Reference no: EM131184799

QUESTION 1

Use the statement of financial position and statement of comprehensive income for Amolatina Ltd to answer the questions that follow. Assume all sales are on credit and 365 days for 2015.

STATEMENT OF FINANCIAL POSITION FOR AMOLATINA LTD AS AT
31 DECEMBER 2015

Assets	(R)	Equity and liabilities	(R)
Cash	24 000 000	Accounts payable	15 000 000
Marketable securities	14 000 000	Notes payable	21 000 000
Accounts receivables	26 000 000	Other current liabilities	10 000 000
Inventories	81 000 000
Total current assets	145 000 000	Total current liabilities	46 000 000
Non-current assets	115 000 000	Long-term debt	25 000 000
Less depreciation	9 000 000	Total liabilities	71 000 000
Net non-current assets 106 000 000		Ordinary shares	80 000 000
		Retained earnings	100 000 000
		Total shareholders' equity	180 000 000
Total assets	251 000 000	Total liabilities and equity	251 000 000

STATEMENT OF COMPREHENSIVE INCOME FOR AMOLATINA LTD FOR YEAR
ENDED 31 DECEMBER 2015

Net sales	410,000,000
Cost of goods sold	150,000,000
Gross profit	260,000,000
Selling expenses	24,000,000
Depreciation expense	5,000,000
EBIT	231,000,000
Interest expense	11,000,000
Net income before tax	220,000,000
Taxes (30%)	66,000,000
Net income	154,000,000

INDUSTRY AVERAGE RATIOS

Current ratio	3:1	Sales/fixed assets	4 times
Debt/total assets	25%	Sales/total assets	5 times
Times interest earned	5 times	Net profit margin	6%
Sales/Inventory	8 times	Return on assets	11')/0
Days' sale outstanding	20 days	Return on equity	13.5%

REQUIRED

(a) Calculate the Du Pont equation for Amolatina Ltd.

(b) Compare the Du Pont equation calculated in (a) with the composite equation for the whole industry.

(c) Briefly comment on a comparison between the Amolatina Ltd and industry with specific regard to liquidity, solvency and asset  management.

1.2 Study BRIDS Ltd's statement of financial position and statement of comprehensive income are given below:

Statement of financial position for BRIDS Ltd as at 31 December
2015

	R		R
Cash	75 000	Accounts payable	160 000
Accounts receivable	110 000	Notes payable	140 000
Inventory	450 000
Total current assets	635 000	Total current liabilities	300 000
Net Non-Current assets	465 000	Long-term (12%)	350 000
		Ordinary shares equity (45 000 shares)	450 000
Total assets	1100000	Total liabilities & equity	1100000

Statement of comprehensive Income for BRIDS Ltd for the year
ended 31 December 2015

Sales	800,000
Cost of goods sold	310,000
Earnings before interest and tax (EBIT)	490,000
Interest expense	65,000
Earnings before tax (EBT)	425,000
Taxes (10%)	42,500
Net income	382,500

The industry average inventory turnover is 8 and the interest rate on the firm's long-term debt is 12%. 45 000 shares are outstanding.

BRIDS Ltd plans to change its inventory methods so as to operate at the industry average inventory turnover ratio. The funds generated from this change will be used to retire long-term debt and it is assumed that the company's sales, the cost of goods sold, and the share price will remain constant. Assume that inventory turnover is given as a ratio of sales to inventory.

REQUIRED

Determine the percentage change in the BRIDS's return on equity (ROE) once these changes are effected.

QUESTION 2

Xola Ltd is evaluating the feasibility of introducing a new product. They would have to invest
R300 000 at time t = 0 for the design and testing of the new product. Management believes that there is a probability of 80% that this phase will be successful and that the project will continue. If stage 1 is not successful the project will have to be abandoned with zero salvage value.

The next stage, if undertaken, would consist of making moulds, and producing two prototypes. This would cost R2 500 000 at time t = 1. Production will commence if the tests are successful. The moulds and prototypes could be sold for R765 000 if the product fails the testing phase. Management estimates the probability of the product passing the testing phase as 90% and that phase 3 will then be undertaken.

Phase 3 consists of converting the unused production line to produce the new design. This would cost R3 500 000. If the economy is strong at this point, the value of sales of the final product would be R16 000 000. If the economy is weak, the sales value of the final product would be R2 500 000. Both sales values occur at time t = 3, and each state of the economy has a probability of 0.5. The required return of Xola Ltd is 8%. The firm only accepts investments if the coefficient of variation of the proposed project is less than 5.

REQUIRED
(a) Use a decision tree to determine the project's expected net present value (NPV).

(b) Calculate the project's variance and standard deviation of the NPV.

(c) Calculate the project's coefficient of variation (CV) of the NPV .

(d) Should the project be accepted or rejected? Substantiate your answer.