ASSIGNMENT 01
Aim: To evaluate your knowledge of some of the fundamental aspects of:
- finance and the financial environment (learning unit 1)
- time value of money principles and applications (learning unit 2)
- investment decision-making (learning unit 3)
- investment in working capital: cash management (learning unit 4)
Answer the following questions and submit your assignment at https://my.unisa.ac.za.
Question 1
Financial decision making falls into two broad categories, one of which is investment decision making. Choose the correct option below that best reflects an investment opportunity.
1. Deciding whether to raise funds through an equity offer or debt
2. Making a choice regarding the type of debt instrument to use
3. Deciding whether a new machine should be bought for production
4. Making a choice regarding the funding for a new machine
Question 2
In which one of the following scenarios is wealth maximisation taking precedence over profit maximisation? Choose the correct option.
1. The financial manager of a business is making a decision regarding two possible new projects with equal expected returns. The project that the manager has chosen is more high risk than the other one. However, the financial manager will get a larger bonus on the high risk project.
2. At a general meeting, some of the shareholders of a business expressed their wishes to get more dividends. The financial manager of the business then proceeds to pay out all earnings as dividends as he also expects this would increase the share price in the short term.
3. The management of a business has come up with a plan to address falling profits. The managers decided to retrench some workers and sell off assets in order to restore profitability over the next year as they will be giving over to a new management team after that.
4. The financial manager has to choose between two projects with similar risks and returns. He chooses the one that has more income in the initial years of the project compared to the other one.
Question 3
Which of the following options best describes risk? Choose the correct option.
1. The probability of a deviation from the historical value
2. The probability of a deviation from the expected value
3. The probability of downside deviation occurring
4. The probability of an upside deviation occurring
Question 4
Which of the following factors would likely not cause an increase in inflation? Choose the correct option.
1. A growing population
2. Increasing oil prices
3. A decrease in disposable income of households
4. The weakening of the Rand
Question 5
Which one of the following types of business entities offers the best access to large amounts of financing? Choose the correct option.
1. Close corporation
2. Partnership
3. Private company
4. Public company
Question 6
In terms of agency theory, which of the following scenarios is an example of agency costs? Choose the correct option.
1. A manager makes a decision to invest in a project, though he chose the best possible project, it makes a loss due to an unexpected economic downturn.
2. Owners of a business offer a manager a large amount of share options as incentives to increase the share price of the business.
3. The owner of a business is also its manager. He pays himself a large bonus after he made a good profit over the past year.
4. The shareholders of a company hire a new manager to replace the current manager who is about to retire.
Question 7
If you were to place R1500 in a three-year fixed deposit account that pays 7% interest compounded annually, how much would you have in the account at the end of the period?
1. R572
2. R1 225
3. R1 815
4. R1 838
Question 8
If a movie ticket, popcorn and a cool drink costs R150 today, how much would it have cost 10 years ago assuming the rate of inflation for these items averaged 6% per annum over this period?
1. R11
2. R60
3. R84
4. R269
Question 9
You are currently considering installing an irrigation system on a farm. The farm owner has given you the following two options regarding payment for your services:
Option 1: You get paid R500 000 upfront to install the system.
Option 2: You will get R700 000 when you have finished installing the system.
You currently have enough cash to buy the materials for the system and to install it. The estimated amount of time that it will take to install the system is two years. You have access to an account where you can earn 11% interest compounded annually on any deposits.
Which of the two payment options should you choose? Choose the correct answer based not only on the option to be chosen, but also the motivation given below.
1. Option one as you will have R200 000 more after the project.
2. Option one as you will have R83 950 more after the project.
3. Option two as you will have R83 950 more after the project.
4. Option two as you will have R294 189 more after the project.
Question 10
A friend has asked you to help her determine how much she must save in her pension fund to retire comfortably one day. You tell her that you think a rough guideline is that she should be putting away 17% of her salary before tax earnings each year. She indicates to you that she gets R200 000 per year before tax. If she saves the amount you recommended, in yearly payments, how much will she have in her savings annuity when she retires in 40 years' time if her savings product pays interest of 9% compounded annually?
1. R1 067 920
2. R6 281 884
3. R11 488 003
4. R67 576 489
Question 11
Your manager gave you a task to determine how much the team you are working with can spend on new equipment to finish construction of the building project you are going to undertake. She indicates that in your project budget, there is an amount of R500 000 per year allocated for equipment. The project will take 5 years to complete and the equipment will have to be purchased before the start of the project. The cost of financing from your equipment supplier is 10% per annum. Calculate how much you will presently have available to spend if you pay off your equipment with the allocated budget over the term of the project.
