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Financial Management I
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This study guide highlights key focus areas for you as a student. Because the field of study in question is so
vast, it is critical that you consult additional literature.
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CONTENTS
1. WELCOME TO REGENESYS ........................................................................................................................ 1
2. TEACHING AND LEARNING METHODOLOGY ............................................................................................ 2
2.1 PRINCIPLES FOR RESPONSIBLE MANAGEMENT EDUCATION .................................................. 2
2.2 REGENESYS’ INTEGRATED LEADERSHIP AND MANAGEMENT MODEL ................................... 4
2.3 THE QUINTUPLE BOTTOM LINE ..................................................................................................... 5
2.4 DEVELOPING REGENESYS' GRADUATE ATTRIBUTES ............................................................... 7
3. KEY TO ICONS .............................................................................................................................................. 9
4. STUDY MATERIAL ....................................................................................................................................... 10
5. PRESCRIBED RESOURCES ....................................................................................................................... 10
5.1 BOOKS ............................................................................................................................................ 10
5.2 ARTICLES........................................................................................................................................ 11
5.3 MULTIMEDIA ................................................................................................................................... 12
5.4 ACCESSING JOURNAL ARTICLE AND OTHER ONLINE LINKS .................................................. 13
5.5 ADDITIONAL SOURCES TO CONSULT......................................................................................... 14
6. INTRODUCTION TO THIS COURSE ........................................................................................................... 15
6.1 LEARNING OUTCOMES ................................................................................................................. 15
6.2 FINANCIAL MANAGEMENT............................................................................................................ 17
6.2.1 DEFINING FINANCIAL MANAGEMENT ............................................................................... 17
6.2.2 WHO IS THE FINANCIAL MANAGER?................................................................................. 17
6.2.3 CORE FUNCTIONS OF THE FINANCIAL MANAGER ......................................................... 18
6.2.4 DECISION-MAKING .............................................................................................................. 19
6.2.5 THE FINANCIAL PLANNING PROCESS .............................................................................. 22
6.2.6 KEY POINTS ......................................................................................................................... 26
6.3 COLLECTING AND REPORTING OF RESULTS............................................................................ 27
6.3.1 ACCOUNTING RECORDS .................................................................................................... 27
6.3.2 FINANCIAL STATEMENTS ................................................................................................... 29
6.3.3 KEY POINTS ......................................................................................................................... 43
6.4 ANALYSING FINANCIAL STATEMENTS........................................................................................ 44
6.4.1 FINANCIAL ANALYSIS APPROACH .................................................................................... 44
6.4.2 COMPARATIVE ANALYSIS .................................................................................................. 46
6.4.3 GRAPHS AS AN ANALYTICAL TOOL .................................................................................. 46
6.4.4 INDEX ANALYSIS ................................................................................................................. 48
6.4.5 COMMON SIZE ANALYSIS................................................................................................... 49
6.4.6 AN INTRODUCTION TO RATIO ANALYSIS ......................................................................... 50
6.4.7 CATEGORIES OF RATIOS ................................................................................................... 51
6.4.8 FEEDBACK FROM SIYANDA ............................................................................................... 60
6.4.9 LIMITATIONS OF RATIO ANALYSIS .................................................................................... 61
6.4.10 KEY POINTS ......................................................................................................................... 63
6.5 TIME VALUE OF MONEY................................................................................................................ 64
6.5.1 WHAT IS THE TIME VALUE OF MONEY? ........................................................................... 64
6.5.2 WHEN WOULD A FINANCIAL MANAGER USE TIME VALUE OF MONEY? ...................... 65
6.5.3 HOW DO WE CALCULATE THE TIME VALUE OF MONEY? .............................................. 65
6.5.4 KEY POINTS ......................................................................................................................... 72
6.6 FINANCING DECISIONS................................................................................................................. 73
6.6.1 INTRODUCTION TO COST OF CAPITAL ............................................................................ 73
6.6.2 WEIGHTED AVERAGE COST OF CAPITAL ........................................................................ 74
6.6.3 KEY POINTS ......................................................................................................................... 79
6.7 BUDGETS, VARIANCE ANALYSIS AND CASH PLANNING .......................................................... 80
6.7.1 BUDGETING.......................................................................................................................... 80
6.7.2 COST ACCOUNTING TERMINOLOGY ................................................................................ 81
6.7.3 VARIANCE ANALYSIS .......................................................................................................... 82
6.7.4 CASH PLANNING.................................................................................................................. 84
6.7.5 KEY POINTS ......................................................................................................................... 85
6.8 CAPITAL BUDGETING (LONG-TERM INVESTMENTS) ................................................................ 86
6.8.1 AN INTRODUCTION TO CAPITAL BUDGETING ................................................................. 86
6.8.2 WHEN DO WE USE CAPITAL BUDGETING? ...................................................................... 86
6.8.3 CAPITAL BUDGETING TECHNIQUES AND CALCULATIONS ............................................ 87
6.8.4 IMPORTANT CAPITAL BUDGETING CONCEPTS .............................................................. 91
6.8.5 KEY POINTS ......................................................................................................................... 92
7. REFERENCES ........................................................................................................................................ 93
8. GLOSSARY OF TERMS ......................................................................................................................... 97
9. APPENDIX 1: QUESTIONS AND ANSWERS....................................................................................... 100
10. APPENDIX 2: USERS OF FINANCIAL STATEMENTS ........................................................................ 106
11. APPENDIX 3: PRESENT AND FUTURE VALUE TABLES ................................................................... 106
12. SELF-ASSESSMENT QUESTIONNAIRE ............................................................................................. 114
13. VERSION CONTROL ............................................................................................................................ 115
List of Tables
List of Figures
“Have a vision. Think big. Dream, persevere and your vision will become a reality.
Awaken your potential, knowing that everything you need is within you.”
Dr. Marko Saravanja
At Regenesys we help individuals and organisations achieve their personal and organisational goals
by enhancing their management and leadership potential. Our learning programmes are designed
to transform and inspire your mind, heart and soul, helping you to develop the knowledge, skills,
positive values, attitudes and behaviours required for success.
Having educated more than 100 000 students based in highly reputable local and international
corporations across more than 160 countries since the inception of Regenesys in 1998, we are now
one of the fastest-growing institutions of management and leadership development in the world. Our
ISO 9001:2008 accreditation bears testimony to our quality management systems meeting
international standards. We are also accredited with the Council on Higher Education.
At Regenesys you will be taught by business experts, entrepreneurs and academics who are inspired
by their passion for human development. You will be at a place where business and government
leaders meet, network, share their experience and develop business relationships.
We will help you awaken your potential and to realise that everything you need to succeed is within
you. And we will be with you every step of the way.
Areas of Expertise
Regenesys uses an interactive teaching and learning methodology that encourages self-reflection
and promotes independent and critical thinking. Key to our approach is an understanding of adult
learning principles, which recognise the maturity and experience of participants, and the way that
adult students need to learn.
At the core of this is the integration of new knowledge and skills into existing knowledge structures,
as well as the importance of seeing the relevance of all learning via immediate application in the
workplace. Practical exercises are used to create a simulated management experience to ensure
that the conceptual knowledge and practical skills acquired can be directly applied within the work
environment of the participants. The activities may include scenarios, case studies, self-reflection,
problem solving and planning tasks.
Our courses are developed to cover all essential aspects of the training comprehensively in a user-
friendly and interactive format. Our subject matter experts have extensive experience in
management education, training and development.
Regenesys upholds the UN Global Compact’s Principles for Responsible Management Education:
(PRME, 2014:1)
These principles provide a foundation for doing business responsibly and sustainably, and –
exercised in a culture of integrity – set the stage for long-term success (UN, nd).
This course will draw on a model developed by Regenesys Management, demonstrating how the
external environment, the levels of an organisation, the team and the components of an individual
are interrelated in a dynamic and systemic way. The success of an individual depends on his or her
self-awareness, knowledge, and ability to manage these interdependent forces, stakeholders and
processes.
The degree of synergy and alignment between the goals and objectives of the organisation, the team
and the individual determines the success or failure of an organisation. It is, therefore, imperative
that each organisation ensures that team and individual goals and objectives are aligned with the
organisation’s strategies (vision, mission, goals and objectives, etc); structure (organogram,
decision-making structure, etc); systems (HR, finance, communication, administration, information,
etc); culture (values, level of openness, democracy, caring, etc). An effective work environment
should be characterised by the alignment of organisational systems, strategies, structures and
culture, and by people who operate synergistically.
