4.1 Choose a term to complete each of the following statements - NSC Accounting - Question 4 - 2017 - Paper 1

The internal auditor is employed by the company to establish and maintain effective internal control processes to ensure compliance and risk management.

A shareholder is a person who invests in a company by acquiring shares, thus owning a portion of the company and partaking in its profits.

External auditors are appointed by shareholders to provide an unbiased opinion on the financial statements, ensuring transparency and accountability in the company's financial reporting.

Ordinary share capital consists of 1,200,000 ordinary shares with an issued capital of R5,292,000. Retained income includes the balance from the previous year and the net profit after income tax, leading to an updated retained income figure.

To calculate the percentage operating profit on sales, use the formula:

ext{Percentage Operating Profit} = rac{ ext{Operating Profit}}{ ext{Sales}} imes 100 = rac{697,000}{8,652,000} imes 100 ext{ which equals } 8.1\%

The debt-equity ratio can be calculated as follows:

ext{Debt-Equity Ratio} = rac{ ext{Total Liabilities}}{ ext{Shareholders' Equity}} = rac{985,000}{5,292,000} ext{ which simplifies to } 0.19.

To calculate the dividends per share (DPS):
Total dividends can be calculated based on the retained income and the number of shares outstanding. Using the formula:

ext{DPS} = rac{ ext{Total Dividends}}{ ext{Number of Shares}} = rac{(168,000 + 12,000)}{1,200,000} = 0.28 ext{ per share}.

The price of R9.10 charged by Castro Ltd is aligned with market expectations, as the shares were issued at an average price. However, given the market value of R12.00, issuing at a lower price may dilute existing shares and affect current shareholders' value.

The issue of new shares typically reduces financial gearing, making it less risky. Financial indicators include a lower debt-equity ratio, which decreases from 0.8 to 0.1, indicating reduced financial risk. Return on Capital Employed (ROCE) may also improve as more equity is available for operations.

Henry owns 300,000 shares, and to maintain a 60% stake post-issuance of 200,000 new shares, he would need:

ext{New Total Shares} = 300,000 + 200,000 = 500,000  

ext{Shares required to retain 60%} = 0.6 	imes 500,000 = 300,000.  

He would not need to buy more shares if he retains his shares as they already satisfy this requirement.

Ronki Ltd's liquidity can be assessed through its current ratio, which has decreased, indicating potential liquidity risks. Additionally, the quick ratio shows that the company may have challenges meeting short-term obligations, suggesting a possible liquidity crunch.

Ronki Ltd paid a premium of R15.00 per share for the buy-back, above the market price. This strategy may enhance shareholder value but could also indicate the company’s effort to consolidate ownership or reflect an undervaluation of the shares.

1. Increased Ownership: The buy-back reduces the number of shares in circulation, increasing Henry's ownership percentage.
2. Enhanced Share Value: As shares become scarcer, the value of remaining shares may increase.
3. Stronger Voting Power: With fewer shares held by others, Henry could maintain or increase his voting influence in company decisions.