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Fma401v Assignment 14

Unformatted text preview: FMA401V/101/0/2016 Tutorial Letter 101/0/2016 FINANCIAL MANAGEMENT IV FMA401V Department of Finance, Risk Management and Banking IMPORTANT INFORMATION Register as a user of myUnisa as soon as possible; it is free of charge. Visit https://my.unisa.ac.za for details. At myUnisa you will be able to get in touch with fellow students, submit your assignments, update your details, find self-assessment questions and participate in discussion forums. Provide Unisa with your cellular number because important announcements may be sent to you by SMS. Note that this module carries 24 credits and requires at least 240 hours of study, including the time required to complete the assignments and the examination. Give at least 240 hours to this module in order to ensure your success. Take note of rule 12 in the brochure, my Registration @ Unisa. Students must pass at least 4 modules of 12 credits each or 2 modules of 24 credits each per year. Students who do not comply with this requirement will be excluded from further admission to the university. Open Rubric CONTENTS Page 1 INTRODUCTION .......................................................................................................................... 3 1.1 Tutorial matter............................................................................................................................... 3 2 PURPOSE AND OUTCOMES ...................................................................................................... 3 3 CONTACT DETAILS .................................................................................................................... 5 3.1 Lecturers....................................................................................................................................... 5 3.2 Department ................................................................................................................................... 5 3.3 University ...................................................................................................................................... 6 4 RESOURCES ............................................................................................................................... 6 4.1 Prescribed book ............................................................................................................................ 6 4.2 Recommended books ................................................................................................................... 6 4.3 Electronic reserves (e-reserves) ................................................................................................... 6 4.4 Study guide errata......................................................................................................................... 6 4.5 myUnisa ........................................................................................................................................ 6 5 STUDENT SUPPORT SERVICES ................................................................................................ 6 6 TUTORS ....................................................................................................................................... 7 7 STUDY PLAN ............................................................................................................................... 7 8 ASSESSMENT ............................................................................................................................. 8 8.1 Assessment plan .......................................................................................................................... 8 8.2 Assignments ................................................................................................................................. 9 8.2.1 General assignment numbers ....................................................................................................... 9 8.2.2 Unique assignment numbers ........................................................................................................ 9 8.2.3 Due dates for assignments ........................................................................................................... 9 8.2.4 Submission of assignments ........................................................................................................ 10 8.2.5 The assignments ........................................................................................................................ 10 9 FREQUENTLY ASKED QUESTIONS ........................................................................................ 35 10 CONCLUSION............................................................................................................................ 41 11 APPENDIX A: ERRATA TO THE STUDY GUIDE ...................................................................... 42 12 APPENDIX B: INTEREST TABLES ........................................................................................... 