3.1 Explain whether or not the company is managing their working capital efficiently - NSC Accounting - Question 3 - 2023 - Paper 1

To calculate the total number of additional shares Denise purchased, we start with the fact that she owns 51% of the total shares and that 540,000 shares were her initial holdings.

Let the total number of shares be denoted as $T$:

$T = \frac{540,000}{0.49} = 1,102,040.82$

Thus, rounding to the nearest whole number, the total shares are approximately 1,102,041. Since she owns 51%, this means:

$0.51T = 540,000 + X$

Where $X$ is the additional shares purchased. Therefore,

$X = 1,102,041 * 0.51 - 540,000 \\ = 562,041 - 540,000 = 22,041$

Denise purchased approximately 22,041 shares.

One possible reason Denise was determined to become the majority shareholder is her desire to influence the decision-making process of the company. As the majority shareholder, she would have greater control over strategic decisions, allowing her to implement changes that align with her vision for the company's future.

1. The company issued new shares for R750,000 in 2023, in contrast to the previous year's action where they bought back shares for R250,000.
2. The company repaid R1,800,000 of the loan in 2023, whereas in 2022, they borrowed R3,500,000. These changes indicate a shift in the company’s financial strategy.

One reason for these decisions could be the company’s need to stabilize its finances by reducing reliance on debt and increasing cash reserves, thereby improving financial health.

The decisions made by the directors have lowered the financial risk of the company as evidenced by the debt/equity ratio, which has dropped from 4:1 to 1:1. This indicates a reduced reliance on debt financing, making the company less vulnerable to rate fluctuations and potential insolvency.

These decisions have positively affected the gearing of the company. The Return on Total Capital Employed (ROTCE) has dropped from 11.4% to 9%, reflecting improved management of the capital structure in favor of equity rather than debt financing.

1. The significant increase in the dividend payout from 67.6% to 106.7% indicates that the company might be depleting its retained earnings to pay dividends, which could compromise long-term growth.
2. Shareholders might be concerned that excessive dividends mean less reinvestment in the company, thus limiting its capability to fund projects that could yield higher returns.

Shareholders may not be satisfied given that while dividends per share increased from 50c to 64c (by 28%), the earnings per share decreased from 74c to 60c (by 14c drop), indicating declining profitability despite higher dividends. This could discourage further investment due to fears of unsustainable payout levels.

1. Cash and Cash Equivalents: The cash and cash equivalents decreased to R836,000, raising concerns over short-term liquidity.

   • Reason: Shareholders worry that decreased liquidity could hinder the company’s operational capabilities.

2. Market Price of Shares on JSE: The market price of shares on the JSE decreased, indicating reduced investor confidence.

   • Reason: This decline may reflect investor apprehension regarding the company’s future profitability and growth potential.