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This document contains suggestedMAC3702 Application of financial solutions to the following past papers.
management techniques
May/June 2017
October/November 2017
May/June 2018
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,QUESTION – MAY 2017 (55 marks; 99 minutes)
Mike Sports Limited (“MSL”) is a Cape Town based football (soccer) kit manufacturer and supplier. The
company is listed on the Johannesburg Stock Exchange and it owns chain stores across the SADC region.
MSL also offers hundreds of people with franchise opportunities to enable them to operate their own
businesses.
Recently telecommunications companies have injected billions of rands into South African soccer by the
way of competitions, buying existing clubs and using local stars as faces of their marketing campaigns. This
has presented MSL and its peers with exciting opportunities to grow their bottom line, hence the recent
decision by the MSL Board to introduce a new soccer boot design - EISH 7 inspired by the great soccer
legend, Einstein Shabalala. The following information was sourced from the integrated annual report of
MSL.
Extract from the statement of financial position at 31 May 2016
Rand
Equity and Liabilities
Ordinary shares (80 cents each) 500 000
Retained income 720 000
Shareholders’ capital and reserves 1 220 000
15% Preference shares (R100 each) 120 000
Long term loan – Tebha Bank (16,67%) 680 000
Total equity and liabilities 2 020 000
Additional information
1. The expected operating profit, excluding profits from the sale of EISH 7 soccer boots, for the year
ending 31 May 2017 is as follows:
R Probability
1 600 000 20%
1 700 000 30%
1 800 000 40%
2 000 000 10%
2. Ordinary share dividends declared and paid in the previous five (5) years were as follows:
Year Dividend per share
2012 72 cents
2013 80 cents
2014 91 cents
2015 95 cents
2016 105 cents
The MSL Board intends to maintain the average growth in dividends.
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, 2
3. The market price for ordinary shares is currently R12 per share and that of preference shares is R96
per share. New issues will have no effect on these prices, although ordinary share issue costs will
be 4% per share issued.
4. MSL aims to maintain a debt: equity ratio of 1: 1 going forward (based on book values).
5. To manufacture the new EISH 7 soccer boot, MSL is planning to buy a new machine for R800 000
on 1 June 2016. The company will use this machine for 5 years in full production, and then scrap it
at R50 000.
6. The expected annual production quantities of this new soccer boot for which demand exists are
given below:
Quantity (pairs) Probability
8 000 30%
12 000 40%
15 000 20%
18 000 10%
The expected cost per pair:
Cost R
Direct material 465
Direct labour 200
Variable overhead 50
7. The budgeted cash fixed costs for the production of EISH 7 is R400 000 per annum and the selling
price is set at R800 per pair. No inflationary increases need to be considered.
8. The following options are available to finance the newinitiative:
• New ordinary shares can be issued (retained earnings cannot be utilised).
• Up to 4 000 15% preference shares of R100 each can be issued.
• A loan from Sambo Bank of R200 000 at prime + 800 basis points.
• A top-up loan from Tebha Bank of R50 000 at the same rate as the existing loan, which is
considered to approximate the fair market interest rate.
The loans can only be taken at the total amounts as made available by the banks.
9. The South African Income Tax Act stipulates a company tax rate of 28% and a section 12C allowance
on new manufacturing machines of 20% per annum. The prime lending rate is currently 10,5% and
is expected to stay unchanged for the foreseeable future.
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