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FMA401V/101/0/2015

Tutorial Letter 101/0/2015

FINANCIAL MANAGEMENT IV
FMA401V

Department of Finance,
Risk Management and Banking
IMPORTANT INFORMATION:
Please 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.
It is also important that you provide Unisa with your cellular number because important
announcements may be sent to you by SMS.
Please 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. Devote at
least 240 hours to this module in order to ensure your success.
Take note of rule 12 in the brochure my Registration @ Unisa. You 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.
CONTENTS
Page

1 INTRODUCTION .......................................................................................................................... 3
1.1 Tutorial matter............................................................................................................................... 3
2 OUTCOMES FOR THE MODULE ................................................................................................ 3
3 LECTURER(S) AND CONTACT DETAILS................................................................................... 5
3.1 Lecturers....................................................................................................................................... 5
3.2 Department ................................................................................................................................... 5
3.3 University ...................................................................................................................................... 5
4 MODULE-RELATED RESOURCES ............................................................................................. 6
4.1 Prescribed book ............................................................................................................................ 6
4.2 Recommended books ................................................................................................................... 6
4.3 Electronic reserves (e-reserves) ................................................................................................... 6
5 ADDITIONAL RESOURCES ON myUnisa .................................................................................. 6
6 STUDENT SUPPORT SERVICES FOR THE MODULE ............................................................... 6
7 MODULE-SPECIFIC STUDY PLAN ............................................................................................. 6
8 ASSESSMENT ............................................................................................................................. 7
8.1 Assessment plan .......................................................................................................................... 7
8.2 General assignment numbers ....................................................................................................... 8
8.3 Unique assignment numbers ........................................................................................................ 8
8.4 Due dates for assignments ........................................................................................................... 8
8.5 Submission of assignments .......................................................................................................... 9
8.6 Assignments ............................................................................................................................... 10
9 EXAMINATION ........................................................................................................................... 34
10 FREQUENTLY ASKED QUESTIONS ........................................................................................ 34
11 CONCLUSION............................................................................................................................ 40

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1 INTRODUCTION
Dear Student
Welcome to the module for 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 each assignment,
which will contain the suggested solutions to the assignment questions

Additional resources provided at https://my.unisa.ac.za

2 OUTCOMES FOR THE MODULE

At the end of this module you should be able to:

(1) explain the financial environment of a business entity, including:

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

(2) 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
net present value of an investment
internal rate of return

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(3) advise management on investment decisions, including investment in long-term
assets and capital projects. This includes:

the capital budgeting process


o the 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
types of capital decision

(4) advise management on the investment in working capital, especially the


management of cash. This includes:

the importance of working capital management


the need for working capital
cash management
the objectives of cash-flow information
presentation of cash-flow information
cash budgets

(5) advise management on investment in working capital, especially the management of


accounts receivable. This includes:

credit policy
credit terms
collection policy

(6) advise management on investment in working capital, especially the management of


inventory. This includes:

advantages and disadvantages of stock-keeping


inventory planning and control
the economic order quantity (EOQ)
the inventory cost rate
the order point
safety stock
inventory control

(7) explain financial statements analysis, including:

recording changes in the financial position


the flow of information
the income statement
the balance sheet
users of financial statements

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(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
the combined leverage or the total leverage

3 LECTURER(S) AND 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)
e-mail: kotzepn@unisa.ac.za e-mail: lngcobo@unisa.ac.za
Fax 086 204 8239 Fax 086 641 5351
Tel 012 429 2040 Tel 012 429 4083

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 finman@unisa.ac.za.

3.3 University
Administrative queries may be directed 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. Registration matters must be
directed to econ@unisa.ac.za

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4 MODULE-RELATED 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
None.
4.3 Electronic reserves (e-reserves)
None.

5 ADDITIONAL RESOURCES ON myUnisa


Unofficial resources are uploaded on myUnisa on a regular basis. These resources include
study notes as well as practice questions. Please 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.

6 STUDENT SUPPORT SERVICES FOR THE MODULE


Important information appears in the brochure my Studies @ Unisa.

7 MODULE-SPECIFIC 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.

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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.

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. Assignments may not be submitted by fax or e-
mail. For detailed information and requirements as far as assignments are concerned, see the
brochure my Studies @ Unisa that you received with your study material.

