,MAC3702 Assignment 2 (COMPLETE ANSWERS)
Semester 2 2024 - DUE 12 September 2024 ; 100%
TRUSTED Complete, trusted solutions and explanations.
QUESTION 1 (25 marks; 45 minutes) Lesidi Limited, a
company listed on the Johannesburg Stock Exchange (JSE),
specialises in manufacturing paint. Their flagship product, Yizo,
has been rated the best paint by the South African Paint
Association for the past ten years. This top award has driven
Lesidi's success and challenged them to innovate continuously
to maintain Yizo's quality standards. The company has
developed various Yizo product variations and is always looking
for innovative ways to improve and expand the range. Recently,
Lesidi identified a promising spray paint product that could
complement the Yizo product line without compromising its
brand quality. They are considering acquiring Bafifi (Pty)
Limited, as they are impressed with the high-quality spray paints
Bafifi produces. Bafifi manufactures spray paint and primer
products. Over the past five years, Bafifi has experienced
significant growth, driven primarily by its innovative product
development. Recently, Bafifi introduced an all-in-one, single-
coat application spray paint. This new product allows customers
to apply just one coat for both priming and painting, eliminating
the need for separate primer and paint applications. Lesidi is
considering making a bid for Bafifi. Bafifi has 10 million shares
in issue. The following information relating to Bafifi is
provided: Year 1 Year 2 Year 3 Year 4 2023 2024 2025 2026
R’000 R’000 R’000 R’000 Actual Forecast Forecast Forecast
Revenue 260 000 291 200 * * Cost of Sales (125 000) (174 720)
, * * Gross Profit 135 000 116 480 * * Other Operating expenses
(40 000) (46 000) * * Depreciation (23 000) (23 000) (23 000)
(23 000) Profit from Operations 72 000 47 480 * * Finance
Costs (24 000) * * * Profit before tax 48 000 * * * Taxation –
27% (12 960) * * * Profit after tax 35 040 * * * QUESTION 1
(continued) 1. Forecast for 2024 to 2026 Bafifi’s forecast was
prepared using the following assumptions • Sales prices are
projected to increase by 12% in 2024 and thereafter by a
constant growth of 7%. • Bafifi’s gross profit percentage is
expected to decrease in 2024 due to the introduction of a new
product thereafter increase by 5% in 2025 and then return to the
2023 levels in 2026. • Bafifi’s expects to increase its operating
profit margin by limiting the increase in other operating
expenses, to only 5% per year from 2025. • Assume that
depreciation amount equals tax allowances. • Bafifi took out a
loan with Buzz bank of R100 million at the beginning of 2023 to
finance the development of the new spray product. The loan
bears an interest rate of 10% with interest payable annually on
the last day of the year. The loan capital amount is repayable in
2025. The interest payments for 2023 included interest payments
on another loan with Buzz Bank, which was fully settled in
2023. • The marginal tax rate is 27% payable in the year in
which the liability arises. Continuing Value • Using year 3 as the
base year, Free cash flows beyond year 3 are expected to grow
at a constant rate of 5%. • Bafifi’s current weighted average cost
of capital (“WACC”) equals 17% and its target WACC is
16.5%. • Lesidi’s current WACC is 16% and its present capital
structure is close to a target capital structure for a company of its
nature and size REQUIRED: For each question below,
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