General notes: Semester 2

Question 1

Which division should cut etc

Answer 1

DO CULF

Question 2

DOL, BEP

Answer 2

-DOL: Contribution/ Profit
The DOL indicate that for every 1% increase in revenue, profits would increase by….
-BEP: FC/Contribution p/u
Produce at least x to break even

Question 3

Economic update

Answer 3

-Construction industry suffering
-Inflation is high, looting (price increases)
GDP
-Economic commodities are increasing
-Interest rates were dropped, recapitalize and grow
-Consumption expenditure by government not affected (Lack of capital formation)
-Exports (Great)_ Bringing money in by mines (commodities)
Exchange rates have impact
Reduce government deficits
-Gvt making money through CGT, Cashing in products (pension funds etc, rates)
-Government expenditure increased

Question 4

Address gearing difficulties

Answer 4

-make use of a revolving credit facility as a temporary measure
- consider raising additional equity through a fresh issue, a rights issue
-continue not paying a dividend
- company could also offer a conversion of debt into equity as a resolution
-additional equity issued would dilute current shareholders interest significantly as the company would in all probability be
doing so most when the share price is depressed
-consider selling non-performing divisions that are not core to the businesses operations
-explore merging with another mining company. Additional synergies may arise
-Debt could be cross-guaranteed in the larger group, de-risking the business.
-Explore sale and lease back transactions to raise liquidity.

Question 5

Factors to consider in determining special order

Answer 5

• Normal selling price is lower, existing customers may feel alienated
• If price is too low, competitors may reduce prices so overall price reduction
• Assess how competitors might price order
• Company must recover incremental costs
• Start up costs and learning curve should be included when determine SP
• FC already fully absorbed, minimum price likely to be lower
• Order may present new opportunity in market
• Have sufficient funding to cover working capital

Question 6

Exam notes

Answer 6

• If there is a change in business model think of if they have a specialisation or skills
• In a valuation justify any change in the business cycle and you cannot expect too much growth if the company is struggling

In ethics consider stakeholders

If asked about something, define it first

Question 7

Restructuring considerations

Answer 7

• Saving on the interest relating to the shareholders’ loans will generate a sufficient profit/return
• loans are written off, the tax implications
  -shareholders are unwilling to write off their loans/convert them into equity, more bridging financing
  -Restructuring may take some time
  -Cancel contracts and/or what about a moratorium
  on claims from creditors and loan providers?
  -Could use the profit from the sale of the non-core assets
  -Highly leveraged, there is a risk that the bank may call facilities up following a breach of other covenants
  -Interest saving
  -Has a buyer been identified?
  -The utilization of the assessed tax loss may provide an additional source of saving
  -Employee morale