Summative assessment

Read$/$analyse$/$interpret the following information and answer the following questions.

Overview:

Springs Ltd is a company listed on the Johannesburg Stock Exchange $($JSE$)$ and is in the health food

industry. The company specialises in locally produced health foods and supplements, all of which are

locally produced.

Extracts of financial information

Springs Ltd has a $30$ September year$-$end. The following information has been extracted from the

financial statements of the last three years:

$2022$

R$000$

$2023$

R$000$

$2024$

R$000$

Sales $200000216000226800$

Purchases $177000160000225000$

Closing inventory $300004200028000$

Accounts receivables $138002250023300$

Accounts payable $859005589065250$

Cash and cash equivalents $350025004020$

Additional information:

$1.85\%$ of sales are on credit. The company's credit policy is $20$ days.

$2.92\%$ of purchases are on credit. Springs Ltd$.$s policy is to delay the payment of trade creditors

as late as possible to increase the company's cash flow position.

Possible Expansion

The company is considering expanding its supplement range geared towards sportsmen. The

machinery necessary to manufacture the supplements will cost R$15$ million and have no value after

five years.

The following information is available:

Financing costs

The financial director calculated the pre$-$tax cost of financing for Springs Ltd as follows:

$\%$

Ordinary shareholder$$s equity $15$

Preference shares $9\mathrm{.}5$

Long$-$term loan $14$

Debentures $12$

Capital structure

R$000$

Ordinary shares at R$3\mathrm{.}50$ per share $175000$

Retained earnings $50000$

$13\%$ Preference shares of R$2\mathrm{.}60$ each $65000$

$290000$

Debentures bearing interest at $14\%$ per year $8000$

Long$-$term loan bearing interest at $11,5\%$ per year

payable at the end of the period $25000$

$323000$

The ordinary and preference shares currently trade at R$4\mathrm{.}25$ and R$2\mathrm{.}75$ per share respectively. The

long$-$term loan is repayable after $8$ years. Current market related interest rates on similar loans

approximate to $10\mathrm{.}5\%$ per annum.

Trademark

Springs entered into preliminary discussions with a European sports club to acquire the rights to

exclusively use their trademark in South Africa. The cost of acquiring the trademark is expected to

be R$25$ million, payable in advance.

Projected total cash flows for the proposed project

Y$1$

R$000$

Y$2-5$

Sales $19800$ Increase with $4\%$

per year

Manufacturing costs $6000$ Increase with $4\%$

per year

Selling costs $2400$ Increase with $4\%$

per year

Fixed costs per year $940$ Increase of $3\mathrm{.}2\%$

per year

Additional investment in working capital due to

trademark

$300$ Increase with $4\%$

per year

Required

In a report to the board of Springs, address the following tasks:

$1)$ Evaluate Springs Ltd$$s current working capital management position.

Your answer should include the following three sub$-$sections:

$1\mathrm{.}1$ Calculate all the relevant working capital ratios for $2023$ and

$2024.$

$1\mathrm{.}2$ Evaluate the current working capital management position.

$1\mathrm{.}3$ Provide recommendations for possible improvement in

working capital management.

$24$

$2)$ Determine the appropriate discount rate for the net present value

calculations.

$22$

$3)$ Assist the directors of Springs Ltd in determining whether investing

in supplements is the correct decision. Assume that the investment

will be made this year and that the manufacturing of the supplements

will commence next year.

Include in our calculations and decision the following:

$1.$ Accounting Rate of Return $($ARR$)$

$2.$ Net present value $($NPV$)$

$3.$ Internal Rate of Return $($IRR$)$

$4.$ Profitability Index

$32$

$4)$ In assisting the board of Springs Ltd in their decision$-$making, provide

the benefits and disadvantages of using equity vs debt financing.

$12$

$5)$ Technical requirements: report format, layout and numbering of

tasks, professionalism, language, grammar and referencing.

$10$

NOTE:

$$ Ignore all taxes, depreciation, and wear and tear.