While Regenesys’ Integrated Leadership and Management Model demonstrates the interconnected-
ness of the individual with organisational layers and the broader environment, the quintuple bottom
line draws attention to the interrelationships between the actualisation of organisational purpose,
and people, planet, and prosperity, given the organisation’s ability to pivot.
• Is your organisation’s influence on people and planet bearable for all affected?
• Is the value created by your operation shared in an equitable way?
• Is the organisation’s balance between consumption and prosperity viable?
Once the answer to all three questions is yes, the organisation should be sustainable.
In other words, how is achieving the organisation’s purpose going to affect people, the planet and
its profit or prosperity requirements? All are inextricably linked. And much depends on the
organisation’s ability to pivot.
As a business student you have the capacity to bring about real change. As much as
businesses are shaped by their environment, their actions influence the environment.
You can contribute to sustainable change by managing responsibly.
Getting a qualification is not enough, on its own, to prepare you to traverse the rapidly changing
world of work, where industry 4.0 and 5.0 are rendering many professions obsolete. We will work
with you throughout your studies to help you develop these critical attributes to navigate the new
world order, along with the skills and knowledge you need to excel in any environment.
Think differently
Both well-informed and knowledgeable, you must be committed to sound research, taking a
multidisciplinary and metacognitive approach to problem-solving, and able to recognise and put
aside personal bias, basing decisions on evidence. This will prepare you to take calculated risks.
This ties back to the overarching P in the quadruple bottom line: purpose. Purpose-driven, you put
sustainability at the heart of your organisation. Emotionally and spiritually intelligent, you should be
self-aware, understand the interconnectedness of all things, and act ethically and with integrity. As
an ideal graduate, you will be a service-oriented agent of change.
Harness diversity
You appreciate the value of individual differences. Socially intelligent, collaborative and a skilled
communicator, you should be able to facilitate connections to build, empower and manage high-
functioning teams with diverse skills and personalities, and support them in assuming
responsibilities.
Professional comportment
With a confident and inspiring aura, you are utterly professional, yet accessible. Deliberate,
determined, disciplined, and focused. You will model your values, and hold yourself accountable.
You will have the resilience and grit to keep going in the face of adversity.
Your glocal outlook underpins your ability to operate and compete ethically and profitably as a
responsible global citizen in a borderless world. Your multicultural awareness and wide-ranging
interest in current affairs enables you to recognise and respond to local cultures and needs without
losing sight of the global picture.
As you work through your course, keep an eye out for each of these icons. They will signal
which of the attributes you are developing as you work through your study tasks.
The next few sections contain practical information that will help you do just that.
Example Calculations
Audio Presentation
Choice Appendix
These resources provide a starting point for your studies. You are
expected to make good use of your textbooks, the additional
resources provided via online links, and wider reading that you, as a
higher education student, will source yourself.
5. PRESCRIBED RESOURCES
5.1 BOOKS
The following textbook is prescribed and should be used to complete the course:
• Stoltz, A., Viljoen, M., Gool, S., Cronje, R. & Meyer, C. 2014, Financial Management: Fresh Perspectives, Cape
Town: Pearson Education.
Please ensure you order or download your textbook before you start the course.
• Titman, S., Keown, A.J. and Martin, J. D. (2020) Financial Management: Principles and Applications, 14th Global
Edition. Pearson International.
• Codible.com. (2012) NPV and IRR in Excel 2010. [video clip], http://m.youtube.com/watch?v=qAhV3xG0i8s
(accessed 13 August 2022).
• Prof Coram. (2011) Calculating FV (future value) time value of money problems using Excel. [video]
https://www.youtube.com/watch?v=AuJvHoypfQU (accessed 13 August 2022).
• Prof Coram. (2011) Calculate IRR using Excel. [video clip], http://m.youtube.com/watch?v=Ug74NbL81CE
(accessed 13 August 2022).
• TempletonIndia. (2015) Understanding asset classes and their types. [video clip]
https://www.youtube.com/watch?v=8g8gPAqFxmM&feature=youtu.be (accessed 13 August 2022).
Most course links should open directly when you click on them, provided your browser is open and
connected to the net. However, to access Emerald and Ebsco articles, you must be logged in to the
student portal, and have the relevant database open.
Click on Tools, Resources, Library, and then on Ebsco or Emerald (whichever you need):
If this does not work (it can depend on what browser you are using), cut and paste the URL (the
www address) into your browser and click to access the link. Use Chrome, Firefox or Safari as your
browser – not Internet Explorer, which is no longer supported by all applications. Check that you
have copied the whole URL, and have not left out part after a hyphen. There should not be any
spaces in the URL – the whole thing should be on one line.
Links to additional media that may prompt discussion and help you complete this course will be
saved in Around the Net, a couple of clicks down from the Ebsco and Emerald database links in
the portal library. Visit the site regularly to see what’s new.
As a higher education student, you are responsible for sourcing additional information that will assist
you in completing this course successfully. Here are sources you can consult to obtain additional
information on the topics to be discussed in this course. You will find more on the portal.
EbscoHost and These online databases contain journal articles, e-books and multimedia relevant to your
Emerald studies. Registered Regenesys students in good standing can access them through the
student portal.
NetMBA MBA constructs and discussion. http://www.netmba.com/
MindTools Ideas, constructs, management models and commentary. http://www.mindtools.com/
ProvenModels Provides management models – generalisations of business situations that, when applied in
context, can be powerful tools for solving business problems.
http://www.provenmodels.com/
12manage.com More models, principles and global commentary. http://www.12manage.com/
The Free Comprehensive overviews of strategic planning.
Management Library http://managementhelp.org/strategicplanning/index.htm
TED TED (Technology, Entertainment and Design) is a nonprofit organisation that devotes itself
to spreading new, transformative ideas in science, business and global issues, among other
topics. TED’s website will take you to each of the groundbreaking TED Talks, and also to
TEDx, a programme that helps communities, organisations and individuals to create local
TED-like experiences. https://www.ted.com/about/our-organization
A word of caution – not all information available on the internet is necessarily of a high academic
standard. Always compare the information you find with that in reputable sources, such as
articles published in accredited journals.
We have written this course around the story of Nolwazi and her coffee shop, The Zulu Love Bean
(Pty) Ltd. Our aim is to facilitate an applied understanding of financial management theory. While
this case study considers the many financial management responsibilities and decisions that Nolwazi
must make, the principles and processes that you learn here can be readily applied to other
industries.
As with most disciplines, practice makes perfect. Use the opportunities provided in this study guide
and the prescribed materials to develop your financial management skills.
To facilitate your learning we have included a glossary of terms at the end of the study guide.
Read the case study below, as reference will be made to this case throughout the guide.
Nolwazi is the proud owner of a coffee shop in Johannesburg called The Zulu Love Bean (Pty) Ltd.
The coffee shop sells a variety of coffees on the go, and its own house brand of coffee beans.
Since Nolwazi has been so successful with her coffee shop in Johannesburg, she is thinking of
expanding the business by opening a second shop in Cape Town (calling this one The Sea Bean to
better suit the location).
Nolwazi has employed a financial manager, Siyanda, to help her make the best decisions for her
growing business. Nolwazi wants to know more about how Siyanda is going to help her grow the
wealth of her business.
• Chapter 1 in Stoltz, A., Viljoen, M., Gool, S., Cronje, R. & Meyer, C. (2014) Financial
Prescribed textbook
Management: Fresh Perspectives. Pearson Education.
• Chapter 1 in Titman, S., Keown, A.J. and Martin, J. D. (2020) Financial Management:
Additional textbook
Principles and Applications, 14th Global Edition. Pearson International.
In this section we look at who the financial manager is and the importance of planning and
Section overview decision-making in financial management, the aim of which is to maximise owner and or
shareholder wealth.
It requires “planning, organising, directing and controlling the financial activities such as procurement
and utilisation of funds of the enterprise. It means applying general management principles to
financial resources of the enterprise.” These activities include making decisions on investment,
raising finance, and distribution of profit (Management Study Guide, 2013).
The main goal of a business is to make a profit for the owners (or shareholders). A financial manager
is a professional person who has sufficient knowledge of economic and accounting systems to
enable him or her to assist the owners in achieving their main goal.
Economic systems: “Deeply rooted in all economic issues is the fundamental objective of making
the best use of scarce resources. In financial management, the scarce resource is financial capital.”
Accounting systems: Used to standardise reporting so that the financial manager can analyse and
interpret the results of the business.
