MAC3761/202/0/2022

Tutorial Letter 202/0/2022

Management Accounting III
MAC3761
Year module

Department of Management Accounting

IMPORTANT INFORMATION
This tutorial letter contains the suggested solution of Test 2.
 MAC3761/202/0/2020

CONTENTS

Page
1 INTRODUCTION ..................................................................................................................... 2
2 TEST 02: MARK QUERIES ..................................................................................................... 2
3. SUGGESTED SOLUTIONS .................................................................................................... 3
4 REFERENCES .................................................................................................................... 122
 MAC3761/202/0/2022

1 INTRODUCTION

Dear Student

This tutorial letter contains the suggested solutions to the questions of Test 02 of 2022. It is in
your own interest to work through the suggested solutions in conjunction with the test questions
and your answers. To help you follow through the suggested solutions, calculations/workings
are referenced and/or cross-referenced using symbols such as the following:
*
The average of your best three test marks (based on the highest mark obtained) will constitute
your year mark. (For more information, refer Tutorial letter 101/0/2022). The year mark will
weigh 30% in the calculation of the final mark of the module, which will be made up as follows:

Assessment Contribution to final mark

Average of best three tests (year mark) 30%
Final examination (summative assessment) 70%
Total 100%

It’s important and in your own interest that you go onto myUnisa to visit the MAC3761 module
site on a regular basis, as we post study materials, important announcements, and additional
resources such as notes and links to videos, on the site.

Kind regards,
MAC3761 lecturers

Lecturers’ contact details: Refer to myUnisa.

E-mail: [email protected] or [email protected]

2 TEST 02: MARK QUERIES

A mark plan and announcement will be uploaded on myUnisa in due course, specifying how
you should go about if you would like to query the number of marks awarded to your test 2
script. It is imperative for you to follow the process exactly as described in the announcement,
otherwise your query will not be attended to.

Direct all administrative queries on Test 02, such as whether the University received your test
script or not, to the Student Assessment Administration Department by sending an e-mail to
[email protected].

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3. SUGGESTED SOLUTIONS

QUESTION 1 SKD LIMITED

a. CALCULATE THE WEIGHTED AVERAGE COST OF CAPITAL

[ 15 MARKS]

INSTRUMENT MARKET VALUE COST OF EQUITY

Ordinary shares 𝐾𝑒 =D1/P0 +g
MVe (“Price”) = R484m

Workings: D1 = 100c x 1,055 = 105,5c

20 000 000 shares x R24,20 =R484m P0 = 2 000c x 1,1 x 1,1 =R24,20

(R20 x 1,1 x 1,1) =105,5c/2 420c + 5,5
Market capitalisation given as R300m in =4,36 + 5,5
2015, share price 1500c therefore number
of ordinary shares issued: =9,86%
R300m/R15 = 20m
Share price end 2020:
2 000c/R20 given

INSTRUMENT MARKET VALUE COST OF PREF.

Preference shares
CF0 0
CF1 (2023) - R137,5m (250m x R5 x 11%)
CF2 (2024) - R137,5m 𝐾𝑝 = 8,75%+3,5%
CF3 (2025) - R1 387,5 m
(R1250m + R137,5m) 𝐾𝑝 = 12,25%
I/Y 12,25
Comp NPV R1 212,632 023)

ALTERNATIVE (Preference shares)

INSTRUMENT MARKET VALUE COST OF PREF.

Preference shares
FV - R1 250 m
PMT - R137,5m (250m x R5 x 11%)
N 3 𝐾𝑝 = 8,75%+3,5%
I/Y 12,25
Comp NPV R1 212,632 023
𝐾𝑝 = 12,25%

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QUESTION 1 SKD LIMITED (continued)

INSTRUMENT MARKET VALUE COST OF LOAN

Interest
Term loan 𝑀𝑉𝑑1 = 𝐾𝑑1 = 13,1% x 0,72
𝐾𝑑1

R11 059 200(R120 million x 12,80% x 0,72) 𝐾𝑑1 = 9,43%

𝑀𝑉𝑑1 *=
0,0943
= R117m (R117 276 776)

INSTRUMENT MARKET VALUE COST OF DEBENTURES

Debentures
MVd2 = R628m FV - R1 978m =
(2 098m – 120m])
PV R628m (given)
n 2
PMT - R18m (R25m x 0,72)
Comp I/YR 79,72% (post-tax)

Capital structure Market value of Portion of Cost of Weighted

instruments capital capital cost of
(Rm) structure capital

Ordinary shares R484 0,198 9,86% 1,95%

Preference shares R1 213 0,496 12,25% 6,08%

Term loans R117 0,047 9,43% 0,44%

Debentures R628 0,257 79,72% 20,49%

Total R2 442 1 / 100% 28,96%

ALTERNATIVE CALCULATION OF WACC:

𝑀𝑉𝑒 𝑀𝑉𝑝 𝑀𝑉𝑑1 𝑀𝑉𝑑2

x 𝐾𝑒 + x 𝐾𝑝 + x 𝐾𝑑1 + x 𝐾𝑑2
𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1+𝑀𝑉𝑑2 𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1+𝑀𝑉𝑑2 𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1+𝑀𝑉𝑑2 𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1+𝑀𝑉𝑑2

OR:

(𝑀𝑉𝑒 x 𝐾𝑒)+ (𝑀𝑉𝑝 x 𝐾𝑝) + (𝑀𝑉𝑑1 x 𝐾𝑑1) + (𝑀𝑉𝑑2 x 𝐾𝑑2)

𝑀𝑉𝑒+𝑀𝑉𝑝+𝑀𝑣𝑑1+𝑀𝑉𝑑2

484 1 213 117 628

WACC = 2 442
x 9,86% + 2 442 x 12,25% + 2 442 x 9,43% + 2 442 x 79,72%

WACC = 28,96%

Conclusion:
The target WACC of SKD Limited is provided as 11,5% and therefore, the company does not
meet the target WACC as their current WACC is too high at 28,96%.
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QUESTION 1 SKD LIMITED (continued)

b. EVALUATION OF THE GROUP’S DIVIDEND POLICY

[9 MARKS]

1. PREFERENCE SHARES
SKD has redeemable preference shares in issue. In substance, redeemable preference shares are
debt instruments as opposed to equity instruments. Therefore, the “dividends” payable in relation to
redeemable preference shares are in fact interest expense as opposed to preference claim to the
distributable earnings of the group (Skae 2017:254). As such, SKD’s dividend policy will not
encompass these preference shares because it is classified as debt in substance.

2. ORDINARY DIVIDEND

Details R million
2020 2021 2022
Profit before interest & tax 892 907 919
Net interest expense (120) (125) (139)
Taxation (183) (185) (187)
Net profit for the year 589 597 593

Ordinary dividends paid 18 19 20

Dividend pay-out ratio* 3,06% 3,18% 3,37%

Dividend cover* 32,72 31,42 29,65
This must not be a %
 Given
 Dividends paid ÷ Net profit for the year
 Net profit for the year ÷ Dividends paid
* Mark either Dividend pay-out ratio OR Dividend cover
 2020: 90 cents x 20 000 000 shares = R18 000 000
2021: 95 cents x 20 000 000 shares = R19 000 000
2022: 100 cents x 20 000 000 shares = R20 000 000
ALTERNATIVE CALCULATION

2020 2021 2022

Profit before interest & 892 907 919
tax
Net interest expense (120) (125) (139)
Taxation (183) (185) (187)
Net profit for the year 589 597 593
Dividend per share 90 cents 95 cents 100 cents
Earnings per share  29,45 29,85 29,65

Dividend payout ratio  3,06% 3,18% 3,37%

Dividend cover* 32,72 31,42 29,65
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QUESTION 1 SKD LIMITED (continued)
 Given
 589/20 = 2945 cents
597/20 = 2985 cents
593/20 = 2965 cents
 90/2945
95/2985
100/2965
 2945 cents/90
2985 cents/95
2965 cents/200

Discussion points
There was an increase in profits before tax between 2020 and 2022. This was provided in the AFS.
▪ The dividends over the entire period (2020 – 2022) have increased each year in line with the
increase in profits. This was provided in the scenario.
▪ The company cash reserves have also been following the same trend as profit after tax by
increasing year-on-year in line with the profit increase or decrease. This was provided in
thescenario. As such, it appears that the dividends are continuously paid from the profits after tax.
▪ Information content or signalling effect – It is possible that SKD has created an expectation that
the dividend would be paid in line with the profits generated. This is a good policy because in years
where the company cannot sustain/meet the expectation, perhaps due to (significant) decline in
profits or losses made, shareholders will accept the fact.

▪ Dividends are not paid in the same % ratio as earnings.

▪ The current dividend policy follows the performance of the company which makes it sustainable.

▪ The Group distributes a small percentage of its profits to shareholders, which allows it to invest
more into the growth projects, while managing shareholders’ expectations. The Group has averaged
a dividend pay-out ratio (dividend cover) of 3,34% (29,99) over the 3 years, and it should consider
establishing a fixed dividend policy (dividend as a fixed % of profits). This would allow shareholders
to manage their expectations better and to plan effectively. Comparison to industry dividend pay-
out will inform whether the company’s policy of paying dividends is generous.