1. R310 461
2. R1 895 393
3. R2 500 000
4. R3 052 550
Question 12
Frans has a rich uncle that just gave him R500 000 on the day of his graduation. He plans to use this money to buy a house and deposits it in a savings account that pays interest of 5% compounded annually. He has determined that he should be able to buy the house he wants in three years' time as he first needs to establish his career. Currently the house is worth R600 000 and the price of the house is expected to grow by 7% per annum (compounded). Frans will use what he has in the savings account at the time to pay for most of the costs but then wants to finance the remainder using a bond that will have a cost of 9% compounded annually over a period of 10 years. Determine the annual payment that Frans will have to make on his bond when he buys the house in three years' time.
1. R9 016
2. R15 582
3. R24 369
4. R154 393
Question 13
If you were to place R15 000 in a savings account today and it is worth R22 511 in six years' time, what would the interest rate on the account be?
1. -6,54% pa
2. 7% pa
3. 50% pa
4. 150% pa
Question 14
You currently have R50 000 in a savings account that pays interest of 15% compounded annually. If your initial deposit into the account was R25 000, how long has your money been in the savings account? (Choose the nearest full year)
1. 1 year
2. 2 years
3. 5 years
4. 7 years
Question 15
A student needs a new laptop but does not have enough cash to buy one. The sales person at a local store then offers the student financing over a period of 24 months. After a credit check, the student is offered an interest rate of 12% per annum, compounded monthly. If the laptop he chooses costs R9 000, how much will his monthly payments be?
1. R424
2. R1 156
3. R4 568
4. R5 325
Use the following information to answer questions 16, 17, 18 and 19.
Diapers Ltd is investigating the possible purchase of two new machines. Both machines are expected to increase revenue and profits as they are intended for a new type of super absorbent diaper. The company maintains a cost of capital of 11%. The following information pertains to the cash flows that are expected to be generated by the machines:
|
Year
|
Notes
|
Machine X (R)
|
Machine Y (R)
|
|
0
|
Purchase price
|
-15 000 000
|
-18 000 000
|
|
0
|
Installation and setup costs
|
-4 000 000
|
-3 000 000
|
|
1
|
Inflows
|
3 500 000
|
4 500 000
|
|
2
|
|
4 300 000
|
5 800 000
|
|
3
|
|
5 500 000
|
6 200 000
|
|
4
|
|
6 200 000
|
6 100 000
|
|
5
|
|
7 200 000
|
6 300 000
|
Question 16
Calculate the NPV for Machine X and choose the correct option.
1. R19 517
2. R21 664
3. R4 021 664
4. R7 700 000
Question 17
Calculate the NPV for Machine Y and choose the correct option.
1. R46 715
2. R51 853
3. R3 051 853
4. R7 900 000
Calculate the IRR for Machine X and choose the closest correct option.
1. 7%
2. 9%
3. 11%
4. 20%
Question 19
Calculate the payback period for Machine Y and choose the correct option indicating this as well as whether the purchase of the machine could be accepted based on the payback period. The company requires a payback period of less than 4 years.
1. 3 years, 9 months. Acceptable.
2. 3 years, 9 months. Not acceptable
3. 4 years. Acceptable
4. 4 years. Not acceptable.
Question 20
A project has the following probabilities associated with its profitability:
|
Possible profit (R)
|
Probability
|
|
200 000
|
0,1
|
|
250 000
|
0,2
|
|
310 000
|
0,4
|
|
350 000
|
0,2
|
|
400 000
|
0,1
|
Calculate the expected return of the project and choose the correct option.
1. R302 000
2. R304 000
3. R310 000
4. R1 510 000
Question 21
A company is deciding whether they should go ahead with a new project that is deemed risky and offers a return of 15%. The financial manager of the company provided the following information:
- Risk free projects offer a return of 5%.
- He estimates the market return at 9%.
- The project is deemed risky and has a beta of 2.
Use the capital asset pricing model (CAPM) to determine the required return on the project and indicate whether it is acceptable in relation to the return offered.
1. 10%, the project is acceptable.
2. 10%, the project is not acceptable.
3. 13%, the project is not acceptable.
4. 13%, the project is acceptable.