(Correia et al, 2007)
The financial manager is responsible for three main functions (Stoltz , 2007), namely:
For example, Siyanda starts by showing Nolwazi how best to raise money in order to expand her
business to Cape Town (financing role). He explains that there are three different ways in which to
raise money, namely (Stoltz et al, 2007):
• Using the reserves of the company from profits already generated in her Johannesburg shop
(equity);
• Issuing shares (equity); or by
• Securing long-term loans (liability).
“Equity is the residual interest in the assets of the entity after deducting all of its liabilities”
(Equity = Assets – Liabilities).
(IASB, 2014)
Therefore, if The Zulu Love Bean (Pty) Ltd has more money than it does debt, Nolwazi could use
these reserves to buy her coffee shop in Cape Town.
“A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.”
(IASB, 2014)
Therefore, if Nolwazi decides, with Siyanda’s help, to borrow money to buy her coffee shop in Cape
Town, this would be a liability for her company, which would have to be repaid at a future date.
Siyanda must assist Nolwazi decide whether or not to buy a coffee shop in Cape Town (investment
role). He explains to her that she should buy an investment only when the return on the investment
is greater than the cost of the funds needed to buy the investment (Stoltz et al, 2007).
If Nolwazi buys the coffee shop in Cape Town, through the company, then the company would have
invested in further assets, such as the building, the furniture, the coffee machines, etc.
“An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.”
(IASB, 2014)
Siyanda points out to Nolwazi that the activities in the investment and financial roles are reflected in
the statement of financial position and those of the operations role reflect in the statement of
comprehensive income. Both financial statements are discussed later.
6.2.4 Decision-making
In a small company such as The Zulu Love Bean (Pty) Ltd, where the business consists of Nolwazi
and a few employees, all the decisions made are in line with increasing the wealth of Nolwazi, the
owner. However, in a much larger and more complex organisation, decisions made may not always
achieve this same goal. Two theories best explain this:
• Agency theory: “Recognises that people will make decisions in their own [best] interests,
while these will, to a large extent, be congruent with the interest of the firm, there are
occasions when this will not be so.” For example, consider that the financial manager is
rewarded for short-term profits only. To ensure short-term profits he instructs production to
cut down on routine repairs and maintenance. This shortens the life of the machines and
costs the company more money in the long term (ie diminishes the wealth of the owners).
• Signalling theory: “Because management is removed from the shareholders [or owners]
and other analysts, it is not always possible to communicate the state of the firm to those
interested parties in ways that are meaningful or credible to them. As a result, users look for
signals from management about the true state of the firm. For example, an increase in
dividend per share may be seen as a signal that an increase in earnings is sustainable.”
(Correia , 2007)
“Decisions cannot be taken in isolation, since they will invariably have consequences for several
functional areas throughout the organisation” (Correia , 2007). The following theory best describes
three levels of decision-making:
Strategic management: “Each organisation should function in terms of a clear sense of purpose.”
Strategic management is recognising a goal, setting the objectives, knowing what the company’s
present position is and generating different strategies to achieve the objectives. For example,
resources must be put in place to pursue a chosen strategy.
Management control: Management control systems are structures that are put in place to ensure
that the strategies, as mentioned above, above are effectively and efficiently applied. An example is
management reward systems, which encourage activities such as instituting reporting systems and
investigating variances on exception reports.
Operational control: “Operational control is the process of ensuring that the day-to-day operations
of the organisation are carried out efficiently and effectively.” An example of this is the management
of cash balances.
(Correia , 2007)
(Correia , 2007)
Several financial models, tools and techniques are explained throughout your recommended
textbook and in this study guide. These combine to assist the financial manager in making decisions
that increases the wealth of the owner and or shareholders. Examples include:
• Model – the capital asset pricing model (a model that describes the relationship between risk
and expected return);
• Tool – cash flow (a tool that helps management to manage the in and outflows of cash); and
• Technique – goal setting (setting of SMART goals discussed in 7.1.5).
Even though there are limitations to using models, tools, and techniques for decision-making (eg
time taken to collect and analyse data), there are also advantages (eg reducing risk, more accurate
information). One such advantage is the ability to perform sensitivity analysis based on data
collected. Sensitivity analysis is a process of calculating alternatives to determine how risky a
decision might be.
• Chapter 6 in Stoltz, A., Viljoen, M., Gool, S., Cronje, R. & Meyer, C. (2014) Financial
Management: Fresh Perspectives. Pearson Education.
Other important concepts in financial management for evaluating risk are standard deviation and
coefficient of variation. Standard deviation is a popular statistical indicator used to indicate the risk
attached to an asset. It is an indication of the dispersion around the expected value. The coefficient
of variance also measures dispersion, but it considers the expected rate of return.
Refer to your prescribed textbook for more detailed explanations of these concepts:
• Chapter 6 in Stoltz, A., Viljoen, M., Gool, S., Cronje, R. & Meyer, C. (2014) Financial
Management: Fresh Perspectives. Pearson Education.
Explain, in your own words, how sensitivity analysis can assist Nolwazi in making her decision to open a second shop
in Cape Town based on two possible locations. Use the analysis grid below to assist you in your explanation.
Location Range
A 24% to 16% = 8%
B 30% to 10% = 20%
Remember that “financial management is the total planning and control of all the financial aspects
of the organisation” (Correia et al, 2007). Financial planning provides the financial road map for
guiding, co-ordinating, monitoring and controlling the organisation’s actions to achieve its short and
long-term goals.
The financial planning process, in its simplest forms, is shown in the six-step process in Figure 3.
(1) Set financial goals: Set SMART goals according to the strategic direction and needs of the
organisation.
(2) Gather relevant data: Collect financial data and information for effective planning. Ensure
the data collected is current, accurate, reliable, and specific to the needs.
(3) Analyse data: Analyse and interpret data – draw conclusions and make recommendations.
(4) Recommendation of financial plan: Develop a draft plan and present to management. Be
open to suggestions and possible changes. Make changes where required.
(5) Implementation of financial plan: Implementation of the plan is the responsibility of the
financial manager and his or her team. Policies, processes, and action plans (including
targets, resources, responsible persons, completion dates, and authorities) contribute to the
effective and efficient implementation.
(6) Monitoring of financial plan: Review the plan regularly against the set goals. Determine
variances (the differences between planned and actual figures). Continue unchanged if the
desired results are being achieved, or recommend changes where required.
• Siyanda presents his draft financial plan to Nolwazi. He is open to her inputs.
• Nolwazi reviews Siyanda’s plan using what she has learned about sensitivity analysis and
revises the plan to show a more aggressive increase in sales.
• Nolwazi and Siyanda now sit down together to refine their short- and long-term planning
before they implement their plan – specifically the inputs and outputs required (discussed
below).
• Nolwazi makes a note to review the financial management policies and procedures that will
help them to implement their plan, and the controls that will help them to know if they are
achieving the desired results.
Short-term planning
Short-term planning are goals set for the next one to two years. Examples of short-term planning
include:
• Inputs: sales forecasts, production plans, capital expenditure plan and any other related
operating and financial data; and
• Outputs: Operating budgets, and projected financial statements.
Long-term planning are goals set for the next three to five years. We provide you with more on capital
budgeting as part of long-term planning in Section 7.6. Examples of long-term planning include:
• Inputs: Strategic goals, proposed capital expenditure, major sources of available funding,
research and development activities, termination of existing projects, repayment of
outstanding debt, and planned acquisitions; and
• Outputs: Long-term financial plan including long-range forecasts and goals (a forecast is an
estimation of major revenue and expenditure items that are used to provide a detailed budget;
the budget assists the organisation in achieving its goals; Section 7.5 deals with budgeting).
The sum of all short-term activities must result in achieving long-term goals. This may mean that the
long-term plan may require the completion of a sequence of short-term plans. The most common
example is the annual budget, which acts as a link between the current year and future years.
“Financial planning is not an absolute science; it works towards target figures, yet needs to retain
the flexibility to react to unforeseen circumstances and to take advantages of opportunities.
Deviations from the target are perfectly acceptable, but they should be made deliberately and in the
full knowledge that there is a deviation from the target” (Correia et al, 2007).
Financial Planning
1. What are the consequences of Nolwazi and Siyanda not implementing a financial planning process?
2. Explain the differences between short- and long-term financial planning. Use examples to support your
explanation.
3. What unforeseen circumstances could occur during the implementation of Nolwazi and Siyanda’s financial plan?
It will help you strengthen and embed your understanding of the course. You will not be able to
change your answers once you have submitted them, so make sure you have completed the
relevant section of coursework first. Where you see Select all that are relevant, be aware that
any number of the options presented could be correct. You will lose marks for incorrect
selections, so choose carefully. Your combined marks from these assessments count towards a
total of 20% of your course mark.