44 -2- FMA401V/101 1 INTRODUCTION Dear Student Welcome to the module Financial Management IV (FMA401V). You have enrolled for an interesting yet challenging module. On completion of this module you should be able to assess, calculate and interpret a range of financial topics. 1.1 Tutorial matter Your tutorial matter for Financial Management IV (FMA401V) consists of the following: ● A study guide and question bank for Financial Management IV (FMA401V) ● A tutorial letter that you will receive shortly after the closing date of the second assignment, which will contain the suggested solutions to both assignment’s questions ● Additional resources provided at https://my.unisa.ac.za 2 PURPOSE AND OUTCOMES At the end of this module you should be able to: (1) explain the financial environment of a business entity, including: (2) the role of the financial manager the task and scope of financial management goals of financial management value certainty, uncertainty and risk return the financial environment inflation monetary policy and interest rates the financial markets basic forms of business organisation explain the concept of time value of money and do calculations, including: compound interest and the future value of money calculation of the present value of a single period rate of return on an investment present value of an unequal series of cash flow net present value of an investment internal rate of return -3- (3) advise management on investment decisions, including investment in long-term assets and capital projects, including: the capital budgeting process o planning phase o financial planning in project evaluations o payback method o accounting rate of return o NPV o IRR o equivalent annual cost o implementation of the project the post-implementation phase the types of capital decision (4) advise management on the investment in working capital, especially the management of cash, including: (5) advise management on investment in working capital, especially the management of accounts receivable, including: (6) credit policy credit terms collection policy advise management on investment in working capital, especially the management of inventory, including: (7) advantages and disadvantages of stock-keeping inventory planning and control economic order quantity (EOQ) inventory cost rate order point safety stock inventory control explain financial statements analysis, including: -4- the importance of working capital management the need for working capital the cash management the objectives of cash-flow information the presentation of cash-flow information the cash budgets recording changes in the financial position flow of information income statement balance sheet users of financial statements FMA401V/101 (8) explain cost, break-even analysis and leverage in financial management and do calculations, including: costs break-even point and break-even value operating leverage financial leverage combined leverage or the total leverage 3 CONTACT DETAILS 3.1 Lecturers Direct any enquiries of an academic nature concerning this module, such as an enquiry about a specific calculation in the prescribed book, during office hours to: Mr PN Kotze (Primary) Ms L Ngcobo (Secondary) Tel: 012 429 2040 Tel: 012 429 4083 Mr MN Bhomoyi (Secondary) Tel: 012 429 6555 Alternatively you can send us an e-mail at the following address: [email protected] This inbox is the easiest way you can use to get feedback from the lecturers of the module as it is monitored by all of us. You can also post any content-related queries on the discussion forums on myUnisa; we monitor the discussion forums on a daily basis. There is also a questions and answers tool on myUnisa that you are welcome to use and there you can also check whether another student may have already asked a similar question. 3.2 Department This module is offered by the Department of Finance, Risk Management and Banking (DFRB). Please note that you may get in touch with fellow students, download study material, submit assignments, change your address and/or examination venue, view your assignment marks, download previous examination papers, find self-assessment questions (only if applicable) and get in touch with your lecturer at https://my.unisa.ac.za For academic enquiries, contact the Department at 012 429 3603. E-mail queries may be sent to [email protected] -5- 3.3 University You may direct administrative queries to the appropriate department as indicated in the brochure, my Registration @ Unisa. Examples of administrative queries are registration matters, study material matters, account queries and graduation issues. You must direct registration matters to [email protected] 4 RESOURCES 4.1 Prescribed book You must acquire the following prescribed book from one of the official Unisa bookstores (a list of bookstores is available on myUnisa): Marx, J & De Swardt, C. 2013. Financial management in Southern Africa. 4th edition. South Africa: Pearson Education. 4.2 Recommended books Els, G. et al. 2014. Corporate Finance: A South African Perspective. 