QUESTION 2

Ultimate Asset Managers has been provided with the following information relating to Lions Ltd for the years ended 31 December 2018 and 2019.

Details	2019	2018
Revenue	R 1 800 000	R 1 250 000
Profit before taxation	R 550 000	R 725 000

Extract from the Statement of Financial Position

Details	1 January 2019	1 January 2018
Equity	R 1 025 000	R 980 000
Interest bearing bank loans	R 350 000	R 415 000

Additional information: 1) Taxation for both years has been calculated at 28%.

2) Research and development costs of R 120 000 each year. These were expensed in the statement of profit or loss in the year in which they were incurred as accounting standards do not allow the capitalisation thereof. The company expects to derive economic benefits from these expenditures over a period of three years, starting from the beginning of the year following the year in which the expenditure was incurred.

3) Included in profit after taxation is the following:

Depreciation (the same for both accounting and tax purposes) of R 125 000 each year.

Interest expense of R 40 000 (2019) and R 51 000 (2018).

Credit losses of R 22 500 (2019) and R 18 000 (2018).

Rent expense of R 60 000 in 2019 and R 75 000 in 2018.

REQUIRED:

Q.2.1 Using the information provided, calculate the NOPAT (Net Operating Profit After Tax) to be used in the calculation of the Economic Value Added, of Lions Ltd at 31 December 2018 and 2019.

Q.2.2 If the Economic Value Added has been calculated as R 413 825 for 2019, calculate Lion Ltds weighted average cost of capital (WACC).