• Chapter 2 in Stoltz, A., Viljoen, M., Gool, S., Cronje, R. & Meyer, C. (2014) Financial
Prescribed textbook
Management: Fresh Perspectives, Cape Town: Pearson Education
• Chapter 3 in Titman, S., Keown, A.J. and Martin, J. D. (2020) Financial Management:
Additional textbook
Principles and Applications, 14th Global Edition. Pearson International.
In this section, we look at financial statements as a requirement for financial reporting, how
Section overview
financial statements should be presented, and key terminology used in reporting.
Financial managers collect the accounting information processed by the bookkeeper and or
accountant during the year, and uses this information to compile financial statements, which can
later be analysed for decision-making. Accounting makes use of the double-entry system: in other
words, for every debit recorded, there is a credit, and vice versa.
If the double-entry system is followed correctly, total equity equals total assets minus total liabilities.
This can also be seen by looking at the statement of financial position, where total assets equal total
equity plus total liabilities. We discuss the statement of financial position later.
or
This is called the accounting equation. It is the most important equation directing the
management to what is happening in the organisation as far as wealth is concerned
Work through the following example, which demonstrates the principle of double entry.
Thabo Moleti has decided to open a business repairing faulty coffee machines. He finds a shop to
rent near his home and opens for business on 1 January 2022. The following transactions took place
during January 2022:
Date Transaction
Jan 1 Owner contributes R7500 in cash to capitalise the business.
Jan 8 Purchased R2500 in coffee-machine parts on account, payable in 30 days.
Jan 15 Paid first month's shop rent of R1000.
Jan 17 Repaired coffee machines for Nolwazi amounting to R1100 (collected R400 in cash; and
invoiced Nolwazi for the remaining R700)
Jan 18 R275 in coffee-machine parts were used.
Jan 25 Collected R425 from customer accounts.
Jan 28 Paid R500 to suppliers for parts purchased earlier in the month.
These transactions affect the accounting equation as shown below. (Numbers in brackets are
negative numbers.)
When an enterprise keeps records accurately, the accounting equation will always be in balance.
The balance is maintained because each transaction has an effect on a minimum of two accounts
in any business. Because the two sides of the equation are affected by each transaction, the
accounting system is referred to as double-entry accounting.
The Companies Act, 71 of 2008, which governs companies registered in South Africa, requires
companies to prepare financial statements within six months of their year-end (Companies Act
Guide, 2008). The financial statements must comply with international financial reporting standards
(IFRS) or IFRS for small-medium-entities (SMEs), depending on the company’s public interest
score.
The public interest score is a points system in which each company is given a score according to
the number of employees, the value of turnover, extent of third-party liabilities and the number of
stakeholders it has.
One point for each employee, one point per R1 million of third-party liability, one point for each R1
million of turnover during the financial year, and one point for every stakeholder.
• If a company scores less than 100 points, it does not have to prepare financial
statements in terms of IFRS or IFRS for SMEs.
• If a company scores between 100 and 349, then it must prepare financial statements in
terms of IFRS or IFRS for SMEs.
• If a company score is 350 or more, it must prepare financials in terms of IFRS (ie IFRS
for SMEs is not permitted).
1. Calculate the public interest score for The Zulu Love Bean (Pty) Ltd if Nolwazi has 20 employees, is the only
stakeholder, her total liabilities are R726 384 and her total turnover is R390 000.
2. Must the Zulu Love Bean (Pty) Ltd have financial statements prepared in terms of IFRS or IFRS for SMEs?
SA GAAP, which was a standard previously used in South Africa for accounting and financial
reporting, was withdrawn on 1 December 2012, so financial statements should no longer be prepared
in terms of SA GAAP. (GAAP stands for “generally accepted accounting principles”.)
IFRS are standards designed to apply to all profit-orientated entities’ financial statements. They are
intended to provide information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making economic decisions. For more
on the users of financial statements, refer to Appendix 2.
Such financial statements are meant to provide users with useful information for making economic
decisions. The users of financial statements are shareholders, creditors, employees, financial
intermediaries (eg banks), and the public at large.
The International Accounting Standards Board (IASB) promotes the use of IFRS for general-purpose
financial statements. The IFRS set out the recognition, measurement, presentation and disclosure
requirements of elements in financial statements. The overriding requirement of IFRS is to provide
financial statements that represent fairly the economic situation of the entity.
US GAAP, which is slowly being aligned to IFRS, are the accounting and reporting standards applied
in the US. It is not necessary for the learning outcomes of this course to know all the differences
between IFRS and US GAAP, but one should know that both exist and there are differences (eg the
terminology used for financial statements).
(Presentation of financial statements, 2011)
(1) A statement of profit or loss and other comprehensive income for the period;
(2) A statement of financial position as at the end of the reporting period;
(3) A statement of changes in equity for the period;
(4) A statement of cash flows for the period; and
(5) Notes, being a summary of significant accounting policies and other explanatory information.
(IASB, 2014)
“A document that summarises all the trading events that affected the wealth of the
business over a specified period.”
(Stoltz et al, 2007)
Previously
called ‘Income
Statement’
Brackets
show a
negative for
accounting
Is 28% of
profit
before
tax
20x2 20x1
(R million) (R million)
Turnover 137 836 129 943
Cost of sales (88 508) (74 634)
Gross profit 49 328 55 309
Other operating income 1 021 635
Operating expenses (25 683) (22 128)
Operating profit 24 666 33 816
Investment income 2 060 989
Finance cost (1 917) (1 145)
Profit before tax 24 809 33 660
Tax (10 480) (10 129)
Profit after tax 14 329 23 531
Noncontrolling interest (67) (1 111)
Preference share dividends (614) (3)
Attributable earnings 13 648 22 417
Ordinary dividends (7 193) (5 766)
Retained earnings for the year 6 455 16 651
(Els, 2010)
Income: “The definition of income encompasses both revenues and gains. Revenue arises in the
course of the ordinary activities of an entity and is referred to by a variety of different names
including sales, fees, interest, dividends, royalties and rent.”
(IASB, 2014)
The revenue of The Zulu Love Bean (Pty) Ltd is the income received from selling the coffees on the
go, and the income from the branded bags of coffee beans.
Gross profit: Is revenue less cost of sales. In order to understand gross profit, it is important to
understand the difference between mark-up and gross margin (ie gross profit is a currency value,
whereas mark-up and margin are percentages). The cost of sales is the direct cost attributable to
the production of products or services sold.
(Investopedia, 2014a)
• The mark-up method refers to an amount added to the cost of a product to determine its
selling price, and is expressed as a percentage of cost of sales.
• The gross margin method is the profit a company makes based on its total revenue, and is
expressed as a percentage of revenue. Consider the example below:
Expenses: “The definition of expenses encompasses losses as well as those expenses that
arise in the course of the ordinary activities of the entity. Expenses that arise in the course of the
ordinary activities of the entity include, for example, cost of sales, wages and depreciation. They
usually take the form of an outflow or depletion of assets such as cash and cash equivalents,
inventory, property, plant and equipment.”
(IASB, 2014)
Before looking at the definition of cost of sales and depreciation it is important to understand the
accrual basis of accounting and the matching principle.
“A system of accounting based on the accrual principal, under which revenue is recognised
(recorded) when earned, and expenses are recognised when incurred.” This contrasts the cash
basis of accounting under which “income is recorded when cash is received and expenses are
recorded when cash is paid out.”
(Business Dictionary, 2014e,f)
For instance, Nolwazi needed some repairs done to a coffee machine in her shop. She asked a
company to repair it for her but was not sure when to record the expense in her books. Let us look
at three different scenarios and the results to help her understand the principle of accrual
accounting and cash basis accounting:
In scenario 1, the repairs were paid for in the same period as they were incurred.
In scenario 2, the repairs were paid for before they were done. The payment was made in advance,
even though the coffee machine was repaired only in December. This was recorded as a prepayment
in November that appears in the current asset section in the balance sheet.
In scenario 3, the repairs were carried out in December and the supplier agreed on 30-day terms
to be paid at the end of January. Even though the payment was made at the end of January, we
record the expense in December. This is recorded in the current liability section of the balance sheet
as an accrued expense.
Table 2 illustrates the accrual basis of accounting considering the three scenarios explained above.
In all three cases the expense should be recognised in December.
Table 3 illustrates the cash basis of accounting. It should be noted that the expense is recorded only
when cash is paid out.
