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5.1 Choose the correct word(s) from those given in brackets - English General - NSC Accounting - Question 5 - 2020
Question 5
5.1 Choose the correct word(s) from those given in brackets. Write only the word(s) next to the question numbers (5.1.1 to 5.1.4) in the ANSWER BOOK. 5.1.1 The (int... show full transcript
Worked Solution & Example Answer:5.1 Choose the correct word(s) from those given in brackets - English General - NSC Accounting - Question 5 - 2020
Step 1
5.2.1 Fill in the missing amounts on the Cash Flow Statement provided.
Answer
The Cash Flow Statement should reflect the following amounts based on the provided information:
- Cash generated from operations - R 247,000 (worked out by considering the sales and payments).
- Interest paid - (R 66,000).
- Cash outflows for fixed assets purchased should amount to (R1,417,000).
- Repurchase of shares should indicate a cash outflow of (R816,000).
- Other entries must reflect Net Change in Cash and Cash equivalents clearly.
Indicate all outflows in brackets.
Step 2
5.2.2 Calculate the following financial indicators on 29 February 2020:
Answer
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% operating profit on sales = ( \frac{\text{Operating profit}}{\text{Sales}} \times 100 = \frac{1,122,500}{4,824,000} \times 100 = 23.2% ).
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Acid-test ratio = ( \frac{\text{Current Assets} - \text{Trading Stock}}{\text{Current Liabilities}} = \frac{712,800 - 619,000}{774,000} = 0.12 ).
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NAV per share = ( \frac{\text{Total Assets} - \text{Total Liabilities}}{\text{Number of shares}} = \frac{5,880,000 - 2,867,200}{1,500,000} = 2.01 ).
Step 3
5.3.1 Explain which company has the better liquidity. Quote TWO financial indicators to support your opinion.
Answer
Lulu Ltd has the better liquidity compared to Coco Ltd. This is supported by the following financial indicators:
- Current ratio: Lulu Ltd's current ratio is 1.6:1, indicating sufficient current assets to cover current liabilities.
- Acid-test ratio: Lulu Ltd shows a more favorable acid-test ratio of 0.8 compared to Coco Ltd's 0.2, suggesting that Lulu Ltd can meet its short-term obligations more readily.
Step 4
5.3.2 Comment on the earnings per share and the % return on equity of Lulu Ltd.
Answer
Lulu Ltd's EPS increased from 233 cents to 273 cents, which signifies an increase of 17.2%. Shareholders will be satisfied with this increase as it shows effective management and profitability. Additionally, a return on equity (ROE) of 25% reinforces that the company is generating good returns on shareholders' investments.
Step 5
5.3.3 Comment on the market value of the shares in Coco Ltd.
Answer
The market value of Coco Ltd shares is R18.80, which is lower than the NAV of R28.00. This discrepancy indicates that the market may have negative perceptions about the company's future growth. Additionally, the market price is lower than potential returns, which can dissuade investors.
Step 6
5.3.4 Compare the dividend payout rates of both companies and explain why the directors of EACH company decided on these payout rates.
Answer
Lulu Ltd has a dividend payout ratio of 41.3%, whereas Coco Ltd has a ratio of 117%. Directors of Lulu Ltd may prefer a lower payout to reinvest in the company for growth, while Coco Ltd's higher payout could be a strategy to attract investors seeking immediate returns.
Step 7
5.3.5 Noah says that the dividend of 110 cents per share he earned from Lulu Ltd is better than the dividend of 200 cents per share from Coco Ltd.
Answer
One point refuting Noah’s claim is that, while Coco Ltd offers a higher individual dividend, Lulu Ltd’s higher return on equity (25%) indicates better overall financial health and potential for future growth.
Step 8
5.3.6 Comment on the risk and gearing of EACH company.
Answer
Lulu Ltd has a debt-equity ratio of 0.8, indicating a moderate level of risk due to higher debt usage. Their return on capital employed (ROCE) is 20%, suggesting efficient use of capital. Conversely, Coco Ltd, with a debt-equity ratio of 0.2, is less reliant on debt, indicating lower risk but also a lower ROCE of 13%.
Step 9
5.3.7 Noah wants to buy shares in Lulu Ltd on the JSE at current market value to become the majority shareholder and CEO. Calculate how much Noah will have to pay for the shares that he needs.
Answer
Noah needs to purchase 1,500,000 shares (to gain majority). Given the market price of R7.00 per share: Total cost = 1,500,000 * R7.00 = R10,500,000. However, if he wishes to buy only enough to control 51%, he needs to acquire 765,000 shares, costing R5,355,000 at R7.00 each.