The following information is applicable to questions 22-27:
Fishes Ltd boxes fresh fish and distributes it to restaurants. The management of the company recently ran into a problem where they did not have enough cash on hand to pay for stock last month and have tasked you to create a cash budget in order to avoid such a problem in the future. The bookkeeper has put together the following information regarding the age analysis of debtors and creditors as well as cash sales and payments from the records:
Sales for the past four months were as follows:
|
December
|
January
|
February
|
March
|
|
R500 000
|
R400 000
|
R350 000
|
R420 000
|
Sales for the next four months are expected to be as follows:
|
April
|
May
|
June
|
July
|
|
R480 000
|
R520 000
|
R540 000
|
R600 000
|
40% of sales are in cash and the remainder on credit for credit sales, collections are done as follows:
10% one month after the sale took place 20% two months after the sale took place 70% three months after the sale took place
Purchases amount to 60% of the sales value for any given month. All purchases are on credit and are paid as follows:
80% one month after the purchase took place 20% two months after the purchase took place
Other expenses are fixed salaries and transport costs, which amount to R200 000 per month. The company had a cash balance of R10 000 at the end of March. Compile the cash budget and answer the questions that follow (Only questions 22-27).
Question 22
What was the cash sales amount for June? Choose the correct option.
1. R216 000
2. R265 200
3. R324 000
4. R540 000
Question 23
How much of April's credit sales were collected in July? Choose the correct option.
1. R57 600
2. R192 000
3. R201 600
4. R296 400
Question 24
What will the total credit collections for May be? Choose the correct option.
1. R208 000
2. R226 200
3. R312 000
4. R434 200
Question 25
What will the total collections (or income) for April be? Choose the correct option.
1. R192 000
2. R235 200
3. R427 200
4. R480 000
Question 26
What amount of March's credit purchases were paid in April? Choose the correct option.
1. R25 200
2. R201 600
3. R288 000
4. R443 600
Question 27
What will the total expenses for July be? Choose the correct option.
1. R200 000
2. R296 400
3. R321 600
4. R521 600
The following information is applicable to questions 28-30.
Pigeon Pies Ltd is currently looking at their cash management. The financial manager has already compiled the cash budget for the next three months, except for the closing and opening balances for some months as well as the required financing. The company aims to always maintain a cash balance of R500 000. Below you will find a summary of the cash budget from which to calculate the necessary balances and financing requirements:
|
|
August
|
September
|
October
|
|
Opening balance
|
R520 000
|
R470 000
|
|
|
Total income
|
R350 000
|
R420 000
|
R530 000
|
|
Total expenses
|
R400 000
|
R430 000
|
R510 000
|
|
Closing balance
|
R470 000
|
|
|
Question 28
What is the closing balance for September? Choose the correct option.
1. R10 000
2. R40 000
3. R460 000
4. R470 000
Question 29
What amount of financing is necessary for the month of August? Choose the correct option.
1. R30 000
2. R50 000
3. R470 000
4. None as there will be a surplus
Question 30
What amount of financing will be necessary for the month of October?
1. R20 000
2. R30 000
3. R460 000
4. R480 000
ASSIGNMENT 02
Aim: To evaluate your knowledge of some of the fundamental aspects of:
- investments in working capital: accounts receivable management (learning unit 5)
- investments in working capital: inventory management (learning unit 6)
- financial ratio analysis (learning unit 7)
- leverage in financial management (learning unit 8)
Answer the following questions and submit your assignment at https://my.unisa.ac.za or in hard copy.
The first two questions are revision questions from Assignment 01. These questions are included so that you can get feedback on the written form of the questions as questions for the exam will also be in written form and not MCQ.
Question 1
Pigeon proofing Ltd sells pigeon deterrents. All of its sales are on credit. Sales for the past two months were as follows:
|
January
|
February
|
|
R50 000
|
R100 000
|
It is expected that sales for the next two months will be as follows:
|
March
|
April
|
|
R120 000
|
R60 000
|
Collections from credit sales takes place as follows:
- 20% collected in the month of sale
- 80% collected one month following the month of sale
Required:
Calculate the total cash receipts from credit sales for March and April.
Question 2
You just received R60 000 from a beneficiary and have decided to save it for a deposit on a house. You place it in a fixed deposit account for a term of 3 years and the account pays 13% interest compounded annually. How much will your savings account have in it at the end of the period?
Question 3
Furniture Ltd made a loss last year. Though revenue was up from the previous year, profits were down a lot. The management investigated this and found that a very large amount of their clients are not paying on time or at all. This led to a very high bad debt ratio over the past year. The management has decided to amend the credit policy of the business in order to avoid this in the coming year.