2nd edition. South Africa: Oxford University Press. Gitman, LJ et al. 2014. Principles of Managerial Finance: Southern African Perspectives 2nd edition. Pearson, Cape Town, South Africa 4.3 Electronic reserves (e-reserves) None. 4.4 Study guide errata Please make sure to take note of the errata for some mistakes in the study guide. You can find it in appendix A of this tutorial letter. It is very important that you take note of these mistakes. 4.5 myUnisa Additional resources are uploaded on myUnisa on a regular basis. These resources include study notes as well as practice questions. Visit the myUnisa page for the module regularly to stay up to date with resources uploaded. There are discussion forums and question and answer tools that you can use to ask your lecturers and fellow students questions regarding the content of the module. There are also further frequently asked questions on the content of the module. You can also find important errata for the study guide in appendix A of this tutorial letter. Ensure that you take note of these changes before you start with your studies. This document will also be available on myUnisa and may be updated from time to time. The study notes that are available on myUnisa is an excellent place to start with your studies of this module as they were compiled to be accessible for students who have not yet encountered an accounting or finance module before. 5 STUDENT SUPPORT SERVICES Important information appears in the brochure, my Studies @ Unisa -6- FMA401V/101 6 TUTORS Face to face tutorial services are offered by the regional centres of UNISA. You can find the contact details of your nearest regional centre on the UNISA website and enquire regarding the availability of classes. 7 STUDY PLAN Use my Studies @ Unisa for suggestions on how to manage and plan your time. Introduction to finance and the financial environment: Study chapter 1 in the study guide. Read chapter 1 in the prescribed textbook. Time value of money: Study chapter 2 in the study guide. Read chapter 7 in the prescribed textbook. The investment decision: The investment in long-term assets and capital projects Study chapter 3 in the study guide. Read chapter 13 in the prescribed textbook. Investment in working capital: The management of cash Study chapter 4 in the study guide. Read chapter 9 in the prescribed textbook. Investment in working capital: The management of accounts receivable Study chapter 5 in the study guide. Read chapter 10 in the prescribed textbook. Investment in working capital: The management of inventory Study chapter 6 in the study guide. Read chapter 11 in the prescribed textbook. Financial statements analysis and financial ratio analysis: Study chapter 7 in the study guide. Read chapters 3 and 4 in the prescribed textbook. Leverages in financial management: Study chapter 8 in the study guide. Read chapter 16 in the prescribed textbook. -7- 8 ASSESSMENT 8.1 Assessment plan Assignments are seen as part of the learning material for this module. When you do the assignments, study the reading texts, consult other resources, discuss the work with fellow students or tutors or do research, you are actively engaged in learning. Paying attention to the assessment criteria for each assignment will help you to understand more clearly what is required of you. You may submit written assignments and assignments completed on mark-reading sheets either by post or electronically via myUnisa. Also, you may not submit assignments by fax or email. For detailed information and requirements concerning assignments, see the brochure, my Studies @ Unisa, that you received with your study material. Compulsory assignments For this module, you must complete two compulsory assignments in the form of one multiplechoice question assignment and one written assignment. Submission deadlines for each of the assignments for this module are non-negotiable and you must submit these assignments if you wish to gain entry to the examination. The assignments contribute to your year mark. Year marks Your year mark, based on the mark obtained for the two compulsory assignments, contributes 20% towards your final mark, while your examination mark contributes 80%. The combined weighted average of your year mark and examination mark must be 50% or higher for you to pass the module. However, you must also obtain a minimum of 40% in the examination. If you obtain less than 40% in the examination, we will not take your year mark into account and you will fail. For example: Assignment 01 mark = 50% and Assignment 02 mark = 90%. These marks each contribute 50% towards the final 20% year mark. Assignment No Mark Weight Total Assignment 01 50% 50% 25 Assignment 02 90% 50% 45 70 x 20% of final = 14 -8- FMA401V/101 For example: Assume an examination mark of 55% 80% of the examination mark = 44% Final mark = (20% assignment mark) + (80% examination mark) = 14% + 44% = 58% You will need a final mark of at least 40% in order to qualify for a supplementary examination. For general information and requirements concerning assignments, see the brochure, my Studies @ Unisa. 