In light of the above, it is clear that according to the accrual basis of accounting the expense is
recognised when incurred (delivery of the service has taken place), while the cash basis of
accounting requires the expense to be recorded when cash is paid out. Accrual accounting is most
used by businesses, whereas cash-basis accounting is mostly used for personal finances.
Matching principle: “The costs incurred in that period should be matched against the revenue
generated in the same period.” The matching principle is part of the accrual basis of accounting.
Nolwazi buys coffee beans from a supplier, then packages them in branded bags to be sold. When
is the cost of the coffee beans recognised in the statement of comprehensive income according to
the matching principle?
November December
Buys coffee beans from supplier Sells coffee beans to customer
Coffee beans form part of inventory The cost of the coffee beans is now recognised in cost of sales
Statement of financial position Statement of comprehensive income
“At a minimum, an entity discloses its cost of sales separately from other expenses.”
(IASB, 2014)
Depreciation: “Is the systematic allocation of the depreciable amount of an asset over its useful
life.”
(IASB, 2014)
Depreciation can be calculated using a straight-line method or the diminishing balance method.
The following example best explains these methods:
Nolwazi bought a coffee machine at the beginning of 2013 for R50 000. The useful life is five years
and therefore the depreciation rate is 20%, as shown in the two methods given in Table 5. The
difference between the two methods is that Nolwazi might believe that the diminished figures of R10
000, R8 000, R6 400, R5 120, and R4 096 are a better representation of the coffee machine over its
useful life.
Year 2 10 000 (50 000 x 20%) 20 000 (50 000 -10 000) x 20% = 8 000 18 000
Year 3 10 000 (as above) 30 000 (50 000 – 10 000 – 8 000) x 20% = 6 400 24 400
Year 4 10 000 (as above) 40 000 (50 000 – 10 000 – 8 000 – 6 400) x 20% = 5 29 520
120
Year 5 10 000 (as above) 50 000 (50 000 – 10 000 – 8 000 – 6 400 – 5 120) x 33 616
20% = 4 096
* AD = accumulated depreciation
• The main difference between the two methods is that in the straight-line method the same
amount is written off each year whereas in the diminishing method, the amount written off
diminishes each year leaving a greater residual amount at the end.
• One would choose the method appropriate to the nature of the asset. For example, if the
economic benefits of the asset are realised equally over the life of the asset, then the
straight-line method is more appropriate.
• Finance costs: This is your interest expense, for example on loans from the bank or
creditors.
• Taxation: The taxation line in the statement of comprehensive income consists of all taxes that the
company must pay, eg company tax. In South Africa taxation is currently charged at 28% on taxable
income and payable to the South African Revenue Service (SARS).
Read the guide to dividends tax issued by the South African Revenue Service (SARS):
Statement of financial position: “A snapshot of the financial position of the business at a specific
point in time.”
(Stoltz et al, 2007)
Previously
called
‘Balance
Sheet
Assets =
Equity +
Liabilities
Non-
current is
greater
than a year
Current is
within a
year
Users of financial statements look at key aspects, for example whether the company is a going
concern; the company’s liquidity position; and the company’s solvency position. What do these
mean?
Going concern: “Financial statements are usually prepared on the assumption that the entity is a
going concern and will continue in operation for the foreseeable future. Hence, it is assumed that
the entity has neither the intention nor the need to liquidate or curtail materially the scale of its
operations; if such an intention or need exists, the financial statements may have to be prepared on
a different basis and, if so, the basis used is disclosed” (IASB, 2014).
Liquidity: “An enterprise’s ability to pay short-term obligations; the term also refers to its capability
to sell assets quickly to raise cash” (Investopedia, 2014b).
Solvency: “A solvent company is one that owns more than it owes; in other words, it has a positive
net worth and a manageable debt load” (Investopedia, 2014b).
Nolwazi asks Siyanda the following questions. Can you assist Siyanda with the answers?
(IASB, 2014)
! !
“Information about the cash flows of an entity is useful in providing users of financial statements
with a basis to assess the ability of the entity to generate cash and cash equivalents and the
needs of the entity to utilise those cash flows.”
(IASB, 2014)
The following terms are important in understanding the statement of cash flows:
Operating activities “Are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities.”
Investing activities “Are the acquisition and disposal of long-term assets and other
investments not included in cash and cash equivalents.”
Financing activities “Are the activities that result in changes in the size and composition
of the contributed equity and borrowings of the entity.”
(IASB, 2014)
Note that the above three activities refer to the opening diagram (Figure 1). Identify the above three
activities in the statement of cash flows below and note the discussion points.
Note that:
Read the 2018 annual report of Famous Brands to gain an understanding of an annual
report and the layout of financial statements:
• Accounting uses the double entry system: in other words, for every debit recorded, there is
a credit, and vice versa.
• The public interest score is a points system whereby each company is given a score based
on the number of employees, the amount of turnover, amount of third party liabilities and the
number of stakeholders that company has.
• IFRS are standards designed to apply to all profit-orientated entities’ financial statements.
• Apart from the Companies Act, there are various other legislation applicable to companies.
• A complete set of financial statements in terms of IFRS consists of:
o A statement of profit or loss and other comprehensive income for the period;
o A statement of financial position as at the end of the reporting period;
o A statement of changes in equity for the period;
o A statement of cash flows for the period; and
o Notes, being a summary of significant accounting policies and other explanatory
information.
It will help you strengthen and embed your understanding of the course. You will not be able to
change your answers once you have submitted them, so make sure you have completed the
relevant section of coursework first. Where you see Select all that are relevant, be aware that
any number of the options presented could be correct. You will lose marks for incorrect
selections, so choose carefully. Your combined marks from these assessments count towards a
total of 20% of your course mark.
• Analyse and interpret financial statements including the statement of financial position,
statement of comprehensive income, and statement of cash flows;
Learning outcomes
• Apply ratio analysis to financial statements; and
• Appreciate advantages and limitations of ratio analysis.
• Chapter 3 in Stoltz, A., Viljoen, M., Gool, S., Cronje, R. & Meyer, C. (2014) Financial
Prescribed textbook
Management: Fresh Perspectives, Cape Town: Pearson Education.
• Chapters 3 & 4 in Titman, S., Keown, A.J. and Martin, J. D. (2020) Financial Management:
Additional textbook
Principles and Applications, 14th Global Edition. Pearson International.
In this section we provide a detailed understanding of ratio analysis, how to calculate and
Section overview
interpret ratios and the advantages and limitations of ratio analysis.
One of the purposes of financial statements is to provide data and information about the enterprise
in terms of its past, present, and future performance. Together with micro and macroeconomic data,
they help users to measure performance against competitors, the industry, and economic conditions.
Collectively, the financial statements, micro and macroeconomic data, and astute analysis of this
data and information provide for effective decision-making.
The statements of financial position, of comprehensive income, and of cash flows are the primary
sources of data (together with their notes and management commentaries).
But remember that financial managers may need more data and information (eg they may need to
drill down into the individual accounts) to draw meaningful conclusions.
• Basis of preparation (eg whether the fiscal year corresponds to the calendar year;
financial statements prepared in terms of IFRS or other standards; consolidated in that
they may include subsidiary companies, etc);
• Policies, methods, and estimates (differences can occur in accounting choices even
though companies use the same set of accounting standards, eg accounting standards
permit flexibility in the accounting of depreciation);
• Financial instruments and risks arising from financial instruments;
• Commitments and contingencies;
• Related-party transactions;
• Subsequent events (events that occur after the statement date);
• Business acquisitions and disposals; and
• Operating segments’ performance.
(Adapted from CFA, 2012a)
• Other companies?
• Previous periods or years?
Compare • The industry and the economy?
• Budgets/targets?
• Short- and long-term plans?
• Is it good or bad?
• Was the result expected?
Evaluate • If bad, why?
• If good, can it be maintained (what can be learned)?
• Who or what is responsible by when?
• Comparative analysis;
• Graphics as an analytical tool;
• Index analysis;
• Common size analysis; and
• Ratio analysis.
Comparative analysis involves comparing changes in the financial statements of the enterprise from
year to year. Most importantly, comparative financial statement analysis discloses trends.
Normally a minimum of five years of financial statements (or data) is needed to analyse in this way.
(Correia, 2007)
Data should ideally be represented graphically, providing a visual overview of trends that are not
easily detectable in tables.
(Macworld, 2013)
Index analysis is like comparative analysis except that a base year is chosen. All the information in
the base year is valued at 100% and the years that follow are presented as a percentage calculation
from the base year (Correia et al, 2007).