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QUESTION 1 SKD LIMITED (continued)

c. CHANGES TO WORKING CAPITAL MANAGEMENT

[6 MARKS]

Cash discount:
By giving customers a discount, this will encourage more sales. The proposed cash discount
of R48m (R9 545m x 25% x 2%) to lead to a decrease in profits.

Bad debts:
There will be a decrease in bad debts (due to the decline in credit sales/debtors or could be
due to an increase of the cash discount leading to less credit sales) and therefore will lead to
an increase in profits. The decrease in bad debts will be R13,6m (R68m x 20%).

Late payment interest:

There will be an increase in profit as a result of extra interest charged on accounts which are
at least 60 days outstanding. The effect of this will be an increase in profit of R33m ([R9 545m
x 75% x 70% x 8%] x [(90 – 60) ÷365 ]).

Holding costs:
There will be a saving in holding costs which will increase profit. [(R955m+R953m) ÷ 2 –
R825m] x 11,5%: R15m).

Advice:
The proposed change to the working capital policy should be implemented as it will yield an
overall increase in profits (pre-tax) of R14 million.
▪ The company should also consider what the financial impact of this policy would be in the future,
as there may possibly be changes in the economy or changes in consumer spending which
might cause losses/decreases going forward.

Workings:

Item Rm
Cash discount (R9 545m x 25% x 2%) (48)

Decrease in bad debt expenses (R68m x 20%) 14

Late payment interest 33

(R9 545m x 75% x 70% x 8% x [(90– 60) ÷365])
Holding costs saved (R954m – R825m) x 11,5% 15
Pre-tax net benefit/(cost) on change of policy R14m

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QUESTION 1 SKD LIMITED (continued)

d. RISK ASSESSMENT
[10 MARKS]

Risk identification and discussion Risk mitigation

Competition:
The markets for skin and hair products are The company should strengthen its long-term
highly competitive and some of the relationships with its existing customers by
competitors may have advantages that providing terms that will be favourable to the
adversely affect the SKD’s ability to customers. The company should also
compete favourably. consider introducing added services e.g.
including loyalty points, delivery, etc.
Infrastructure (power):
The manufacturing operations rely on The company should increase its usage of
electricity supply (“energy-intensive”) and renewable energy and alternative energy
the supply can be interrupted. In the main, sources to minimise disruption to operations.
the manufacturing facilities will largely be
impacted by the current loadshedding)
Highly skilled workers:
In the main, predominately high-level The company should aim to boost staff morale
technical skills needed in the operations and provide employees with a conducive
due to the chemicals they work with. SA has environment for employees to thrive. The
short supply of highly technical labour company should invest in the upskilling of its
force. employees, as well as graduates and bursary
holders who can always be brought into the
employ of the organisation. Continuous
review of the groups’ recruitment,
remuneration and skills retention strategies to
always remain competitive amongst its peers
and competitors. Provision of continuous
upskilling programmes and on-the-job training
opportunities for the current labour force.
Global economic uncertainty:
Recession and challenges in different The company should consider diversifying its
global markets, slow economic growth may clientele further, especially targeting markets
lead to a decline in demand and prices. not yet penetrated. It should consider entering
in long-term contracts with its customers.
Possible lawsuits Be transparent on the packaging of the
The products could cause allergic reactions product and communicate with consumers
or negative side effects and this might lead regarding possible side effects. Warning on
to potential law suits/reputational damage. the labels.
Reputational damage List ingredients on the product and
Should a consumer use the product and an communicate to consumers what number
allergic reaction/adverse side effect occurs. they can contact should they experience
problems. Be transparent.
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Changes in consumer preferences:
Trends in the health and beauty industry is The company should appoint someone that
ever changing. SKD must keep up with what keeps a close eye on the research with
its customers want across all races and regards to consumer behaviour and trends
cultures. and be agile in terms of its processes and
products.

Risk identification and discussion Mitigating factors

Financial obligations & liquidity:
The company makes use of debt in financing its The company should consider
operations. This form of funding mainly requires reinvesting profits back into the
periodic repayment and interest is charged on business to allow growth and reduce the
such facilities. gearing. Issue of ordinary shares can
also be considered to decrease the level
of debt in the business.
Safety of employees and others:
Employees are exposed to chemicals in the The company should employ well
laboratory which might cause injury to the skin trained safety officers and all employees
and eyes. Employees could be harmed if safety should regularly attend health and
procedures and controls are not carried out safety courses.
properly. This may further lead to shutting down of
affected factories and its laboratory.

Risk identification and discussion Mitigating factors

Socio-political unrest:
High unemployment rates, cultural The company should consider its spending
differences, political ideologies, and service in CSI, especially projects that bring stability
delivery protest around the country. Unrest to communities where it operates. The
in the community may lead to the sabotage of company should also invest in the
the company’s infrastructure or difficulties inempowerment of people in the community
accessing the facilities. and continue to create more jobs for the
locals.
High proportion of credit sales: The company should consider undertaking
A relatively high portion of sales are made on proper analysis and understanding of its
credit and the company is thus susceptible customers and put in place proper credit
to high bad-debts and high investment in control procedures. It must also
working capital. continuously monitor the company’s
investment in working capital and effect
changes as and when it is necessary.

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Regulatory compliance: The company should appoint and retain
As a listed company, SKD is exposed to the skilled, knowledgeable and experienced
risks of non-compliance to various staff in the legal and compliance department
regulatory requirements such as: JSE listing to monitor and control regulatory
requirement, IFRS, Companies Act, Cross- compliance.
border taxation, Transfer pricing.
The fact that no discount is given to Working capital management should be
customers. This could perhaps lead to a prioritised and skilled finance staff must be
decline in sales as consumers might shop employed to keep this under control and
where the terms are more favourable. updated as and when. There should be
sound policy and procedures in place.
The fact that no interest is charged on Working capital management should be
outstanding debts. This could lead to an prioritised and skilled finance staff must be
increase in bad debt and in turn, poor cash employed to keep this under control and
flow. Debtors can take as long as they want to updated as and when. There should sound
settle their accounts and there are no policy and procedures in place.
consequences. Poor working capital
management could lead to SKD not having
cash in order to take advantage of other
opportunities.

e) [5 MARKS]

A regular market exists therefore the joint cost for the period will be reduced by the total
NRV of the production of the by-product in February 2022.

Calculation of joint-cost:

R1 500 000 (given) – net proceeds from by-product

Net proceeds from by-product:
(50 litres X 1500) - (50 litres X 100)
= R75 000 – R5 000
= R70 000

Therefore R1 500 000 (given) - R70 000

= R1 430 000

Joint cost allocated between the joint products based on physical measures:
Skin moisturiser:
1000litres/ (1000+800)
litres X R1 430 000
=R 794 444
Eye serum:
800litres/ (1000+800)
litres X R1 430 000
=R635 556
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QUESTION 1 SKD LIMITED (continued)

f) [10 MARKS]

Product Incremental income

Night-time repair Value after further processing:
1 000 litre x 0,88 x R588 x 4=
R2 069 760

Value at split-off point:

1 000 litre x R1 890 = R1 890 000

Incremental income R179 760

Retinol cream Value after further processing:
800 litre x 0,88 x R1 030 x 4 =
R2 900 480
Value at split-off point:
800 litre x R3 450 = R2 760 000
Incremental income
R140 480
Product Incremental costs
Night-time repair Further processing costs:
1 000 litre x 0,88 x 10 x 4 = R35 200

Retinol cream Further processing costs:

800 litre x 0,88 x 15 x 4 = R42 24

Conclusion
Night-time repair R179 760 - R35 200 = R144 560
Process the skin moisturiser further into
Night time repair

Retinol cream R140 480 – R42 240 = R98 240

Process the eye serum further into
Retinol cream

g) Any five risks related to the environment. [5 MARKS]

1. If SKD does not continuously put measures in place and monitor its processes, they might
expose the environment or their staff to the chemicals they use in the manufacturing process
and this might cause harm to the environment/employees/consumers. This could lead to
litigation/reputational damage. The same risk for chemical spillage at the manufacturing plant.
2. If the Packaging Division does not place emphasis on producing packaging solutions for all
SKD’s skin and hair products taking the effect of plastic on the environment into account, SKD
will contribute to the carbon footprint of the plastic they produce which in turn could lead to
fines/reputational damage. This links to number 1 above but is more focused on the plastic.
3. How does SKD discard of the chemicals they use during manufacturing so that it is not harmful
to people and the environment?
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QUESTION 1 SKD LIMITED (continued)

SKD might face compliance risk and other legal implications if they do not continue to have
measures in place that keep their carbon footprint and impact of their operations on the
environment, at a minimum.
4. What about the amount of water they use during manufacturing of their products?
5. If SKD does not do business sustainably, their impact on global warming and carbon emission
could potentially harm the company’s reputation.

TOTAL MARKS [60]

REFERENCES
Roos, S, Cairney, C, Chivaka, R, Fourie, H, Joubert, D, Mohammadali, H, Pienaar, A, Stack,
L, Streng, J, Swartz, G & Williams, J. 2011. Principles of management accounting: a South
African perspective. 2nd edition. Cape Town: Oxford University Press Southern Africa.

Skae, FO, Benade, FJC, Combrink, A, de Graaf, A, Jonker, WD, Ndlovu, S, Nobatyi, AE,
Plant, GJ, Steyn, BL & Steyn, M. 2017. Managerial Finance. 8th edition. South Africa:
LexisNexis.
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UNISA 2022
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