MAC2602 Assignment 2 (QUIZ) Semester 1 2023

QUESTION 1 Show the components of total equity financed amounts as well as the components of debt financed amounts separately, then calculate the capital structure of CoreOre Limited. Total amount financed: + = Capital structure: Equity (342 555 / 611 855 This is the TOTAL of ALL CAPITAL (therefore the DEBT PLUS the EQUITY x 100 / 1) 55,99% Rounded to 56% Debt (269 300 / 611 855 x 100 / 1) 44,01% Rounded to 44% D:E Ratio = 44:56 CoreOre needs to raise R30 million for a project. Advise them on how they should finance the new project keeping the target capital structure in mind. The target capital structure was given in the question as being 40:60 (40% debt and 60% equity of the total capital of 100%. Capital structure: Equity (372 555 / 641 855 x 100 / 1) 58,04% Rounded to 58% Debt (269 300 / 641 855 x 100 / 1) 41,96% Rounded to 42% The new debt:equity ratio will then be 42:58 Downloaded by: madyahf | Distribution of this document is illegal S - The study-notes marketplace With the additional R30m added to equity, the capital structure changed as follows: Debt decreased from 44% to 42% (therefore closer to the target of 40%. Equity increased from 56% to 58%. Calculate the cost of ordinary shares (cost of equity) by using the capital asset pricing model (CAPM) approach. Calculate the WACC using the target capital structure. Use the cost of ordinary shares (cost of equity, Ke) as calculated in (c). Cost of debt (bonds) Downloaded by: madyahf | Distribution of this document is illegal S - The study-notes marketplace QUESTION 2 Gross profit (GP) margin:  The gross profit margin indicates the proportion of sales that is available to cover other expenses and earn a profit AFTER accounting for cost of goods sold.  When the two companies are compared there is a relative small difference which indicates that the industry mark-up has not changed significantly.  The implication of this relative constant gross profit margin is that the companies are in a fairly stable industry that creates stable conditions that justify stable mark-ups. Current ratio  The current ratio is the most important measure of the liquidity of a company. For most industries, the norm is 2:1 which implies that R1 of current liabilities are covered by R2 of current assets.  When the two companies are compared, Organic Products is close to the norm but OP ratio is too high.  The implication of the high ratio of Green Tree is that it may indicate that: o current assets might be overstated (valued too high) o or current assets are not converted into cash fast enough o or too much money is tied up in non-productive assets. Downloaded by: madyahf | Distribution of this document is illegal S - The study-notes marketplace Inventory turnover rate  The inventory turnover rate measures the number of times that inventory is sold or used in a year.  When the two companies are compared, the difference between the two companies is relatively small indicating that the industry result is also almost 5 times.  The implication of the high turnover rates is that both companies apply effective management of inventory. This can a