QUESTION 1: Functions of financial management and decision-making [21 MARKS]

1.1 Identify three primary functions of a financial manager and explain the (9)

relationship between these roles.

1.2 Create your own example(s) to illustrate the difference between sensitivity (12)

analysis, standard deviation and coefficient of variance. Ensure that you explain

how these indicators are interpreted.

QUESTION 2: The framework of financial reporting and financial statement [29 MARKS]

analysis

2.1 A machine costing R120 000 has a useful life of five years (20% depreciation). (10)

Calculate the asset’s depreciation for all five years using both the straight-line

method and diminishing balance method. Also, discuss the difference

between the two methods and provide an appropriate example to explain how

one would choose the appropriate method to use.

2.2 Consider the following information: (4)

Jenny is the owner of Exco (Pty) Ltd and has 90 employees, two stakeholders,

total liabilities of R3-million and a total turnover of R900 000 for the financial year.

Discuss whether Exco (Pty) Ltd should prepare financial statements in terms of

IFRS or IFRS for SMEs?

2.3 Exco (Pty) Ltd has a net profit margin of 3%, an asset turnover of 1.7 and a (5)

debt:equity ratio of 40%.

Calculate the company’s return on assets (ROA) and interpret this ratio.

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2.4 The ROE of Exco (Pty) Ltd has fallen to 6% and the company expects its (5) operating income (EBIT) to be R10-million, while sales revenue is expected to

be R60-million for the coming financial year. In addition, the company’s asset turnover is expected to be 1.2 times and Exco (Pty) Ltd is expected to pay R2 million in interest on debt of R20-million. The company pays corporate tax of 28%.

Calculate the company’s expected debt:equity ratio.

2.5 Consider the following information taken from the balance sheet of XYZ Ltd and (5)

calculate and interpret the current ratio:

Land and buildings R1 000 000

Accounts payable R 300 000

Plant and machinery R 200 000

Inventory R 500 000

Account receivable R 400 000

Cash R 200 000

QUESTION 3: Capital budgeting [25 MARKS]

3.1 An initial investment on machinery of R5 000 is expected to generate cash (7)

inflows of R3 000, R4 000, R5 000 and R6 000 at the end of the first, second,

third and fourth year respectively. Calculate and interpret the NPV of the

investment if the discount rate is 15%.

3.2 Determine the payback period of a project with a cost of R100 000 and a (3)

required rate of return of 14%. The project will have estimated future cash flows

of R20 000, R30 000, R100 000 and R120 000 at the end of the first, second,

third and fourth year respectively. Show all your calculations, including the cumulative cash flow.

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3.3 Consider the following information about two machines: (10)

Machine A Machine B

Initial investment R30 000 R32 000

Expected annual cash flow R12 000 R15 000

Expected life span 4 years 3 years

Based on the NPV and IRR techniques, which machine should be bought (10% rate of return)? Explain your answer.

3.4 Is it possible that the NPV and IRR methods can result in conflicting rankings? (5)

Please explain your answer.

QUESTION 4: Cost of capital [14 MARKS]

4.1 XYZ Ltd has an equity beta of 1.30, market risk premium is expected to be 6%, (7)

and the yield on government bonds is currently 9%. XYZ Ltd issued bonds (R100

par value) that are currently trading at R80 and have an 8% coupon rate. The

corporate tax rate is currently 28% and the maturity date of the bonds is in five

years.

Using the CAPM, calculate the cost of equity and the markets overall expected

rate of return (Rm). Thereafter, interpret these values.

4.2 XYZ Ltd paid a dividend of R0.15 per share and the dividend is expected to grow (3)

at 9% annually. Currently, the share price is R1.50.

What is XYZ’s cost of equity based on the dividend growth model?

4.3 Considering your answers on the two questions above, discuss the main (4)

differences between the CAPM and dividend growth model.

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QUESTION 5: Time value of money [11 MARKS]

5.1 You decided to invest R20 000 in a bank account over five years that is paying (5)

5% interest per year. Calculate your interest if interest is compounded annually. Also, how much will you have accumulated if the interest was compounded monthly instead of annually?

5.2 Explain what a zero-coupon bond is and calculate the present value of the (6)

following zero-coupon bond with a par value of R100:

The bond is to be redeemed in five years’ time and the interest is compounded semi-annually. The current market rate for such bonds is 8%.