UNIVERSITY EXAMINATIONS, UNIVERSITEITSEKSAMENS ed ==, UNISA lezen: MAC2602 OctoberNovember 2018 Principles of Strategy, Risk & Financial Management ‘echniques Durston 2 Hows 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 ‘temoved from the examination venueUNIVERSITY EXAMINATIONS UNIVERSITEITSEKSAMENS, UNISA lesen MAC2602 October/November 2018 Principles of Strategy, Risk & Financial Management ‘echniques Duration 2 Hours 100 Maris EXAMINATION PANEL AS APPOINTED BY THE DEPARTMENT Us of a non-programmable pocket calculator permissible Closed book examination ‘This examination question paper remains the property of the University of South Africa and may not be removed from the examination venue ‘This paper consists of 12 pages and interest factor tables A to D on pages lv Table A Present value of R1 aftern years Table B Present value of R1 per annum recewved for n years Table C Future value of RI after n years Table D Future value of Rt 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 write m pencil Ignore value-added tax, capital gains tax and inflation except where indicated in the question A combined final mark of 50% is required to pass this module This final mark 1s calculated as follows (20% - obtained for compulsory assignments 01 and 02) + (80% x mark obtained in this, exammation), subject to a subminimum of 40% for this paper oanens PROPOSED TIMETABLE [Question] Topic He Marks [Mmutes | l 1 [Analysis of financial information & working capital management 22 | 26 2 [Cost of capital & capital structure E 4 25 30 I 3 [Capital nvestment and capital budgeting Poe 40, 4 [Muttipie choice questions 20 24_| too” (720 } [TURN OVER]2 MAC2602 OCTOBER/NOVEMBER 2018 QUESTION 4 (22 marks) (26 minutes) Shoe-String Limited trades in the retail-clothing sector and is listed on the general retail sector of the Johannesburg Securities Exchange (JSE) The company's main focus 1s on young adults between the ages of 20 and 35 years The unaudited financial statements for the period ended 31 May 2018 are shown below Statement of financial position as at 31 May 2018 2018 2017 R’000 R’000 ASSETS Non- current assets 396 224 376 948, Current assets 554921 313.240 Inventory 256 800 “144 000 Cash balances and investments __190518| | ___ 114738 | Total Assets _ 951 145 EQUITY AND LIABILITIES Equity 412651 383.854 Ordinary share captal 98 400 98 400 Accumulated reserves 314.251 | 258451 Non-current liabilities 226 063, 133.895 Long term loan [- 226063) [133 895 Current abihties 312434 202 442 Trade payables 222323] [168209 Accruals and provisions 90 108 34.233 Total equity and labihtes 951 145 690 188QUESTION 4 (CONTINUED) MAC2602 OCTOBER/NOVEMBER 2018 ‘Statement of profit or loss and other comprehensive income for the period ended 31 May 2018 Revenue Cost of sales Opening inventory Purchases Less Closing inventory Gross profit Operating expenses Operating profit before other income, interest and tax Finance charges (net) Profit after interest before tax Tax Profit after tax Additional information 2018 R'000 1.089 829 (675 693) 144 000 788 493, (256 800) 414 136 (225 161) 188 975 (28 256) 160719 (45.000) 115719 1 The company has 98,4 million ordinary shares of R1 each in issue 2017 R'000 977 425 (664 649) 237 600 571.049 (144 000) 32776 (150.408) 162 368 (22.454) ~ 139.914 (9176) 130 738 2 The company launched a new exclusive shoe brand at the beginning of the 2018 financial year which is very popular amongst most young adults 3 The annual sales ocourred evenly throughout the year Of the tumover in 2018, 65% was credit sales This represents a slight decrease from the 70% credit sales in 2017 The financial manager has reviewed the company's credit sales policy and intends to decrease credit sales to 55% of turnover fram 2019 onwards 4 Allinventones are purchased on credit A substantial part of the new shoe brand is imported from China This inventory is ordered in large quantities to save on shipping costs The budgeted tumover of the company 1s R1 307 796 000 for 2019 5 There are 365 days in a year and the company tax rate is 28% 6 You may ignore the impact of