For example, if the gross profit of the base year was R80 000 (2011) and the following year (2012)
it was R120 000, then the index analysis would represent the information of the base year as 100%
and of the following year as 150%.
The following simplified income and expenditure statement provides the percentages for 2012 as
compared to the base year 2010.
ABC (Pty) Ltd: Simplified income statement for the year ended 31 December 2012
2012 2010
Base
Turnover 154% 100%
Cost of sales 169% 100%
Gross profit 138% 100%
Marketing and distribution costs 172% 100%
Administration expenses 173% 100%
Other operating costs 184% 100%
Earnings before interest and taxation 77% 100%
Interest payable 175% 100%
Earnings after interest and before taxation 54% 100%
Taxation 53% 100%
Earnings after taxation 54% 100%
Dividends 54% 100%
Retained earnings for the year 54% 100%
Retained earnings at the beginning of the year 168% 100%
Retained earnings at the end of the year 122% 100%
(Adapted from Correia, 2007)
Common size analysis views every individual item in proportion to the rest of the group. The example
following shows a section from the statements of position for two companies (A and B). Company A
is clearly more liquid than B (liquidity is a function of how quickly assets can be converted into cash).
Given that cash yields very little return (eg in a current account) this may not be an efficient use of
excess funds. In analysing the data you might ask why Company A is holding such a large
percentage of its assets in cash. Perhaps Company A is preparing for an acquisition, or it maintains
this cash position as insulation from a particularly volatile operating environment (eg significant
seasonal changes in turnover).
Also note the relatively high percentage of receivables in Company B, which may indicate a greater
proportion of credit sales, or perhaps lower credit or collection standards.
Example of the asset portion of two companies using common size analysis format:
Company A Company B
Percent of total assets Percent of total assets
Cash 38 12
Receivables 33 55
Inventory 27 24
Fixed assets net of depreciation 1 2
Investments 1 7
Total assets 100 100
(CFA, 2012a)
The following information (total assets) for Company Z has been represented using the indexing approach (each item
expressed relative to the same item in period one).
1. Analyse the information. What can you deduce from the information?
2. What trends do you see?
3. What could be contributing to these trends?
4. Explain why indexing (and comparative analysis) provides a useful approach to financial analysis.
Assets Period
1 2 3 4 5
Cash 1.00 0.74 0.69 0.49 0.41
Investments 1.00 7.00 7.00 6.00 4.00
Receivables 1.00 0.93 0.84 1.52 1.80
Inventory 1.00 1.67 2.40 1.67 1.80
Fixed assets net 1.00 2.00 6.00 9.00 8.00
of depreciation
Total assets 1.00 1.04 1.13 1.26 1.34
(CFA, 2012a:346)
“Ratio analysis combines selected figures from financial statements of a business and transforms
them into useful information.”
(Stoltz et al, 2007)
Now that Siyanda has prepared the financial statements as set out and explained throughout Section
7.2, Nolwazi wants to know what these financial statements tell her about her business. Siyanda
therefore must analyse the numbers in the financial statements so that he can provide useful,
meaningful, and relevant information on the company’s results to Nolwazi.
“It is important to note that there is an infinite number of ratios available, however for meaningful
analysis of the company’s results, there should be a clear, direct and understandable relationship
between the two variables.”
(Correia et al, 2007)
Variables are figures taken from financial statements, for example gross profit and sales. When the
two variables are compared (ie the ratio is calculated), this result should be thought through carefully.
For example, if the gross profit margin has declined this could indicate that mark-ups have been
reduced in order to increase turnover.
Ratios can be grouped together into the following categories, each of which is shown in the tables
that follow:
• Profit margin;
• Profitability (return);
• Turnover;
• Turnover time;
• Liquidity;
• Solvency;
• Investment (market value); and
• Cash flow.
Before you familiarise yourself with the categories of ratios, you should note that some textbooks
and websites might still use terms that have changed in international accounting standards. For
example, sales are now referred to as revenue and EBIT is now called operating profit. The
following table illustrates some additional changes:
Should you come across old terms, please refer to the table above to acquaint yourself with the
international term.
Profit margin ratios measure how much profit the company earned from each R1 of turnover.
= 36%
Earnings before interest and tax profit before interest and tax The EBIT margin gives an indication
margin (EBIT) = of how much EBIT was earned for
sales
every R1 in sales made.
118 900
=
390 000
= 30%
Net profit margin (NP) profit after tax The NP margin gives an indication of
=
sales how much NP was earned for every
R1 in sales made.
74 808
=
390 000 The NP margin decreased from prior
year. This could have been due to
= 19% an increased cost of sales, which
could be due to inventory loss or a
weakening of inventory control.
Profitability ratios reflect whether management was able to generate sufficient profit from the
investments.
(Stoltz et al, 2007)
= 6.9%
Return on equity (ROE) profit after tax ROE measures how much
=
total shareholder funds profit after tax was earned from
owners’ funds.
74 808
=
360 516
= 20.75%
“While profit margins express profit in terms of sales, return [ratios] express profit in terms of capital
invested.”
(Stoltz et al, 2007)
Turnover ratios tell us how much turnover the company made for each R1 invested in assets.
= 0.38 times
Current asset turnover (CA) sales The CA ratio shows the efficiency with
=
current assets which the company’s CAs were used to
generate turnover.
390 000
=
56 900
= 6.85 times
= 250 times
Trade payables (TP) cost of sales Measures how many times a year the
=
trade payables company settles its creditors.
250 000
=
8 256
= 30.28 times
Liquidity ratios indicate “whether the firm will be able to meet its maturing financial obligations”.
50 000
=
14 756
= 3.39: 1
“Solvency refers to the company’s ability to meet its financial obligations over the longer term.”
726 384
=
1 086 900
= 67%
Debt to equity ratio total liabilities This shows the capital structure of
=
total equity the company.
726 384
=
360 516
= 201%
Financial leverage ratio total assets Shows the relationship between
=
total equity assets and equity.
1 086 900
=
360 516
= 301%
Finance cost cover (or interest EBIT Indicates by what percentage the
=
coverage) finance cost (interest expense) profit can decrease before the
company can no longer pay its
interest.
“These ratios indicate the relationship of the firm’s share price to dividends and earnings. They are
strong indicators of what investors think of the firm’s past performance and future prospects.”
“Cash flow is the essence of any business. If the cash flow is inadequate, the firm will be unable
to meet its future financial obligations. As a result, most analysts consider the analysis of cash
flow as one of the best indicators of financial stability.”
(Correia et al, 2007)
Based on the above analysis of The Love Bean, Nolwazi asks Siyanda to explain how she could
improve her results for The Love Bean. She also wants to know how this information will help her
when she starts the second coffee shop, The Sea Bean. Siyanda says that the total asset turnover
ratio seems low, but on closer consideration he noticed that property, plant, and equipment (PPE)
make up a significant part of total assets. Included in PPE, is the cost of the coffee shop in Gauteng
(The Love Bean). He suggests that Nolwazi considers leasing the coffee shop in Cape Town (The
Sea Bean) rather than buying it. By leasing the building, Nolwazi will incur an expense rather than
accrue an asset.
Remember from Section 7.1 that an asset is something that is controlled. If it is controlled
by someone outside the organisation it is an expense. Assets – things controlled by the
organisation – are recognised in the statement of financial position, and expenses are recognised
in the statement of comprehensive income.
Remember from Section 7.1 that our objective is to make best use of our scarce resource
– financial capital (equity). Therefore, if trade payables allow a 60-day interest-free repayment
period for example, then we are not making best use of this free capital by settling payables in
only 12 days. The implications of this for business are that the shorter the cycle, the less time
capital is tied up in the business process, which is good for the bottom line (Investopedia, 2014).
This website is useful for finding a similar company in a similar industry to compare
ratios:
“While ratio analysis is obviously a very useful technique for evaluating performance, there are
some limitations that need to be considered before it is applied mechanically. Applying ratio
analysis blindly, using a procedural approach, is dangerous as the effectiveness of the exercise
depends upon the interpretation of the ratios by the analyst.”
(Correia et al, 2007)
• Diversified industries: When comparing the ratios to another company, Siyanda should not
compare Nolwazi’s coffee shop business to a business in a different industry, for example a
bank or a construction company.
• Inter-firm comparisons and different accounting policies: Even though the use of IFRS
assists in standardising accounting policies across different companies, companies can still
to some extent tailor policies to best suit their businesses.
Remember from Section 7.2.1 that a complete set of financial statements includes a summary
of significant accounting policies and other explanatory information.