8.2 Assignments This section contains further information regarding assignments. This includes: 8.2.1 General assignment numbers Assignments are numbered consecutively per module, starting from 01. 8.2.2 Unique assignment numbers Each assignment has been allocated a unique number in order to identify it in the Unisa assessment plans. Always ensure that you indicate the correct unique number when submitting assignments. 8.2.3 Due dates for assignments As indicated earlier, you should preferably submit your assignments at https://my.unisa.ac.za prior to the due date of each assignment. Do not wait until the day before the due date. Technical problems with the computer servers of myUnisa may prevent you from submitting your assignment at the last minute. If you are unable to submit your assignments via myUnisa and need to mail them to us in hard copy form, ensure that your assignments reach the Unisa main campus by the due dates. Requests for extension of due dates for assignments will not be granted. These due dates have been set to allow you sufficient time for completing other assignments and preparing for the examination. You can obtain information about whether Unisa has received your assignment and the mark achieved for an assignment from https://my.unisa.ac.za. -9- 8.2.4 Submission of assignments To submit an assignment via myUnisa: Go to myUnisa at https://my.unisa.ac.za Log in with your student number and password. Select the module. Click on assignments in the left-hand menu. Click on the assignment number you want to submit. Follow the instructions on the screen. To submit a multiple-choice question (MCQ) assignment by means of an SMS from your cellphone: Download and install the Unisa Mobile application from https://my.unisa.ac.za/portal/pda Install and start the application on your phone. Select the “MCQ Assignment” option. Login with your myUnisa credentials. Select your module. Select the appropriate unique assignment number. Select appropriate answers to the assignment questions. Send your answers. Receive immediate onscreen confirmation. You should only submit your assignment by means of a mark-reading sheet (for MCQs) or hard copy (for essay-type questions) and mail it to Unisa if you do not have access to the internet. If you are using a mark-reading sheet, remember to: Use an HB pencil. Indicate your student number and the above-mentioned unique number on the markreading sheet. Follow the instructions for completing mark-reading sheets. Incomplete mark-reading sheets will be returned to you unmarked. Submit the assignment in good time. It must reach the Unisa main campus by the dates indicated below; otherwise it might not be in time to be marked by the Assignment Section. 8.2.5 The assignments There are two compulsory assignments, one consisting of multiple-choice questions and one written that you have to hand in. There is also one self-assessment assignment consisting of essay-type questions that you will not hand in. Please note: For all calculative questions, you should choose the nearest correct option, as there may be slight rounding differences between the answers. The use of financial calculators and the financial tables will influence the rounding on your answers. For assignment two it is important to show your calculations where applicable. If you are not using a financial calculator, you can find the necessary interest tables in appendix B at the end of this tutorial letter. -10- FMA401V/101 ASSIGNMENT 01 Due date: 13 May 2016 Unique number: 882118 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. 2. 3. 4. Deciding whether to raise funds through an equity offer or debt Making a choice regarding the type of debt instrument to use Deciding whether a new machine should be bought for production 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. 2. 3. 4. 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. 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. 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. 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. -11- Question 3 Which of the following options best describes risk? Choose the correct option. 1. 2. 3. 4. The probability of a deviation from the historical value The probability of a deviation from the expected value The probability of downside deviation occurring 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. 2. 3. 4. A growing population Increasing oil prices A decrease in disposable income of households 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. 2. 3. 4. Close corporation Partnership Private company 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. 2. 3. 4. 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. Owners of a business offer a manager a large amount of share options as incentives to increase the share price of the business. 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. 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. 2. 3. 4. -12- R572 R1 225 R1 815 R1 838 FMA401V/101 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. 2. 3. 4. R11 R60 R84 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. 2. 3. 