MAC3702 Assignment 2 (COMPLETE ANSWERS) Semester 1 2026 - DUE 22 April 2026

MAC3702 Assignment 2 (COMPLETE ANSWERS) Semester 1 2026 - DUE 22 April 2026; 100% TRUSTED Complete, trusted solutions and explanations. For assistance, Whats-App 0.8.1..2.7.8..3.3.7.2... Ensure your success with us.... QUESTION 1 (69 marks) UrbanKick Sports Limited (“UKS”) is a Johannesburg-based sportswear manufacturer and distributor specialising in football apparel and footwear. The company is listed on the Johannesburg Stock Exchange (JSE) and operates several branded retail outlets across South Africa and selected SADC countries. Due to increased investment in South African football by technology firms, streaming platforms and mobile network operators, UKS has identified growth opportunities in the performance footwear market. The upcoming FIFA world cup, many South African football clubs that will be participating in the African Cup tournaments and growing popularity of women’s football also contribute to the growth opportunities. The UKS board has overwhelmingly approved the launch of a new smart-performance soccer boot called NOVA X9, inspired by local football icon Neo Khumalo. The following information was extracted from the integrated annual report of UKS. Extract from Statement of Financial Position at 31 December 2025 Rand 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 - Hatsa Bank (13%) 680 000 Total equity and liabilities 2 020 000 Additional information 1. The expected operating profit, excluding profits from the sale of Nova X9 soccer boots, for the year ending 31 December 2025 is as follows: R Probability % % % % 2. Ordinary share dividends declared and paid in the previous five (5) years were as follows: Year Dividend per share 2021 78 cents 2022 85 cents 2023 94 cents 2024 100 cents 2025 110 cents The UKS Board intends to maintain the average annual growth in dividends. MAC 3702 ASSIGNMENT 2 – SEMESTER 1 4 3. The market price for ordinary shares is currently R14 per share and that of preference shares is R98 per share. New share issues will have no effect on these prices, although ordinary share issuing costs will be 3% per share issued. 3. UKS aims to maintain a debt: equity ratio of 1: 1 going forward (based on book values). The book values will approximate the market values of the capital instruments. 5. To manufacture the new Nova X9 soccer boot, UKS is planning to buy a new machine for R900 000 on 1 January 2026. The company will use this machine for 5 years in full production, and then scrap it off at R60 000. 6. The expected annual production quantities of this new soccer boot for which demand exists are given below. These projections will stay the same throughout the 5 year period. Quantity (pairs) Probability 9 000 30% 12 500 40% 15 000 20% 18 500 10% The expected cost per pair: Cost R Direct material 480 Direct labour 220 Variable overhead 55 7. The budgeted fixed costs to produce Nova X9 are R450 000 per annum and the selling price is set at R880 per pair. No inflationary increases need to be considered. The discount rate to be used is 18%. The additional working capital required for this project is R100 000. 40% of this amount will be utilised in the beginning of the project and the balance in the third year. 60% of the total amount will eventually be recovered. 8. The following options are available to finance the new initiative: • 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 Bousaam Bank of R250 000 at prime + 250 basis points. • A top-up loan from Hatsa Bank of R80 000 at the same rate as the existing loan, that is consistent with a fair market interest rate. The loans can only be taken at the total amounts as made available by the banks. 9. The Corporate tax rate is 27% and an allowance on new manufacturing machines is allowed by SARS at 25% per annum on the cost of the machine. The prime lending rate is currently 10,25% and is expected to stay unchanged for the foreseeable future. MAC 3702 ASSIGNMENT 2 – SEMESTER 1 5 REQUIRED (a) Calculate the expected operating profit for the year ending 31 December 2025 including the expected operating profit from the new Nova X9. [Round off to the nearest Rand] (10) (b) Determine how the acquisition of the new manufacturing machine should be financed, considering the funding options available to UKS as well as the current capital structure on 31 December 2025 using book values. In your comments, discuss what factors the company should also consider regarding cheaper funding options and control. (Calculations 9 marks; comments 3 marks) (12) (c) Calculate the weighted average cost of capital of UKS based on book values after the financing of the new project. [Round off amounts to the nearest Rand and other numbers to the nearest two decimal places] (10) (d) Based on net present value (NPV) principles, advise UKS if they should go through buying the new machine. You must show all your detailed calculations. [Round off answers to the nearest rand] (21) (e) Determine how long (in years) it will take UKS to recover its initial capital investment in the new machine, using the discounted payback method. Use the answers from question (d). (5) (f) List five (5) qualitative factors that should be considered by the Board of UKS before deciding to buy the new machine. (5) (g) For this question use the following additional information to the scenario given above: UrbanKick Sports Limited (UKS) is considering expanding its Nova X9 product line into international markets to exploit the upcoming FIFA