MAC$4865/$Assignment$\_02$

QUESTION $3(23$ marks$)$

Health Food Ltd is a company that produces animal food. The company started $16$ years ago as a family business and has rapidly grown ever since. The company was listed on the Johannesburg Stock Exchange $($JSE$)$ in $2024.$

Health Food Ltd has $20$ million R$1$ shares in issue, currently trading at R $12\mathrm{.}00$ per share.

You have been newly appointed as the financial manager of Health Food Ltd$,$ having completed your university studies recently. The board still comprises mostly of the original family members that started the company. Since the company listed, the administrative, legal and external reporting burden has grown significantly, where the board is unfamiliar with what is expected of them. The managing director, Mr$.$ Iqinile, has been confronted with several issues during the last couple of months, where he has asked for your assistance.

The issues include:

In an unfortunate health and safety accident, a mildly toxic chemical was unknowingly added to the production process of some of the animal food, ending up in the final products which caused illness to some customers' Healths and animals. The incident has led to bad publicity and a legal battle is still ongoing, where it appears that there will be damages against the company.

Health Food Ltd have had its production and operations halted for a few weeks while an investigation was conducted relating to the health and safety incident. This has caused cash flow issues, and Health Food Ltd utilised the bigger part of its cash reserves to fund the business while production was halted.

Shareholders are demanding dividends for the current year, even though the cash flow is extremely stretched.

Cash flow issues have caused the company to increase its gearing to a level that will be too high for certain financiers.

Health Food Ltd require R $30000000$ in funding for a new production plant.

Mr$.$ Iqinile has requested you to provide input on how to deal with the issues identified above.

$11$

Required:

$3\mathrm{.}1$ Write a memorandum to the board of directors where you:

$($a$)$ Briefly discuss the objective of Integrate Reporting $(<mi\; id="EditorElement\_1329019">|</mi>$R$>)$ and its primary purpose.

In addition to the above, discuss the three fundamental concepts underpinning integrated reporting.

$(6$ marks$)$

$($b$)$ Explain what gearing is and discuss the type of funding that could be raised without increasing the gearing ratio.

$(4$ marks$)$

$($c$)$ Explain what a scrip dividend is and discuss the advantages of a scrip dividend for Health Food Ltd$.$

$(6$ marks$)$

$($d$)$ Calculate what Health Food Ltd$\text{'}$s share price will be after a scrip dividend, if the directors decide to offer a $1$ for $5$ scrip dividends to shareholders.

Show all calculations

$(4$ marks$)$

$($e$)$ Calculate what the terms of the rights issue should be if Health Food Ltd$\text{'}$s directors would consider a rights issue at a discount of $25\%$ to raise the funds required for the new production plant.

Show all calculations

$(3$ marks$)$

$[$Question total: $23$ marks$]$