Management Accounting and Finance IV: ACCN 4027 and ACCN 5003
2024 Simulated ITC Paper 2
Question 1 (60 MARKS)
Better Energy Group Ltd (JSE Code: BEG) is listed in the Consumer Goods and Services sector of the
JSE’s Alternate Exchange (AltX). The company’s business is operationally split into a Production
division and a Repair division. The Production division focuses on manufacturing and selling gas stoves,
gas geysers and other gas-powered appliances. The appliances are sold in bulk to retailers around the
country, for sale to consumers who use the appliances in their homes. The Repair division carries out
repairs on gas-powered appliances.
The demand for gas-powered appliances increased rapidly over the last decade, as consumers sought
alternates to electrical appliances due to rampant loadshedding in South Africa. BEG therefore has a
substantial amount of cash resources and is considering various further expansion through acquisition
to increase its product and service offering. BEG’s strategic objectives include expanding their product
offering to include production equipment used in factories. In this manner, BEG hopes to expand its
customer base to include small business owners. However, some directors believe that BEG would
benefit from expanding its distribution capabilities to reduce reliance on retailers for the distribution of
its products. Other directors believe that the demand for gas-powered appliances has been declining
due to the improved capability of Eskom to maintain power supply.
1. Acquisition of 3G
The board of BEG is considering a 100% acquisition of Good Gas Guys (“3G”), a family-owned business
that repairs small gas-powered appliances and delivers gas cannisters or refills thereof to homes around
South Africa. As with BEG, 3G’s performance over the past decade has been buoyed by the increased
demand for gas-powered appliances due to loadshedding. 3G operated through 95 repair centres
nationally (as at 31 December 2023) and also provides a “mobile repair service” where customers can
choose to have their appliances repaired at their homes, by the 3G’s technicians.
3G has expanded rapidly over the past two years. They opened 10 new repair centres in January 2022
and 16 new repair centres in January 2023. 3G funded the establishment of the new repair centres with
debt, so that they could quickly take advantage of the increased demand for their services. If BEG were
to acquire 3G, the directors expect the acquisition to be effective from 1 January 2025, after a due
diligence is conducted in 2024.
The financial performance of 3G for the financial years ended 31 December 2022 and 31 December
2023 are summarised below.
Statement of Comprehensive Income for the year ended 31
December: EXTRACT
Sales revenue
Cost of sales
Gross profit
Operating costs
Operating profit
Interest paid
Statements of Financial Position as at 31 December: EXTRACT
Non-current assets
Property, plant and equipment
Current assets
Total assets
-
2023
R'000
172 991
119 018 53 973
35 612 18 361
2 087 -
2022
R'000
145 429
101 364
44 065
27 957
16 108
1 250
2023
R'000
2022
R'000
19 594
46 872
13 844
37 132
66 466
50 976
Management Accounting and Finance IV: ACCN 4027 and ACCN 5003
2024 Simulated ITC Paper 2
Share capital and retained earnings
28 361
22 319
Non-current liabilities
Long term loans
10 186
4 480
Current liabilities
27 919
24 177
Total equity and liabilities
66 466
50 976
Mr Hubris is the CFO of BEG. He is very optimistic about the prospect of acquiring 3G. He estimates
that if 3G and BEG were to remain as separate businesses, for the year ended 31 December 2025,
BEG would have earned a net profit after tax (NPAT) of R80m and 3G would have earned a NPAT of
R20m. However, annual after-tax cost savings of R1m will be achieved by closing the head office of
3G, as the company’s administrative functions can be performed by BEG. In addition, BEG can utilise
3G’s vast network of repair centres to distribute their own products. He estimates an annual after- tax
profit impact of R4m.
The current market capitalisation of BEG is R505m. The share price has been stable at R10.1 over the
past three months and can be assumed to remain at this level for any further forecasts. Based on the
estimates of Mr Hubris, a fair price for the 100% of 3G is R58 600 000. BEG intends issuing shares at
R10.1 to 3G in settlement of the purchase price.
2. New venture with Gas Solutions in Zimbabwe
The board has been approached by Gas Solutions (GS) to assist them in their business.
2.1 Funding Assistance
Gas Solutions (GS) is a listed entity in Zimbabwe that is struggling financially. The company is under
undue stress due to a lack of resources and increased inflation. However, they have found a silver lining
due to the news of large crude oil reserves being found in North Zimbabwe. GS is under discussions
with the Zimbabwe government to become the first company to start drilling for oil, and this is expected
to help turn the company around. GS has engaged with the directors of BEG to borrow R 4 million each
year over the next 5 years with the repayments being paid out starting from year 6 for the following 10
years. These payments will be 10 equal instalments from year 6 to year 15 made in Rands The deal
includes variable interest charged at 2% above the South African prime lending rate. The terms include
the clause that GS will have to sell 40% of all the oil drilled in the first 10 years to BEG at a discount of
10% of the stipulated market price of crude oil1 traded on the exchange.
The directors of BEG are keen in utilising their extra cash resources to lend to SG and enter a new
market and have agreed to the loan. This will help BEG diversify their offering and enter the crude oil
market. BEG intends to buy the crude oil and sell it to their customers in South Africa.
2.2 Purchase of goods
Whilst the mining project gets underway, GS purchased 100 000 gas stoves from BEG to resell in
Zimbabwe. Due to limited local currency in supply, GS has agreed to pay in US Dollars. The gas Stoves
were sold at $10 each and transported to Zimbabwe on the 01 July 2024. Full and final payment will be
made on the 15 of September 2024.
1
Crude oil is traded on an exchange and prices are stipulated by the market in USD
Management Accounting and Finance IV: ACCN 4027 and ACCN 5003
2024 Simulated ITC Paper 2
Mr Hubris is concerned that the Rand will strengthen towards the second part of the year and has been
considering various ways in which he can hedge the risk. On the 1st of July 2024 He entered a futures
contract with expiry on 30 September 2024. He believes he might have not used the best hedge in the
market and is interested in considering alternative avenues for mitigating such a risk in the future, such
as a forward contract or an option contract.
Below are the spot rates on 01 July 2024.
Bid
18.2020
Ask
18.2080
On 01 July 2024 the 2.5-month forward premium is 4% and can be applied to both the bid and ask rates
and can be assumed to cover all costs relating to the contract.
Mr Hubris could have also entered an option contract with a total premium of R 5000 using the below
exercise prices for 1 USD, with expiry on 15 September 2024:
Call Option: R18.8852
Put Option: R18.9852
Mrs. Jane is the CEO of BEG and she was suggesting to Mr. Hubris that since the transaction with GS
is very risky, they should consider using cheaper materials in the stoves so as to make a higher
contribution on those products, she said that; “Considering that the available products in Zimbabwe
may not meet the highest quality standards, anything we provide them—regardless of its quality—will
likely be perceived as valuable. Therefore, it would be advantageous for us to use less expensive
materials to increase our profit margins, which could also result in higher bonuses for us. However, I
suggest we keep this information between us.”
A.
Discuss any concerns you may have with respect to the conversation
that Mrs. Jane had with Mr. Hubris using the ethical theory of
Kantianism.