TEST 1

MODULE DESCRIPTION : MANAGEMENT ACCOUNTING 302

MODULE CODE : RGK302/ RGKV302

FACULTY : BUSINESS AND ECONOMIC SCIENCES

QUALIFICATION : BACHELOR OF COMMERCE

DATE : 18 NOVEMBER 2020

DURATION (IN MINUTES) : 90 MINUTES

TOTAL MARKS : 50

PAGES : 7 (INLCUDING COVER PAGE)

EXAMINER : MR L MOLATLHWE

MODERATOR : MRS J PIENAAR (INTERNAL)

APPENDIX : FORMULA PAGE

INSTRUCTIONS

1. Attempt all questions.

2. Show all workings clearly and round to two decimals, unless stated
otherwise.
3. If necessary, state any assumptions that you have made.
4. The use of financial calculators are permitted. Show all keystrokes.

THIS PAPER CONSISTS OF THREE QUESTIONS

MARKS MINUTES ABLE TO PRINT UNABLE TO PRINT
QUESTION PAPER PAPER
Question 1 10 18
NORMAL EXTRA NORMAL EXTRA
Question 2 15 27
TIME TIME TIME TIME
Question 3 25 45
Overall Time 50 90.0 90 MIN 112.5 MIN 112.5 MIN 135.5 MIN

DO NOT TURN THE PAGE BEFORE TOLD TO DO SO

Question 1 (10 Marks; 18 Minutes)

Zappia (Pty) Ltd (Zappia) is a company listed on the Johannesburg Stock Exchange
(JSE) with operations in a number of countries. The company is currently going
through several financial challenges including allegations of financial mismanagement
by senior executives as well as failure of timely and on budget delivery for one of its
biggest capital projects. The project has failed to meet all the timelines and has
experienced significant cost overruns which has required additional funding amounting
to billions of rands. These challenges have resulted in shareholders questioning
management’s ability to develop and execute a sustainable strategy for the company
to improve returns.
The above challenges are intensified by managements extravagant use of the
company’s financial resources as they want glitzy offices to work from, fly in business
class and stay in expensive hotels as they travel across countries to over foreign
operations.
As with many other companies, Zappia experienced the negative effects of Covid-19
as a full lockdown across the markets it operates in was imposed. During this lockdown
period, very limited economic activity took place impacting sales volumes and in turn
revenue generated. This decline in sales is on back of an already poor sales volumes
and overall profitability outlook as the world is going through an economic downturn.
In the recent investor update, the finance director indicated that the company’s
borrowings have increased significantly and are likely to increase in the short term.
These borrowings consisting of domestic and foreign borrowings are likely to be priced
at higher interest rates due the company being recently downgraded. The increased
borrowings will significantly increase the interest expense payable by the company
with projected interest expense peaking at 50% of every rand of sales generated.

REQUIRED: MARKS
a) Discuss the role of the financial manager in the context of Zappia. 6

b) Explain the problem Zappia is facing and list ways in which this
4
problem can be managed.

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Question 2 (15 Marks; 27 Minutes)

Madluphutu is an aspiring investor on the Johannesburg Stock Exchange (JSE) as he

heard that it offers good returns. Several of his friends claim to have made good money
through buying and selling shares, whilst others hold these investments for longer
periods before selling them

In one of the discussions with his friends, he heard that buying and holding more than
one share improves the overall returns as well as decrease risk the investor is exposed
to. He is considering investing his recent casino winnings in one or both of the following
two companies, Alpha and Beta. However, he is unsure of which approach to take
between investing in single shares or both shares in equal proportions based on the
discussion with his friend about investing in more than one share. All he wants are
good returns at low risk and an investment strategy achieves this goal.

The following information of two companies’, Alpha and Beta, whose financial
performance are closely correlated to the country’s gross domestic product (GDP) has
been provided to Madluphutu. The returns are assumed to follow a normal distribution
despite the limited readings available. The correlation coefficient for the two
companies has been correctly calculated as -0.08.