VAT 7 The following ratios for the 2017 financial year are also gwen Gross profit percentage Net operating profit percentage Change in turnover from 2016 Return on assets Return on equity (based on closing balances) Inventory turnover (based on closing balances) 32,00% | 16.61% 10,30% 23,53% 36.95% 4,62 times [TURN OVER]4 MAc2602 OCTOBER/NOVEMBER 2018 QUESTION 4 (CONTINUED) REQUIRED a) __ Name three (3) ratios used in financial analysis that are grouped under the category of “Financial markets " a b) Write down the complete formula for the calculation of the return on equity (ROE) (1 mark) AND explain what this ratio measures (1 mark) 2) ©) This 1s a method that breaks down the return on total assets ratio (ROA) into two components - a profit margin and an asset turnover rate Wnte down only the NAME of this method Oy 4) Calculate the following ratios for 2018 (0) Show the formula and detailed calculations (2 marks) (W) State whether the ratio has imcreased or decreased from the previous year (1 mark) (i) Brefyy discuss the possible reason/(s) for the change from the previous year (1 mark) 1) Gross profit percentage (4) 2) Change in turnover (4) 3) Return on assets (a) 4) Inventory turnover (based on CLOSING balances) (4) (Round your final answer to two (2) decimal places) (22 QUESTION 2 (25 marks) (30 minutes) ‘Afru Russian and Chips (Pty) Ltd (‘ARC’) 1s a russian and chips retailer and franchiser founded by the famous Aaron Mokoena in 2010 Since its establishment, ARC has achieved rapid growth Profit levels started to increase and this led to the reduction of the company's debt levels The company Is now working towards its target capital structure (60% 40% debt-to-equity at book values) The current challenges in the South African economy forced ARC to restructure its business and revise its growth strategy Additional information. 4 The company has a beta of 1,4 and a market premium of 5% The next ordinary dividend (Ds) is expected to be R244 per share (2017 R2,26) which is in line with the dividend growth policy 2 The debentures are redeemable after six (6) years and will be redeemed at face value The interest paid on these debentures 1s fixed at R5 200000 per annum However, similar debentures are currently serviced at 8,3% per annum 3. The long-term loan was received from National Empowerment Finance (*NEF") at a 9% per annum interest rate and will be repaid on 30 Apri 2022 The going interest rate on loans similar to that from NEF is 10,5% per annum [TURN OVER]5 MAC2602 OCTOBER/NOVEMBER 2018 QUESTION 2 (CONTINUED) 4 Salient information as at 30 Apni 2018 ‘Current share price ROT.54 Yield on RSA retail bonds ~ risk-free (%) 7,50 Prime lending rate (%) 10,75 Corporate taxation rate (%) 28,0 5 The total equity and liabilities of the company are as follow EQUITY AND LIABILITIES R Equity 80 799.000 Ordinary share capital (40 cents per share) [6 000 000 Retained income ) 72799000 Non-current abilities 135 299 000 Debentures {57600 000 Long-term loan 70 200 000 Deferred tax 7 499 000 Current habilities, 32020000 Trade and other payables 28 211 000 Provisions 3.809 000 Total equity and lrabilities “248 118 000 REQUIRED a) Calculate the cost of equity of Afru Russian and Chips (Pty) Ltd (‘ARC’) by using () Gordon's Growth model and (4) (i) The capital asset pricing model (CAPM) 8) Show the formulas used as well as detailed calculations (Round your fmal answer to ONE decimal place ) b) Calculate the market value of debentures as at 30 Apni 2018 You may use either the mathematical formula or the financial calculator Show the formula used (mathematical formula) as well as detailed calculations or al the financial calculator mputs (Round your final answer to the nearest Rand ) 6) ©) Caloulate the market value of equity as at 30 Apri 2018 (2) [TURN OVER]6 MAc2602 OCTOBERINOVEMBER 2018 QUESTION 2 (CONTINUED) d) Calculate the cost of debt to be used in the calculation of the weighted average cost of capital (WACC) for () the debentures and a) (the NEF long-term foan (ty ‘Show detailed calculations and round your final answer to one decimal place €) Calculate