Question 3 (Marks: 20)

Answer the two independent questions below.

Q.3.1 Starlight Products specialise in direct marketing. The company has expanded and needs a new building in which to house its offices and warehousing facilities. Cheque Bank was approached for finance to support this project and approval was received. However, the company also had existing credit lines on their financial statements from debentures issued and a loan from their parent company. With reference to this example, illustrate the difference between specific and general borrowings clearly and explain how the borrowing costs would be calculated in each case. (6)

Q.3.2 Resonant Holdings owns a commercial shipping fleet and is in the process of refitting a container ship that was bought from a previous owner. They took ownership on 1 June 2020 and anticipate that it will take twelve months to complete the refurbishment at a total cost of R15 million. One third of the project cost is to be financed by a specific loan at an interest rate of 6.5% and the balance will be financed from two general sources, namely debentures worth R10 million at an interest rate of 7.25% and a revolving loan costing 7%, also worth R10 million.

The company expects to make three payments to the ship builders during the year as follows:

• R4 000 000 on 1 June 2020
• R5 000 000 on 1 October 2020
• A final payment of R6 000 000 on 1 April 2021

Required:

Calculate the borrowing costs that Resonant Holdings will capitalise for the year ended 31 May 2021. (14)