Compulsory assignment

For this module, you must complete two compulsory assignments in the form of one multiple-
choice 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.

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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, regardless of your year mark. If you obtain less than 40% in the examination, your
year mark will not be taken into account and you will fail.

For example:
Assignment 01 mark = 50% 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

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 as far as assignments are concerned, see the
brochure my Studies @ Unisa.

8.2 General assignment numbers


Assignments are numbered consecutively per module, starting from 01.

8.3 Unique assignment numbers


Each assignment has been allocated a unique number in order to identify it in the Unisa
assessment plans. Please ensure you always indicate the correct unique number when
submitting assignments.
8.4 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.

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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 format, please 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 the completion of other assignments and
your preparation for the examination.

Information about whether Unisa has received your assignment and the mark attained for an
assignment can be obtained from https://my.unisa.ac.za.

8.5 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 an 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 mark-
reading 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.

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8.6 Assignments
There are two compulsory assignments, one consisting of multiple-choice questions and one
written that you have to hand in and 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.

ASSIGNMENT 01 Due date: 8 May 2015

Unique number: 614739

Aim: To evaluate your knowledge of some of the fundamental aspects of:

finance and the financial environment (study unit 1)


time value of money principles and applications (study unit 2)
investment decision-making (study unit 3)
investment in working capital: cash management (study unit 4)

Answer the following questions and submit your assignment at https://my.unisa.ac.za

QUESTION 1

Economic value is mainly determined by a combination of factors.


Which ONE of the following factors is not a determinant of economic value?

1. The risk associated with a return


2. The amount, or magnitude, of an expected return
3. The timing of the expected return
4. Whether the return maximises short-term profits

QUESTION 2

Which of the following options best describes risk?

1. The probability of a deviation from the historical value.


2. The probability of a deviation from the expected value.
3. The probability of a downside deviation occurring.
4. The probability of an upside deviation occurring.

QUESTION 3

If the inflation rate increases, what would one expect to happen to interest rates?

1. decrease
2. double
3. increase
4. stay the same

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QUESTION 4

Return can best be described as

1. the guaranteed income from investing.


2. the income over a single period gained from investing.
3. the capital over and above the initial investment gained on an asset as well as any
income received from it, divided by the initial investment amount.
4. only the income made from an asset divided by the initial investment amount.

QUESTION 5

Which of the following types of business entities would be best positioned to obtain large
amounts of financing from public sources (i.e. not banks)?

1. sole proprietorship
2. public company
3. private company
4. partnership

QUESTION 6

Calculate the future value of R13 500 if it was saved in a bank account that pays 4% compound
interest per annum for a period of 8 years.

1. R 4 975
2. R 9 864
3. R 17 820
4. R 18 475

QUESTION 7

You want to open a savings account for a young relative so that he will have some money to
start out with when he turns 18.
At the moment he is 8 years old. You want him to receive R95 000 when he turns 18. If you
were to invest a lump sum in a savings account for your relative, how much would you need to
invest if the account pays 6% compound interest per annum?

1. R 33 283
2. R 53 048
3. R 56 230
4. R 170 131

QUESTION 8

You borrowed R5 000 from a friend six years ago. She asked for 7% simple interest per year on
the loan.
You now have to repay the loan with the interest, as agreed. How much interest will you pay?

1. R 2 100
2. R 2 504
3. R 7 100
4. R 7 504
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QUESTION 9

You are presented with two investment options, one where interest is compounded monthly and
the other where interest is compounded annually.
The first option (Option A) is over 2 years and pays 12% interest compounded monthly.
The second option (Option B) is over 2 years and pays 12% interest compounded annually.
Calculate the future value of both investments and choose the most correct option below if you
have R1500 000 to invest.

1. Option B should be chosen as it has a future value of R1881 600, which is higher
than Option A.
2. Option A should be chosen as it has a future value of R1904 602, which is higher
than Option B.
3. Option B should be chosen as it has a future value of R1881 600, which is lower than
Option A.
4. Both options are equal as the interest rate is the same.

QUESTION 10

If a person invested R200 000 ten years (all full years) ago and it is worth roughly R430 000
today, what was the growth rate on the investment?
(Choose the nearest option, rounded to the nearest full percentage. Assume annual
compounding.)

