Level Up Ltd (Level Up) is a construction entity with offices strategically located in Johannesburg, Port...

      

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Level Up Ltd ("Level Up") is a construction entity with offices strategically located in Johannesburg, Port Elizabeth, Cape Town, and Durban. The entity's construction activities are conducted in the same way and traditional format as most mainstream construction entities. Level Up is listed on the main board of the Johannesburg Stock Exchange ("JSE") in the industrial sector and its shares are currently trading on the exchange at R119 per share. The financial yearend of the entity is 31 July, and the entity has recently published its audited 2023-financial year annual financial statements. The following are extracts of Level Up's 2023 financial statements: Level Up Ltd Statement of Financial Position as at 31 July 2023 2023 R'm ASSETS Non-Current Assets Property, plant and equipment Total Non-Current Assets Current Assets Inventory Receivables Cash and bank Total Current Assets Total Assets EQUITY AND LIABILITIES Equity Ordinary shares capital Notes 10 261 10 261 230 161 188 579 10 840 3 120 2022 R'm 10 581 10 581 243 182 157 582 11 163 3 120 Retained earnings Total equity Non-Current Liabilities Long-term borrowings Total Non-Current Liabilities Current Liabilities Trade and other payables Short-term borrowings Total current liabilities Total Equity and Liabilities Number of shares in issue Opening balance Profit for the year Dividends Closing balance 1 Revenue 2 1 Notes 2 864 5 984 33 2989 2 989 871 996 1 867 Level Up Ltd Statement of Changes in Equity as at 31 July 2023 10 840 Singular 52 000 000 2 263 5 383 Retained earnings 2023 R'm 2 263 601 0 2 864 3 985 3 985 799 996 1795 11 163 Singular 52 000 000 2022 R' m 1832 535 (104) 2 263 Level Up Ltd Statement of Comprehensive Income for the year ended 31 July 2023 2023 R'm 2 332 2022 R'm 2179 (Cost of sales) Gross profit (Selling and marketing expenses) (Administration expenses) (Other operating expenses) Profit before interest and tax expenses (Finance costs) Profit before tax expense (Income tax expense) Profit for the year (618) 1714 (187) (201) (346) 980 (115) 865 (264) 601 (578) 1 601 (176) (189) (323) 913 (122) 791 (256) 535 Note 1 Level Up obtained a R4 980 000 five-year loan from Delta National Bank precisely two financial years ago. According to the loan agreement, interest compounds annually at 3.2% above the South African government bond rate. Instalments are payable annually on the anniversary of the loan. The effective interest rate for a 5 year South African government bond is currently 8.34%. Note 2 Trade and other payables consist of suppliers that provide material and other equivalent utilities to Level Up in order for Level Up to perform its business activities and services. These suppliers do not charge interest for credit purchases as long as the agreed repayment periods are met. Note 3 After carefully analysing and evaluating the financial statements, internal management reports, budgeted cash flows and future plans; the Directors of Level Up has determined that R28 000 000 is available which the entity wish to give back to shareholders. This value can either be distributed to shareholders as dividends or by repurchasing shares from the current shareholders. The Directors of Level Up are currently evaluating both options. REQUIRED: 1.1. Calculate the following ratios for Level Up Ltd for the 2023 financial year: Current ratio Quick ratio (Acid test ratio) Debt ratio . Debt to equity (Debt: Equity ratio) 1.2. Analyse the extracts from the financial statements and answers to question 1.1. Identify the type of working capital finance policy Level Up Ltd has and motivate your answer. Supplement your answer by explaining why Level Up Ltd would want to employ this working capital finance policy. (6 marks) 1.3. Advise the directors of Level Up Ltd whether the above working capital finance policy is best for Level Up Ltd and motivate your advice. (6 marks) Dividend per share Net asset value of Level Up Ltd per share. 1.4. Draft a report to the directors of Level Up Ltd in which you advise them whether the entity should distribute value back to the shareholders by Option 1: Declaring a dividend, or Calculations - 21 marks Interpretation and advice - 7 marks (6 marks) Option 2: Through a repurchase of shares from the shareholders. Separately for each option, include the effect that each option will have on the following 2023 financial year figures, in your report: Share price per share Earnings per share Price - earnings ratio (28 marks) 1.5. Identify and explain the 3 (three) most evident financial risks which Level Up Ltd are exposed to and provide 2 (two) recommendations how each financial risk can be mitigated or managed. 1.6. Briefly discussed 3 (three) United Nations ("UN") sustainable development goals with which Level Up Ltd may encounter conflicts with considering the entities business activities. Round to two decimal places where required for all calculations above. Competency Framework Reference: C2 FINANCING DECISIONS C2.1 a) b) C2.3 a) b) C3.2 a) (13 marks) b) (6 marks) Cash management Provide advice on cash management processes (analyse and evaluate cash flow and working capital), to ensure financial risks are managed or mitigated Develop strategies for managing and monitor the entity's working capital Decisions related to distribution of profits Analyse the manner in which an entity distributes cash or assets to shareholders by means of dividends or share buybacks Recommend the most appropriate method to distribute profits Capital allocation process Analyse the organisation's capital allocation process for alignment with its strategic objectives, including value creation Interpret the available methods of capital allocation (mergers and acquisitions, investment in organic growth, repurchase shares, pay down debt and pay dividends) for the organisation to inform decision-making Level Up Ltd ("Level Up") is a construction entity with offices strategically located in Johannesburg, Port Elizabeth, Cape Town, and Durban. The entity's construction activities are conducted in the same way and traditional format as most mainstream construction entities. Level Up is listed on the main board of the Johannesburg Stock Exchange ("JSE") in the industrial sector and its shares are currently trading on the exchange at R119 per share. The financial yearend of the entity is 31 July, and the entity has recently published its audited 2023-financial year annual financial statements. The following are extracts of Level Up's 2023 financial statements: Level Up Ltd Statement of Financial Position as at 31 July 2023 2023 R'm ASSETS Non-Current Assets Property, plant and equipment Total Non-Current Assets Current Assets Inventory Receivables Cash and bank Total Current Assets Total Assets EQUITY AND LIABILITIES Equity Ordinary shares capital Notes 10 261 10 261 230 161 188 579 10 840 3 120 2022 R'm 10 581 10 581 243 182 157 582 11 163 3 120 Retained earnings Total equity Non-Current Liabilities Long-term borrowings Total Non-Current Liabilities Current Liabilities Trade and other payables Short-term borrowings Total current liabilities Total Equity and Liabilities Number of shares in issue Opening balance Profit for the year Dividends Closing balance 1 Revenue 2 1 Notes 2 864 5 984 33 2989 2 989 871 996 1 867 Level Up Ltd Statement of Changes in Equity as at 31 July 2023 10 840 Singular 52 000 000 2 263 5 383 Retained earnings 2023 R'm 2 263 601 0 2 864 3 985 3 985 799 996 1795 11 163 Singular 52 000 000 2022 R' m 1832 535 (104) 2 263 Level Up Ltd Statement of Comprehensive Income for the year ended 31 July 2023 2023 R'm 2 332 2022 R'm 2179 (Cost of sales) Gross profit (Selling and marketing expenses) (Administration expenses) (Other operating expenses) Profit before interest and tax expenses (Finance costs) Profit before tax expense (Income tax expense) Profit for the year (618) 1714 (187) (201) (346) 980 (115) 865 (264) 601 (578) 1 601 (176) (189) (323) 913 (122) 791 (256) 535 Note 1 Level Up obtained a R4 980 000 five-year loan from Delta National Bank precisely two financial years ago. According to the loan agreement, interest compounds annually at 3.2% above the South African government bond rate. Instalments are payable annually on the anniversary of the loan. The effective interest rate for a 5 year South African government bond is currently 8.34%. Note 2 Trade and other payables consist of suppliers that provide material and other equivalent utilities to Level Up in order for Level Up to perform its business activities and services. These suppliers do not charge interest for credit purchases as long as the agreed repayment periods are met. Note 3 After carefully analysing and evaluating the financial statements, internal management reports, budgeted cash flows and future plans; the Directors of Level Up has determined that R28 000 000 is available which the entity wish to give back to shareholders. This value can either be distributed to shareholders as dividends or by repurchasing shares from the current shareholders. The Directors of Level Up are currently evaluating both options. REQUIRED: 1.1. Calculate the following ratios for Level Up Ltd for the 2023 financial year: Current ratio Quick ratio (Acid test ratio) Debt ratio . Debt to equity (Debt: Equity ratio) 1.2. Analyse the extracts from the financial statements and answers to question 1.1. Identify the type of working capital finance policy Level Up Ltd has and motivate your answer. Supplement your answer by explaining why Level Up Ltd would want to employ this working capital finance policy. (6 marks) 1.3. Advise the directors of Level Up Ltd whether the above working capital finance policy is best for Level Up Ltd and motivate your advice. (6 marks) Dividend per share Net asset value of Level Up Ltd per share. 1.4. Draft a report to the directors of Level Up Ltd in which you advise them whether the entity should distribute value back to the shareholders by Option 1: Declaring a dividend, or Calculations - 21 marks Interpretation and advice - 7 marks (6 marks) Option 2: Through a repurchase of shares from the shareholders. Separately for each option, include the effect that each option will have on the following 2023 financial year figures, in your report: Share price per share Earnings per share Price - earnings ratio (28 marks) 1.5. Identify and explain the 3 (three) most evident financial risks which Level Up Ltd are exposed to and provide 2 (two) recommendations how each financial risk can be mitigated or managed. 1.6. Briefly discussed 3 (three) United Nations ("UN") sustainable development goals with which Level Up Ltd may encounter conflicts with considering the entities business activities. Round to two decimal places where required for all calculations above. Competency Framework Reference: C2 FINANCING DECISIONS C2.1 a) b) C2.3 a) b) C3.2 a) (13 marks) b) (6 marks) Cash management Provide advice on cash management processes (analyse and evaluate cash flow and working capital), to ensure financial risks are managed or mitigated Develop strategies for managing and monitor the entity's working capital Decisions related to distribution of profits Analyse the manner in which an entity distributes cash or assets to shareholders by means of dividends or share buybacks Recommend the most appropriate method to distribute profits Capital allocation process Analyse the organisation's capital allocation process for alignment with its strategic objectives, including value creation Interpret the available methods of capital allocation (mergers and acquisitions, investment in organic growth, repurchase shares, pay down debt and pay dividends) for the organisation to inform decision-making