial assets 16 000 16 000
NON-CURRENT ASSETS 150 000 130 000
Trade receivables 25 000 19 000
Inventory 17 000 16 000
Cash 7 000 13 000
Prepayments 1 000 2 000
CURRENT ASSETS 50 000 50 000
TOTAL ASSETS 200 000 180 000

39
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

EQUITY AND LIABILITIES 20X8 20X7

Ordinary shares (20X8 = 100 000; 20X7 = 90 000) 120 000 100 000
General reserves 4 000 3 000
Retained earnings 21 000 19 000
Ordinary shareholders’ equity 145 000 122 000
Preference shares (10%) 5 000 5 000
Shareholders’ equity 150 000 127 000
EQUITY 150 000 127 000
Long-term loans (8%) 10 000 9 000
Debentures (7%) 6 000 6 000
Mortgage loan (5%) 10 000 16 000
NON-CURRENT LIABILITIES 26 000 31 000
Trade payables 14 000 10 000
Bank overdraft (10%) 8 000 11 000
Dividends payable 2 000 1 000
CURRENT LIABILITIES 24 000 22 000
TOTAL EQUITY AND LIABILITIES 200 000 180 000
Statement of profit or loss of James Ltd for the year ended 31 December 20X8
Revenue (160%) 80 000
- Cost of sales (100%) (50 000)
GROSS PROFIT (60%) 30 000
- Operating expenses (depreciation R7 000) (21 715)
OPERATING PROFIT 8 285
+ Investment income 960
+ Gain on the disposal of PPE 1 400
- Finance costs (2 520)
PROFIT before TAX (100%) 8 125
- Income tax expense (20%) (1 625)
PROFIT after TAX (80%) 6 500
- Preference share dividends (500)
ATTRIBUTABLE EARNINGS 6 000
- Ordinary share dividends (3 000)
- Transfer to reserves (1 000)
RETAINED EARNINGS 2 000

Question 8 Credit sales Cash sales

Turnover ratio of inventory per month 30 days = 1 times 5 days = 6 times
Profit per cycle 50 R300 10 R300
x = R150 x = R33,33
100 1 90 1
Profit per month R150 x 1 = R150 R33,33 x 6 = R199,98
Monthly return on initial capital 150 100 199,98 100
x = 50% x =
300 1 300 1
66,66%
What amount of capital is required in 300 900 300 900
order to generate R900 gross profit x = R1 800 x =
1 150 1 199,98
per month? R1 350,14
40
 FUNDAMENTAL ANALYSIS

Mark-up of 50% Selling price Cost price Profit

150 100 50

Gross profit percent of 10% Selling price Cost price Profit

100 90 10

Question 9
Statement of financial position of Wimpie Ltd as at 31 December 20X8
ASSETS 20X8 20X7
PPE @ cost price 240 000 180 000
- Accumulated depreciation (70 000) (50 000)
Total PPE @ carrying value 170 000 130 000
Patents & licences 8 000 8 000
Intangible assets 8 000 8 000
Share investments 7 000 6 000
Loans granted 5 000 4 000
Financial assets 12 000 10 000
NON-CURRENT ASSETS 190 000 148 000
Trade receivables 13 000 9 000
Inventory 25 000 18 000
Cash 21 000 13 000
Prepayments 1 000 2 000
CURRENT ASSETS 60 000 42 000
TOTAL ASSETS 250 000 190 000

EQUITY AND LIABILITIES 20X8 20X7

Ordinary shares (20X8 = 20 000; 20X7 = 15 000) 55 000 30 000
General reserves 2 000 2 000
Retained earnings 43 000 28 000
Ordinary shareholders’ equity 100 000 60 000
Preference shares (10%) 20 000 20 000
Shareholders’ equity 120 000 80 000
EQUITY 120 000 80 000
Long-term loans (9%) 20 000 18 000
Debentures (7%) 40 000 35 000
Mortgage loan (4%) 50 000 37 000
NON-CURRENT LIABILITIES 110 000 90 000
Trade payables 4 000 7 000
Bank overdraft (10%) 14 000 12 000
Dividends payable 2 000 1 000
CURRENT LIABILITIES 20 000 20 000
TOTAL EQUITY AND LIABILITIES 250 000 190 000

41
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Statement of profit or loss of Wimpie Ltd for the year ended 31 December 20X8
Revenue (150%) 225 000
- Cost of sales (100%) (150 000)
GROSS PROFIT (50%) 75 000
- Operating expenses (depreciation R24 000) (35 000)
OPERATING PROFIT 40 000
+ Investment income 1 200
- Loss on the disposal of PPE (200)
- Finance costs (8 000)
PROFIT before TAX (100%) 33 000
- Income tax expense (33⅓%) (11 000)
PROFIT after TAX (66⅔%) 22 000
- Preference share dividends (2 000)
ATTRIBUTABLE EARNINGS 20 000
- Ordinary share dividends (5 000)
RETAINED EARNINGS 15 000
Return on total assets Operating profit + Investment income 100
x
Average total assets 1
40 000 + 1 200 100
x = 18,73%
0,5(250 000 + 190 000) 1
Turnover time of current assets Average current assets 360
x
Net revenue 1
51 000 360
x = 81,6 days
225 000 1
Gross profit margin Gross profit 100
x
Revenue 1
75 000 100
x = 33⅓%
225 000 1
Acid test ratio Current assets - Inventory - Prepayments
Current liabilities
60 000 - 25 000 - 1 000
= 1,7
20 000
Turnover time of inventory Average inventory 360
x
Cost of sales 1
21 500 360
x = 51,6 days
150 000 1
Finance costs cover Profit before tax + Finance cost (EBIT)
Finance costs
41 000
= 5,13 times
8 000
Price-earnings ratio Market price Attributable earnings
EPS =
Earnings per share Average number of OS issued
560 20 000
= 4,9 = 114,29c
114,29 0,5(20 000 + 15 000)
42
 FUNDAMENTAL ANALYSIS