1. 1%
2. 8%
3. 9%
4. 12%

QUESTION 11

What will the future value of an annuity be if it has yearly payments of R10 000 for 8 years at an
interest rate of 5% compounded annually?

1. R 14 775
2. R 80 000
3. R 84 000
4. R 95 491

QUESTION 12

What is the present value of an annuity that has payments of R5 000 each year over a period of
10 years at an interest rate of 7% compounded annually?

1. R 2 542
2. R 35 118
3. R 50 000
4. R 69 082

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QUESTION 13

A share of Pigeon Soup Limited was given to you by a benefactor. You expect that you will be
able to sell it for R180 in three years time. It is expected that the share will pay dividends as
follows: In year 1, R10; year 2: R12; year 3: R15.

How much would the share be worth today if you were to buy it, assuming a required rate of
return of 10%? (Hint: Calculate the NPV of the cash flows.)

1. R 135,24
2. R 165,52
3. R 182,10
4. R 217,00

QUESTION 14

Which one of the following statements describes the process of capital budgeting best?

1. Planning for short-term expenditure on operational activities.


2. The spending of excess funds on purchases for operational activities.
3. Planning for long-term expenditure on fixed assets.
4. The spending of borrowed funds on current assets.

Use the following information to answer questions 15 to 19:

Pigeon Runners Limited is considering replacing a packaging machine.


The company has to decide between two mutually exclusive options regarding new machines.
The two machines have different expected cash flows but similar lifespans.
Below are the cash outflows and inflows associated with each machine:

Year Type of cash flow Machine A Machine B


0 Purchase price R 500 000 R 600 000
0 Installation costs R 200 000 R 150 000
1 Inflows R 100 000 R 100 000
2 Inflows R 150 000 R 200 000
3 Inflows R 175 000 R 200 000
4 Inflows R 200 000 R 250 000
5 Inflows R 250 000 R 200 000

The company has a cost of capital of 5% and also uses this as its discount rate.

QUESTION 15

Calculate the net present value (NPV) for machine A and choose the nearest correct option.

1. R 42 886
2. R 175 000
3. R 242 886
4. R 542 886

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QUESTION 16

Calculate the net present value (NPV) for machine B and choose the nearest correct option.

1. R 61 792
2. R 200 000
3. R 211 792
4. R 661 792

QUESTION 17

Calculate the internal rate of return (IRR) for both machines and choose the correct option,
indicating the IRRs and which of the two options would be preferable based on IRR only.

1. Machine A IRR: 6,90%; Machine B IRR: 7,66%; Machine A should be chosen.


2. Machine A IRR: 6,90%; Machine B IRR: 7,66%; Machine B should be chosen.
3. Machine A IRR: 18,87%; Machine B IRR: 15,60%; Machine A should be chosen.
4. Machine A IRR: 18,87%; Machine B IRR: 15,60%; Machine B should be chosen.

QUESTION 18

Parrot Pies Limited is considering purchasing a new machine that fills pies with meat products.
The company believes that an acceptable payback period for any investment should be less
than five years.
The financial manager has estimated that the machine will generate the following cash inflows:

Year Cash flow


1 R 40 000
2 R 10 000
3 R 20 000
4 R 50 000
5 R 60 000

If the machine costs R150 000 today, what will the payback period for the machine be and
should the company buy the machine?

1. 4,17 years. The company should buy the machine.


2. 4,17 years. The company should not buy the machine.
3. 4,5 years. The company should buy the machine.
4. 4,5 years. The company should not buy the machine.

QUESTION 19

A company is evaluating two possible projects to undertake.


The following cash flows are expected for the two projects:

Project 1 Project 2
Year 0 (purchase price) R 500 000 R 600 000
Average yearly inflow (for 20 years) R 75 000 R 90 000

The company has a policy of only accepting projects with a payback period of less than 6 years.
Calculate the payback period for both projects and choose the correct option, indicating the
answers and indicating which project/s the company should choose.
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1. Project 1: 6,67 years; Project 2: 6,67 years. Both projects are acceptable.
2. Project 1: 6,67 years; Project 2: 6,67 years. None of the projects are acceptable.
3. Projects 1: 20 years; Project 2: 20 years. Both projects are acceptable.
4. Project 1: 20 years; Project 2: 20 years. None of the projects are acceptable.

