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3.1 Mark-up percentage Explain how the customers reacted to the change in the mark-up percentage and whether this benefited the company or not - NSC Accounting - Question 3 - 2024 - Paper 1
Question 3
3.1 Mark-up percentage Explain how the customers reacted to the change in the mark-up percentage and whether this benefited the company or not. 3.2 Profitability an... show full transcript
Worked Solution & Example Answer:3.1 Mark-up percentage Explain how the customers reacted to the change in the mark-up percentage and whether this benefited the company or not - NSC Accounting - Question 3 - 2024 - Paper 1
Step 1
3.1 Mark-up percentage
Answer
The customers reacted positively to the change in the mark-up percentage. The average spending of clients increased from R120,000 to R160,000, which is an increase of R40,000. Additionally, sales revenue rose from R33.6 million to R39.2 million. This indicates that customers supported the business despite the 20% rise in the mark-up, which increased to 60%. However, there was a drop in customer numbers from 280 to 245, a decrease of 12.5%. This suggests that while existing customers increased their purchase amounts, some may have opted not to continue, indicating mixed benefits from the increased mark-up.
Step 2
3.2 Profitability and operating efficiency:
Answer
The operating efficiency of the company has shown significant improvement over the past two years. Firstly, the operating expenses on sales have decreased from 28% to 26%, indicating a 2% decrease in costs. Secondly, the operating profit on sales improved from 10.2% to 15.4%, representing an increase of 5.2%. These figures demonstrate better control over costs and increased profitability.
Step 3
3.3.1
Answer
The shareholder's confusion about the increase in the debt-equity ratio in 2024 can be explained by the company’s decision to increase its share capital. While the loan has increased, which normally contributes to higher debt, the addition of new equity also changes the balance, leading to increased gearing despite the financial injection.
Step 4
3.3.2
Answer
The CFO's opinion that increasing the loan was a good decision is supported by two points: Firstly, the Return on Total Capital Employed (ROTCE) improved significantly from 11% to 19.7%, indicating enhanced profitability relative to capital. Secondly, the degree of gearing has moved from negative to positive, which shows that the company’s investment strategy is beginning to bear fruit as it can now cover interest rates on loans (currently at 13% p.a.) more comfortably.
Step 5
3.4.1
Answer
Shareholders should be satisfied with the return on their investment as the Return on Shareholders' Equity (ROSE) improved significantly from 8% to 15.6%, an increase of 7.6%. This return is substantially higher than typical market benchmarks, ensuring that shareholders' contributions are being effectively utilized.
Step 6
3.4.2
Answer
The Earnings Per Share (EPS) has increased from 113 cents to 224 cents, which reflects a rise of 111 cents. This increase shows improved profits within the company. Consequently, the dividend pay-out ratio has decreased from 80% to 40%, signaling that the company is retaining more profit for reinvestment rather than distributing it, a move that might benefit the business's future growth.
Step 7
3.5
Answer
The performance of the share price on the stock exchange (JSE) has been quite favorable, with the market price increasing from R1.342 to R1.610, reflecting a rise of 286%. This positive trend is likely driven by the good returns earned. Furthermore, in 2024, the market price of R1.610 exceeded the Net Asset Value (NAV) of R1.543 by R67, indicating robust investor interest and demand for shares.