QUESTION $1(40$ Marks; $120$ Minutes$)$

LUXE LIVING LIMITED

Raymond Mashaba is a South African businessman who purchased a chain of four small consumer

goods$*$ retail stores, situated in the Limpopo province, from its founder in the $1980$s$.$ Shortly thereafter,

a holding company was registered, and since then more stores have been added in other provinces

as part of the strategic expansion of his portfolio, showcasing Raymond$$s business acumen and an

understanding of market dynamics.

Given his desire to create a luxurious shopping experience for consumers, he decided to rebrand the

entire store$-$chain to focus on conveying elegance, sophistication, and exclusivity. The rebranding

included redesigning store layout, d$$cor$,$ packaging, and product assortment. To solidify its position in

the market and to provide avenues for continued growth and investment, the holding company listed

under the $$Personal Care, Drug and Grocery Stores$$ sector on the Johannesburg Stock Exchange in

the late $90$s$.$ The holding company was subsequently renamed Luxe Living Limited $($Luxe Living$).$

Luxe Living went from strength to strength and soon became an established South African premium

food, clothing, and homeware retailer, targeting the upper Living Standards Measure$**($LSM$)8-10$

category.

However, for the financial year ended $29$ February $2024($FY$2024),$ Luxe Living$$s financial

performance worsened significantly, and its share price declined due to a drop in sales and gross profit

across its various product types as well as the impact of loadshedding. Furthermore, a fierce

competitor, Elite Eats Group $($Elite Eats$),$ steadily gained market share in the LSM $4-7$ category by

introducing an online shopping application $($app$).$ Elite Eats$$ customers can use this app to order fresh

food $($including vegetables$),$ personal care products as well as selected medicines and have them

delivered to their doorstep within $60$ minutes. Market research shows that more consumers are

transitioning to online shopping for convenience and are exploring more affordable alternatives without

sacrificing quality. In addition to the online shopping application, Elite Eats also introduced modernised

flagship stores, which proved to be stiff competition for Luxe Living.

Luxe Living$$s management is exploring different options and ideas on how it can improve $($turn around$)$

the way in which it conducts its business.

SECTION A: DISTRIBUTION NETWORK

Luxe Living makes use of a decentralised distribution network as part of its business model. It has nine

distribution warehouses, with inventory located at the various warehouses spread across all nine

provinces. Luxe Living receives its goods from only carefully selected suppliers, which means that the

quality of products always meets high standards and delivery times are managed closely and adhered

to$.$ From these warehouses, the products are distributed to various Luxe Living stores across the

country, where they are sold.

Luxe Living prides itself as a company that conducts business in an environmentally sustainable way.

As part of its strategy, the company is working on changing its largest warehouse in Johannesburg,

Edenvale, to a $$green$$ warehouse. This means that the building design and operations reduce or

eliminate any negative impact it could have on the natural environment and climate.

$*$ Consumer goods: Can also be referred to as $$final$$ goods because they end up in the hands of the consumer or the enduser. Examples of consumer goods include food, clothing, electronics, and appliances.

$**$ Living Standards Measure $($LSM$)$ Segmentation: A tool to classify a standard of living and disposable income of

consumers, with LSM $1$ being the poorest.

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Test $3/$July $2024$

$[$TURN OVER$]$

CONFIDENTIAL

To give back to the community, Luxe Living will construct a community solar farm adjacent to where

the Edenvale warehouse is$.$ A solar farm is a large$-$scale solar energy production system that uses

solar panels to harvest energy from the sun. This solar farm will provide power to Luxe Living$$s entire

Edenvale warehouse facility as well as to the surrounding community. The total cost of building the

solar farm is estimated to be R$45$ million. Of this total cost, R$13$ million will be funded by the

Department of Mineral Resources and Energy in a form of a non$-$repayable grant.

Luxe Living has a target capital structure of $30\%$:$70\%($debt: equity$).$ In the target capital structure, the

following should be maintained:

$$ Ordinary share capital should be $60\%$ of total equity.

$$ The debt portion should be split equally between loans, debentures, and total bonds.

$$ In terms of the targeted capital structure, $75\%$ of total bonds is made up of Rand$-$denominated

Luxe Living $($local$)$ bonds.

$$ The loans in relation to each other, should be weighed in the same proportion as they currently

are in the extract below as per note $3\mathrm{.}1$ and $3\mathrm{.}2.$

Extract of S