The following information is of relevance for questions 20 to 26:

A business that sells appliances is currently working on their cash budget.


The business had the following sales from November 2014 to February 2015:

November December January February


R 180 000 R 200 000 R 150 000 R 120 000

The financial manager of the business expects the following sales over the next four months:

March April May June


R 180 000 R 200 000 R 220 000 R 240 000

The financial manager has compiled the following information from past sales data:

15% of sales are done in cash and the remainder is sold on credit
Credit sales are collected as follows:
10% in the month of sale
20% one month after the month of sale
50% two months after the month of sale
20% three months after the month of sale

Use this information to answer questions 20 to 26.

QUESTION 20

How much was the cash sales for the month of February 2015 only?

1. R 12 000
2. R 18 000
3. R 22 500
4. R 30 000

QUESTION 21

Calculate the credit sales from March 2015 that will be collected in May 2015.

1. R 27 000
2. R 30 600
3. R 76 500
4. R 90 000

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QUESTION 22

Calculate the credit sales from April 2015 that will be collected in May 2015.

1. R 30 000
2. R 34 000
3. R 44 000
4. R 85 000

QUESTION 23

Calculate the total credit sales made in June 2015.

1. R 36 000
2. R 187 000
3. R 204 000
4. R 240 000

QUESTION 24

Calculate the total cash collections from credit sales for the month of March 2015.

1. R 15 300
2. R 27 000
3. R 133 450
4. R 160 450

QUESTION 25

Calculate the total amount of cash collected in June 2015 (from cash and credit sales).

1. R 20 400
2. R 36 000
3. R 173 400
4. R 209 400

QUESTION 26

What percentage of cash from the credit sales of February 2015 will be collected in May 2015?

1. 0%
2. 15%
3. 20%
4. 50%

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Use the following information to answer questions 27 to 29:

Parrot Pies Limited has the following information pertaining to the compilation of their cash
budget. Use this information to answer questions 27 to 29.

The company purchases 100% of its stock on credit.


Purchases for the months of March, April and May 2015 are expected to be as follows:

March April May


R 280 000 R 190 000 R 310 000

The company pays for purchases as follows:


40% in the month of purchase
60% one month after the month of purchase
Every month, the company pays R5 000 for electricity.
Wages amount to R50 000 per month.
Rent on a shop is R60 000 per month.
Assume that these are the companys total expenses.

QUESTION 27

What amount of cash will be paid in April for credit purchases made in March?

1. R 112 000
2. R 168 000
3. R 280 000
4. R 283 000

QUESTION 28

What amount of cash will be paid in April for purchases made in April?

1. R 76 000
2. R115 000
3. R 168 000
4. R 190 000

QUESTION 29

What will the total cash expenses in April be?

1. R 115 000
2. R 168 000
3. R 244 000
4. R 359 000

QUESTION 30

If a business has a cash balance of R200 000 on 1 January 2016, what will the closing balance
at the end of January 2016 be if the business had the following cash income and expenses
during the month?

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Total cash income R 500 000
Total cash expenses R 400 000

1. R 300 000
2. R 400 000
3. R 700 000
4. R1 100 000

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ASSIGNMENT 02 Due date: 7 August 2015

Unique number: 614764

Aim: To evaluate your knowledge of some of the fundamental aspects of:

investments in working capital: accounts receivable management (study unit 5)


investments in working capital: inventory management (study unit 6)
financial ratio analysis (study unit 7)
leverage in financial management (study unit 8)

Answer the following questions and submit your assignment at https://my.unisa.ac.za or in hard
copy.

This is a written assignment comprising six questions that are in total worth 50 marks.

[Questions 1 to 3 revise the study units covered in Assignment 01. The reason for the
inclusion is so that feedback can be given on the topics, as Assignment 01 consists of
MCQs while the exam paper has to be answered in writing.]

QUESTION 1 (4,5)

Pigeon Proofing Limited sells pigeon deterrents. All of its sales are on credit.
Sales for the past three months were as follows:

April May June


R 200 000 R 250 000 R 180 000

It is expected that sales for the next three months will be as follows:

July August September


R 160 000 R 220 000 R 240 000

Cash from credit sales are collected as follows:

30% is collected in the first month following the month of sale.


20% is collected two months after the month of sale.
The balance is collected three months following the month of sale.

Required:

Calculate the cash receipts from credit sales for the months of July, August and September.

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QUESTION 2 (2)

You just received a bonus at work of R50 000.


You decide to invest it in a fixed-term deposit account that pays 8% interest compounded
annually. The term of the deposit is 5 years. How much will you have in the account at the end
of the term?

QUESTION 3 (1,5)

You are faced with two investment options for a fixed deposit that you want to make over a term
of 8 years:

Option A pays simple interest of 6% annually.


Option B pays compound interest of 6% compounded annually.

Which of the two investment options would pay more over time and why?

QUESTION 4 (11)

Francois operates a dress shop that sells frilly dresses.


As dresses are expensive, Francois sells only on credit to give his customers time to pay him
back. His shop has access to a bank account where it can earn 8% interest annually on any
excess funds invested in the account. Francois is planning for the coming year. He is
reconsidering his credit standards as he feels he can boost sales by adjusting it.
Currently the situation regarding his credit customers is as follows:

Sales are expected to be R300 000 for the coming year.


Variable costs associated with sales are equal to 70% of the sales amount.
The average collection period (ACP) with the current standards will likely be 45 days, as
it has been in the past.
Bad debts are expected to be 4% of sales.

Francois expects some changes if he changes his credit standards and expects the situation
regarding his credit customers to change as follows:

Sales are expected to increase to R380 000 under the proposed standards.
Variable costs will still be 70% of sales.
The ACP should increase to 60 days.
Bad debts will increase to 6% of sales.

Required:
Calculate the effect this will have on earnings before interest and tax, and advise whether you
think it is a good idea or not. (Assume a 365-day year.)

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QUESTION 5 (18)

Use the information below to answer questions 5.1 to 5.4:

Donald started a new business last year. Currently he is working on estimates for the coming
year, taking into account what he has learned so far.
His business sells tractor tires to farmers and industrial clients. He is currently determining key
factors for his inventory management for the coming year.

He expects sales of R8 400 000 in the coming year. His tractor tires sell for R14 000 each and
the variable costs associated with each sale are expected to be R10 000.
Donald has added together the total cost of placing an order with a supplier and estimates the
cost to be R5 000 per order.

He has also looked at past invoices and delivery notes and determined that his supplier takes
15 days to deliver new stock after it was ordered.

As the tires are very big, it costs the business R500 to carry one unit of stock per year.
Donald has also estimated that his fixed costs for the coming year will be R1 950 000.

QUESTION 5.1 (5)

Calculate the economic order quantity for Donald's business.

QUESTION 5.2 (3)

Calculate the reorder point in units for Donald's business.

QUESTION 5.3 (5)

Calculate the break-even point in rand for Donalds business.

QUESTION 5.4 (5)

Calculate the degree of operating leverage for Donald's business using the information given.
(Use his expected sales point.)

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QUESTION 6 (13)

Below is an extract from the financial statements of Pigeon Proofing Limited.:

Extract from the statement of comprehensive income:

Sales R 800 000


Cost of sales R 320 000
Operating expenses R 70 000
Interest R 50 000
Tax R 60 000
Net profit R 300 000

Extract from the statement of financial position:

Total assets R 4 800 000


Total liabilities R 3 600 000

Required:

Calculate the following ratios:

a) Gross profit margin (2)


b) Return on equity (2)
c) Debt ratio (2)
d) Times interest earned ratio (3)
e) Net profit margin (2)
f) Return on assets (2)

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FMA401V/101

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)

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Question 2 (7)

2.1 Jersey Limited is a manufacturer of milk bottles. The following information is obtained from
its 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 reorder 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 the breakeven point (in units) of Sun Manufacturing Limited be for the year? (3)

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FMA401V/101

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 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

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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)

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FMA401V/101

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 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.

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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.

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FMA401V/101

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

CF (R) PVIF PV of CF (R)


0 -65000 1 -65000
1 13000 0.935 12155
2 18000 0.873 15714
3 19000 0.816 15504
4 14000 0.763 10682
5 14000 0.713 9982

Calculator -R 956,57 Tables -R 963

Do not invest in the machine as it has a negative NPV.