• Window dressing: While this is not good corporate governance practice, companies may
use certain accounting policies to make their results and ratio analysis appear better.
• Strong and weak points: It is difficult to assess how strong or how weak one ratio is. It is
also difficult to establish if the strong points offset the weak points. For example, would the
satisfactory results of one ratio off set the poor results of another ratio?
• Historical cost basis: Accounting data is reflected at historic cost and therefore not adjusted
for inflation.
Siyanda would like to compare The Zulu Love Bean (Pty) Ltd’s ROA ratio with another
company called Cup and Bean (Pty) Ltd.
Cup and Bean (Pty) Ltd The Zulu Love Bean (Pty) Ltd
Building* Bought in 1998 for R550 000 Bought in 2012 for R1 million
Machinery (coffee Bought in 2010, fully depreciated Bought in 2012, book value at end
machines and by 2014 and therefore no book of 2014 is R30 000
other) value.
Profit after tax for R120 000 R74 808
2014
ROA ratio = 22% = 7%
*Assume for this example that the building is in a similar location and of similar size.
It may seem that Cup and Bean (Pty) Ltd has a much stronger ROA than The Zulu Love Bean
(Pty) Ltd, but on closer inspection you will notice that Cup and Bean (Pty) Ltd’s building was
bought 14 years before The Zulu Love Bean (Pty) Ltd’s building and therefore was bought at a
much lower cost, which affects the ROA ratio significantly. As you know, accounting data is
reflected at historic cost and therefore when comparing the ROA of the two companies one must
be careful of this limitation when interpreting the results.
Attempt the following questions to obtain more insight into financial statement analysis:
1. What does it mean if Nolwazi’s coffee shop has a current ratio of less than 1?
2. Which ratio must Nolwazi calculate to get an indication of the percentage of the sales amount remaining
after the business has paid for its goods?
3. Siyanda explains to Nolwazi that it is important to have positive net working capital value. What does this
mean?
• One of the purposes of financial statements is to provide data and information about the
enterprise in terms of its past, present, and future performance.
• Various techniques can be used to analyse and interpret financial information such as
comparative analysis, graphics, index analysis, common size analysis and ratio analysis.
• Ratios can be grouped together into the following categories:
o Profit margin
o Profitability (return)
o Turnover
o Turnover time
o Liquidity
o Solvency
o Investment (market value)
o Cash flow
It will help you strengthen and embed your understanding of the course. You will not be able to
change your answers once you have submitted them, so make sure you have completed the
relevant section of coursework first. Where you see Select all that are relevant, be aware that
any number of the options presented could be correct. You will lose marks for incorrect
selections, so choose carefully. Your combined marks from these assessments count towards a
total of 20% of your course mark.
Learning outcomes • Explain financial management terminology, concepts and principles (Part 1)
• Chapter 4 in Stoltz, A., Viljoen, M., Gool, S., Cronje, R. & Meyer, C. (2014) Financial
Prescribed textbook
Management: Fresh Perspectives. Pearson Education.
• Chapter 5 in Titman, S., Keown, A.J. and Martin, J. D. (2020) Financial Management:
Additional textbook
Principles and Applications, 14th Global Edition. Pearson International.
In this section we provide a detailed understanding of what the time value of money is, when to
Section overview
use the time value of money, and how to calculate the time value of money.
Why is almost any unit of currency worth more today than in a year’s time? The reason is that if you
invest money today, you will have more money in the future. As an investor you expect to earn
money on your investment in the form of interest or other returns over time.
Time value of money: “Financial managers (and investors) are always confronted with
opportunities to earn positive rates of return on their funds, whether through investment in
attractive projects or in interest-bearing securities or deposits. Therefore, the timing of cash
outflows and inflows has important economic consequences, which financial managers explicitly
recognise as the time value of money. The time value is based on the belief that a rand today is
worth more than a rand that will be received at some future date.”
(Gitman, 2010)
• Investment decisions: A financial manager is required to value projects with cash flows that
will occur at different times. The timing of cash flows is an important element of decisions
such as whether a project is viable or not;
• Financing decisions: In determining how best to finance an investment the financial
manager must calculate time value of money (see Section 7.6);
• Working capital management: You have learnt from Section 7.3 that interest-free trade
payables are “free capital”, and management wants to make best use of this free capital. By
extending the period in which you must settle trade payables, decreasing debtors’ days and
minimising inventory on hand, you have more cash to invest today to have more money in
the future. You can now see why the cash conversion cycle is important; and
• Dividend policy: In the consideration of whether to pay dividends now or at a future date,
management uses time-value-of-money principles.
We begin our study of the time value of money by considering the two views of time value:
• Future value (FV) – value of the cash you will receive at a given future date
• Present value (PV) – cash in your hand today
Present value techniques discount all cash flows to the start of a project or investment (ie time zero
or T0). Conversely, future value techniques determine the accumulated value of all cash flows at the
end of a project (ie Tn).
The future value technique uses compounding to find the future value of each cash flow and then
sums up all these values to find the investment’s future value. Figure 9 demonstrates this with the
arrows denoting the cash flows being compounded and summed up at the end of the project’s or
investment’s life. (Gitman, 2010)
The present value technique uses discounting to find the present value of each cash flow at time
zero. This is depicted by the arrows flowing from each cash flow to the beginning of the project as
shown in Figure 9.
The timeline in Figure 9 shows a project of four years that starts with cash outflow at time zero of
R5 000 (denoted by a minus sign). The positive values show cash inflows.
As you remember, Nolwazi is considering opening a coffee shop in Cape Town (The Sea Bean). A
property is advertised that can be bought for R1 million or leased monthly at R10 000 per month.
Nolwazi has asked Siyanda to help her decide whether to buy or lease the property.
Point to note:
• Nolwazi can obtain a 100% mortgage bond at a rate of 6%, interest compounded monthly;
• The term of the loan is 20 years;
• Property values are expected to rise at 9% per year; and
• Interest is payable at the beginning of each month.
To answer her questions, Siyanda starts with some simple explanations and calculations.
“Future value is the value in rand that an investment or series of investments will grow to over a
stated time period at a specified rate.”
(Correia et al, 2007)
FV = PV (1+i)
FV = 100 x (1 + 0.12)
FV = 100 x 1.12
FV = 112
The interest earned is therefore R12 and the future value of the investment after one year is R112.
If a sum of R100 is invested for three years at 12% compounded interest, what would the future
value be at the end of the three years?
Compound interest is “interest added to the original investment rather than being paid out.”
FV = PV x (1 + i)!
FV = Future value – the amount of cash in the future
PV = Present value – the value of the investment in the beginning
i = Interest rate
n = The number of periods that the investment will receive interest
FV = 100 x (1 + 0.12)"
FV = 100 x (1.12)"
FV = ghi. ji
In order to understand the compound interest the following logic can be applied:
Interest earned in year two is higher than the interest earned in year one because interest has been
earned on the interest from year one that was reinvested (ie interest of 12% was earned on the R12
earned and reinvested from year one). The total interest earned is therefore R40.50 (R140.50 –
R100) and the future value of the investment after three years is R140.50.
The present value is how much we need to invest today to reach a target amount in the future.
Calculating the present value of investments makes it possible to compare investments that have
different income streams and timing of cash flows. The present value of cash flows is similar to
calculating the future value, but instead of referring to “compounding” we refer to “discounting”.
If an investment offers a return of 140.50 in three years’ time at a discount rate of 12%, how much
would have to be invested today?
FV
PV =
(1 + i)!
140.50
PV =
(1 + 0.12)"
PV = R100
Annuity
An annuity is a stream of equal periodic cash flows over a specific period of time. Such flows are
usually annual, but can also occur monthly (eg car payments, mortgage payments, pension fund
payments). These flows may be inflows or outflows.
There are two types of annuities, namely an ordinary annuity (the cash flow occurs at the end of
the period) or annuity due (the cash flow occurs at the beginning of the period) (Gitman, 2010).
With an annuity due, the future value is higher than an ordinary annuity because its annual cash
flows can earn interest for one more year than in the case of an ordinary annuity.
Because ordinary annuities are more frequently used in finance, unless otherwise specified the term
annuity refers to ordinary annuities (as in the example below).
Where:
John wishes to calculate how much money he will receive at the end of five years if he invests in
an ordinary annuity that requires annual payments of R10 000, at the end of each of the five years,
into a savings account paying 10% annual interest.
As the timeline demonstrates, John will have R61 051 in his account at the end of year five. This
method involves finding the future value of each payment and summing them.
