Exam paper for second semester (Last Assessment Opportunity

Booyens, M., Mr.

Boyce, L., Mrs.

Van den Berg, R., Ms.

Name not available

 
 
Department of Commercial Accounting 
Financial Management 3B 
BFB33B3
 
Last Assessment Opportunity 
NOVEMBER 2014 
 
Time: 3 hours Marks: 100 
 
Assessors: 
 
Mrs L Boyce 
 
Internal moderator: 
 
 
Mr M Booyens 
External moderator: Ms R van den Berg 
  
  
INSTRUCTIONS: 
 This paper consists of 14 pages (including the cover page). 
 Answer all questions. Show all calculations and workings clearly. 
 Silent, non-programmable calculators may be used. 
 Round all calculations to two decimal places, unless stipulated otherwise. 
 INDICATE YOUR INDEX NUMBER (FROM THE CLASS LIST) IN THE TOP MIDDLE OF YOUR SCRIPT. 
 
QUESTION TOPIC MARKS TIME 
1 Time value of Money 20 36 minutes 
2 Bonds, Share valuations and cost of capital 20 36 minutes 
3 Risk and Return 20 36 minutes 
4 Financial Statements and Financial Statement Analysis 20 36 minutes 
5 Working Capital Management 20 36 minutes 
  100 180 minutes 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 2 of 13 
 
QUESTION 1         (20 MARKS) 
QUESTION 1.1         (2 marks) 
Michael is currently 23 years old and plans to retire at the age of 60. He contributes R2 500 
per annum towards a retirement annuity that pays an interest rate of 10% per annum. 
REQUIRED: 
Calculate the value of the investment when he turns 60.     (2) 
QUESTION 1.2         (9 marks) 
Pearl’s mother applied for a personal loan from her bank to fund a portion of Pearl’s university 
fees.  Her repayment is R1 500 per month. The interest on the loan is 12% nominal annual 
compounding monthly. The term of the loan is 12 months. 
REQUIRED: 
a) Calculate the value of the loan at inception.      (2) 
b) Complete the amortisation table for the first 2 months as in the following format: (7) 
Month P1 P2 Instalment 
Capital 
Paid 
Interest 
Paid 
Accumulated 
Interest Paid 
Closing 
Bal 
0   - - - -  
1   R1 500     
2        
 
QUESTION 1.3         (2 marks) 
Mzala needs R3 500 in 5 years’ time to pay for a trip to Cape Town. He has R2 000 that he 
can invest today. He is shopping for a bank that will offer him the best interest rate to raise the 
funds that he needs. 
REQUIRED: 
a) Calculate the interest rate that he will need to earn.      (2) 
 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 3 of 13 
 
QUESTION 1.4         (5 marks) 
Luyolo currently has R3 000 that he wants to invest and needs to raise R10 000. He can earn 
an interest rate of 9% nominal annual compounding semi-annually. 
REQUIRED: 
a) Calculate how long he needs to invest (in years) in order to achieve his target. (3) 
b) Calculate the effective interest rate.       (2) 
 
QUESTION 1.5         (2 marks) 
You have decided to fund the tuition fees of the top students from each grade from your former 
high school. The fees per annum amount to R25 000 in total and you expect that they will 
increase at 5% per annum.  
REQUIRED: 
a) Calculate how much you need to donate to the school to start a fund for the fees assuming 
you can earn interest at 10% per annum.     (2) 
 
 
 
 
 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 4 of 13 
 
QUESTION 2         (20 MARKS) 
QUESTION 2.1        (10 MARKS) 
Answer the following multiple choice questions by selecting the most correct answer. 
2.1.1 A bond that does not earn any coupon payments during its term is called a: (1) 
A. Zero coupon bond 
B. Discount bond 
C. Inflation-linked bond 
D. A & B 
E. None of the above 
 
Use the following information to answer questions 2.1.2 to 2.1.4 
Company Y has issued a bond that earns coupon payments at a rate of 9% semi-annually. 
The yield to maturity is 10%. The bond matures in 10 years’ time. The nominal value of the 
bond is R1 500. 
2.1.2 The coupon payment per period is equal to:      (1) 
A. Zero 
B. R67.50 
C. R135 
D. R150 
E. None of the above 
 
2.1.3 The bond is trading at a:        (1) 
A. Discount 
B. Premium 
C. Par 
D. None of the above 
 
2.1.4 The price of the bond will be:        (1) 
A. Higher than the nominal value of the bond 
B. Equal to the nominal value of the bond 
C. Lower than the nominal value of the bond 
D. None of the above 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 5 of 13 
 
2.1.5 PEP Boutique has just paid a dividend of R2 per share. The dividend is expected to 
grow at a constant rate of 10% per annum. Investors require a 12% rate of return on 
the investment. The intrinsic value  per share is closest to:   (2) 
A. R20 
B. R110 
C. R100 
D. 18.33 
E. None of the above 
 
2.1.6 The CEO of Mixit needs to calculate the cost of ordinary shares. The risk free rate is 
currently 9%. Mixit has a beta of 1,1. The return on a market portfolio is 11%. The 
required rate of return for the ordinary share of Mixit is closest to:   (2) 
A. 11.2% 
B. 6.8% 
C. 12.1% 
D. 4.8% 
E. None of the above 
 