Question 1.2

Calculator: Tables:
PV = R14 000 R14 000 x 2.011 R28 154
I = 15
N=5
so
FV = R28 159

Question 1.3

Calculator: Tables
FV= R450 000 R450 000 x 0.712 R320 400
N=3
I = 12
so
PV = R320 301,11

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Question 1.4

Calculator: Tables:
PMT = R5 000 R5 000 x 26.21 R131 050
N = 13
I = 11
FV = R131 058,19

Question 1.5

Calculator: Tables:
PMT = R22 000 R22 000 x 4.799 R105 578
N= 8
I= 13
so
PV = R105 572,95

Question 2.1

EOQ =

or

EOQ =

EOQ = = =

= 12 909, 95 12 910

Question 2.2

Reorder level in units


Average usage = 500 000 / 360 = 1388.889 1 389
Reorder point = waiting time x average usage
= 4 days x 1 389 units = 5 556 units

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FMA401V/101

Safety stock + reorder point = 4 000 + 5 556 = 9556 units

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%

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Question 4.4

ROE = Net profit equity


= 100 500 204 910
49.0%

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

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FMA401V/101

Question 5

April May June


Opening balance 20 000 42 300method 79 900method
Sales cash 44 000 40 000 48 000
sales credit 55 800 60 600 63 000
Other cash 10 000 12 000 11 000
Total income method 109 800 112 600 122 000
Total expediture 87 500 75 000 75 000
Purchases credit 55 000 45 000 40 000
Sundry expensesmethod 7 500 5 000 10 000
Salaries 20 000 20 000 20 000
Rent 5 000 5 000 5 000
Closing balance method 42 300 79 900 126 900 method

Cash sales January February March April May June


60000 48000 54000 66000 60000 72000

Credit sales
April May June
January 6000half
February 9600half 4800half
March 27000half 10800half 5400half
April 13200half 33000half 13200half
May 12000half 30000half
June 14400half
Total 55800 60600 63000

Credit purchases
April May June
March 30000half
April 25000half 25000half
May 20000half 20000half
June 20000half
Total 55000 45000 40000

Sales: cash
April May June
April R 110 000 44000
May R 100 000 40000
June R 120 000 48000

-33-
9 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 a written exam 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 attain at least 40% in order to qualify for admission to the supplementary
examination. Details about the procedure and cost for re-marking examination scripts may be
found on myUnisa (https://my.unisa.ac.za).

10 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?
Please use myUnisa (https://my.unisa.ac.za) to rectify any mistakes. Alternatively, send
an e-mail to econ@unisa.ac.za or mail us a letter addressed to The Registrar, PO Box
392, Unisa, 0003. Please remember to quote your student number in all correspondence.
What must I do to obtain items that were out of stock when I registered?
Please use the internet facility at https://my.unisa.ac.za to download copies of any of the
study material. Alternatively, send an e-mail to despatch@unisa.ac.za. Please remember
to quote your student number in all correspondence. Please 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. Please do not call us to
request an extension for the submission of 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?

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FMA401V/101

The assignment marks do count towards the final marks, as explained in this tutorial
letter.
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, all assignments must either be submitted via myUnisa or posted. Assignments e-
mailed 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 returned to the postal address that you indicated. Please 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?
Any requests for aegrotat examinations must be done in writing and directed to the Head:
Examinations, Box 392, Unisa, 0003 or exams@unisa.ac.za. 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%. Any enquiries in this regard must be directed to the
Head: Examinations, Box 392, Unisa, 0003 or exams@unisa.ac.za
What will happen if I do not write any of the papers during the supplementary
examination?

-35-
In such a case you will have to obtain a registration form, complete it, pay the required
fees and register again.
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. Please 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.
You will be given the opportunity to sit for the next formal, written examination at the next
exam opportunity or, if you require a later opportunity, your lecturer can give you a
portfolio of evidence to complete. Please note that due to the time frame in early January
before the supplementary examination, students who qualify for both the FI concession
and the supplementary examination are usually referred to the supplementary
examination. If you prefer to do the portfolio, you will need to 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 provide support to you regarding the content of the
module. Arrangements regarding support from your lecturer will be communicated to you
in an e-mail to your myLife e-mail account if you choose the portfolio of evidence.
Will the alternative assessment be easier than writing the exam?
Please 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, usually the October / November exam, then as a
FI concession student you get one more opportunity for assessment, by means of either
the supplementary examination or the portfolio. If you fail the supplementary examination
or portfolio, you need to register for the module again. Remember, the FI concessions
are not a guaranteed pass; in fact, many students are unsuccessful.

