Assignment Task
Question One
Notukula Ltd is deciding whether to pay out R90 000 in excess cash in the form of an extra dividend or a share repurchase. Current profits are R2,40 per share and the share sells for R20. The abbreviated balance sheet before paying out the dividend is:
Equity 240 000 Bank/cash 90 000
Debt 160 000 Other Assets 310 000
400 000 4 00 000
Evaluate each alternative (i.e: pay the dividend or repurchase the shares) by calculating:
1.1 Number of shares in issue
1.2 Dividends per share (for the first alternative, i.e. pay the dividend)
1.3 New share price
1.4 Earnings per share
1.5 Price-earnings ratio
Question Two
The following information relates to a capital investment known as Project Z141 of Quhama Limited:
Required:
2.1 Calculate the accounting rate of return. (Answer rounded off to 2 decimal places)
2.2 Calculate the payback period. (Answer in years, months and days)
2.3 If a payback period of 2 years is required, will the project be accepted? Explain
2.4 Calculate the net present value (NPV). (Round off amounts to the nearest Rand)
2.5 Based on the NPV would the project be accepted? Explain
Question Three
The extracts of the financial statements of Retina Ltd for 2020 and 2021 are provided below:
Retina Ltd Extracts from the Statement of Comprehensive Income for the year ended 31 December 2021 and 2020
Required:
You are required to complete the following calculations for 2021 only and comment on each answer: (The comparative figures for 2020 are provided in brackets. Where applicable, answers must be rounded off to 2 decimal places).
3.1 Gross Margin (2020: 45%)
3.2 Debtors collection period (2020: 36.50 days)
3.3 Acid test ratio (2020: 1.33:1)
3.4 Return on assets (2020: 22.49%)
Question Four
4.1 Analyse the significance of calculating weighted average cost of capital (WACC) (5)
4.2 At a Board meeting a director remarks: “selling preference shares with a return of 9% or debentures with a return of 9% is really one and the same thing”. The company has the option of raising the R400 000 through either:
a. The sale of 40,000 preference shares at R10 per share or
b. 4,000 debentures of R100 each.
NB: the tax rate is 30%
Do you agree with the director’s assertion?
Discuss with the aid of appropriate calculations. (10)
4.3 Deno Ltd shares have a beta of 1.40. At present government bonds/treasury bills present a return of 6% and the market return is 12%. Deno Ltd’s dividend was R2.20 per share last year and they expect dividends to grow at 5%. Their shares sell for R30 per share at present (par value R20).
Calculate Deno Ltd’s cost of equity using:
- 4.3.1. The Dividend Growth model
- 4.3.2 The Capital Asset pricing model.
4.4 Analyse the reason/s for each method presenting different answers.