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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
Mark-up percentage Explain how the customers reacted to the change in the mark-up percentage and whether this benefited the company or not.
Answer
Customers responded positively to the increased mark-up percentage, as reflected in the financial indicators:
- Average spending of clients increased from R120,000 to R160,000, a difference of R40,000.
- Sales revenue rose from R33.6 million to R39.2 million.
- Despite a drop in customer numbers from 280 to 245, the average spend increased, indicating a supportive customer base willing to absorb the higher costs. This suggests that the company benefited from the price increase.
Step 2
Profitability and operating efficiency: Comment on the operating efficiency of the company over the past two years. Quote TWO financial indicators.
Answer
The operating efficiency of the company has shown improvements:
- Operating expenses as a percentage of sales decreased from 28% to 22%, indicating better cost management and improved profitability.
- The return on sales improved from 10.2% to 15.4%, reflecting enhanced efficiency in converting sales into profit. These improvements suggest the company has effectively managed its operating costs over the past two years.
Step 3
Financial risk and gearing: 3.3.1 One of the shareholders cannot understand why the debt-equity ratio increased in 2024 despite the increase in the loan. Provide him with an explanation.
Answer
The debt-equity ratio increased due to the rise in borrowings without a proportional increase in shareholder equity. As the company took on more debt to finance operations or growth, the equity base did not expand significantly, which caused a higher proportion of debt relative to equity, indicating increased financial risk.
Step 4
Financial risk and gearing: 3.3.2 The chief financial officer (CFO) is of the opinion that the increase in the loan was a good decision. Apart from the debt-equity ratio, provide TWO points to support his opinion, including ONE relevant financial indicator.
Answer
Support for the CFO's opinion includes:
- The return on capital employed (ROCE) improved from 11% to 19.7%, a significant increase of 8.7 percentage points, suggesting that the capital is being used more effectively to generate profit.
- The degree of gearing has transformed from negative to positive, which indicates that the company's financial leverage is now working in its favor, even as interest rates have risen.
Step 5
Returns, earnings and dividends: 3.4.1 Comment on whether the shareholders should be satisfied with the return on their investment. Provide TWO points, including ONE relevant financial indicator.
Answer
Shareholders should be satisfied due to:
- The return on shareholders' equity (ROSHE) significantly improved from 8% to 15.6%, demonstrating that their investment is yielding increasingly higher returns, up by 7.6 percentage points.
- This return far exceeds the industry standard returns, which are only around 7%, reinforcing the effectiveness of the company's strategies.
Step 6
Returns, earnings and dividends: 3.4.2 Comment on the earnings per share (EPS) and explain its impact on the dividend pay-out policy adopted by directors.
Answer
The EPS increased from 113 cents to 224 cents, an increase of 111 cents. This substantial rise indicates improved profitability and a stronger financial position for the company. As a result, the dividend pay-out ratio has been adjusted down from 80% to 60%, reflecting a strategic move to retain more earnings for reinvestment while still providing substantial dividends to shareholders.
Step 7
Share price on the stock exchange: Comment on the performance of the share price on the stock exchange (JSE). Provide TWO points, with figures and trends.
Answer
The share price performance on the JSE shows positive movement:
- The market price of shares improved from R342 to R610, an increase of R268, which highlights strong investor confidence and growth potential.
- In 2024, the market price (R610) exceeded the net asset value (NAV) of R543 by R67, indicating that the market values the company more highly than its book value, a signal of financial health and growth prospects.
Step 8
Allan Ashwin owns shares in Britesun Ltd. He is pleased with his investment in shares of this company. Provide facts or calculations to support this statement.
Answer
Allan Ashwin should be pleased as:
- His investment return (dividend) is 11.5% of the price he paid for his shares, meaning he receives R780 from an initial investment of R6,000.
- Additionally, his return increased from 8% to 15.6%, which represents a substantial gain of 7.6 percentage points, illustrating the company's strong performance.
Step 9
Apart from the points provided above, state TWO different factors that will influence shareholders to vote in favor of approving such shares.
Answer
Two factors that may influence shareholders include:
- Liquidity/working capital is more beneficially reflected as the current ratio improved to 1.8:1 from 1.6:1, signifying improved short-term financial health.
- The anticipated growth in market positions due to innovative product offerings could attract more shareholders, boosting the company's long-term prospects.