UNIVERSITY EXAMINATIONS UNIVERSITEITSEKSAMENS. UNISA lees MAC2602 Mayiuune 2018 Principles of Strategy, Risk & Financial Management ‘echniques Duration 2 Hours 100 Marks EXAMINATION PANEL AS APPOINTED BY THE DEPARTMENT Use of a non-programmable pocket calculator 1s permissible Closed book exam ‘Thus examination question paper remains the property of the University of South Africa and may not be removed from the examination venue [TURN OVER]UNIVERSITY EXAMINATIONS UNIVERSITEITSEKSAMENS. — oy UNISA Ieee MAC2602 Mayline 2018, Principles of Strategy, Risk & Financial Management ‘echniques Duration — 2 Hours 100 Marks EXAMINATION PANEL AS APPOINTED BY THE DEPARTMENT Use of a non-programmable pocket calculator 1s permissible Closed book examination This examination question paper remains the property of the University of South Africa and may not be removed from the examunation venue This paper consists of 7 pages and interest factor tables A to D on pages Hiv Table A Present value of R’ aftern years Table B_ Present value of R1 per annum received for n years Table C Future value of R1 after n years Table Future value of R1 per annum recewed for n years PLEASE NOTE. All questions must be answered and calculations must be shown Ensure that you are handed the correct examination answer book (blue) by the invigilator Each question answered must commence on a separate page Do NOT wnite in pencil Ignore value-added tax and capttal gains tax except where indicated in the question ‘A combined final mark of 50% 1s required to pass this module This final mark is calculated as follows (20% - obtained for compulsory assignments 01 and 02) + (80% x mark obtained in this examination), subject to a subminimum of 40% for this paper PROPOSED TIMETABLE [Question ____Topre Marks | Minutes: 1 __|Muttipfe choice questions 10 2 2 [Cost of capital & capital structure 33 40 '3___|Analysis of financial information & working capital management 20 | 24 4 [Capital investment and capital budgeting [26 31 5 __|fime value of money (at 13 700_[_120 [TURN OVER]2 MAC2602 MAYIJUNE 2018 QUESTION 4 (10 marks) (12 minutes) This question consists of five multiple-choice questions Each question must be considered independently, except where specific reference 1s made to information in another question Each ‘question has only one correct answer, and the marks per question are indicated in brackets after each question Please answer the five questions in your examination answer book and list the question numbers below fone another, from 1 1 ~1 6, with your corresponding answer next to it, for example 11 @) 12 (b) ‘The questions are as follows. 11 The process of selecting and implementing measures to reduce or mtigate sk to an acceptable level is known as a) risk analysis, b) risk monitoring ©) sk response @) sk reporting @ 42 Which one of the following definitions best describes sustainability for businesses? a) All the products, processes and manufacturing activities meet customer needs, while at the same lime treating the environment mn such a manner that if does not decrease the ability of future generations to meet their own needs b) The potential for long-term maintenance of well-being which has environmental and social dimensions ©) Asset of processes, customs, polices, laws and institutions affecting the way the business is managed 4) The growth of an investment in a business The investment can be sold after a few years for a prof 2 13 Which of the following statements are TRUE regarding secondary market transactions in the capital markets? (1) Avery few transactions in the capital market are secondary market transactions and they do not generate cash flow for the organisation (2) The secunties of an organisation are made more attractive to other investors Ina secondary market, thereby increasing the pnce of the securties (3) A secondary market transaction 1s created when a holder of an organisation's secunttes sell the debt securities to another investor (4) The management of an organisation should be aware of the share price as their ‘compensation is often linked to the share price of the organisation (5) The level of the organisation's share price in secondary market transactions will determine how much can be raised by future issues of shares a) Statements (1), (2) and (4) 'b) Statements (2), (3), (4) and (8) ©) Statements (1), (2) (3) and (4) 4) Statements (1), (2), (3) (4) and (6) Q3 MAC2602 MAYIJUNE 2018 14 The following statements regarding factors that vill influence risk are given, (1). The non-compliance with regulations or internal procedures (2) Research and development capacity with the abiity to innovate (3) Business interruptions, such as those due to power failures and no back-up power generators (4). The flexibility of production processes when product specifications alter (5) Actions of competitors (©) Significance of new technology Indicate which combination of the above statements are factors influencing strategic risk a) Statements (2), (4), (5) and (6) ‘b) Statements (1), (2), (5) and (6) ©) Statements (2), (3) (4) and (5) 4) Statements (1), (3), (4), (5) and (8) @) 715 The PESTEL analysis ts a method to identify risks Wich one of the following alternatives: 1s the correct desenption for this analysis? a) Agroup tnes to find a solution for a specific problem or question by gathering a list of Ideas spontaneously contributed by the group b) Techniques involving data collection and could include the survey of stakeholders by intermew or questionnaire ©) The process to break down a business process into ts component parts to examine all the nsks to that process | @). Abbroakdown ofall the potiical, econome, legal, social, technological ane ecological factors that could affect the organisation 2) (10) (QUESTION 2 (33 marks) (40 minutes) “The following information regarcing Foxdean Limiteo’s current financial situation is available Eamings before interest and tax (EBIT) R7 500 000 Number of ordinary shares 700 000 Cost of equity 13% Current market pice per share R38 ‘Current market value of debt 2 800 000 Cost of debt 10% (pre-tax) The current tax rate for companies 1s 28% The company's market 1s stable and they expect no growth 50% of earnings (EBIT) are paid out as dividends Ifthey increase their debt so that their capital structure has 50% debt, the cost of equity will nse to 17, 1% and the effective average interest rate on all debt will nse to 12% (pre-tax) REQUIRED a) Calculate the current market value of the shares of Foxdean Limited @ b) Calculate the total market value of Foxdean Limited Q) ©) Calculate the current weighted average cost of capital (WACC) of Foxdean Limited @) @) Calculate the new weighted average Cost of capital (ACC) of Foxdean Limited if they increase the debt to 50% of thew capital structure (7) ITURN OVER]4 MAC2602 MAYIJUNE 2018 QUESTION 2 (CONTINUED) @) Calculate the value of the 50% equity (Guide use the dividend growth model to determine the market value of the shares, Po) (4) f) Define the following terms (0) Cost of capital (2) (w). Opportunity cost (2) (u) Effective cost of finance (2) {1v) Coupon interest rate (2) (v) Yield to maturity (YTM) (2) (33) QUESTION 3 (20 marks) (24 minutes) This question consists of two independent parts, Part A and Part B PART A (15 marks) ‘The following selected information from the statement of financial position and statement of profit or loss and other comprehensive income for Luhabe Limited for the year ending 30 September 2017 1s available R Share Capital 250 000 Retained earnings 15.000 Sales (70% on credit) 750.000 Gross profit 150 000 Total expenses 53.000 Bank overdraft 12.000 Trade and other creditors 9500 Property, plant and equipment 350.000 Fixed deposit 20000 Inventories. 55.000 Trade and other receivables 25.000 Long-term loan 100 000, Additional information: 1 The opening balances for inventones and trade and other receivables are R50 000 and F100 000 respectively There are 365 days per annum Value added tax (VAT) 1s calculated at a rate of 14% The current company tax rate is 28% The fixed deposit will only be available on 30 June 2018 enon [TURN OVER]5 MAC2602 MAY/JUNE 2018 ial 3 PART A (CONTINUED) REQUIRED Calculate the folowing rts for 2017 i) Show the formula and detailed calculations (x) Brefly explain What the ratio meansiindicates and (Ii) compare it to the industry ratios provides in brackets below and ‘comment thereon a) Acid test ratio (1,5 1) ©) b)_ Debtors collection period (based on closing debtors) (15 days) 6) €) Inventory turnover (based on average inventory) (1,5 times) 8 (15) PART B (5 marks) When considering short-term financing, certain inherent advantages and disadvantages have to be considered REQUIRED: 'Name and discuss three advantages and two disadvantages of short-term financing IWnte your answers under the headings Advantages and Disadvantages ) 6) (20) |QUESTION 4 (26 marks) (31 minutes) Pro-ball Limited is a specialist manufacturer of a vanaty of balls for different kinds of sports such as netball, soccer and rugby ‘They are currently using an existing cutting and stitching machine in the manufacturing of soccer balls An improved cutting and stitching machine for the manufactunng of soccer balls was launched at an international far for manufacturers of sporting equipment in Beri Germany This improved cutting and stitching machine 1s expected to have a production capacity that 's 15% more than that of the existing machine for the period of the useful Ife of the new improved machine ‘The following information regarding the existing and the new improved machines is available Existing | New improved Cost price 1320000} 1.600 000} Cost to attend the intermational fair 35 009] Current Book value 792 000) + Curtent Tax value 660 000] | Current Market value 800 000} 4 Realisable value (end of useful life) Ni 500 000) Useful life = Initial 5 years| 3 years| = Remaining | 3 years| ; ‘Annual production - Maximum production (batches) 5600) 6 440] = Maximum sales (batches) 5 600 6 440) [TURN OVER]6 Mac2602 MAYIJUNE 2018 QUESTION 4 (CONTINUED) The following expected economic conditions, estimated costs and additional information should be taken into account Vanabie ] Fixed cost per year j Selling price | Direct material] manufacturing | (excluding Years per batch cost perbatch | cost per batch __| depreciation) R R R R | Yeari 6.000. 