School of Management Studies Finance I (BUS219S): 2nd Semester 2007

SUGGESTED SOLUTIONS TO TUTORIAL 1

Linking Accounting and Finance
CHAPTER 2:
5. NWC = CA – CL; CA = NWC + CL; CA = 500K + 750K = R1,25M
Book value CA = R1,25M, book value NNCA= R0,75M; book value assets = 1,25
+ 0,75 = R2M
Market value NNCA = R1,00M, given market value CA = R1,25M; ∴ market value
assets = 1,00+ 1,25 = R2,25M
16 Balance Sheet
Share capital ???? Tangible net non-current assets R3 000 000
Retained profit 2 750 00 Patents & copyrights 525 000
0

Long-term debt 525 000

Inventory 330 000
Accounts payable 500 000 Accounts receivable 105 000
Short-term debt 125 000 Cash 210 000
625 000 645 000
Total equities and liabilities 4 170 000 Total assets 4 170 000
??? = 4 170 000 – 2 750 000 – 525 000 – 625 000 = R270 000
21. Income Statement
Sales R6 000
Cost of goods sold 4 500
PBDIT 1 500
Depreciation 800
PBIT 700
Interest 100
PBT 600
Normal taxes 180
STC 20
a. NPAT R400
b. OCF = PBDIT - T = 1500 - 200 = R1300
c. Inc (NWC) = NWCend = NWCbeg
= (CAend - CLend) - (CAbeg - CLbeg)
= (1550 - 900) - (1000 - 750)
= R650 - 250 = R400
Inc (Cap Spend)= NNCAend - NNCAbeg+ Depr
= R4200 - 4000 + 800 = R1000
CFA = OCF - Inc (NWC) - Inc (CS)
= R1300 - 400 - 1000 = -R100
The cash flow from assets can be positive or negative, since it represents whether the
firm raised funds or distributed funds on a net basis. In this problem, even though net
profit and OCF are positive, the firm invested heavily in both non-current assets and
net working capital; it had to raise a net R300 in funds from its shareholders and
lenders to make these investments.
d. CF to lenders = interest - net new LTD = R100 - 0 = R100
CF to shareholders = CF from assets - CF to lenders
= -100 - 100 = -R200 = dividends - net new equity
Net new equity = R160 + 200 = R360

The firm had positive earnings in an accounting sense (NPAT > 0) and had positive
cash flow from operations. The firm invested R400 in new net working capital and
R1 000 in new fixed assets. The firm had to raise R100 from its stakeholders to
support this new investment. It accomplished this by raising R360 in the form of new
equity. After paying out R160 of this in the form of dividends to shareholders and
R100 in the form of interest to lenders, R100 was left to just meet the firm’s cash flow
needs for investment.
 Mini Case Study A 10marks

1. A company (private or public) 14. Net profit for the year/Equity at the
(1/2) beginning of the year [17.8%]
(Has shareholders equity) Or:
Net profit for the year/Equity at
2. For cash only (No AR)
the end of the year [15%]
3. Interest on Loan No mark awarded if just the
4. Shares in Supplier Ltd formula was given but no figure
5. 18% (3600/20000) calculated
6. R1 15. R115 000 (112000+ 3000)
7. R2.25 (247310/110000) 16. “Net Working Capital”
8. R1.91 (210000/110000) “Working Capital” also accepted
“Net Liquid Assets” also accepted
9. 34 cents (37310/110000)
“Liquid Assets” not accepted
10. R137 310 (R1.25 per share) The question requires a “term” not
11. R113 655 (113115-8000+8540) an explanation, thus explanations
12. R201 085 (204685-3600) not accepted.
13.

Mini Case Study B

% Return on Equity [Book values]

ELECTRA LTD 2005 2004
[Note alternatives depending on
13 28.1% 20.2%
1 Number of shares in issue 16,000 15,000 whether the opening equity or closing
equity is used]

2 Book value of the company R 311,143 R 257,780 % Return to shareholder [on Share
14 21.0%
Investment]
3 Book value per share R 19.45 R 17.19
14 Capital strucuture - Equity:Debt 1.38 1.39
4 Market value of the company R 569,600 R 468,750
16 % Growth in Sales 12.0%
5 Market value per share R 35.60 R 31.25
17 % Margin on Sales (GP/Sales) 30.0% 28.0%
Date of additional loan (tricky little
6 28 Feb/1 Mar
calculation) 18 Effective Tax rate for the year (Tax/PBT) 25.0% 20.0%
Cost Price of machinery purchased
7 (Equipment totalling R20 400 was R0 COMMENT BRIEFLY ON THE PERFORMANCE OF THE
purchased) COMPANY FOR THE YEAR TO 30 JUNE 2005

8 Total Assets
9 Cash flow from Investments
10 Depreciation: Equipment
11 Depreciation: Machinery
R 655,543 R 569,600 All the indicators are that this company is performing well. It is
experiencing growth in sales above the inflation rate, retaining and
R0 improving its margins, and achieving an excellent return on equity,
probably above the expectations of the shareholders. One variable
R 6,400 which should be monitored is operating expenses, as they seem to
have increased at a much faster rate (38%) than growth in sales.
The market has responded well to the expectation of these results
R 3,600
with return to shareholder well above the benchmark government

12 Approximate cash flow from operations R 97,563