4. Option one as you will have R200 000 more after the project. Option one as you will have R83 950 more after the project. Option two as you will have R83 950 more after the project. 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. 2. 3. 4. R1 067 920 R6 281 884 R11 488 003 R67 576 489 -13- 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. 2. 3. 4. R310 461 R1 895 393 R2 500 000 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. 2. 3. 4. R9 016 R15 582 R24 369 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. 2. 3. 4. -6,54% pa 7% pa 50% pa 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. 2. 3. 4. -14- 1 year 2 years 5 years 7 years FMA401V/101 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. 2. 3. 4. R424 R1 156 R4 568 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 Purchase price Installation and setup costs Inflows 0 0 1 2 3 4 5 Machine X (R) Machine Y (R) -15 000 000 -18 000 000 -4 000 000 -3 000 000 3 500 000 4 500 000 4 300 000 5 800 000 5 500 000 6 200 000 6 200 000 6 100 000 7 200 000 6 300 000 Question 16 Calculate the NPV for Machine X and choose the correct option. 1. 2. 3. 4. R19 517 R21 664 R4 021 664 R7 700 000 Question 17 Calculate the NPV for Machine Y and choose the correct option. 1. 2. 3. 4. R46 715 R51 853 R3 051 853 R7 900 000 -15- Question 18 Calculate the IRR for Machine X and choose the closest correct option. 1. 2. 3. 4. 7% 9% 11% 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. 2. 3. 4. 3 years, 9 months. Acceptable. 3 years, 9 months. Not acceptable 4 years. Acceptable 4 years. Not acceptable. Question 20 A project has the following probabilities associated with its profitability: Possible profit (R) 200 000 250 000 310 000 350 000 400 000 Probability 0,1 0,2 0,4 0,2 0,1 Calculate the expected return of the project and choose the correct option. 1. 2. 3. 4. R302 000 R304 000 R310 000 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. 2. 3. 4. -16- 10%, the project is acceptable. 10%, the project is not acceptable. 13%, the project is not acceptable. 13%, the project is acceptable. FMA401V/101 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 R500 000 January R400 000 February R350 000 March R420 000 Sales for the next four months are expected to be as follows: April May R480 000 R520 000 June R540 000 July 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. 2. 3. 4. R216 000 R265 200 R324 000 R540 000 Question 23 How much of April’s credit sales were collected in July? Choose the correct option. 1. 2. 3. 4. R57 600 R192 000 R201 600 R296 400 -17- Question 24 What will the total credit collections for May be? Choose the correct option. 1. 2. 3. 4. R208 000 R226 200 R312 000 R434 200 Question 25 What will the total collections (or income) for April be? Choose the correct option. 1. 2. 3. 4. R192 000 R235 200 R427 200 R480 000 Question 26 What amount of March’s credit purchases were paid in April? Choose the correct option. 1. 2. 3. 4. R25 200 R201 600 R288 000 R443 600 Question 27 What will the total expenses for July be? Choose the correct option. 1. 2. 3. 4. R200 000 R296 400 R321 600 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: Opening balance Total income Total expenses Closing balance -18- August R520 000 R350 000 R400 000 R470 000 September R470 000 R420 000 R430 000 October R530 000 R510 000 FMA401V/101 Question 28 What is the closing balance for September? Choose the correct option. 1. 2. 3. 4. R10 000 R40 000 R460 000 R470 000 Question 29 What amount of financing is necessary for the month of August? Choose the correct option. 1. 2. 3. 4. R30 000 R50 000 R470 000 None as there will be a surplus Question 30 What amount of financing will be necessary for the month of October? 1. 2. 3. 4. R20 000 R30 000 R460 000 R480 000 -19- ASSIGNMENT 02 Due date: 12 August 2016 Unique number: 757431 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 (3) 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 (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? -20- FMA401V/101 Question 3 (12) 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. Sales Variable costs Average collection period (ACP) Bad debts Discounts Current R1 800 000 60% of sales 180 days 15% of sales 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: Sales Variable costs Average collection period Bad debts Discounts New R1 700 000 60% of sales 120 days 7% of sales 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 (13) 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. -21- Question 4.1 (4) Calculate the economic order quantity for Doors Ltd. Question 4.2 (3) Calculate the re-order point for Doors Ltd. Question 4.3 (3) A supplier offers the following credit terms: 3/14 net 60. Calculate the cost of giving up the cash discount. Question 4.4 (3) 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 (10) 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 Cost of sales Operating expenses Interest Tax Net profit R15 000 000 R11 000 000 R2 000 000 R1 200 000 R216 000 R584 000 Extract from the statement of financial position: Total assets Inventory Other