The management together with the bookkeeper have put together the following figures for next year if the credit policy is kept as it is currently. This is based on historical data that has been collected for the past few years.
|
Current
|
|
Sales
|
R1 800 000
|
|
Variable costs
|
60% of sales
|
|
Average collection period (ACP)
|
180 days
|
|
Bad debts
|
15% of sales
|
|
Discounts
|
10% discount given on 20% of total sales
|
The management also compiled expected figures based on their past experiences and expectations for their proposed credit policy. The terms of the new credit policy are also outlined in the table below:
|
New
|
|
Sales
|
R1 700 000
|
|
Variable costs
|
60% of sales
|
|
Average collection period
|
120 days
|
|
Bad debts
|
7% of sales
|
|
Discounts
|
20% discount given on 40% of sales
|
The company has a cost of capital of 9% and can use spare cash in new projects or investments that would at least earn this return.
Required:
Calculate the effect that the proposed policy will have on earnings before interest and tax (EBIT) and advise which plan would be better to take. (Assume a 365 day year)
Question 4
The following information is applicable to questions 4.1 and 4.2:
Doors Ltd purchases doors in bulk and resells them to the public. Last year the company had sales of R1 000 000. Each door is sold for R50. The company rents a shop that comes with a small warehouse at a local mall. The financial manager of the company has estimated that it costs the company R5 per year to keep each door in storage based on the amount of space they have and rental costs. When the company places an order, it takes 11 days for their supplier to deliver new stock and the owner of the business wishes to always keep at least 100 doors in stock. The financial manager has also estimated that it costs the company R1 000 for each order they place.
Question 4.1
Calculate the economic order quantity for Doors Ltd.
Question 4.2
Calculate the re-order point for Doors Ltd.
Question 4.3
A supplier offers the following credit terms: 3/14 net 60. Calculate the cost of giving up the cash discount.
Question 4.4
An organisation has a cash conversion cycle (CCC) of 45 days and an operating cycle of 75 days. What was the company's average payment period?
Question 5
The following information is applicable to questions 5.1 to 5.4:
Ladders Ltd had their financial year end on 31 July 2015. The manager of the business you work for has tasked you to do an analysis of Ladders Ltd as he wants to go into a supplier agreement with them and needs to be sure that they are profitable and have good working capital efficiency before he signs such a large agreement. Assume that all purchases are on credit. Below you will find extracts from the financial statements of Ladders Ltd:
Extract from the statement of comprehensive income:
|
Sales
|
R15 000 000
|
|
Cost of sales
|
R11 000 000
|
|
Operating expenses
|
R2 000 000
|
|
Interest
|
R1 200 000
|
|
Tax
|
R216 000
|
|
Net profit
|
R584 000
|
Extract from the statement of financial position:
|
Total assets
|
R8 500 000
|
|
Inventory
|
R1 300 000
|
|
Other current assets
|
R2 400 000
|
|
|
|
|
Total liabilities
|
R8 400 000
|
|
Accounts payable
|
R3 200 000
|
Question 5.1
What was Ladders Ltd's gross profit for 2015?
Question 5.2
What was the company's return on assets (ROA) for 2015?
Question 5.3
Calculate the average payment period for the 2015.
Question 5.4
Calculate the current ratio for Ladders Ltd and comment on how this may impact on your business if you were to become a supplier that sells on credit to Ladders Ltd.
Question 6
The following information is applicable to questions 6.1-6.3:
|
Selling price per ice cream
|
R15
|
|
Variable costs per ice cream
|
R12
|
|
Rent
|
R50 000 per month
|
|
Utilities
|
R3 000 per month
|
|
Insurance
|
R500 per month
|
|
Maintenance
|
R1 000 per month
|
Lerato has recently opened up a new shop in a big mall. The shop will sell ice cream to mall- goers and is located in a busy aisle with lots of foot traffic. Because of her position in the mall, the rent is quite high and Lerato thinks she will have to sell a lot of ice cream for this. She has put together the following breakdown of her expenses and selling price:
Question 6.1
Calculate the amount of units that Lerato will have to sell each year in order to break even.
Question 6.2 (2)
If Lerato manages to sell 250 000 ice creams in one year and her business has interest costs of R 15 000 per year, what would the business' degree of financial leverage be?
Question 6.3 (3)
Two years later Lerato's shop is doing well and her total sales for this year and the previous year is looking good. The table below summarises her sales and operating profit (EBIT) for the past two years:
|
|
Sales
|
Operating profit (EBIT)
|
|
Year 1
|
R4 500 000
|
R150 000
|
|
Year 2
|
R4 800 000
|
R180 000
|
Calculate the degree of operating leverage for her business.
ASSIGNMENT 03
Question 1
Sit Tight Limited, a company that manufactures chairs, is considering the purchase of a machine for R65 000.
The expected cash inflows generated by the machine are as follows:
|
Year
|
Cash flow (R)
|
|
1
|
13 000
|
|
2
|
18 000
|
|
3
|
19 000
|
|
4
|
14 000
|
|
5
|
9 000
|
After the 5-year period the machine is expected to have a scrap value of R5 000. The company's required rate of return is 7%.