Where:
To calculate the present value of an ordinary annuity consider the following example:
Joan wants to calculate the most she should pay to purchase an ordinary annuity that consists of
payments of R10 000 at the end of each year for five years.
She requires the annuity to provide her with a minimum of a 10% return.
Let us start off, as usual, with drawing a timeline to illustrate the problem.
As the timeline depicts, Joan should pay R37 907. This method involves finding the present value
of each payment and summing them.
A mixed stream does not reflect any pattern (irregular cash flows). To find the present value of a
mixed stream of cash flows you must present the value of each sum in the manner described above
and then add all the individual values to find the present value of the stream.
Table 15 sets out examples of when the time value of money is used:
Investment decisions We use capital budgeting techniques such as net present value (NPV) to determine
whether a project is viable or not (eg will provide us with a positive rand value).
Financing decisions In decisions to lease or buy we must apply the principle of time value of money.
Working capital The maximising of the value of the firm consists of the investment of cash, minimisation of
management inventories, or stretching accounts payable. Such decisions require the application of time
value of money.
Dividend policy In the consideration of the postponements of cash dividends management uses time-
value-of-money principles.
Valuation Basic valuation works out the present value sum of all net cash inflows expected for the
length of the investment.
(Marx et al, 2009)
Now that Siyanda has demonstrated how to calculate time value of money (TVM) in its simplest form, let us assist
Nolwazi with the following:
1. What will the future value be in 20 years’ time if she purchases the property today?
2. What will the monthly instalments on the property be?
3. Based on these calculations, recommend to Nolwazi whether she should purchase or lease the property
advertised in Cape Town.
• Prof Coram. (2011) Calculating FV (future value) time value of money problems using Excel.
[video] https://www.youtube.com/watch?v=AuJvHoypfQU (accessed 13 August 2022).
• The time value is based on the belief that a rand today is worth more than a rand that will be
received at some future date.
• Future value (FV) refers to the value of the cash you will receive at a given future date.
• Present value (PV) refers to the cash in your hand today.
• An annuity is a series of payments of a fixed amount for a specific number of periods.
• A mixed stream involves irregular cash flows.
It will help you strengthen and embed your understanding of the course. You will not be able to
change your answers once you have submitted them, so make sure you have completed the
relevant section of coursework first. Where you see Select all that are relevant, be aware that
any number of the options presented could be correct. You will lose marks for incorrect
selections, so choose carefully. Your combined marks from these assessments count towards a
total of 20% of your course mark.
Learning outcome • Explain financial management terminology, concepts and principles (Part 2)
• Chapter 8 in Stoltz, A., Viljoen, M., Gool, S., Cronje, R. & Meyer, C. (2014). Financial
Prescribed textbook
Management: Fresh Perspectives. Pearson Education.
• Chapters 14 & 15 in Titman, S., Keown, A.J. and Martin, J. D. (2020) Financial
Additional textbook
Management: Principles and Applications, 14th Global Edition. Pearson International.
In this section we explain cost of capital and how to calculate the weighted average cost of
Section overview
capital.
Siyanda has advised Nolwazi to invest when the return on the investment is greater than the
cost of the funds needed to invest. Nolwazi has also learnt that financing can be obtained from the
owners (equity) or by borrowing money (liabilities). And we know that the financial manager’s
role is to assist in making decisions in order to generate a profit and therefore create wealth for the
shareholders (owners). The shareholders require a certain return on the funds they have
invested in the company.
The return on equity (ROE) and investment ratios indicate what return the shareholders receive on
their funds. The shareholders will be satisfied only with a return that is more than they could have
received by investing elsewhere. Remember that this an opportunity cost.
From the above it becomes clear that the cost of capital is the “opportunity cost of funds employed
in a business” (Business Dictionary, 2014b).
Consider that Nolwazi could have taken the money (and time) invested in the Zulu Love Bean
and invested these in another business opportunity, which might have given her a similar or
better return. The cost of capital is the cost of the funds employed in the Zulu Love Bean.
Siyanda explains some fundamental concepts to help her understand the cost of capital:
• The weighted average cost of capital, composed of debt financing and equity financing;
• The dividend growth model; and
• The capital asset pricing method.
When the assets required by the company are financed by debt and by equity in a certain proportion,
we call this the capital structure of the company. Management decides what the best capital structure
is to achieve the optimal wealth for the owners or shareholders. Once an optimal capital structure is
identified, the required rate of return must be determined for the debt and equity elements, and finally
the weighted average cost of capital is calculated.
The correct calculation of the weighted average cost of capital (WACC) is important for the following
reasons:
Where:
In the following sections, we look at the calculation of these components and finally the WACC.
Debt refers to interest-bearing loans. Note that r* (as explained in the WACC formula) can be
expressed in other ways, for example s + . The formula for calculating the cost of debts is as follows:
K , = I(1 − t)
Where:
K , = cost of debt
I = interest rate payable
t = marginal tax rate
For example, if Nolwazi takes out a loan that charges interest at 10%, the cost of debt will be as
follows (assuming interest rate charged is market related and tax rate is 28%):
K , = 10%(1 − 28%)
K , = 7.2%
The cost of a preference share is the ratio of the preference share dividend to the firm’s net proceeds
from the sale of the preference share. The net proceeds are the amount to be received, less the
flotation cost. The formula for calculating the cost of a preference share is:
D-
r- =
N-
Where:
Preference share dividends are paid out of the firm’s after-tax cash flow, and therefore a tax
adjustment is not required. As with the other cost components in the WACC formula, the cost of
preferred shares can also be expressed in different ways. In this instance, the cost of a preference
share can, for example, also be expressed as v . .
(Gitman, 2010)
There are various methods for calculating the cost of shareholder’s equity. Two popular methods
are the dividend growth method and the capital asset pricing model method.
This method is used to calculate the cost of the accumulated profits of the company, which have not
been paid out to the shareholders in the form of dividends yet. This model assumes constant growth.
Please note: If the rate of growth in ordinary share (‘common stock’) dividends is expected to be
constant into the indefinite future and this rate of growth is less than the ordinary shareholders’
required rate of return, then the discounted cash flow valuation model for ordinary shares reduces
to the following simple formula:
x/
w=
@Ay − z
Where:
• V = the value of an ordinary share (which is equal to the present value of all future expected
dividends)
• D0 = the most recent annual cash dividend received by the ordinary shareholders that was paid
in the year the valuation is being done (Year 0)
• g = the expected annual rate of growth in the cash dividend payment, which is assumed to be
constant forever
• D1 = D0 (1 + g) = the expected dividend for the end of Year 1
• Req = the ordinary shareholders’ required rate of return for their shares (note that this is NOT a
market’s required yield or promised rate of return, but the rate of return the investor expects to
earn from investing in the firm’s stock. This expected rate of return reflects the riskiness of the
stock’s future dividends).
Remember that the investor’s required rate of return is determined by two key factors—the level of
interest rates in the economy and also the risk of the firm’s stock (see also the Capital Asset Pricing
Model).
Assume the following is known about Company X:
D1 = D0 (1 + g)
= $2.00 x (1 + 0.10)
= $2.00 x 1.10
= $2.20
Step 2: Calculate V
V = D1 ÷ (Req – g)
= $2.20 ÷ (0.15 – 0.10)
= $2.20 ÷ 0.05
= $44
a) Calculate D1
b) Calculate V
In order to understand the capital asset pricing method it is important to understand the following:
Risk-free rate “Investors will demand to earn a return equal at least equal to the return
offered by government bonds.”
Market premium “Investing in equities is risky and therefore investors require a market
premium for investing in the equities markets.”
Beta “A particular company may be more or less risky than the market and so the
market premium needs to be adjusted.”
(Correia et al: 2007)
Beta measures the volatility of a stock in relation to the market. High-beta stocks are risky but provide
potentially higher returns. Low beta stocks are less risky but provide smaller returns. “It’s a
convenient measure that can be used to calculate the costs of equity used in a valuation method
that discounts cash flows.” However, it may not be reliable as it does not incorporate new information
(Investopedia, 2014f).
k 0 = R 1 + β (R 2 − R 1 ) Market premium
Assume the risk-free rate is 10%, the beta is 1, and the return on the market portfolio is 25%.
= 25%
The calculation of WACC is best illustrated with the example shown in Table 20 (assuming the target
capital structure is 40:60 debt to equity).
Now that Siyanda has explained cost of capital let’s assist Nolwazi with the following:
Check your solutions to these questions against the model answers in Appendix 1.
• