ASSIGNMENT:
Aim: To evaluate your knowledge of some of the fundamental aspects of:
- finance and the financial environment
- time value of money principles and applications
- investment decision-making
- investment in working capital: cash management
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
Question 18: 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
R480000 R520000 R540000 R600000
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