Probability
Company Alpha Company Beta
GDP growth related GDP
Expected Profit Expected Profit
growth
-1% to +0.99% 11% -2 000 -1 800
+1% to 1.99% 14% 3 000 2 000
+2% to 2.99% 20% 4 000 4 000
+3% to 3.99% 30% 5 000 8 000
+4% to 4.99% 25% 6 000 12 000

REQUIRED: MARKS
a) Calculate the following in respect of Alpha and Beta:
i. Return 4
ii. Standard deviation

b) Assuming Madluphutu invests in both shares in equal proportions, 5

calculate the portfolio return and risk.

c) Discuss the benefits of investing in a portfolio compared to 6

investing in a single share.

RGK302\RGKV302 Test 1 2020 Page 3 of 7

Question 3 (25 Marks; 55 Minutes)

Tatalia Investments (Pty) Ltd (Tatalia) is a local manufacture of various protective

equipment. The prolonged impact of Covid-19 pandemic has resulted in an increased
demand for protective gear. This is due to companies reconsidering their operations
and the role protective gear plays in improving the overall health and safety of their
working environments.

Given this increased demand, management of Tatalia is considering increasing its

plant capacity, as they are currently supplementing demand for their products with
imports. They are of the view that this targeted investment in expansion can yield
positive returns, as it will provide flexibility of production, since they will not only be
tied to one type of protective gear, but have the ability to expand their product range.
The new technology associated with the investment will also enable the company to
create new jobs especially for internships who may find opportunities once qualified.

The proposed investment in the expansion is estimated at R6.5 million, and will have
a salvage value of R950 000 at the end of its useful life. Working capital requirements
of R850 000 will be required to ramp up production.

The following operational information has been established in respect of increased

capacity:

Cost per unit of production:

Materials R150.00
Labour R100.00
Maximum capacity in units 14 000
Selling price R450.00
Useful life 5 years

Market research indicates an initial demand of 12 000 units per annum increasing at
6% annually which can be accommodated by the increased capacity. Costs and selling
prices are also expected to increase by 6% annually.

The machine will qualify for tax allowance of 20% annually and the company tax rate
it 28%. You can ignore capital gains tax where applicable.

Management is not sure how to finance the increased capacity and are discussing
whether to finance this new investment with debt or equity financing specifically listing
on the Johannesburg Stock Exchange Alt-X. The difficulty in taking this decision is
compounded by the absence of a clear cost of capital for the company. However, there
the company will prefer to use as much debt financing as possible after using a portion
of retained earnings.

RGK302\RGKV302 Test 1 2020 Page 4 of 7

The following information as at 31 August 2020 has been gathered to assist the
company to calculate its cost of capital.

Balance Sheet Notes R’000

ASSETS
Non-current assets 42 000
Land and buildings 30 000
Plant and Equipment 12 000
Net-current assets 10 000
52 000
EQUITY AND LIABILITIES
R10 Ordinary shares 1 12 000
Share premium 1 000
Retained income 15 000
28 000
16% Non-Redeemable Debentures 2 14 000
Long term loan (18%) 3 10 000
52 000

Income statement (Abridged) Notes 2018 2019 2020

R R R
Operating income 11 412 11 858 12 340
Debenture interest 2 2 240 2 240 2 240
Long term loan interest 3 3 600 3 600 3 600
Net income before taxation 5 572 6 018 6 500
4
Dividend per share R2.85 R3.02 R3.20

Notes:
1) The current market value of the shares is R22.50.
2) Long term debentures similar to those issued by Tatalia Ltd are currently
yielding a return of 22%.
3) The long-term loan matures on 31 August 2022 and its book value reflects
the market value.
4) The 8% growth in dividends reflects the company growth rate.

RGK302\RGKV302 Test 1 2020 Page 5 of 7

REQUIRED: Marks
a) Calculate Tatalia’s Weighted Average Cost of Capital (WACC). 11.5

b) Using Net Present Value (NPV) analysis, advise the management of

Tatalia whether or not to increase its plant capacity. Use the WACC from 8.5
(a) above in your evaluation.

c) Discuss two possible sources of debt funding available to Tatalia stating 4

which might be best to use.

Presentation and Communication 1

RGK302\RGKV302 Test 1 2020 Page 6 of 7

FORMULA PAGE:

Portfolio standard deviation:

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