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5.1 Choose the correct word(s) from those given in brackets - NSC Accounting - Question 5 - 2020
Question 5
5.1 Choose the correct word(s) from those given in brackets. Write only the word(s) next to the question numbers (5.1.1 to 5.1.4) in the ANSWER BOOK. 5.1.1 The (int... show full transcript
Worked Solution & Example Answer:5.1 Choose the correct word(s) from those given in brackets - NSC Accounting - Question 5 - 2020
Step 1
5.2.1 Fill in the missing amounts on the Cash Flow Statement provided.
Answer
To fill in the missing amounts on the Cash Flow Statement, follow these steps:
- Calculate the cash generated from operations.
- Fill in the amount for income tax paid and dividends paid using the provided data.
- Use the given figures for fixed assets purchased and other cash effects.
- Ensure the final figures balance by checking total cash inflows against outflows.
Step 2
5.2.2 Calculate the following financial indicators on 29 February 2020:
Answer
-
% operating profit on sales:
Operating Profit = R1 122 600
Sales = R4 824 000
Operating Profit % = ( \frac{R1 122 600}{R4 824 000} \times 100 = 23.27% )
- Acid-test ratio:
Current Assets = R774 000 ( - ) Trading Stock = R619 000.
Acid-test ratio = ( \frac{R155 000}{R774 000} = 0.20 )
- NAV per share:
Total NAV = R5 880 000 - R28 800 = R5 851 200
Number of shares = 1 500 000
NAV per share = ( \frac{R5 851 200}{1 500 000} \approx R3.90 )
- Current Ratio:
Current Ratio = ( \frac{Current assets}{Current liabilities} = \frac{774 000}{712 800} = 1.09 )
Step 3
5.3.1 Explain which company has the better liquidity. Quote TWO financial indicators to support your opinion.
Answer
Lulu Ltd has better liquidity compared to Coco Ltd. This can be supported by the following financial indicators:
- Current Ratio: Lulu Ltd has a higher current ratio which indicates better short-term financial stability to cover its liabilities.
- Acid-test Ratio: Lulu Ltd's acid-test ratio also suggests it can meet its immediate obligations more efficiently than Coco Ltd.
Step 4
5.3.2 Comment on the earnings per share and the % return on equity of Lulu Ltd. Give TWO reasons why the shareholders will be satisfied with these indicators.
Answer
Lulu Ltd shows an increase in earnings per share from 233 cents to 273 cents, representing a 17.2% growth. This reflects positively on the company's profitability.
Two reasons why shareholders will be satisfied are:
- Increased EPS indicates that the company is generating more profit per share, which can lead to higher dividends.
- A higher return on equity (25%) demonstrates effective management and utilization of equity in generating profits.
Step 5
5.3.3 Comment on the market value of the shares in Coco Ltd. Explain TWO points.
Answer
Coco Ltd has a market value of R18.80, which is higher than its net asset value (R17.88).
Two points to note are:
- The market price reflects investor confidence, suggesting that investors have a positive outlook on future growth.
- The shares may be perceived to be undervalued, hence the higher market price compared to NAV could attract more investors.
Step 6
5.3.4 Compare the dividend payout rates of both companies and explain why the directors of EACH company decided on these payout rates.
Answer
Lulu Ltd pays out 110 cents per share, retaining 59.7% for growth. In contrast, Coco Ltd pays out 200 cents but retains only 17.7%.
The directors of Lulu Ltd chose a lower payout to reinvest in the company for further expansion. On the other hand, Coco Ltd’s directors decided on a higher payout due to stable cash flows, ensuring shareholder satisfaction.
Step 7
5.3.5 Noah says that the dividend of 110 cents per share he earned from Lulu Ltd is better than the dividend of 200 cents per share from Coco Ltd. Give ONE point to prove that he is incorrect.
Answer
While the dividend amount from Coco Ltd is higher, the sustainability and growth potential must also be considered. Lulu Ltd retains a greater percentage of its earnings for reinvestment, which can support long-term value increase.
Step 8
5.3.6 Comment on the risk and gearing of EACH company. Quote TWO financial indicators.
Answer
Lulu Ltd:
- Debt-equity ratio: 0.8:1 indicates moderate risk due to leverage.
- Return on Capital Employed (ROCE): 20% shows efficient use of capital despite the risk.
Coco Ltd:
- Debt-equity ratio: 0.2:1 signifies low gearing and thus lower financial risk.
- ROCE: Lower at 15%, highlighting less efficient capital use compared to Lulu.
Step 9
5.3.7 Noah wants to buy shares in Lulu Ltd on the JSE at current market value to become the majority shareholder and CEO. Calculate how much Noah will have to pay for the shares that he needs.
Answer
Noah currently wants to buy 1 000 000 shares at R7.00 each. Therefore, he will have to pay:
Total cost = Number of shares ( \times ) Price per share = 1 000 000 ( \times ) R7.00 = R7 000 000.