Page 17 - CIMA SCS Workbook February 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

EXERCISE 2

Workings – long term funding analysis

N$ 000 2018 2017
Gearing D / E 22,766 / 4.0% 19,861 / 3.8%
570,776 527,186
D / (D+E) 22,766 / 3.8% 19,861 / 3.6%

593,542 547,047
Interest Operating profit / N/A – net N/A – net
cover Finance costs interest is interest is
received! received!
Dividend Profit for the year N/A – no N/A – no
cover / Dividend dividend paid! dividend paid!

Working – cash position analysis

N$ 000 2018 2017 2016
Cash held at year end 51,604 190,691 31,312
Cash increase / (decrease) over the year (139,087) 159,379 Not given in preseen

Commentary on long term funding and cash position:

Gearing – debt finance

Vita’s gearing is extremely low, and has not changed significantly year on year. Having said that, it
would be useful to know what the company’s share price is, to enable us to calculate gearing
using (up-to-date) market values rather than book values.

Even so, it is clear that Vita has scope to increase its gearing considerably without causing any
problems. Indeed at the moment the company receives more interest on its cash balances than it
pays on its borrowings, so it has a net interest income and hence no interest cover to worry
about.

One advantage of using debt finance to fund new investments is that the interest payments are
tax deductible. At the moment Vita is missing out on this benefit because of its low level of
gearing.

Gearing – equity finance

Vita became a listed company nearly two years ago, but unfortunately no information is provided
to show how the share price has moved over that period.

Vita has maintained its policy of not paying a dividend, so presumably it will have attracted a
clientele of shareholders who are happy to receive their returns from capital growth rather than
income (dividends).

On page 7 of the pre-seen it says that Vita intends to raise some more funds from the market in
the near future to finance its higher levels of investment in R&D. This looks to be a very
reasonable suggestion. There is also scope to pay a dividend at some point in the future if the
directors assess that this would send a positive signal to the market.

KAPLAN PUBLISHING 57