current assets R8 500 000 R1 300 000 R2 400 000 Total liabilities Accounts payable R8 400 000 R3 200 000 Question 5.1 What was Ladders Ltd’s gross profit for 2015? -22- (1) FMA401V/101 Question 5.2 (2) What was the company’s return on assets (ROA) for 2015? Question 5.3 (3) Calculate the average payment period for the 2015. Question 5.4 (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 (10) The following information is applicable to questions 6.1–6.3: Lerato has recently opened up a new shop in a big mall. The shop will sell ice cream to mallgoers 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: Selling price per ice cream Variable costs per ice cream Rent Utilities Insurance Maintenance R15 R12 R50 000 per month R3 000 per month R500 per month R1 000 per month Question 6.1 (5) 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 Year 1 Year 2 Operating profit (EBIT) R4 500 000 R150 000 R4 800 000 R180 000 Calculate the degree of operating leverage for her business. -23- ASSIGNMENT 03 – SELF-ASSESSMENT DO NOT HAND IN THIS ASSIGNMENT. This assignment is for exam preparation only. Question 1 (13) 1.1 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. (5) 1.2 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. (2) 1.3 Calculate the present value of R450 000 over 3 years, assuming a discount rate of 12%. (2) 1.4 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? (2) 1.5 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%. (2) -24- FMA401V/101 Question 2 (7) 2.1 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 . (4) 2.2 Determine the re-order point for Jersey Limited. Assume a 360-day year. (3) Question 3 (5) 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: 3.1 Calculate the expected marginal income for the year. (2) 3.2 What will be the breakeven point (in units) of Sun Manufacturing Limited for the year? (3) -25- Question 4 (24) Use the following information to answer questions 4.1 to 4.8. 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 Current assets Inventories Trade receivables Prepayments Cash and cash equivalents 99 784 224 586 159 376 30 358 1 952 32 900 Total assets 324 370 EQUITY AND LIABILITIES Capital and reserves Issued capital Accumulated profits Non-current liabilities Interest-bearing borrowings Current liabilities Trade payables Short-term (interest-bearing) borrowings Current portion of non-current liabilities Total equity and liabilities -26- 204 910 13 940 190 970 53 004 66 456 48 310 13 586 4 560 324 370 FMA401V/101 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. 4.1 Gross profit margin (3) 4.2 Net profit margin (3) 4.3 Return on assets before interest and tax (3) 4.4 Return on equity (3) 4.5 Current ratio (3) 4.6 Quick ratio (acid test) (3) 4.7 Debt ratio (3) 4.8 Times interest earned ratio (3) -27- Question 5 (21) 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. -28- FMA401V/101 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. (21) DO NOT TURN OVER TO THE NEXT PAGE BEFORE YOU HAVE ATTEMPTED THE EXERCISE. PLEASE TRY THE EXERCISE FIRST BEFORE YOU CHECK THE ANSWERS. -29- SOLUTION TO ASSIGNMENT 03 The mark allocation has been included so that you can see how marks may typically be allocated in a written assessment. The mark allocation included is for illustrative purposes and may not have been worked out in exactly the same manner as it would be allocated for an exam. Use this allocation to gauge your preparedness for the exam. Question 1.1 0 1 2 3 4 5 CF (R) -65000 13000 18000 19000 14000 14000 PVIF 1 0.935 0.873 0.816 0.763 0.713 PV of CF (R) -65000 12155 15714 15504 10682 9982 Calculator -R 956,57√√√√ Tables -R 963 Do not invest in the machine as it has a negative NPV.√ Question 1.2 Calculator: PV = R14 000 I = 15 N=5 so FV = R28 159√√ Tables: R14 000 x 2.011 R28 154 0.712 R320 400 Question 1.3 Calculator: FV = R450 000 N=3 I = 12 so PV = R320 301,11√√ -30- Tables R450 000 x FMA401V/101 Question 1.4 Calculator: PMT = R5 000 N = 13 I = 11 FV = R131 058,19√√ Tables: R5 000 x 26.21 R131 050 Tables: R22 000 x 4.799 R105 578 Question 1.5 Calculator: PMT = R22 000 N= 8 I= 13 so PV = R105 572,95√√ Question 2.1 EOQ = or EOQ = EOQ = = = = 12 909, 95√ ≈ 12 910 Question 2.2 Re-order level in units Average usage = 500 000 / 360 = 1388.889 ≈ 1 389 Re-order point = waiting time x average usage = 4 days x 1 389√ units = Safety stock + re-order point = 4 000 + 5 556 5 556 units√ = 9556 units√ -31- Question 3.1 Marginal income = sales - variable costs R6 000 000 - (R4 x 400 000) = R4 400 000√√ Question 3.2 Breakeven point = total fixed costs / marginal income per unit = R1 600 000 / (R4 400 000 / 400 000) √ = 145 454.5 ≈ 145 455 units√√ Question 4.1 Gross profit margin = gross profit ÷ sales = 316 306√ / 709 226√ = 44.6%√ Question 4.2 Net profit margin = net profit ÷ sales = 100 500√ / 709 226√ = 14.2%√ Question 4.3 ROABIT = EBIT ÷ Total assets = 151 998√ ÷ 324 370√ = 46.9%√ Question 4.4 ROE = Net profit ÷ equity = 100 500√÷ 204 910√ = 49.0%√ -32- FMA401V/101 Question 4.5 Current ratio = current assets ÷ current liabilities = 224 586√ ÷ 66 456√ = 3.4√ Question 