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MAC3702 Assignment 2 (COMPLETE ANSWERS) Semester 2 2024 - DUE 12 September 2024
MAC3702 Assignment 2 (COMPLETE ANSWERS) Semester 2 2024 - DUE 12 September 2024
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,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, 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)
To approach this question, we'll need to work through the
various steps systematically. I'll guide you through the
calculations and rationale for each part of the question.
Part (a): Complete the Table by Calculating Bafifi’s Forecast
from 2024 to 2026
Let's begin by forecasting the revenue, cost of sales, gross
profit, and other figures for the years 2024 to 2026.
Step 1: Forecast Revenue
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