Question 10
Statement of financial position of Prime Dot Ltd as at 28 February 20X9
20X9 20X8
PPE @ cost price 47 500 40 000
- Accumulated depreciation (15 000) (12 000)
Total PPE @ carrying value 32 500 28 000
Patents & licences 1 500 1 500
Intangible assets 1 500 1 500
Share investments 3 000 2 300
LT loans granted (5%) 6 000 3 200
Financial assets 9 000 5 500
NON-CURRENT ASSETS 43 000 35 000
Trade receivables 22 000 18 000
Inventory 14 000 11 000
Cash 10 000 4 000
Prepayments 1 000 2 000
CURRENT ASSETS 47 000 35 000
TOTAL ASSETS 90 000 70 000
Ordinary shares (20X9 = 5 000; 20X8 = 4 000) 30 000 20 000
Retained earnings 4 000 5 000
Ordinary shareholders’ equity 34 000 25 000
Preference shares (12%) 2 000 2 000
Shareholders’ equity 36 000 27 000
EQUITY 36 000 27 000
Long-term loans (7%) 5 000 4 000
Debentures (8%) 4 500 3 000
Mortgage loan (6%) 25 000 22 000
NON-CURRENT LIABILITIES 34 500 29 000
Trade payables 9 000 6 000
Bank overdraft (10%) 8 900 6 000
Current tax liabilities 900 600
Dividends payable 700 1 400
CURRENT LIABILITIES 19 500 14 000
TOTAL EQUITY AND LIABILITIES 90 000 70 000
Statement of profit or loss of Prime Dot Ltd for the year ended 28 February 20X9
Revenue (166⅔%) 100 000
- Cost of sales (100%) (60 000)
GROSS PROFIT (66⅔%) 40 000
- Operating expenses (depreciation R4 000) (35 890)
OPERATING PROFIT 4 110
+ Investment income (300 + 300) 600
- Loss on the disposal of PPE (500)
- Finance costs (3 100)
PROFIT before TAX (100%) 1 110
- Income tax expense (33⅓%) (370)
PROFIT after TAX (66⅔%) 740
- Preference share dividends (240)
ATTRIBUTABLE EARNINGS 500
- Ordinary share dividends (1 500)
RETAINED EARNINGS (1 000)

43
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

NB: Investment income consists of: Dividends received = 300

+ interest on loans granted = 300 (R6 000 @ 5%)
600

b. Inventory purchased = Opening Inventory 11 000

(thus Purchases) + Purchases ?
?
- Closing Inventory (14 000)
= Cost of sales 60 000
Purchases = R63 000

Question 11
Earnings per share EPS
a. Dividend cover = = = 3,5 times
Dividend per share 14c
thus: Earnings per share = 49c
Debt 100
b. Debt/equity ratio = x = 150%
Equity 1
thus: Equity = 100
Debt = 150
TOTAL CAPITAL = 250 = TOTAL ASSETS
Debt 100 150 100
Debt-to-assets ratio = x = x = 60%
Total assets 1 250 1

Average current assets 360

c. Turnover time of current assets = x = 48 days
Net revenue 1
Net revenue
Turnover ratio of current assets =
Average current assets
360
thus: Turnover ratio = = 7,5 times
48

Question 12
Statement of financial position of First Years’ Ltd as at 31 December 20X9
ASSETS 20X9 20X8
PPE @ cost price 150 000 135 000
- Accumulated depreciation (47 000) (40 000)
Total PPE @ carrying value 103 000 95 000
Intangible assets - Goodwill 8 000 8 000
Financial assets - LT loans granted (6%) 14 000 11 000
NON-CURRENT ASSETS 125 000 114 000
Trade receivables 16 400 21 100
Inventory 18 000 15 300
Cash 10 300 9 400
Prepayments 300 200
CURRENT ASSETS 45 000 46 000
TOTAL ASSETS 170 000 160 000
44
 FUNDAMENTAL ANALYSIS

EQUITY AND LIABILITIES 20X9 20X8

Ordinary shares (20X9 = 25 000; 20X8 = 20 000) 63 500 46 000
General reserve 10 000 9 000
Retained earnings 6 500 4 500
Ordinary shareholders’ equity 80 000 59 500
Preference shares (8%) 5 000 8 500
Shareholders’ equity 85 000 68 000
EQUITY 85 000 68 000
Long-term loans (9%) 25 000 20 000
Mortgage loan (6%) 40 000 50 000
NON-CURRENT LIABILITIES 65 000 70 000
Trade payables 12 100 11 400
Bank overdraft (10%) 7 500 10 100
Current tax liabilities 400 500
CURRENT LIABILITIES 20 000 22 000
TOTAL EQUITY AND LIABILITIES 170 000 160 000

Statement of profit or loss of First Years’ Ltd for the year ended 31 December 20X9
Revenue (125%) 150 000
- Cost of sales (100%) (120 000)
GROSS PROFIT (25%) 30 000
- Operating expenses (depreciation = R7 000) (13 300)
OPERATING PROFIT 16 700
+ Investment income 840
- Loss on the disposal of PPE (140)
- Finance costs (5 400)
PROFIT before TAX (100%) 12 000
- Income tax expense (30%) (3 600)
PROFIT after TAX (70%) 8 400
- Preference share dividends (400)
ATTRIBUTABLE EARNINGS 8 000
- Ordinary share dividends (5 000)
- Transfer to Reserves (1 000)
RETAINED EARNINGS 2 000
NB: Attributable earnings can be calculated by completing the statement
b. Ratios Calculation Answer
Profitability
16 700 + 840 100
1 Return on total assets (Ro) 
0,5(170 000 + 160 000) 1 10,63%
16 700 + 840 - 5 400 100
2 Return on equity (Re) 
0,5(85 000 + 68 000) 1 15,87%
5 400 100

3 Cost of debt (Rv) 0,5(65 000 + 20 000 + 70 000 + 22 000) 1 6,10%

45
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

840 100
4 Return on financial assets 
0,5(14 000 + 11 000) 1 6,72%
Profit margins
30 000 100
5 Gross profit margin  20%
150 000 1
16 700 100
6 Operating profit margin  11,13%
150 000 1
12 000 + 5 400 100
7 EBIT-margin  11,6%
150 000 1
8 400 100
8 Net profit margin  5,6%
150 000 1
Liquidity
45 000
9 Current ratio 2,25
20 000
45 000 - 18 000 - 300
10 Acid test ratio 1,34
20 000
Turnover ratios and times
150 000
11 Turnover ratio of current assets
0,5(45 000 + 46 000) 3,30 times
0,5(45 000 + 46 000) 360
12 Turnover time of current assets  109,2 days
150 000 1
150 000
13 Turnover ratio of PPE
0,5(103 000 + 95 000) 1,52 times
0,5(103 000 + 95 000) 360
14 Turnover time of PPE  237,6 days
150 000 1
Turnover ratio of trade 150 000
15
receivables 0,5(16 400 + 21100) 8 times
NB: There is no indication of the amount of credit sales, thus we use total revenue as credit
revenue
Turnover time of trade 0,5(16 400 + 21100) 360
16  45 days
receivables 150 000 1
120 000
17 Turnover ratio of inventory 7,21 times
0,5(18 000 + 15 300)
0,5(18 000 + 15 300) 360
18 Turnover time of inventory  49,95 days
120 000 1
Solvency ratios
65 000 + 20 000 100
19 Debt-to-assets ratio (Debt ratio)  50%
170 000 1
Coverage ratios
12 000 + 5 400
20 Finance costs cover 3,22 times
5 400
Dividend cover (Ordinary 8 000 EPS 35,56c
21 or = 1,6 times
shares) 5 000 DPS 22,22c
Investment ratios
46
 FUNDAMENTAL ANALYSIS

8 000
22 Earnings per share 35,56c
0,5(25 000 + 20 000)
35,56 100
23 Earnings yield x 8,89%
400 1
5 000
24 Dividend per share 22,22c
0,5(25 000 + 20 000)
22,22 100
25 Dividend yield x 5,56%
400 1
400
26 Price-earnings ratio 11,25
35,56
85 000 - 5 000 - 8 000 R2,88 /
27 Book value per share 288c
25 000

Question 13
a. Calculate the earnings per share D 8,47c
b. Calculate the turnover ratio of inventory B 8,47 times
c. Calculate the price-earnings ratio E 8,47
d. Calculate the dividend cover B 8,47 times
e. Calculate the return on total assets C 8,47%
f. Calculate the acid test ratio E 8,47

Question 14
Attributable earnings
a. Earnings per share =
Average number of ordinary shares issued
R36 857
= = 14,74c per share
0,5[260 000 + 240 000]

EPS 100 14,74c 100

b. Earnings yield = x = x = 4,21%
Market price 1 Market price 1
thus: Market price per ordinary share = 350,12c or R3,50

c. Average issue price per ordinary share

Issued OS - capital at end of 20X8 423 100
= = = 162,73c or R1,63
Number of OS issued at end of 20X8 260 000

d. Ordinary dividends declared = DPS x average number of ordinary shares issued

= 11,2c x 250 000 = R28 000

Shareholders' equity - PS capital - intangible assets

e. Book value per share =
Number of ordinary shares issued
496 750 - 3 300
= = 189,79c or R1,90
260 000

NB: Shareholders’ equity - PS capital = Ordinary shareholders’ equity = R496 750

47
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Question 15

a. Opening inventory + purchases - closing inventory = cost of sales

54 700 + 320 000 - ?? = ????

Opening inventory + closing inventory 54 700 + ??

Average inventory = = = 60 350
2 2
thus: Closing inventory = 66 000
thus: Cost of sales = R308 700

Credit revenue
b. Turnover ratio of trade receivables =
Average trade receivables
50% x Turnover (??) 0,5 x 460 450
= = = 3,49 times
0,5[48 250 + 83 600] 65 925
Revenue - Cost of sales = gross profit
?? - 308 700 = 151 750 thus: Revenue = R460 450

EBIT 60 510 + 13 600

c. Finance costs cover = = = 5,45 times
Finance costs 13 600
d. Income tax expense = 60 510 x 30% = R18 153
Attributable earnings 36 857
e. Ordinary dividend cover = = = 1,32 times
Ordinary dividends declared 28 000
Profit before tax 60 510
- Income tax expense (18 153)
Profit after tax 42 357
- Preference share dividends (5 500)
Attributable earnings 36 857
f. Attributable earnings = R36 857

Question 16 Credit sales Cash sales

Turnover ratio of inventory per month 30 days = 1 times 10 days = 3 times
Profit per cycle 40 R500 20 R500
x = R200 x = R125
100 1 80 1
Profit per month R200 x 1 = R200 R125 x 3 = R375
Monthly return on initial capital 200 100 375 100
x = 40% x = 75%
500 1 500 1
What amount of capital is required in 500 900 500 900
order to generate R900 gross profit x = R2 250 x = R1 200
1 200 1 375
per month?
Mark-up of 40% Selling price Cost price Profit
140 100 40
Gross profit percent of 20% Selling price Cost price Profit
100 80 20
48
 FUNDAMENTAL ANALYSIS

Question 17
Statement of profit or loss of Schumann Ltd for the year ended 31 December 20X9
Revenue (150%) 225 000
- Cost of sales (100%) (150 000)
GROSS PROFIT (50%) 75 000
- Operating expenses (depreciation R23 000) (33 000)
OPERATING PROFIT 42 000
+ Investment income (2 000 + 400) 2 400
- Loss on the disposal of PPE (500)
- Finance costs (6 400)
PROFIT before TAX (100%) 37 500
- Income tax expense (30%) (11 250)
PROFIT after TAX (70%) 26 250
- Preference share dividends (2 000)
ATTRIBUTABLE EARNINGS 24 250
- Ordinary share dividends (4 000)
- Transfer to reserves (2 750)
RETAINED EARNINGS 17 500
NB: Investment income = Interest received on loans granted 400
+ dividends received on share investments 2 000
2 400
b. Increase in ordinary share capital = 55 000 - 30 000 = R25 000
Increase in number of shares issued = 20 000 - 15 000 = 5 000
25 000
Issue price = = R5
5 000

Question 18
Market price 560
a. Price-earnings ratio = = = 16
EPS 35
EPS 100 35 100
b. Earnings yield = x = x = 6,25%
MP 1 560 1
EPS 35
c. Dividend per share = = = 5c per share
Dividend cover 7
Attributable earnings 5 250 000
d. Earnings per share = = = 35c
Average number of OS issued ??
thus: Average number of ordinary shares issued = 15 000 000 (15 million)

49
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Question 19
Statement of profit or loss of Larm Ltd for the year ended 28 February 20X8
Revenue (100%) 85 000
- Cost of sales (60%) (51 000)
GROSS PROFIT (40%) 34 000
- Operating expenses (depreciation R7 000) (18 000)
OPERATING PROFIT 16 000
+ Investment income 1 400
+ Gain on disposal of PPE 246
- Finance costs (2 646)
PROFIT before TAX (100%) 15 000
- Income tax expense (33⅓%) (5 000)
PROFIT after TAX (66⅔%) 10 000
- Preference share dividends (500)
ATTRIBUTABLE EARNINGS 9 500
- Ordinary share dividends (4 500)
RETAINED EARNINGS 5 000

b. Ratios Calculation Answer

Profitability
16 000 + 1 400 100
1 Return on total assets (Ro) x 15,82%
0,5(120 000 + 100 000) 1
16 000 + 1 400 - 2 646 100
2 Return equity (Re) x 22,70%
0,5(70 000 + 60 000) 1
2 646 100
3 Cost of debt (Rv) x 5,88%
0,5(50 000 + 40 000) 1
1 400 100
4 Return on financial assets x 10,37%
0,5(16 000 + 11 000) 1
Profit margins
34 000 100
5 Gross profit margin x 40%
85 000 1
16 000 100
6 Operating profit margin x 18,82%
85 000 1
15 000 + 2 646 100
7 EBIT-margin x 20,76%
85 000 1
10 000 100
8 Net profit margin x 11,76%
85 000 1
Liquidity
40 000
9 Current ratio 2,67
15 000
40 000 - 12 000 - 4 000
10 Acid test ratio 1,60
15 000
Turnover ratios and times
50
 FUNDAMENTAL ANALYSIS