4.6 Quick ratio = current assets – (inventory ÷ current liabilities) = (224 586 - 159 376) √ ÷ 66 456√ =1.0 √ Question 4.7 Debt ratio = total debt ÷ total assets = 53004 + 66456 ÷ 324370 = 119 460√ ÷ 324 370√ = 0.4 √ Question 4.8 TIE ratio = profit from operations ÷ finance costs = 151 998√ ÷ 8 426√ = 18.0√ -33- Question 5 Opening balance Sales – cash sales – credit Other – cash Total income√ method Total expediture Purchases – credit Sundry expenses√method Salaries Rent Closing balance√ method Cash sales April 20 000 √ 44 000√ 55 800 10 000 109 800 87 500 55 000 7 500 20 000 5 000 42 300√ May 42 300√method 40 000√ 60 600 12 000 112 600 75 000 45 000 5 000 20 000 5 000 79 900√ January 60000 February 48000 March 54000 April 6000√half 9600√half 27000√half 13200√half May June April 66000 Credit sales January February March April May June Total 55800 4800√half 10800√half 5400√half 33000√half 13200√half 12000√half 30000√half 14400√half 60600 63000 Credit purchases March April May June Total April May June 30000√half 25000√half 25000√half 20000√half 20000√half 20000√half 55000 45000 40000 Sales: cash April May June -34- R110 000 R100 000 R120 000 April 44000 May June 40000 48000 June 79 900√method 48 000 √ 63 000 11 000 122 000 75 000 40 000 10 000 20 000 5 000 126 900√ method May 60000 June 72000 FMA401V/101 8.3 The examination Examination admission will be granted to all students who submit the compulsory assignment. Students who do not submit the assignment will NOT be allowed to write the examination. The provisional examination dates have been published at https://my.unisa.ac.za. The examination paper for FMA401V will be written questions and not multiple-choice type questions. No equations are provided in the examination paper. However, financial tables for time value of money calculations are provided. A student must achieve at least 40% in order to qualify for admission to the supplementary examination. Details about the procedure and cost for re-marking examination scripts are available on myUnisa (https://my.unisa.ac.za). 9 FREQUENTLY ASKED QUESTIONS Section A: Administrative matters 1 Matters pertaining to registration What should I do if any of my personal details (name, address, etc.) have been incorrectly captured during the registration process? Use myUnisa (https://my.unisa.ac.za) to rectify any mistakes. Alternatively, send an email to [email protected] or send us a letter addressed to The Registrar, PO Box 392, UNISA, 0003. Also, remember to quote your student number in all correspondence. What must I do to obtain items that were out of stock when I registered? Go to https://my.unisa.ac.za to download copies of any of the study material. Alternatively, send an e-mail to [email protected] Remember to quote your student number in all correspondence. Allow approximately four weeks for delivery of any outstanding items before contacting Unisa about out-of-stock items. 2 Assignments My assignment is late because … Can I submit it at a later date? It is your responsibility to ensure that your assignment is submitted at myUnisa or reaches the Unisa main campus on or before the closing date. Do not call us to request an extension for submitting an assignment. Once you have received the tutorial letter containing the solutions, you will know that you can no longer submit the assignment. Are the assignments for this module compulsory? The assignments are compulsory. The intention is that you should use the assignments to prepare for the examination. Do the marks obtained for assignments count towards the final mark? The assignment marks do count towards the final marks, as explained in this tutorial letter. -35- Who do I contact to find out if Unisa received my assignment(s) that I sent by mail? Preferably, submit your assignments via myUnisa. If you do not have access to the internet and have mailed your assignments to Unisa, SMS 43584 in order to determine if Unisa received your assignment(s). What do I do if my assignment goes missing in the mail? Preferably, submit your assignments via myUnisa. Always make a copy of your assignment and keep it in a safe place in case you need to submit a duplicate copy. Can I submit my assignments by e-mail? No, you must submit all assignments either via myUnisa or sent by mail. Assignments emailed to lecturers will not be marked. How long will I have to wait before I can expect my assignment(s) results? We aim to have assignments marked within three weeks after each due date. Visit https://my.unisa.ac.za to determine what mark you achieved. Allow an additional week or two for the post office to deliver the results to your postal address. The assignment results will be sent to the postal address that you indicated. Do not call us to make enquiries about your assignment earlier than four weeks after the due date has elapsed. Can I expect my assignment to be returned sooner if I submit it well before the due date? The marking of assignments normally starts on the due dates indicated in this tutorial letter. Assignments are not marked or returned prior to the due dates. What mark did I obtain for my assignment(s)? Register as a user of the myUnisa facility and visit https://my.unisa.ac.za to find out the mark you received for your assignment(s). 