2.1.7 When making investment decisions, investors should only invest in the shares of a 
company where:         (1) 
A. The expected return is lower than the required return 
B. The expected return is equal to the required return. 
C. The shares are over valued 
D. The expected return is higher than the required return 
E. None of the above 
 
2.1.8 An equity instrument held by an investor that has no voting rights at an annual general 
meeting but receives preferential treatment when it comes to distributions of a 
company’s profits and assets in the event of liquidation is called a/an:   (1) 
A. Ordinary share 
B. Cumulative preference share 
C. Participating preference share 
D. B and C 
E. None of the above 
 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 6 of 13 
 
QUESTION 2.2        (10 MARKS) 
PART 1          (6 marks) 
Mapantsula Ltd needs to raise capital for infrastructure upgrade for the company. 
Management is considering 2 options.  
Option  1 
Issue an 8% non-redeemable debenture with a par value of R1 000. The debenture is currently 
trading at a value of R900. The company tax rate is 28%. 
Option  2 
Issue a redeemable 7% preference share with a par value of R100 that is trading at R90 per 
share. The preference share is redeemable in 5 years’ time. 
REQUIRED: 
a) Calculate the cost of the debenture.       (3) 
b) Calculate the cost of the redeemable preference share     (3) 
 
PART 2          (4 marks) 
Mapantsula also needs to calculate its weighted average cost of capital. Management has 
provided you with the following information   
REQUIRED: 
a) Calculate the weighted average cost of capital by completing the following table. (4) 
Present your answer by writing the missing letter (A) followed by your calculation and 
answer. 
Component Market value Weight After-tax cost 
Contribution 
to WACC 
Ordinary shares R500 000 50% 12% D 
Preference shares R150 000 B 7% 1.05% 
Debentures R350 000 35% C 3.5% 
 A 100%  10.55% 
 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 7 of 13 
 
QUESTION 3         (20 MARKS) 
QUESTION 3.1         (2 marks) 
Mr Peabody invested in a company when the share price was R50 one year ago. During the 
year he received a dividend of R2,50. The closing price of the share one year later was R65. 
REQUIRED: 
a) Calculate the one year holding period return of the share.    (2) 
   
QUESTION 3.2         (10 marks) 
Investment 2011 2012 2013 
Average 
return 
Standard 
Dev 
Caltrex Oil 12% 10% 11% ? 1% 
Sasil Oil 8% 9% 10% 9,33% ? 
 
REQUIRED: 
a) Calculate the historic average return for Caltrex Oil over the 3 year period using the 
arithmetic mean method.         (2) 
b) Calculate the standard deviation for Sasil Oil using the average return which has been 
calculated using the geometric mean method.      (5) 
c) Which investment would you select if the coefficient of variation of Caltrex Oil was 0,09 
and Sasol Oil is 1,63. Motivate your answer.      (2) 
d) What would you expect the correlation coefficient of the two companies to be: closer to 
+1 or -1.           (1) 
 
QUESTION 3.3          (8 marks) 
Maxine held the following investments in her portfolio prior to the mine strikes that hit the South 
African economy. 
Company Investment 
Truworths R9 600 
Pick ‘n Pay R25 200 
Gold Fields R15 600 
Vodacom R9 600 
 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 8 of 13 
 
Due to the strike taking longer than expected she decided to change the weighting of the 
investments in the portfolio as follows: 
Company Investment Expected return 
Truworths 25% 12% 
Pick ‘n Pay 50% 10% 
Vodacom 25% 13% 
 
The required rate of return for the portfolio is 10%. 
REQUIRED: 
a) Calculate the weight of each investment prior to the strike.    (2) 
b) Calculate the expected return of the portfolio after the adjustment of the weights portfolio.
           (2) 
c) Using your answer in b) would you advise Maxine to invest in the adjusted portfolio? 
Motivate your answer?         (2) 
d) Is the portfolio diversified?  Motivate your answer.     (2) 
 
 
 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 9 of 13 
 
QUESTION 4         (20 MARKS) 
QUESTION 4.1         (10 marks) 
You have been provided the following extract of the financial statements of Belle CC as your 
first assignment in the internship programme. The previous intern could not complete some of 
the missing information. 
  2014 
Revenue A 
Cost of sales (19 758) 
Gross profit 6 526 
Operating income 136 
Operating costs B 
Operating  profit 3 613 
Investment  income C 
Financial costs (1 087) 
Profit before tax  3 533 
Tax for the period (653) 
Profit after tax 2 880 
Minority interest (3) 
D E 
Ordinary dividends (1 306) 
Retained earnings 1 571 
 
Non-current assets 13 004 
Inventories 2 602 
Receivables 13 159 
Cash and cash equivalents 3 110 
Total assets 31 875 
Current liabilities 15 784 
Deferred tax  liabilities 882 
Pension liabilities 289 
Other provisions 515 
Mortgage debt 352 
Bank loans 3 465 
Finance lease liabilities 15 
Prepayments from customers 275 
Other liabilities 385 
Long-term liabilities 6 178 
 
