1. You are the accounting officer of Zhaka CC, a small construction firm. The members are concerned...
Question:
1. You are the accounting officer of Zhaka CC, a small construction firm. The members are concerned about their inventory management, where up until now, ordering of raw materials has been haphazard and largely by guesswork. The members of Zhaka CC are anticipating an upsurge in demand for their services. They realize that they need to manage their inventory effectively if they want to be a successful player in the building industry.
They have asked you to look at their anticipated brick consumption and make appropriate recommendations. The following data is relevant:–
Budgeted consumption maximum 300 000 bricks/month
minimum 100 000 bricks/month
average 200 000 bricks/month
annual 2 400 000 bricks/year
Additional information: Lead time for delivery from the brick manufacturer, Kwasi Ltd, is a maximum of two months, a minimum of two weeks, and an average of one month.
Price per brick is R2.
Holding cost is 10% of stock value.
The ordering cost is R1 500 per order.
1 Draft a report to the members of Zhaka CC in which you advise them on the appropriate circumstances which determine when businesses might maintain high or low inventory levels and also how to determine their ideal inventory levels.
2 - Cost of capital
Makhado Limited has a target capital structure of 60% equity and 40% debt. The before-tax cost of debt is 7.64% and the cost of new equity is 13%. The finance manager is currently considering a project with an expected return of 12% which will be financed from the issue of ordinary shares as all retained income is already budgeted for in more profitable projects. The company recently issued debentures and, as a result, the present capital is more heavily weighted towards debt. The company tax rate is 28%.
1 Calculate the weighted average cost of capital by making use of the target capital structure.
2 Briefly explain (giving reasons) whether the project under consideration should be accepted or not.
3 List the three steps used to calculate the weighted average cost of capital.
4 Outline the fundamental assumptions of weighted average cost of capital.
Auditing An International Approach
ISBN: 978-0071051415
6th edition
Authors: Wally J. Smieliauskas, Kathryn Bewley