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FMA401V/101

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 completion of the examination period.
Please 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?
Please 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 Unisas Despatch Department. Please send an
e-mail to despatch@unisa.ac.za 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?
Please 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. Please send an e-mail to
econ@unisa.ac.za. Alternatively, mail a letter addressed to The Registrar, Box 392,
Unisa, 0003. Please remember to quote your student number in all correspondence.
8 ACCOUNTS
What do I do if I do not agree with my account statement?

Please send a letter addressed to The Head, Student Accounts, Box 392, Unisa, 0003.
Alternatively, send an e-mail to finan@unisa.ac.za.
Please provide a copy of your receipt(s), deposit slips or electronic funds transfer (EFT)
as proof of payment as well as your student number.
Will the payment immediately appear on my account statement?
Your payment will only reflect on your next account statement.

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SECTION B: ACADEMIC MATTERS
1 THE PRESCRIBED BOOK
May I use any alternative books?
We strongly recommend the use of the prescribed book. You are welcome to consult
additional reading material, but the examination paper is based on the prescribed book.
Which specific pages do I need to study and which can I leave out?
The chapters that need to be studied are indicated in your study guide. The study guide
will indicate if any pages may be left out. You need to focus on achieving the learning
outcome statements.
Could you highlight the most important aspects of each chapter?
Some students are inclined to study only the most important aspects. This may prove to
be disastrous in the examination. All aspects of the prescribed chapters identified by
means of the learning outcome statements should be regarded as important for the
examination.

2. CALCULATORS

Am I allowed to use a calculator?


Yes. In fact, we encourage you to use a financial calculator.

I have a scientific calculator. Will it be sufficient for this paper?

No. Please use a financial calculator.

Which calculator is prescribed or recommended?


We recommend the use of the HP10B II or HP10BII+.

Am I allowed to use a programmable calculator in the exam?


No.

3 SUPPLEMENTARY BOOKS AND VIDEOS


Are there any supplementary books and videos which I can use?

No supplementary books and videos are prescribed.


I would like to do some additional exercises and calculations. Could you provide me with
the tutorial letters of 20..?
Because of limited storage space at Unisa, no tutorial letters from previous years are
kept and/or made available to students. Visit myUnisa for additional resources, if
available.
4 CONTACT WITH FELLOW STUDENTS
I wish to contact other students enrolled for this module in my area. Please provide me
with their contact details.

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FMA401V/101

Contact may be established with fellow students at the discussion forum at myUnisa. Due
to the constitutional right to privacy, we may not disclose the details of students to their
fellow students.
5 EXAMINATION
Are any previous examination papers available?
Previous examination papers are available on myUnisa, but no memoranda are made
available to students. Questions that appeared in previous papers will not necessarily be
repeated in subsequent examination papers, and students are warned not to rely on
previous examination papers in order to pass the module.
What will the format of the examination paper be?
The format of the examination paper will be confirmed in one of the tutorial letters
(normally Tutorial Letter 201) which will be sent to you during the semester.
Will the examination paper contain any theory questions or will there only be calculations
and interpretations?
Most of the questions involve theory, applications, calculations and interpretations.
Will all the equations be provided as an annexure to the examination paper?
The equations will not be provided as part of the examination paper. You must be able to
apply the equations in the exam. No marks are awarded for quoting equations in the
examination script.
If I study only the assignment questions, will I be adequately prepared for the
examination?
No. It is unlikely that you will be adequately prepared by studying only the assignment
questions. These questions represent a sample of the work and cannot be regarded as
being representative of all the study material.
Can you give me the scope of or any hints for the exam?
No hints are provided to students. Please do not call the lecturers about the scope of
or hints for the exam. Base your preparation for the examination on the learning
outcome statements.

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11 CONCLUSION
This tutorial letter provides you with the purpose and outcomes of the module, the contact
details of the lecturer(s), module-related resources and student support services.
It is important that you now prepare a study plan and devote 240 hours to this module in order
to achieve success in the examination.
Details of your assessment have been provided, including your assignments for the
semester/year.
Some frequently asked questions (FAQs) have been provided in order to save you a telephone
call or e-mail.

Best wishes

Your lecturers

UNISA 2014

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