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You are provided with a media article relating to Gadram Ltd - NSC Accounting - Question 4 - 2024 - Paper 1
Question 4
You are provided with a media article relating to Gadram Ltd. 4.1 The three board members implicated in this case each own 150 000 shares. Calculate the loss that L... show full transcript
Worked Solution & Example Answer:You are provided with a media article relating to Gadram Ltd - NSC Accounting - Question 4 - 2024 - Paper 1
Step 1
4.1 The three board members implicated in this case each own 150 000 shares. Calculate the loss that Loma and the two directors each were able to avoid by selling their shares on 13 April 2023.
Answer
To calculate the total loss avoided by Loma and the two directors:
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Determine the potential selling price of the shares: The expected price (R) is to be determined from the market conditions and would typically include the last known price before the suspected insider trading.
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Set a last known price or an estimated price for shares: Let’s assume a hypothetical last known price, for instance, R97.
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Calculate the loss per person: Each board member has 150,000 shares, so:
Loss per director = (150,000 shares) * (R105 - R97)
Loss per director = 150,000 * R8 = R1,200,000
Therefore, for three directors combined: Total loss avoided = 3 * R1,200,000 = R3,600,000.
Step 2
4.2 Explain why the text message is so important to the investigators.
Answer
The text message is crucial to the investigation as it serves as pivotal evidence that suggests the occurrence of a crime. It can effectively link the party who sent the message with potential wrongdoing. The message may indicate intended actions that confirm the breach of fiduciary duties expected from the directors, providing a foundational element for the case against these individuals.
Step 3
4.2 Explain why you think this crime is referred to as 'insider trading'.
Answer
This crime is termed 'insider trading' because it involves the illicit buying or selling of shares based on non-public information that gives an unfair advantage to the officers involved. Such trading undermines the integrity of the securities markets and is classified as fraud since it suggests the use of private knowledge to benefit oneself over others in the market.
Step 4
4.3 Explain how the rapid decline in the share price and the fraudulent financial statements are likely to affect the existing shareholders and its workers.
Answer
The rapid decline in share price and the exposure of fraudulent financial statements will result in severe repercussions:
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Existing shareholders may lose their investments dramatically due to declining share values, potentially leading to financial ruin and loss of dividends.
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Workers could be adversely affected through job losses, increased job insecurity, and diminished morale as companies may resort to cost-cutting measures, resulting in layoffs and reduced benefits.
Step 5
4.4 If you were a shareholder in Gadram Ltd, what other questions would you raise at the AGM? Explain TWO points.
Answer
As a shareholder, I might present the following questions:
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What investigative measures will be undertaken to hold the implicated board members accountable, and will there be any disciplinary actions or resignations?
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How does the company plan to restore shareholder confidence and ensure proper compliance with regulatory frameworks to prevent similar occurrences in the future?