the weighted average cost of capital of Afru Russion and Chips (Pty) Ltd (‘ARC") based on market values at 30 Apni 2018 You can use either the mathematical formula or the table format Show your detailed calculations and round your final answer to two decimal places (8) (25) QUESTION 3 (33 marks) (40 minutes) This question consists of three (3) independent parts, Part A to Part C PART A (5 marks) () Practical examples of types of capital expenditure decisions (@) Bloom Limited is currently in the process of entering into a new market with a new product Ater their board of directors approved the proposal to manufacture the new product, they started to build a new manufacturing unit REQUIRED Is this expenditure an expansion, a replacement or an upgrade/major repawr? ay () While busy with production the machine used in production by Tiger Limited, breaks down ‘The machine was acquired the previous year when the production started, but it now needs to be restored to its previous working conditions, REQUIRED: Is this expenditure an expansion, a replacement or an upgrade/major repair? a) (©) Wingzy 1s a vehicle manufactunng company On their tenth birthday celebrations, they Identified a few captal projects They want to revamp their current factory to restore the asset to its previous condition and output with new technology REQUIRED: Is this expenditure an expansion, a replacement or an upgrade/major repair? a [TURN OVER]7 MAC2602 OCTOBER/NOVEMBER 2018 QUESTION 3 PART A (CONTINUED) (i!) The following list are examples of capital budgeting techniques (methods) - Profitability Index (Pl) - Payback Period - internal Rate of Retuen (IRR) - Accounting Rate of Return (ARR) + Net Present Value (NPV) REQUIRED ‘Which two (2) techniques (methods) listed above are NOT considered to be profitability techniques (methods) Q) (5) PART B (16 marks) Tshabala Green Solutions 1s evaluating capital investment options and needs to decide between equipment Super and Advanced The following information regarding the equipment to be considered for capital investment is avaiable | Equipment | SUPER | ADVANCED { R R Cost price 210000| 192.000 | Working capital required 30.000 25 300 Net operating income before tax (including depreciation) 45.000 94 200 | Realisable value at end of useful Ife : 7 Useful hfe 6 years 6 years Additional information 1 Taxation + Wear and tear allowances are allowed by SARS on the straight-line method at 20% par annum, on the cost of the asset ‘+ Normal income tax rate 1s 28% 2 In determining net operating income, depreciation was taken into account The accounting policy of the company 1s to provide for depreciation over the useful Ife of the asset 3. Management requires an 18% after-tax return on all capital investments, 4 Assume that all cash flows occur at the end of each year, except the initial capital outlays, which ‘occur at the beginning of year 1 REQUIRED {a) Use the information regarding equipment ADVANCED and calculate the amount of taxation that should be taken into account for each year Show detailed calculations of the whole taxation calculation @) ITURN OVER]8 MAC2602 OCTOBER/NOVEMBER 2018 QUESTION 3 PART B (CONTINUED) (b) Use the taxation amounts calculated in (a) above together with information regarding all cash 1m and outflows in order to arrive at the net cash flow after tax for each year for equipment ADVANCED ‘Show detailed calculations of how you amved at the net cash flow after tax for each year (5) (c)_ Use the net cash flow afler tax for each year (as calculated in (b)) and calculate the Net Present Value (NPV) of equipment ADVANCED at the required ciscount rate of 18% Then, based on your NPV calculation of equipment ADVANCED, advise whether equipment ADVANCED should be considered by management and motivate your recommendation [if you make use of a financial calculator to calculate the NPV, you should show your mputs ] (3) (d) Calculate the Internal Rate of Return (IRR) of equipment SUPER by interpolating between 18% and 20% ‘The NPV of equipment SUPER was already correctly calculated by the financial manager as R9 301 at