85 000
11 Turnover ratio of current assets 2,43 times
0,5(40 000 + 30 000)
35 000 360
12 Turnover time of current assets x 148,24 days
85 000 1
85 000
13 Turnover ratio of PPE 1,48 times
0,5(60 000 + 55 000)
75 500 360
14 Turnover time of PPE x 243,53 days
85 000 1
Turnover ratio of trade 85 000
15 0,5(11 000 + 8 000) 8,95 times
receivables
NB: There is no indication of the amount of credit sales, thus we use total revenue.
Turnover time of trade 9 500 360
16 x 40,24 days
receivables 85 000 1
51 000
17 Turnover ratio of inventory 5,37 times
0,5(12 000 + 7 000)
9 500 360
18 Turnover time of inventory x 67,06 days
51 000 1
Solvency ratios
35 000 + 15 000 100
19 Debt-to-assets ratio (Debt ratio) x 41,67%
120 000 1
Coverage ratios
15 000 + 2 646
20 Finance costs cover 6,67 times
2 646
Dividend cover (Ordinary 9 500 44,71
21 of 2,11 times
shares) 4 500 21,18
Investment ratios
9 500
22 Earnings per share 44,71c
0,5(22 500 + 20 000)
44,71 100
23 Earnings yield x 8,94%
500 1
4 500
24 Dividend per share 21,18c
0,5(22 500 + 20 000)
21,18 100
25 Dividend yield x 4,24%
500 1
500
26 Price-earnings ratio 11,18
44,71
70 000 - 5 000 - 4 000 R2,71 /
27 Book value per share
22 500 271,11c

51
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Question 20

Statement of financial position of Aussie Ltd as at 31 December 20X9

ASSETS 20X9 20X8
PPE @ cost price 146 000 120 000
- Accumulated depreciation (56 000) (40 000)
Total PPE @ carrying value 90 000 80 000
Goodwill 12 000 12 000
Intangible assets 12 000 12 000
Share investments 15 000 32 000
LT loans granted (10%) 23 000 16 000
Financial assets 38 000 48 000
NON-CURRENT ASSETS 140 000 140 000
Trade receivables 26 000 11 000
Inventory 35 000 20 000
Cash 29 000 19 000
CURRENT ASSETS 90 000 50 000
TOTAL ASSETS 230 000 190 000
EQUITY AND LIABILITIES 20X9 20X8
Ordinary shares (20X9 = 26 000; 20X8 = 22 000) 64 000 44 000
General reserves 21 000 14 000
Retained earnings 15 000 12 500
Ordinary shareholders’ equity 100 000 70 500
Preference shares (12%) 20 000 14 500
Shareholders’ equity 120 000 85 000
EQUITY 120 000 85 000
Long-term loans (8,5%) 20 000 16 500
Debentures (9%) 10 000 8 000
Mortgage loan (8%) 50 000 40 000
NON-CURRENT LIABILITIES 80 000 64 500
Trade payables 10 000 14 000
Bank overdraft (?%) 11 000 18 000
Current tax liabilities 2 000 6 000
Dividends payable 7 000 2 500
CURRENT LIABILITIES 30 000 40 500
TOTAL EQUITY AND LIABILITIES 230 000 190 000
Statement of profit or loss of Aussie Ltd for the year ended 31 December 20X9
Revenue (166⅔%) 200 000
- Cost of sales (100%) (120 000)
GROSS PROFIT (66⅔%) 80 000
- Operating expenses (depreciation = R18 000) (33 000)
OPERATING PROFIT 47 000
+ Investment income 3 300
+ Gain on the disposal of PPE 1 000
- Finance costs (7 700)
PROFIT before TAX (100%) 43 600

52
 FUNDAMENTAL ANALYSIS

- Income tax expense (25%) (10 900)

PROFIT after TAX (75%) 32 700
- Preference share dividends (2 400)
ATTRIBUTABLE EARNINGS 30 300
- Ordinary share dividends (20 800)
- Transfer to reserves (7 000)
RETAINED EARNINGS 2 500
b. Increase in ordinary share capital = 64 000 - 44 000 = 20 000
Increase in number of ordinary shares = 26 000 - 22 000 = 4 000
R20 000
Issue price = = R5
4 000

c. Finance costs = 7 700

Interest on long-term loans = 20 000 x 8,5% = (1 700)
Interest on debentures = 10 000 x 9% = (900)
Interest on mortgage loan = 50 000 x 8% = (4 000)
thus, Interest on bank overdraft = 11 000 x ?% = 1 100
1 100 100
Interest rate = x = 10%
11 000 1
d. Investment income = 3 300
Interest on LT loans granted = 23 000 x 10% = (2 300)
thus, Dividends received on the share investments = 1 000
1 000 100
Yield on share investments = x = 6,67%
15 000 1
e. Ratios Calculation Answer
Profitability
47 000 + 3 300 100
1 Return on total assets (Ro) x 23,95%
0,5(230 000 + 190 000) 1
47 000 + 3 300 - 7 700 100
2 Return on equity (Re) x 41,56%
0,5(120 000 + 85 000) 1
7 700 100
3 Cost of debt (Rv) x 7,16%
0,5(110 000 + 105 000) 1
3 300 100
4 Return on financial assets x 7,67%
0,5(38 000 + 48 000) 1
Profit margins
80 000 100
5 Gross profit margin x 40%
200 000 1
47 000 100
6 Operating profit margin x 23,5%
200 000 1
43 600 + 7 700 100
7 EBIT-margin x 25,65%
200 000 1
32 700 100
8 Net profit margin x 16,35%
200 000 1
Liquidity

