3.1 Liquidity Explain whether or not the company is managing their working capital efficiently - NSC Accounting - Question 3 - 2023 - Paper 1

To find the total number of additional shares purchased:

Let the total number of shares in issue be represented as $X$. Since Denise owns 51% of the shares:

$0.51X = 540,000 + Y$

Where $Y$ is the number of additional shares purchased. Since $0.51X = 765,000$, we can calculate:

1. Solve for $X$: $X = \frac{765,000}{0.51} = 1,500,000$
2. Therefore, $Y = 765,000 - 540,000 = 225,000$ additional shares were purchased.

Denise may have been determined to become the majority shareholder in order to gain more control over the company's decisions, influence strategic directions, or to ensure that her vision for the company is enacted effectively.

1. The company issued new shares for R750,000 whereas the previous year, it bought back shares for R250,000.
2. In 2023, the directors repaid R1,800,000 of the loan compared to the previous year when the company borrowed R3,500,000.

The directors decided to issue new shares to raise capital and reduce debt levels in order to improve the company's financial position and reduce financial risk.

The decisions to issue shares and repay loans are likely to lower the financial risk of the company. The debt/equity ratio is expected to decrease, reducing reliance on debt and thus decreasing financial risk.

These decisions will lower the company's gearing. The debt-to-equity ratio decreased from 4:1 to 1:1, indicating a healthier balance between debt and equity, thereby reducing financial risk associated with high levels of debt.

1. The increase in the dividend payout ratio from 67.6% to 106.7% means that the company is distributing more of its earnings, reducing funds available for reinvestment.
2. Shareholders may be concerned that such high payouts could jeopardize the company's financial stability in the future.

Shareholders may not be fully satisfied with the trend:

1. The Return on Shareholder's Equity (ROSE) decreased from 7.2% to 5.7%, indicating lower returns on their investment.
2. The Earnings per Share (EPS) dropped from 74 cents to 60 cents, reflecting a decline in profitability.

Cash and cash equivalents have decreased to R836,000, which raises concerns about the company’s ability to meet immediate cash needs and maintain operational stability.

Shareholders could be worried that declining cash reserves may hinder the company's capacity to invest when opportunities arise, thus affecting long-term growth and stability.

The market price of shares has decreased significantly, indicating lower investor confidence and potential challenges in attracting more investment.