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You are provided with information relating to two furniture companies, Vrede Ltd and Nigel Ltd, for the financial year ended 30 April 2022 - NSC Accounting - Question 3 - 2022 - Paper 1
Question 3
You are provided with information relating to two furniture companies, Vrede Ltd and Nigel Ltd, for the financial year ended 30 April 2022. The directors of both co... show full transcript
Worked Solution & Example Answer:You are provided with information relating to two furniture companies, Vrede Ltd and Nigel Ltd, for the financial year ended 30 April 2022 - NSC Accounting - Question 3 - 2022 - Paper 1
Step 1
Profitability/Operating efficiency: Identify and explain which company has been more efficient in controlling its operating activities. Quote TWO financial indicators.
Answer
To determine which company has been more efficient in controlling its operating activities, we can analyze their operating expenses as a ratio to sales.
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Vrede Ltd:
- Operating expenses are 23.9% of sales.
- Net profit on sales is 7.0%.
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Nigel Ltd:
- Operating expenses are 23.0% of sales, which is lower than Vrede Ltd's.
- Net profit on sales is 9.2%, which is higher than Vrede Ltd's.
Thus, Nigel Ltd is more efficient with a lower percentage of operating expenses relative to sales and a higher net profit margin.
Step 2
Liquidity: Identify and explain which company has better liquidity financial indicators. Quote TWO financial indicators.
Answer
To assess liquidity, we can refer to the following indicators:
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Current Ratio:
- Vrede Ltd: 1.8
- Nigel Ltd: 1.1
- Conclusion: Vrede Ltd has a better current ratio, indicating stronger short-term liquidity.
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Stock Turnover Ratio:
- Vrede Ltd: 11 times
- Nigel Ltd: 6 times
- Conclusion: Vrede Ltd demonstrates a higher stock turnover ratio, indicating efficient inventory management.
Concern for Nigel Ltd: Despite Nigel Ltd's lower current ratio of 1.1, a concern arises regarding potential short-term liquidity pressures.
Step 3
Dividends: Comment on the difference between the dividend pay-out policies implemented by the directors of the two companies and explain ONE possible reason for EACH of their decisions in their respective companies. Quote figures or indicators.
Answer
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Vrede Ltd's Dividend Policy:
- Dividend pay-out ratio is 75% of EPS, distributing 64 cents per share as future reserve.
- Rationale: A conservative approach to retain earnings and ensure liquidity during uncertain times.
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Nigel Ltd's Dividend Policy:
- Dividend pay-out ratio is significantly lower, distributing 440 cents per share but retaining more for growth.
- Rationale: To support aggressive expansion strategies and reinvest in the company’s future.
Step 4
Gearing, risk, financing and investing activities: Explain the specific decisions taken by the directors of EACH company that have affected gearing and risk. Quote random amounts.
Answer
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Vrede Ltd:
- Increased their loan by R3 million, impacting the gearing by raising debt.
- This decision heightens financial risk but aims at funding stable operations.
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Nigel Ltd:
- Reduced loans to improve financial stability while repurchasing shares worth R540,000.
- This conservative gear management strategy helps maintain a balanced risk profile.
Shareholder Concerns:
- Both companies' strategies demonstrate distinct attitudes towards risk, with Risky investments in Nigel Ltd potentially leading to future instability.