53
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

90 000
9 Current ratio 3
30 000
90 000 - 35 000 - 0
10 Acid test ratio 1,83
30 000
Turnover ratios and times
200 000
11 Turnover ratio of current assets 2,86 times
0,5(90 000 + 50 000)
70 000 360
12 Turnover time of current assets x 126 days
200 000 1
200 000
13 Turnover ratio of PPE 2,35 times
0,5(90 000 + 80 000)
85 000 360
14 Turnover time of PPE x 153 days
200 000 1
Turnover ratio of trade 200 000
15 10,81 times
receivables 0,5(26 000 + 11 000)
NB: There is no indication of the amount of credit sales, thus we use total revenue.
Turnover time of trade 18 500 360
16 x 33,3 days
receivables 200 000 1
120 000
17 Turnover ratio of inventory 4,36 times
0,5(35 000 + 20 000)
27 500 360
18 Turnover time of inventory x 82,5 days
120 000 1
Solvency ratios
80 000 + 30 000 100
19 Debt-to-assets ratio (Debt ratio) x 47,83%
230 000 1
Coverage ratios
43 600 + 7 700
20 Finance costs cover 6,66 times
7 700
Dividend cover (Ordinary 30 300 126,25
21 or 1,46 times
shares) 20 800 86,67
Investment ratios
30 300
22 Earnings per share 126,25c
0,5(26 000 + 22 000)
126,25 100
23 Earnings yield x 21,04%
600 1
20 800
24 Dividend per share 86,67c
24 000
86,67 100
25 Dividend yield x 14,45%
600 1
600
26 Price-earnings ratio 4,75
126,25
120 000 - 20 000 - 12 000 R3,38 /
27 Book value per share
26 000 338,46c

54
 FUNDAMENTAL ANALYSIS

Question 21
Statement of financial position of Magoo Ltd as at 31 December 20X8
ASSETS 20X8 20X7
PPE @ cost price 515 000 460 000
- Accumulated depreciation (141 000) (120 000)
Total PPE @ carrying value 374 000 340 000
Goodwill 19 000 19 000
Intangible assets 19 000 19 000
Share investments 145 000 20 000
LT loans granted (9%) 14 000 10 000
Financial assets 159 000 30 000
NON-CURRENT ASSETS 552 000 389 000
Trade receivables 79 000 60 150
Inventory 44 000 39 000
Cash 214 500 94 200
CURRENT ASSETS 337 500 193 350
TOTAL ASSETS 889 500 582 350
EQUITY AND LIABILITIES 20X8 20X7
Ordinary shares (20X8 = 137 000; 20X7 = 107 000) 415 000 214 000
General reserves 47 000 34 000
Revaluation reserve 23 000 0
Retained earnings 74 500 42 350
Ordinary shareholders’ equity 559 500 290 350
Preference shares (11%) 40 000 40 000
Shareholders’ equity 599 500 330 350
EQUITY 599 500 330 350
Long-term loans (14%) 40 000 35 000
Mortgage loan (10%) 160 000 150 000
NON-CURRENT LIABILITIES 200 000 185 000
Trade payables 30 000 21 000
Bank overdraft (16%) 50 000 46 000
Dividends payable 10 000 0
CURRENT LIABILITIES 90 000 67 000
TOTAL EQUITY AND LIABILITIES 889 500 582 350

Statement of profit or loss of Magoo Ltd for the year ended 31 December 20X8
Revenue (125%) 1 200 000
- Cost of sales (100%) (960 000)
GROSS PROFIT (25%) 240 000
- Operating expenses (depreciation = R28 000) (85 000)
OPERATING PROFIT 155 000
+ Investment income 3 600
+ Gain on the disposal of PPE 1 000
- Finance costs (29 600)
PROFIT before TAX (100%) 130 000
- Income tax expense (25%) (32 500)
PROFIT after TAX (75%) 97 500
- Preference share dividends (4 400)
ATTRIBUTABLE EARNINGS 93 100
- Ordinary share dividends (47 950)
55
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

- Transfer to reserves (13 000)

RETAINED EARNINGS 32 150

b. Increase in ordinary share capital = R415 000 - R214 000 = R201 000
Increase in number of ordinary shares = 137 000 - 107 000 = 30 000
R201 000
Issue price = = R6,70
30 000

c. Ratios Calculation Answer

Profitability
155 000 + 3 600 100
1 Return on total assets (Ro) x 21,55%
0,5(889 500 + 582 350) 1
155 000 + 3 600 - 29 600 100
2 Return on equity (Re) x 27,75%
0,5(599 500 + 330 350) 1
29 600 100
3 Cost of debt (Rv) x 10,92%
0,5(290 000 + 252 000) 1
3 600 100
4 Return on financial assets x 3,81%
0,5(159 000 + 30 000) 1
Profit margins
240 000 100
5 Gross profit margin x 20%
1 200 000 1
155 000 100
6 Operating profit margin x 12,92%
1 200 000 1
130 000 + 29 600 100
7 EBIT-margin x 13,3%
1 200 000 1
97 500 100
8 Net profit margin x 8,13%
1 200 000 1
Liquidity
337 500
9 Current ratio 3,75
90 000
337 500 - 44 000 - 0
10 Acid test ratio 3,26
90 000
Turnover ratios and times
1 200 000
11 Turnover ratio of current assets 4,52 times
0,5(337 500 + 193 350)
265 425 360
12 Turnover time of current assets x 79,63 days
1 200 000 1
1 200 000
13 Turnover ratio of PPE 3,36 times
0,5(374 000 + 340 000)
357 000 360
14 Turnover time of PPE x 107,1 days
1 200 000 1
Turnover ratio of trade 1 200 000
15 17,25 times
receivables 0,5(79 000 + 60 150)
NB: There is no indication of the amount of credit sales, thus we use total revenue.

56
 FUNDAMENTAL ANALYSIS

Turnover time of trade 69 575 360

16 x 20,87 days
receivables 1 200 000 1
960 000
17 Turnover ratio of inventory 23,13 times
0,5(44 000 + 39 000)
41 500 360
18 Turnover time of inventory x 15,56 days
960 000 1
Solvency ratios
290 000 100
19 Debt-to-assets ratio (Debt ratio) x 32,60%
889 500 1
Coverage ratios
130 000 + 29 600
20 Finance costs cover 5,39 times
29 600
Dividend cover (Ordinary 93 100 76,31
21 or 1,94 times
shares) 47 950 39,3
Investment ratios
93 100
22 Earnings per share 76,31c
0,5(137 000 + 107 000)
76,31 100
23 Earnings yield x 10,60%
720 1
47 950
24 Dividend per share 39,3c
0,5(137 000 + 107 000)
39,3 100
25 Dividend yield x 5,46%
720 1
720
26 Price-earnings ratio 9,44
76,31
599 500 - 40 000 - 19 000 R3,95
27 Book value per share
137 000 394,53c

