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MAC3702 Assignment 2 Semester 2 2024 - DUE 12 September 2024
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MAC3702 Assignment 2 Semester 2 2024 - DUE 12 September 2024 QUESTIONS WITH DETAILED ANSWERS
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MAC3702 Assignment 2Semester 2 2024 - DUE 12
September 2024
QUESTIONS WITH ANSWERS
,MAC3702 Assignment 2 Semester 2 2024 - DUE 12 September 2024
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, remember to:
• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-
value); and round all your workings to two decimals
• Amounts must be presented in R’000
a) Complete the table by calculating Bafifi’s forecast from 2024 to 2026
taking into account the forecast information provided. (8)
b) Calculate the value of the company Bafifi (Pty) Ltd using the Free cash
flow valuation method. (10)
c) Justify with reasons why the Free cash flow valuation method was a
more appropriate valuation method for determining the company value of
Bafifi (Pty) Ltd. (4)
d) Justify with reasons your choice of the discount rate factor used in
discounting the future free cash flows to present values. (3) Total marks for
the Question 1 (25)
Question 1: Valuation of Bafifi (Pty) Ltd
a) Forecasting Bafifi’s Financials for 2024 to 2026
To forecast Bafifi's financials for 2024 to 2026, we'll use the information
provided:
1. Revenue:
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