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3.1 Liquidity Explain whether or not the company is managing their working capital efficiently - NSC Accounting - Question 3 - 2023 - Paper 1
Question 3
3.1 Liquidity Explain whether or not the company is managing their working capital efficiently. Quote TWO financial indicators, with figures and trends. 3.2 % share... show full transcript
Worked Solution & Example Answer:3.1 Liquidity Explain whether or not the company is managing their working capital efficiently - NSC Accounting - Question 3 - 2023 - Paper 1
Step 1
Explain whether or not the company is managing their working capital efficiently. Quote TWO financial indicators, with figures and trends.
Answer
The company is not managing its working capital efficiently. One indicator is the current ratio, which has decreased from 1.3:1 to 0.9:1, indicating fewer liquid assets to cover liabilities. Additionally, the acid-test ratio dropped from 0.6:1 to 0.3:1, showing further liquidity issues.
Step 2
Calculate the total number of additional shares that Denise purchased.
Answer
To calculate the total number of shares Denise purchased, we start with the formula for the percentage of shares owned:
ext{Total shares} = rac{540,000}{0.49} = 1,102,040
Denise owned 51% of these shares on 28 February 2023:
Subtracting her original shares from this total:
Thus, Denise purchased a total of 21,040 additional shares.
Step 3
Give ONE possible reason why Denise was determined to become the majority shareholder.
Answer
Denise may have been determined to become the majority shareholder to gain more control over the company’s decisions. This control would allow her to influence the direction of the company and its strategic initiatives.
Step 4
Identify TWO major decisions taken by the directors in 2023 that were different to those from the previous year. Quote figures.
Answer
One decision was to issue more shares for R750,000, compared to buying back shares worth R250,000 from the previous year. Another decision was to repay R1,800,000 of the loan, which was a significant decrease in borrowing compared to R3,500,000 in the previous year.
Step 5
Step 6
Explain the impact of these decisions on the degree of financial risk over the next two years. Quote ONE financial indicator.
Answer
These decisions will likely reduce the company's financial risk as indicated by the debt/equity ratio, which decreased from 4:1 to 1:1. This shows a better balance between debt and equity.
Step 7
Explain how these decisions affected the gearing of the company. Quote ONE financial indicator.
Answer
The decisions reduced the company's gearing ratio, which is currently observed at a lower level due to decreased reliance on debt. This impact is reflected in the drop of the return on total capital employed (ROCE), which fell from 11.4% to 9%.
Step 8
Explain TWO points to support their opinion.
Answer
Firstly, the increase in the dividend pay-out ratio from 67.6% to 106.7% indicates that the company is prioritizing immediate returns to shareholders over reinvestment, which could harm long-term growth. Secondly, directors may face shareholder dissatisfaction due to their increased focus on dividends, potentially affecting their re-election prospects.
Step 9
Explain whether shareholders would be satisfied with the trend in the dividend and earnings of the year, as well as the dividends they earned. Quote TWO financial indicators.
Answer
Shareholders may be somewhat satisfied with dividends as the dividend per share increased from R0.50 to R0.64, marking a rise of 28%. However, the earnings per share (EPS) decreased from R0.74 to R0.60, indicating a decline in profitability of 14%, which could lead to concerns about the future financial health of the company.
Step 10
In EACH case, provide evidence for the shareholders' concerns over these trends, and explain why they would be concerned about the future prospects for the company.
Answer
- Cash and cash equivalents: The cash and cash equivalents dropped from R836,000 to R818,000, indicating tighter liquidity, and shareholders worry about the company's ability to meet its short-term obligations. 2. Market price of shares on JSE: The market price decreased from a NAV of R1.00 to R0.90, which suggests weakening investor confidence and could impact future funding opportunities.