Question 22
Statement of financial position of Snoekie Ltd as at 31 December 20X7
ASSETS 20X7 20X6
PPE @ cost price 61 500 48 800
- Accumulated depreciation (11 600) (8 300)
Total PPE @ carrying value 49 900 40 500
Intangible assets - Goodwill 3 000 3 000
Financial assets - Share investments 9 600 14 000
NON-CURRENT ASSETS 62 500 57 500
Inventory 16 700 14 500
Trade receivables 5 000 8 800
Cash 15 400 9 000
Prepayments 400 200
CURRENT ASSETS 37 500 32 500
TOTAL ASSETS 100 000 90 000

57
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

EQUITY AND LIABILITIES 20X7 20X6

Ordinary shares (20X7 = 25 000; 20X6 = 20 000) 32 500 20 000
General reserves 4 000 3 000
Retained earnings 16 500 10 000
Ordinary shareholders’ equity 53 000 33 000
Preference shares (8%) 3 000 5 000
Shareholders’ equity 56 000 38 000
EQUITY 56 000 38 000
Debentures (5%) 14 000 8 000
Mortgage loan (4%) 15 000 26 000
NON-CURRENT LIABILITIES 29 000 34 000
Trade payables 5 200 5 900
Bank overdraft (8%) 4 500 6 000
Current tax liabilities 1 200 2 600
Dividends payable 4 100 3 500
CURRENT LIABILITIES 15 000 18 000
TOTAL EQUITY AND LIABILITIES 100 000 90 000
Statement of profit or loss of Snoekie Ltd for the year ended 31 December 20X7
Revenue (100%) 80 000
- Cost of sales (65%) (52 000)
GROSS PROFIT (35%) 28 000
- Operating expenses (9 200)
OPERATING PROFIT 18 800
+ Investment income 1 200
- Loss on the disposal of PPE (140)
- Finance costs (1 660)
PROFIT before TAX (100%) 18 200
- Income tax expense (30%) (5 460)
PROFIT after TAX (70%) 12 740
- Preference share dividends (240)
ATTRIBUTABLE EARNINGS 12 500
- Ordinary share dividends (5 000)
- Transfer to reserves (1 000)
RETAINED EARNINGS 6 500

b. Increase in ordinary share capital = R32 500 - R20 000 = R12 500
Increase in number of ordinary shares = 25 000 - 20 000 = 5 000
R12 500
Issue price = = R2,50
5 000

c. Ratios Calculation Answer

Profitability
18 800 + 1 200 100
1 Return on total assets (Ro) x 21,05%
0,5(100 000 + 90 000) 1
18 800 + 1 200 - 1 660 100
2 Return on equity (Re) x 39,02%
0,5(56 000 + 38 000) 1
1 660 100
3 Cost of debt (Rv) x 3,46%
0,5(44 000 + 52 000) 1

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 FUNDAMENTAL ANALYSIS

1 200 100
4 Return on financial assets x 10,17%
0,5(9 600 + 14 000) 1
Profit margins
28 000 100
5 Gross profit margin x 35%
80 000 1
18 800 100
6 Operating profit margin x 23,5%
80 000 1
18 200 + 1 660 100
7 EBIT-margin x 24,83%
80 000 1
12 740 100
8 Net profit margin x 15,93%
80 000 1
Liquidity
37 500
9 Current ratio 2,5
15 000
37 500 - 16 700 - 400
10 Acid test ratio 1,36
15 000
Turnover ratios and times
80 000
11 Turnover ratio of current assets 2,29 times
0,5(37 500 + 32 500)
35 000 360
12 Turnover time of current assets x 157,5 days
80 000 1
80 000
13 Turnover ratio of PPE 1,77 times
0,5(49 900 + 40 500)
45 200 360
14 Turnover time of PPE x 203,4 days
80 000 1
Turnover ratio of trade 80 000
15 11,59 times
receivables 0,5(5 000 + 8 800)
NB: There is no indication of the amount of credit sales, thus we use total revenue.
Turnover time of trade 6 900 360
16 x 31,05 days
receivables 80 000 1
52 000
17 Turnover ratio of inventory 3,33 times
0,5(16 700 + 14 500)
15 600 360
18 Turnover time of inventory x 108 days
52 000 1
Solvency ratios
29 000 + 15 000 100
19 Debt-to-assets ratio (Debt ratio) x 44%
100 000 1
Coverage ratio
18 200 + 1 660
20 Finance costs cover 11,96 times
1 660
Dividend cover (Ordinary 12 500 55,56
21 or 2,5 times
shares) 5 000 22,22
Investment ratios

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COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

12 500
22 Earnings per share 55,56c
0,5(25 000 + 20 000)
55,56 100
23 Earnings yield x 11,11%
500 1
5 000
24 Dividend per share 22,22c
22 500
22,22 100
25 Dividend yield x 4,44%
500 1
500
26 Price-earnings ratio 9
55,56
56 000 - 3 000 - 3 000 R2 /
27 Book value per share
25 000 200c

Question 23
Statement of financial position of Cable Ltd as at 31 December 20X8
ASSETS 20X8 20X7
PPE @ cost price 112 000 101 000
- Accumulated depreciation (48 000) (39 000)
Total PPE @ carrying value 64 000 62 000
Intangible assets – Goodwill 5 000 5 000
Financial assets - Loans granted (4%) 11 000 8 000
NON-CURRENT ASSETS 80 000 75 000
Trade receivables 14 400 11 600
Inventory 16 000 13 000
Cash 8 900 9 500
Prepayments 700 900
CURRENT ASSETS 40 000 35 000
TOTAL ASSETS 120 000 110 000
EQUITY AND LIABILITIES 20X8 20X7
Ordinary shares (20X8 = 16 000; 20X7 = 12 000) 34 000 24 000
General reserves 4 000 3 000
Retained earnings 24 000 11 000

Ordinary shareholders’ equity 62 000 38 000

Preference shares (10%) 2 000 8 000
Shareholders’ equity 64 000 46 000
EQUITY 64 000 46 000
Debentures (5%) 24 000 30 000
Mortgage loan (4%) 10 000 15 000
NON-CURRENT LIABILITIES 34 000 45 000
Trade payables 18 900 15 200
Bank overdraft (10%) 1 000 1 900
Dividends payable 600 900
Current tax liabilities 1 500 1 000
CURRENT LIABILITIES 22 000 19 000
TOTAL EQUITY AND LIABILITIES 120 000 110 000

