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1. Losing Power (Pty) Ltd is a company in the renewables energy space. They have been operating in the 3 major centres in South Africa (Johannesburg, Cape Town and Durban) and use solar energy as a technology to supply corporate customers with alternative sources of power to the national grid. The company has made substantial (more than R500m of capital investments) since they started in 2015 and is yet to show a profit.

Management are preparing their budgets and business plan for the 2020 financial year (starting on 1 January 2020) and have identified the need to raise R200m of additional capital to fund further expansion. At a recent board strategy session, management presented the broad strokes of their plan the plan was rejected outright by the board and management were sent away to come back with another plan. They are due to present the new plan with the associated budget in a week from now and have engaged your assistance with regards to the following:

1. In the original plan, management intended asking the shareholders for the R200m additional funding. Name 2 other possible sources of funding that management may be able to access besides equity. (2)

1. Management is convinced that the original plan remains the best one. As such, they have decided that they need to demonstrate the risks of not pursuing their plan and the effect this will have on the long term sustainability of the business. Management engaged with their auditors in a full day session and have produced the following inherent risk matrix of the critical risks:

RiskImpactLikelihoodGovernment legislates against solarCriticalRemoteDemand for solar diminishesCriticalPossibleCompetitors move into spaceCriticalProbableManagement fail to execute plans effectivelyCriticalPossible

What is the total inherent risk score for each of these 4 risks? (4)

1. Management have also assessed the effect of mitigating controls as follows:

RISKMitigating ControlEffect of controlGovernment legislates against solarLobbyingUncertainDemand for solar diminishesNoneNoneCompetitors move into spaceAct now to get business to scaleEffectiveManagement fail to execute plans effectivelyRecruit the best people and manage effectivelyEffective

As a result of the above assessment of mitigating controls, calculate the Residual Risk of each of the above 4 risks (6)

1. One of the strategies being considered by management is to purchase one of their competitors. They have identified a small but well-run company in Cape Town that is on the verge of signing a major customer. Management has appointed a firm of auditors to examine the financial statement forecasts of the competitor and they have produced the following summary information:

1. Profit after tax for year ended 31 May 2020 is R2,1m

ii)Profit after tax forecasted for year ended 31 May 2021 is R10m

iii)Funding required to fund the new customer project is R20m.

iv)The company intends obtaining vendor finance to fund the R20m

Answer the questions below:

1. Assuming there is no deferred tax in the business and there are no permanent differences between taxable and accounting income, what is the companys Profit before tax for the year ended 31 May 2020. You can assume a tax rate of 40%. (2)
2. The company expects to pay 5 times Profit After Tax (based on the 2021 forecasted financial statements) for the business of their competitor. What will the purchase price be? (2)
3. Management is keen to issue corporate bonds to fund the acquisition of the competitor. Assuming that the bond will have a coupon rate of 10% per annum, how much interest will the company pay per annum on the bonds raised, assuming that the bonds are repaid in full at the end of the bond contract? (2)
4. If the vendor intends to charge 10% of Profit before tax per annum for funding the customer project, how much will be paid to the vendor in 2021? (2)

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