Question

QUESTION 1 Balance Sheet for Basil Ltd as at 31 December 2010 (R'000) Assets 2010 2009 Non - current assets at book value 106 000 84 000 Current assets 349 000 298 000 Inventory 200 000 150 000 Accounts receivable (debtors) 120 000 100 000 Bank 29 000 48 000 Total assets 455 000 382 000 Equity 163 000 138 000 Ordinary shares 70 000 70 000 Retained income 93 000 68 000 Non-current liabilities 101 000 101 000 Long-term loan 101 000 101 000 Current liabilities 191 000 143 000 Accounts payable (creditors) 49 000 53 000 Short-term loan 115 000 63 000 Taxation 20 000 20 000 Dividends payable 7 000 7 000 Total equity and liabilities 455 000 382 000

Various stakeholders for different reasons have interests in the financial performance and financial position of a business.

By making use of the data of the above statements on the financial performance and position of the business, you are required the following.

Required:

1.1) The suppliers of goods and services on credit to a business are interested in the liquidity of it. They asked you to calculate two ratios to measure the liquidity and comment briefly on the changes over the year.

1.2) If purchases are 70% of Cost of Sales and 50% of all purchases are on credit, calculate how long the creditors had to wait in 2010 before their accounts were settled.

1.3) On the other hand the business is worried about potential bad debts and the financial manager needs to know how long it must wait before the debtors settle their accounts. Yu are required to calculate the debtor's collection period for the two years and comment on the change over the year. (Accept that all sales were on credit)

1.4) The owners are interested in the profitability of the business and request you to calculate two ratios whereby the profitability of the business could be measured in 2010

1.5) The management is interested how well the inventory was managed. In order to form an opinion about this aspect, yu are required to calculate the inventory turnover ratio for 2010.

1.6 Learning Outcome: To understand practically the concept of (CAPM)

An investor wants to add shares in Starbucks Ltd to her portfolio. Starbucks has beta of 0.5, the risk free rate is 7%, and the return on the market is 12%. Establish the expected return on Starbucks Ltd and comment.

Answer 1

A.

Year	2010	2009
Current Assets	349000	298000
Current Liabilities	191000	143000
Current ratio	1.83	2.08
Year	2010	2009
Quick Assets	149000	148000
Current Liabilities	191000	143000
Quick Ratio	0.78	1.03

Current ratio of 1.83 indicates the company has 1.83 of Current assets to cover its current liabilites but it is slight reduction in compared with 2009

Quick ratio indicates, in 2010 inadequate liquidity after removing the inventory

Formula

Current ratio = Current Assets/Current liabilities

Quick Ratio = Quick Assets/Current Liabilities

Quick Assets = Bank + Accounts receivable

B.

Cost of Sales	640000
Purchases
70 % of Cost of sales	448000
Credit Purchase
50 % of Purchase	224000
Year	2010	2009
Accounts Payable	49000	53000
Average Payable	51000
Payable Turnover Ratio	224000/51000	4.3922
No of days creditors settlement	83.103

Creditors had to be waited for 83 days to settle their payment.

Formula

Payable Turnover ratio = Credit Purchase/Average Payable

Credit settlement Period = 365/payable turnover ratio

C.

Debtor Collection Period
Year	2010	2009
Debtors	120000	100000
Sales	853000	743000
Debtor Turnover ratio	7.1083	7.43
Debtor Collection Period	51.348	49.125
Debtor Collection period slightly increases from 49 to 51 days

Formula

Debtor Collection period = 365/Debtor Turnover ratio

D.

Profitabilty ratio
Year	2010	2009
Gross Profit	213000	193000
Sales	853000	743000
Gross Profit Margin	24.97%	25.98%
EBIT	79000	76000
Sales	853000	743000
Operating Profit Margin	9.26%	10.23%

Formula

Gross profit Margin = Gross profit/sales * 100

Operating Profit Margin = EBIT/Sales * 100

E

Year	2010	2009
Cost of Sales or COGS	640000
Invemtory	200000	150000
Average Inventory	175000
Inventory Turnover ratio	3.6571

Fomula

ITO = COGS/Average Inventory

Companies refer to either the cost of goods sold (COGS) or the cost of sales on the balance sheet, or in some cases both, leading to some confusion for investors about the meaning and implication of the two terms. However, fundamentally, there is almost no difference between a company's listed cost of goods sold (COGS) and cost of sales. The two terms are typically used interchangeably in an accounting context.

F.

Rf	7%
Rm	12%
Beta	0.5

Expected return of stock

=  Rf + Beta of Stock (Rm - Rf)

= 7 + 0.5(12-7)

= 9.5%