60
 FUNDAMENTAL ANALYSIS

Statement of profit or loss of Cable Ltd for the year ended 31 December 20X8
Revenue (150%) 180 000
- Cost of sales (100%) (120 000)
GROSS PROFIT (50%) 60 000
- Operating expenses (25 360)
OPERATING PROFIT 34 640
+ Investment income 440
+ Gain on the disposal of PPE 370
- Finance costs (1 700)
PROFIT before TAX (100%) 33 750
- Income tax expense (20%) (6 750)
PROFIT after TAX (80%) 27 000
- Preference share dividends (200)
ATTRIBUTABLE EARNINGS 26 800
- Ordinary share dividends (12 800)
- Transfer to reserves (1 000)
RETAINED EARNINGS 13 000

b. Increase in ordinary share capital = R34 000 - R24 000 = R10 000
Increase in number of ordinary shares = 16 000 - 12 000 = 4 000
R10 000
Issue price = = R2,50
4 000

c. Ratios Calculation Answer

Profitability
34 640 + 440 100
1 Return on total assets (Ro) x 30,50%
0,5(120 000 + 110 000) 1
34 640 + 440 - 1 700 100
2 Return on equity (Re) x 60,69%
0,5(64 000 + 46 000) 1
1 700 100
3 Cost of debt (Rv) x 2,83%
0,5(56 000 + 64 000) 1
440 100
4 Return on financial assets x 4,63%
0,5(11 000 + 8 000) 1
Profit margins
60 000 100
5 Gross profit margin x 33⅓%
180 000 1
34 640 100
6 Operating profit margin x 19,24%
180 000 1
33 750 + 1 700 100
7 EBIT-margin x 19,69%
180 000 1
27 000 100
8 Net profit margin x 15%
180 000 1
Liquidity
40 000
9 Current ratio 1,82
22 000

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COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

40 000 - 16 000 - 700

10 Acid test ratio 1,06
22 000
Turnover ratios and times
180 000
11 Turnover ratio of current assets 4,8 times
0,5(40 000 + 35 000)
37 500 360
12 Turnover time of current assets x 75 days
180 000 1
180 000
13 Turnover ratio of PPE 2,86 times
0,5(64 000 + 62 000)
63 000 360
14 Turnover time of PPE x 126 days
180 000 1
Turnover ratio of trade 180 000
15 13,85 times
receivables 0,5(14 400 + 11 600)
NB: There is no indication of the amount of credit sales, thus we use total revenue.
Turnover time of trade 13 000 360
16 x 26 days
receivables 180 000 1
120 000
17 Turnover ratio of inventory 8,28 times
0,5(16 000 + 13 000)
14 500 360
18 Turnover time of inventory x 43,50 days
120 000 1
Solvency ratios
34 000 + 22 000 100
19 Debt-to-assets ratio (Debt ratio) x 46,67%
120 000 1
Coverage ratios
33 750 + 1 700
20 Finance costs cover 20,85 times
1 700
Dividend cover (Ordinary 26 800 191,43
21 or 2,09 times
shares) 12 800 91,43
Investment ratios
26 800
22 Earnings per share 191,43c
0,5(16 000 + 12 000)
191,43 100
23 Earnings yield x 19,14%
1 000 1
12 800
24 Dividend per share 91,43c
14 000
91,43 100
25 Dividend yield x 9,14%
1 000 1
1 000
26 Price-earnings ratio 5,22
191,43
64 000 - 2 000 - 5 000 R3,56 /
27 Book value per share
16 000 356,25c

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 FUNDAMENTAL ANALYSIS

Question 24 Credit sales Cash sales

Turnover ratio of inventory per month 30 days = 1 times 10 days = 3 times
Profit per cycle 37,5 R500 30 R500
x = R300 x = R150
62,5 1 100 1
Profit per month R300 x 1 = R300 R150 x 3 = R450
Monthly return on initial capital 300 100 450 100
x = 60% x = 90%
500 1 500 1
What amount of capital is required in 500 2 700 500 2 700
order to generate R2 700 gross profit x = x =
1 300 1 450
per month? R4 500 R3 000
Gross profit percent of 37,5% Selling price Cost price Profit
100 62,5 37,5
Mark-up of 30% Selling price Cost price Profit
130 100 30

Question 25
Earnings per share EPS
a. Dividend cover = = = 4 times
Dividend per share 12c
thus: Earnings per share = 48c

Debt 100
b. Debt/equity ratio = x = 150%
Equity 1
thus: Equity = 100
Debt = 150
TOTAL CAPITAL = 250 = TOTAL ASSETS

Debt 100 150 100

Debt-to-assets ratio = x = x = 60%
Total assets 1 250 1

Average current assets 360

c. Turnover time of current assets = x = 60 days
Net revenue 1
Net revenue
Turnover ratio of current assets =
Average current assets
360
thus: Turnover ratio = = 6 times
60

63
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Question 26
Statement of profit or loss of PIPA Ltd for the year ended 28 February 20X1
Revenue (100%) 45 000
- Cost of sales (60%) (27 000)
GROSS PROFIT (40%) 18 000
- Operating expenses (9 260)
OPERATING PROFIT 8 740
+ Investment income 260
+ Gain on the disposal of PPE 80
- Finance costs (2 830)
PROFIT before TAX (100%) 6 250
- Income tax expense (20%) (1 250)
PROFIT after TAX (80%) 5 000
- Preference share dividends (400)
ATTRIBUTABLE EARNINGS 4 600
- Ordinary share dividends (3 600)
RETAINED EARNINGS 1 000

Ratios Calculation Answer

8 740 + 260 - 2 830 100
a. Return on equity (Re) x 12,59%
0,5(50 000 + 48 000) 1
6 250 + 2 830 100
b. EBIT-margin x 20,18%
45 000 1
45 000
c. Turnover ratio of PPE 0,65 times
0,5(70 000 + 68 000)
260 100
d. Return on financial assets x 4,73%
0,5(6 000 + 5 000) 1
3 600
e. Dividend per share 18c
20 000
18 100
f. Dividend yield x 3%
600 1
18 000 100
g. Mark-up x 66,67%
27 000 1

Question 27
a. Shareholders, 20%
b. 10%
c. 3%
d. Corporate actions

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 FUNDAMENTAL ANALYSIS

Question 28 a. b.
R4,5 million R4,5 million
Amount = 1 000 000 shares @ R1,50 = R1,5 mil
Total shareholders’ equity = R2,5m (OS’s) + R2m (Reserves) = R4,5m
The stock split increases the number of shares, but the amount of Ordinary Share Capital
remains unchanged.