2.000. 2520 850 000 | Year 2 6600 2.200 2772 901 000 | (Year 3 7260 2.420_ 3.049) "955.000 | Additional information 1 The annual production and sales for the existing as well as the improved machine wall be imited to the maximum annual production capacity (batches) The economic climate 1s such that the maximum annual production 1s expected to be sold 2 Annual wear and tear allowance for taxation purposes are calculated according to the straight line method at 25% per annum on the cost of the asset 3 Depreciation is calculated over the useful Ife of the asset and the realisable value should be taken into account ‘The present rate of company taxation 1s 28% and value added tax (VAT) can be ignored Management requires a retum of 16% after tax on capital projects of this nature Assume that all cash flows, except initial capital outlays, which occur at the beginning of the year, ocour at the end of the year concerned 7 The net present value (NPV) of the existing machine was already correctly calculated as R12 733 375, oan REQUIRED a) Use the Net Present Value method to determine the net present value (NPV) of the new improved machine Show clearly how you calculated the net present values of the cash flows after tax for each year and the NPV by using factors from the tables provided [Execute your catculations to the nearest rand, and round off all factors to three decimal places ] (15) b) Advise whether the existing machine should be replaced by the improved machine or not Motwvate your recommendation 2 ©) Brefly give the definttion or explanation of what the Payback method entails, 2 6) Calculate the payback pentod for the new improved machine @ @) Supply two (2) disadvantages of the payback method 2 f) Supply the formula and use the profitabilty index (P!) method to calculate the PI of the new improved machine Recommend whether the new improved machine should be bought, based on the PI ratio that you calculated @ (26) QUESTION 5 (11 marks) (13 minutes) 2) Which factor table (Table A, 8, C or D) will you use when you want to obtain the factor for calculating the present value of an ordinary annuity? a b) White down the complete formula that you will use to perform an extrapolation calculation (1) [TURN OVER]9 4) e) 7 MAC2602 MAYIJUNE 2018 QUESTION 5 (CONTINUED) Calculate the future value of R1 300 that was deposited in a bank account and earns compounded interest of 11% annually after two (2) years? Show detailed calculations @ ‘Susan invested an amount of money at 9,5% compound interest She will receive R7 600 per annum for an indefinite period Calculate the present value of the amount that Susan invested ‘Show the mathematical formula and detailed workings [Round your final answer to the nearest rand } ® Company X will be renting out their office space in Cape Town for a period of three (3) years ‘They will receive RASC 000 per year The first payment will be due now, and the remainder of the payments at the beginning of each of the following two years Calculate the present value of the annuity received in advance Use a discount rate of 9% ‘Show the mathematical formula and detailed workings [Use four decimal places for your calculations and round your final answer to the nearest rand} (4) my TOTAL [100] [TURN OVERTtyano Nani T zoo freoa [isu 08 jaro [ten fecz'o o love tooo jesoro four fooc'e oc loo |i00@ [soo love seve jieeo 8 00° |io0'0 zoo'e neo feet'o feet‘ & 009 [i000 zoo" cro froco Jurca z 000 [ove zoo ere feeco [tec & 100% ovo [zoo jeoo.9 forvo leczo ose x 000 ove [cove [root fasva jipco foct'o ® oo' zoo; jeooe [soo joave [zer0 & ov cova [roo [sco frove. jase'o z jroo Jeon |s00% feoo'o fess [sez a leov' ‘sooo |.oo'» Jov0' zo leie'o josw 0 % ovo zone [eon jz100 ee |iceo suv & fso00 {oro [eto jsioe loceo Jose's [revo a lsoxe zr00 [sig |ozo'e laze izeo fers a foo |stoo eso jsz00 lzeeo [reco freso a bio c0'0 lsice [avo [sss'o Pn si09, £00 lovee ferro Juss * isco oso Jasco jssr0 [tos'o a loo 20°0 wec'e [cero sce a lieve jsioo leewe eso foso n leo leevo jass'o [ousto leva loos less feov'a listo jorsia use jsez'o kero lost lees'o fase'o fossa Kove leszo 30 froco jose leze'o lsieo esto Jer'o feewo oro lise'0 lsexo feevo foswo ‘sov0 003.9 frexo fore fosw'o jers'o jor lisvo jose [ere bens frsvo loco Jere [eoe'o \ | suse | xo } mez | aise } sese | save | wee | vice | ver | var | sess | suen j voen | vor | ie | mo | som) ne | mt UVVE NUN IWWLSS/ONVAINO 1a NVA SCUVWM SOIGINN | SUVSA N UALav Givd/GSAaoay Fe AO AN IVA INASAYd Visaviv a avi 102 ANNIYAWN ZOSZOWW.‘TagA0 NunL) pore r are bee ese'et lesoe "1 ese'es ese" beret sores + fezo'ss lere'st lens ieee fszost looses reves lssoze heres eats lowes coro frog ics pce hive lace ieoos. lees sry bese Bue eo eas. 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