3 EXAMINATION What happens if I am unable to write the examination because of ill health, work commitments or any other crisis? Do any requests for aegrotat examinations in writing and direct them to the Head: Examinations, Box 392, UNISA, 0003 or [email protected] A fee is payable for such requests. The amount payable is determined by the Examination Section. What happens if I fail any papers? Students who fail any of the papers may be granted admission to write the supplementary examination scheduled for the next examination, provided they have achieved a final mark of at least 40%. Students must direct any enquiries in this regard to the Head: Examinations, Box 392, UNISA, 0003 or [email protected] What will happen if I do not write any of the papers during the supplementary examination? In such a case you will have to obtain a registration form, complete it, pay the required fees and register again. -36- FMA401V/101 What do I need to bring to the examination venue? Bring your identity document (ID), student card, HB pencil, black pen, financial calculator, ruler, eraser and pencil sharpener. Will it be an open-book examination? No. Could you give me an idea of the scope of the examination paper? The examination paper is based on your prescribed book and the learning outcomes provided in your study guide. Each learning outcome statement and assessment criterion may be used to set examination questions. Do not call us to enquire about the “scope” of the examination paper. 4 ALTERNATIVE ASSESSMENT: FI CONCESSIONS Do I qualify for a FI concession? Only if you fail the examination and FMA401V is one of the last two modules that you need to complete your degree, will an alternative assessment method be considered. You will be contacted by your lecturer or the Examination Section if you qualify for this opportunity. Your lecturer can give you a portfolio of evidence to complete or another method of assessment as he or she chooses. Contact your lecturer and the Examination Section as soon as you are notified that you qualify for an FI concession. Will I still be able to get support from my lecturer regarding the content of the module? Yes, your lecturer will be available to support you regarding the content of the module. Arrangements regarding support from your lecturer will be communicated to you in an email to your myLife e-mail account if you choose the portfolio of evidence. Will the alternative assessment be easier than writing the exam? Note that this alternative assessment opportunity will not be an easier option. The portfolio is a large assignment that you need to complete on your own and it entails a large amount of work. What if I fail my FI concession opportunity? The policy on FI concessions states that students get a maximum of two exam opportunities; this includes your normal exam sitting. In other words, this means that you will write the main exam for the module, the October / November exam, then as a FI concession student you get one more opportunity for assessment, by means of an alternative assessment. If you fail the alternative assessment, you need to register for the module again. Remember, the FI concessions are not a guaranteed pass; in fact, many students are unsuccessful. -37- 5 RESULTS I will be away when the examination results are due to be released. Could you please tell me what mark I obtained for this paper? The results should be available four weeks after of the examination period ended. Do not call the lecturers to request your results. How will the results be announced? The results are normally mailed to students. They are also published at myUnisa https://my.unisa.ac.za and the MTN results facility, cellular number 083 1234. 6 STUDY GUIDE AND TUTORIAL LETTERS I have lost my study guide and tutorial letters. Could you please mail or fax me a copy? Download a copy from myUnisa. Register as a user at https://my.unisa.ac.za. The lecturers do not mail or fax copies of study guides to students. You may also order replacement copies of study guides from Unisa’s Despatch Department. Send an e-mail to [email protected] or a letter to The Head, Despatch, PO Box 392, UNISA, 0003. 7 CHANGES IN REGISTRATION DETAILS What do I need to do if I want to add or cancel any of the modules? Update your details at myUnisa. Alternatively, send an e-mail, fax or letter to indicate any changes that need to be made to your registration. Any such changes must be completed two months before the examination. Send an e-mail to [email protected] to make these changes. Alternatively, mail a letter addressed to The Registrar, Box 392, UNISA, 0003. Also, remember to quote your student number in all correspondence. 8 ACCOUNTS What do I do if I do not agree with my account statement? Send a letter addressed to The Head, Student Accounts, Box 392, UNISA, 0003. Alternatively, send an e-mail to [email protected]

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