Question 29

a. b. c. d. e. f. g. h. i. j. k. l. m.
X √ X X √ X √ X X √ √ X √

n. o. p. q. r.
X X X X √

Question 30

31 August: Rights issue

a. Ordinary share capital = R5 000 + R3 600 = R8 600
b. R3 600 ÷ R1,80 = 2 000 shares
c. Issue ratio = number of existing issued shares ÷ number of new shares issued during
rights issue
50 000 ÷ 2 000 = 1 new share for every 25 existing shares
d. Last day CUM Start EX Record date
Tuesday, 14 August Wednesday, 15 August Friday, 17 August
From 15 Aug to 31 Aug
14 September: Share consolidation - 1 for 4 existing
e. 52 000 ÷ 4 = 13 000 shares
f. R8 600 ÷ 13 000 = 66,15c per share
g. Shareholders’ equity = Ordinary share capital + reserves + preference shares
= 8 600 + 10 000 + 2 000 = R20 600

26 October: Capitalisation issue - 2 per 25 existing @ R2,50

13 000
h. x 2 = 1 040 shares
25
cost of this = 1 040 x R2,50 = R2 600
i. Reserves = 10 000 - 2 600 = R7 400

Question 31
a. Securities f. record date
b. Discretionary g. ex rights
c. pre-listing statement h. underwrite
d. rights issue i. bull market
e. Prospectus j. stock split

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COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Question 32 COMPANY YOU

20X0 Established 400 000 shares
20X5 Inherit 1 000 shares
20X8 Stock split 1 600 000 shares 4 000 shares
(4 for 1)
31 July 20X9 Dividend 30c p.a. R480 000 R1 200
Capitalisation issue 1 600 000 4 000
(5 per 100) x 5 = 80 000 x 5 = 200
100 100
Total = 1 680 000 Total = 4 200
12 Nov 20X9 Rights issue R2 520 000 4 200
= 84 000 shares x 1 = 210
R30 20
Issue ratio (existing shares ÷ Total = 4 410 shares
new shares) Cost = 210 x R30
1 680 000 = R6 300
=
84 000
= 1 for every 20 existing
a. 3 August 20X9
b. 210 shares
c. 4 000 x 30c = R1 200
d. 4 000 + 200 = 4 200
e. underwriting
f. 12 November 20X9
g. 31 July 20X9

Question 33

a. 26 June
b. Tuesday, 23 June
c. Wednesday, 24 June

Question 34
4 000
Number of new shares = x 20 = 160 shares
500
Amount received = 160 x R14 (issue price) = R2 240
Statement of financial position: Equity
Ordinary share capital (4 160 ordinary shares) R10 240
Reserves 2 000
Preference share capital 2 000
Shareholders’ equity 14 240

66
 FUNDAMENTAL ANALYSIS

Question 35 YOU
Mon., 4 January Purchase 500 shares @ R1,20 = R600
15 February Rights issue 500
(20 per 100 existing) x 20 = 100 @ R1,40 = R140
100
Thur., 28 January Purchase 400 shares @ R1,80 = R720
28 January is already in the ex-rights period therefore these 400
shares do not qualify for the rights issue
19 March Consolidation 1 000
(4 for 1) = 250 consolidated shares
4
26 March Capitalisation issue 250
(10 for every 50) x 10 = 50 free shares
50
29 April Purchase 200 shares @ R8 = R1 600
17 May Dividend of 25c per share 500 x 25c = R125
29 April is before the last day of CUM dividend trading (Tuesday,
14 May) therefore the 200 shares that you purchased also qualify
for the dividend

a. 27 January until 15 February

b. Tuesday, 14 May
c. Friday, 29 January
d. Wednesday, 15 May
e. 500 + 400 = 900 shares
f. 250 + 50 = 300 shares
g. 300 + 200 = 500 shares
h. 50 shares
i. R125
j. You pay in total: R600 + 140 + 720 + 1 600 = R3 060
3 060
The average purchase price = = R6,12
500

500 000
Question 36 Number of new shares = = 62 500 shares
8
Statement of financial position: Equity
Ordinary share capital (162 500 ordinary shares) R750 000
General reserve 60 000
Preference share capital 90 000
Shareholders’ equity 900 000
Attributable earnings
a. EPS =
Ordinary shares issued
200 000
= = 200c per share
100 000

Attributable earnings 200 000

b. EPS = = = 250c per share
Ordinary shares issued 80 000

67
COMPONENT 3: ADDITIONAL EXERCISES AND SOLUTIONS

Question 37 YOU
1 January You possess 4 500 shares
11 February Rights issue 4 500
(Receive 9 March) (3 per 20 existing) x 3 = 675 @ R6,50 = R4 387,50
20
8 April Consolidation 5 175
(5 for 1) = 1 035 consolidated shares
5
20 May Purchase 120 shares
20 May is before the last day of CUM dividend trading (Tuesday, 21
June) therefore the 120 shares that you purchased qualify for the
dividend
24 June Dividend of ? p.s. 1 155 x ?c = R635,25
15 July Capitalisation issue 1155
(1 for every 25) x 1 = 46 free shares
25

a. Monday, 8 February
b. 675 @ R6,50 = R4 387,50
635,25
c. = 55c per share
1155
d. Tuesday, 21 June
e. 1 155 + 46 = 1 201 shares

Question 38

4 000
a. Number of free shares = x 10 = 160
250
Monetary value = 160 x R20 (MP) = R3 200
Statement of financial position
Ordinary share capital (4 160 ordinary shares) R19 200
Reserves 800
Preference share capital 4 000
Shareholders’ equity 24 000
4 000
b. May purchase = x 1 = 800
5
Monetary value = 800 x R16 (issue price) = R12 800

Statement of financial position

Ordinary share capital (4 800 ordinary shares) R28 800
Reserves 4 000
Preference share capital 4 000
Shareholders’ equity 36 800
c. Stag
d. 20

68
 FUNDAMENTAL ANALYSIS

Question 39 COMPANY YOU

1988 Established 400 000 shares @ R2
1993 Listed
August 2000 Purchase 4 000 shares
2008 Share consolidation 200 000 shares 2 000 shares
(1 for 2 existing)
13 May 2016 Dividend 30c p.s 200 000 x 30c = R60 000 2 000 x 30c = R600
17 May Capitalisation issue 200 000 2 000
(5 per 100) x 5 = 10 000 x 5 = 100
100 100
Total = 210 000 Total = 2 100
16 July Rights issue 1 890 000 2 100
= 42 000 shares x 1 = 420
45 5
Issue ratio Total = 2 520 shares
210 000 Cost = 420 x R45
= = R18 900
42 000
= 1 for every 5 existing
a. Wednesday, 8 May until Monday,13 May
b. Monday, 28 June until Wednesday, 30 June
c. Friday, 10 May
2 100
d. x 1 = 420
5
e. 2 000 + 100 = 2 100
200 000
f. x 5 = 10 000
100
g. 2 000 x 30c = R600
h. 23 April 2016
i. 210 000 + 42 000 = 252 000

Question 40
a. prospectus f. underwrite
b. securities g. bull market
c. pre-listing statement h. institutional investors
d. rights issue i. stock split
e. record date

69