Required:
Advise Sit Tight Limited on whether or not it should purchase the machine.
Base your recommendation on the net present value (NPV) of the investment.
R14 000 is invested in retail bonds at 15% per annum compound interest for 5 years. Calculate the value of the investment at the end of year 5.
Calculate the present value of R450 000 over 3 years, assuming a discount rate of 12%.
If you save R5 000 each year for the next 13 years in a savings account that pays 11% interest per annum, how much would you have saved?
Calculate the present value of R22 000 received annually at the end of every year for 8 successive years using a discount rate of 13%.
Question 2
Jersey Limited is a manufacturer of milk bottles. The following information is obtained from their records.
Annual sales amount to 500 000 units. The purchasing price per unit is R3. The carrying cost of inventory is equal to 20% of the purchase price of goods. The ordering cost is R100 per order. Four days are required for delivery.
The desired safety stock for the firm is 4 000 units.
Required:
Calculate the economic order quantity (EOQ) for Jersey Limited .
Determine the re-order point for Jersey Limited. Assume a 360-day year.
Question 3
Sun Manufacturing Limited produces light bulbs. The firm's variable costs per light bulb amount to R4 and total fixed costs for the firm are R1 600 000.
Sales of R6 000 000 are expected for the current year. The selling price per bulb is R15.
Required:
Calculate the expected marginal income for the year.
What will be the breakeven point (in units) of Sun Manufacturing Limited for the year?
Question 4
The balance sheet and income statement of Elephant Limited are as follows:
Balance sheet as at 31 December 2012:
|
|
2012
|
|
|
R'000
|
|
ASSETS
|
|
|
Non-current assets
|
|
|
Property, plant and equipment
|
99 784
|
|
Current assets
|
224 586
|
|
Inventories
|
159 376
|
|
Trade receivables
|
30 358
|
|
Prepayments
|
1 952
|
|
Cash and cash equivalents
|
32 900
|
|
|
|
|
Total assets
|
324 370
|
|
EQUITY AND LIABILITIES
|
|
|
Capital and reserves
|
204 910
|
|
Issued capital
|
13 940
|
|
Accumulated profits
|
190 970
|
|
Non-current liabilities
|
|
|
Interest-bearing borrowings
|
53 004
|
|
Current liabilities
|
66 456
|
|
Trade payables
|
48 310
|
|
Short-term (interest-bearing) borrowings
|
13 586
|
|
Current portion of non-current liabilities
|
4 560
|
|
Total equity and liabilities
|
324 370
|
Income statement for the year ended 31 December 2012
|
|
2012
|
|
|
R'000
|
|
Revenue (sales)
|
709 226
|
|
Cost of sales
|
392 920
|
|
Gross profit
|
316 306
|
|
Other operating income
|
2 680
|
|
Distribution costs
|
59 552
|
|
Administrative expenses
|
47 156
|
|
Other operating expenses
|
60 280
|
|
Profit from operations
|
151 998
|
|
Finance costs
|
8 426
|
|
Profit before tax
|
143 572
|
|
Income tax expense
|
43 072
|
|
Net profit for the period
|
100 500
|
Required:
Using the above information, calculate the following ratios for 2012:
Assume 365 days in a year throughout and round off to the nearest one decimal place.
Gross profit margin
Net profit margin
Return on assets before interest and tax
Return on equity
Current ratio
Quick ratio (acid test)
Debt ratio
Times interest earned ratio
Question 5
Seal Limited had sales of R100 000 in January, R80 000 in February and R90 000 in March.
The company forecasts sales for the coming months as follows:
- April R110 000
- May R100 000
- June R120 000
Additional information:
The company had a cash balance of R20 000 on 1 April. 40% of the company's sales is in cash.
Trade debtors (credit sales) are collected as follows:
- 20% during the month of sale
- 50 % during the first month following the sale
- 20% during the second month following the month of sale
- 10% during the third month following the month of sale The company anticipates other cash income as follows:
- April R10 000
- May R12 000
- June R11 000
Credit purchases for March amounted to R60 000. The forecast for the next three months is as follows:
- April R50 000
- May R40 000
- June R40 000
50% of credit purchases are paid in the month of purchase and the balance is paid the following month.
Rent paid amounts to R5 000 per month.
Salaries and wages amount to R20 000 per month. An interest payment of R5 000 is due in May.
Equipment valued at R7 500 will be purchased in cash in April. A trading fine of R10 000 is payable in June.
Required
Prepare the cash budget for Seal Limited for the months of April, May and June.