 
 
 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 10 of 13 
 
REQUIRED: 
a) Calculate the missing elements of the Statement of Comprehensive income for Belle CC. 
Write down the letter followed by the calculation and final answer (e.g. A = 12 + 6 =  8).   
            (5) 
b) Calculate total current assets.        (1) 
c) Calculate total equity.         (1) 
d) Name two items that may be included as part of equity in the Statement of Financial 
Position.           (2) 
e) Explain what is meant by the term “non-current” asset or liabilities.   (1) 
 
QUESTION 4.2         (10 marks) 
The financial manager has also handed you financial information from previous years and 
asked you to populate the missing information in relation to financial statement analysis. 
R'm 2009 2010 2011 2012 2013 
INCOME STATEMENT      
Revenue 23 134 20 186 21 998 26 284 26 923 
Gross profit 5 406 5 207 5 734 6 526 5 209 
Earnings before amortisation and impairment of 
intangible assets (EBITA) 
2 503 2 177 2 405 2 559 977 
Earnings before interest and tax (EBIT) 2 261 1 990 2 171 2 041 (339) 
Earnings before tax (EBT) 2 108 1 872 2 070 1 961 (600) 
Earnings (loss) after tax 1 664 1 278 1 437 1 303 (784) 
            
R'm 2009 2010 2011 2012 2013 
BALANCE SHEET      
Non-current assets 8 464 9 240 10 795 13 004 12 120 
Current assets 13 438 13 359 14 745 17 327 15 208 
Assets held for sale - - - 1 544 - 
Total assets 21 902 22 599 25 540 31 875 27 328 
Equity 6 627 8 139 8 907 9 419 6 922 
Long-term liabilities 3 338 3 145 3 533 6 178 7 284 
Short-term liabilities 11 937 11 315 13 100 16 278 13 122 
Total equity and liabilities 21 902 22 599 25 540 31 875 27 328 
 
Additional information 2009 2010 2011 2012 2013 
Closing share price  367.0 532.0   337.5  327.2 296.1 
Number of shares (millions) 53.20 53.20 53.20 53.20 53.20 
Market capitalisation (millions) 19 524 28 302 17 955 17 16 
Dividend to ordinary shareholders (millions) 372 479 479 479 106 
Price earnings ratio (times)    
11.73  22.15  12.49  13.36   -20.09  
 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 11 of 13 
 
REQUIRED: 
PART A          (6 marks) 
Calculate the following ratios: 
a) Dividend per share for 2013.        (2) 
b) Earnings per share (EPS) for 2012.       (2) 
c) Market capitalisation to book value for 2011.      (2) 
 
PART B          (4 marks) 
a) Explain the term market capitalisation.       (2) 
b) Interpret your observations of the movement in the earnings per share ratio with 
special reference to 2013.        (2) 
 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 12 of 13 
 
QUESTION 5         (20 MARKS) 
QUESTION 5.1         (6 marks) 
Dian sells handmade handbags that she orders from the rural areas of the Eastern Cape. On 
average the annual demand is 200 hand bags. It takes 20 days from date of order to receive 
her handbags from the suppliers. The cost of placing the order is R25 and annual storage 
costs per unit are R75. Dian operates for 360 days a year. 
REQUIRED: 
a) Calculate the re-order point.        (2) 
b) Calculate the economic order quantity.       (2) 
c) Describe two important reasons for management of inventory    (2) 
 
QUESTION 5.2         (4 marks) 
The accounts payment period for the current period of Credit.Com is 90 days, average 
collection period is 45 and inventory turnover is 5. 
The prior year the net operating cycle was 50 days and accounts payment period was 70. 
Credit.Com operates for 365 days per annum. 
REQUIRED: 
a) Calculate the average age of inventory (AAI) for the current year.   (2) 
b) Calculate the cash conversion cycle for the prior year.    (2) 
 
QUESTION 5.3         (5 marks) 
Your first assignment at your new job is the management of cash. The manager has informed 
you that the average sales per annum is R1 200 000. The cash conversion cycle amounts to 
50 days. However he is unsure as to how this information can be used to make decisions 
about his cash management.  
REQUIRED: 
a) Calculate the approximate investment in the cash conversion cycle assuming 360 days 
per annum.          (2) 
b) How can the company improve its cash conversion cycle days?   (3) 
FINANCIAL MANAGEMENT 3B LAST ASSESSMENT OPPORTUNITY 
November 1, 2014 
 
Page 13 of 13 
 
 
QUESTION 5.4         (5 marks) 
Match the description in column two to the working capital term in the fourth column (e.g. Y=2) 
 Description   
A Ability to use available funds to service debt 1 Character 
B Assets used as security for a loan 2 Capacity 
C Details of the credit agreement and credit policy 3 Capital 
D Reputation for payment of debt 4 Collateral 
E Availability of deposit to be used as an investment to 
lessen chances of default 
5 Conditions 
F Analysis of outstanding debt and the length of time since 
credit extension 
6 Cash conversion 
cycle 
  7 Debtor age analysis 
    
 
TOTAL MARKS = 100 
 
 
 
 


Financial management 3B

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