World Cup 2026 and CAF Africa Cup of Nations 2027. However, management is concerned about rising production costs, volatile exchange rates and increasing competition. Name and discuss three financial risks associated with the expansion of the project internationally. (6) TOTAL QUESTION [69] MAC 3702 ASSIGNMENT 2 – SEMESTER 1 6 QUESTION 2 (31 marks) Games SA (Pty) Ltd (“Madlala”) is one of South Africa’s leading gaming and digital entertainment retailers. The company sells video game consoles, accessories, digital gaming subscriptions and virtual reality equipment through eight physical megastores and an expanding online sales platform. Following strong growth in the gaming market driven by next-generation consoles (PlayStation®5 Pro and Xbox Series refresh models), Games SA expanded operations into Gauteng, Western Cape, KwaZulu-Natal, and Free State. All stores operate from leased premises. The company’s non-current asset portfolio includes computer systems, in-store digital display equipment, store fittings and capitalised software platforms Although economic growth is weak, the South African economy continues to improve modestly from previous years. GDP growth is expected to grow at 1,4% in 2026 better than 2025 lifted by resilient household expenditure and higher government consumption in both 2024 and 2025 financial years. The headline annual inflation rate [CPI] was measured at 3,5% in January due to low fuel prices and stable food prices. The South African rand has shown remarkable strength against the US dollar in early 2026 due to increased exports of gold and platinum, narrow budget deficit and stabilised national debt. Management is concerned about potential currency volatility due to existing geopolitical tensions in the world, as most gaming inventory is imported and priced in US dollars. In addition, there is reduced consumer spending on luxury goods. The board is investigating hedging strategies, expansion of private-label accessories, improved working capital efficiency and possible business valuation for attracting private equity investors. The financial information on Games SA is presented below: MAC 3702 ASSIGNMENT 2 – SEMESTER 1 7 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2025 2025 2024 R’000 R’000 Sales revenue Cost of sales () () Gross profit Marketing expenses (2 050 000) (1 850 000) Licensing and platform costs (3 200 000) (3 050 000) Administration expenses (1 850 000) (1 920 000) Depreciation (1 450 000) (1 300 000) Operating profit (EBIT) 8 500 000 7 380 000 Interest expense (2 050 000) (1 780 000) Interest income 180 000 120 000 Profit before tax 6 630 000 5 720 000 Taxation (27%) (1 790 000) (1 545 000) Net profit after tax 4 840 000 4 175 000 Dividends declared and paid: 1 600 000 1 350 000 STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2025 2025 2024 R’000 R’000 ASSETS Non-current assets Current assets Total assets EQUITY AND LIABILITIES Ordinary share capital 3 000 000 3 000 000 Reserves Non-current liabilities Current liabilities Total equity and liabilities MAC 3702 ASSIGNMENT 2 – SEMESTER 1 8 Business Valuation For the year ended 31 December 2025, the company recorded a net profit of R4 840 000 and free cash flows of R3 120 000. The free cash flows for the 2024 financial year amounted to R2 860 000 and the increase in cash flows is in line with expected future growth of the business. Games SA owns proprietary software systems, exclusive African distribution rights and gaming platform partnerships with a fair market value of R (after tax). These assets are currently recorded at R8 200 000 in the statement of financial position. Working Capital Management Due to rising credit defaults and tightening consumer finances, Games SA is considering a more aggressive working capital approach. The company is considering two credit policies, with the intention of implementing the most profitable option. Current Option A Option B Annual debtor's collection costs R420 000 R580 000 R850 000 Bad debt losses (% of loss) 3,5% 2% 1% Average collection period 2 months 1 1/2 months 1 month Annual credit sales represent 70% of total sales revenue and the total annual sales income for 2025 amounted to R. Additional Information • Weighted average cost of capital (WACC): 16% • Corporate tax rate: 27% • Average P/E ratio of similar listed companies on the AltX of the JSE is 12 times and earning yield of 8,3%. • Private companies (companies not listed on the JES) are estimated to trade at 9% below their fair market value (marketability discount). • Current prime lending rate is 10,25%. REQUIRED: (a) Calculate the following ratios for Games SA for the year ended 31December 2025 and 2024 and explain what the possible reasons could be for the increase/decrease from December 2024. (2 marks for the ratio calculation and 2 marks for the explanation.) (i) Gross profit margin (ii) Operating profit margin (iii) Net profit margin (iv) Return on equity (16) (b) With consideration to working capital management, calculate and explain the most financially viable option for Games SA. (Calculate the current, Option A and Option B’s debtor’s losses and the annual cost associated with each. Show detailed calculations). (6) MAC 3702 ASSIGNMENT 2 – SEMESTER 1 9 (c) Determine at how much the owners of Games SA (Pty) Ltd should sell their shares to an independent investor that is interested in buying 25% of the business. Use the price-earnings multiple method. (6) (d) Calculate the total value of Games SA using the free cash flow method. (3)