an 18% discount rate and -R3 198 at a 20% discount rate Clearly show the formula you used for interpolation as well as a detailed calculation of the IRR (4) [Calculations must be rounded off to the nearest rand and percentages to two decimals] (16) PART C (12 marks) The Professional Printing Company (Pty) Ltd uses machine OXFORD in their printing processes The financial manager did some research on a new type of printing machine, CAMBRIDGE, that will decrease the overall expenses and thereby increase net income The financial manager has compiled the following information regarding the equipment Machine ‘OXFORD | CAMBRIDGE existing | _ new Cost price R80 000 000 | R950 00 000 Book value - Current R40 000 000 - Tax value - Current ? : Market value — Current R15 000 000 = Realisable value at end of useful life NIL NIL Useful fe - Orginal 6 years S years - Remaining 3 years : ‘Annual net cash flow before tax lR467 000000 | Re16 666667 Annual depreciation R13 333 333_|R316 666 667 [TURN OVER}9 MAC2602 OCTOBER/NOVEMBER 2018 QUESTION 3 PART C (CONTINUED} Additional information 1. The rate of company taxation is 28% VAT can be ignored 2 Wear and tear allowances are allowed by SARS on the straight-ine method at 25% per annum, (on the cost of the asset 3 Annual depreciation calculated on the straight line method on the cost of the machine over its useful fe Depreciation 1s not included in annual net cash flow before tax given above 4 Management requires a return of 17% on capital projects of this kind 5 Assume that all cash flows occur at the end of the year concerned, except initial capital outlays, which ocour at the beginning of the year 6 New Cambridge printing machine Machine CAMBRIDGE Years (Cost price = R950 million) 7 2 3 R R R [Net cash flow per year from operations before tax | 816666667 | 816 656 667 | 616 666 667 (excluding depreciation) let cash flow per year from operations after tax | 654500000 | 654500000 | 721 000.000 (excluding depreciation) resent value discounted at 17% 859.401 150 } 478 112 250 | 450 192 400 resent value discounted at 50% 436 355 150 | 290.859 800 | 213 632 300 ‘axation amount i 162 166667 | 162 166.667 | 95 666 667 REQUIRED. (@) Calculate the scrapping allowance forfeited as a result of not selling the existing machine, (b) (c} (a) OXFORD, at the beainning of year 4 (Year 41s year 1 of the capital budget) (3) ‘Show the taxation calculation for all three years of the capital budget of the existing machine, OXFORD, ff the company decides to sell it Determine the tax that should be deducted for each of the three years (4) Use the information regarding the new CAMBRIDGE machine from the table of correct Information given under point 5 of the additional information to calculate the net present value (NPV), discounted at 17% (3) Use the information regarding the new CAMBRIDGE machine from the table of correct information given under point 5 of the additional information to calculate the Internal rate of, Return (IRR) by using your financial calculator Show your financial calculator inputs @ (12) [Work to four decimals and round your finat answer to the nearest rand J [33] QUESTION 4 (20 marks) (24 minutes} ‘This question consists of ten multiple-choice questions Each question must be considered independently, except where specific reference Is made to information in another question ITURN OVER]10 MAC2602 OCTOBER/NOVEMBER 2018 QUESTION 4 (CONTINUED) Each question has only one correct answer, and the marks per question (4 1 - 4 10) are indicated in brackets after each question Please answer the ten questions in your examination answer book and list the question numbers below ‘one another, from 4 1 — 4 10, with your corresponding answer next to it, for example 41 (a) 42 (bo) The questions are as follows 4.1 Which of the following statements are charactenisties of strategie objectives? (1) Ithas no time frame in which the target is to be achieved (2) Itinspires changes in the organisation (3) {tis a precise formulation of the goals to be achieved (4) It contains a target to be achieved a) Statements (1) and (3) b) Statements (1) and (4) ©) Statements (2) and (4) d) Statements (3) and (4) @) 42 Which of the following statements do NOT form part of Porter's five forces that shape industry competition? (1) Bargaining power of buyers (2) Bargaining powers of shareholders (3) Threat of new entrants (4) Rivalry among new competitors a) Statements (7) and (3) b) Statements (1) and (4) 6) Statements (2) and (4) d) Statements (2), (3) and (4) 2 43 Which of the following statements are TRUE? (1) Due to the difference in cost of the various forms of finance, obtaining finance in the right proportions from the different sources 1s important (2) Money for long-term expansion should be raised through the money market (3) Money raised by issuing shares 1s equity financed and money used from the retained earnings is debt financed (4) The extent to which the suppliers of an organisation offer trade credit, will determine the creditor's financing of working capital a) Statements (1), (2) and (3) b) Statements (2) and (4) ¢) Statements (1), (3) and (4) d) Statements (1) and (4) 2) [TURN OVER]" MAC2602 OCTOBER/NOVEMBER 2018 QUESTION 4 (CONTINUED) 44 45 46 47 48 ‘With regard to the relationship between risk and return, which ONE of the following statements is FALSE? a) Some investments have low risk and therr return is also lower b) The level of risk does not determine the level of return ©) A comparison chart of risk and return shows that the higher the potenttal return, the higher the risk 18 as well d) The higher return required, the more nisk must be undertaken 2) ‘Which legislation, institute or report requires the board of directors to disclose how the board has satisfied itself that nsk assessments, responses and interventions are effective? a) King Iv b) Companies Act ¢) The Institute of Risk Management d) CIMA Q) Strategie nsk 1s influenced by some factors Which of the following factors influence strategic risk specifically? (1) General state of economy and actions of competitors (2) Industries within which the organisation operates. (3) Spectfic stage of the product's life cycle (4) Unreliable financial and non-financial information (5) Loss of key-person risk, human error and fraud a} Statements (1), (2) and (3) b) Statements (2), (4) and (5) ©) Statements (1), (3) and (4) 4) Statements (1), (2) and (5) @ Porta Chem (Pty) Ltd is a chemical company that manufactures acids Some of the acids are then sold to swimming pool companies, etc The site manager of the chemical processes decided to dump the waste (which still contans a high percentage of acid) in an underground borehole What kind of risk is Porta Chem facing? a) Environmental nsk b) Compliance risk c) Reputation nsk 4) Allof the above @ What is the risk identification method called that analyse the legal, ecological, technological, social, economic and politcal factors that could affect an organisation? a) Diagnostics method b) Fish bone method ©) Five Forces Mode! d) PESTEL analysis (2) [TURN OVER}12 MAC2602 OCTOBER/NOVEMBER 2018 QUESTION 4 (CONTINUED) 49° Bitinvest Ltd is currently examining a new project that has currency risk involved The deciine of the Rand has a negative impact on the cash inflows from the project Ifthe likelihood of this sk 1s 3 (can occur at some time and may be difficult to control) and the impact rating 1s 5 (Impact of the risk wil threaten the survival or viablity of the company), what wall the nsk type, and inherent risk rating be? a) Financial nsk, 8 b) Operational nsk, 15 ©) Financial risk, 15 d) Operational nsk, 8 2 4.10 Isotech Ltd is currently in process of compiling thetr risk management strategy Which elements should be included in this strategy according to CIMA’s Official Learning System? (1), How reporting and monitoring take place (2) The risk management is a continuous process (3) The company's preferred option for risk treatment (4) Minimising operational losses (5). ‘The risk profile/nsk appetite of the company a} Statements (1), (2) and (3) b) Statements (1), (3) and (5) ¢) Statements (1), (3) and (4) 4d) Statements (1). 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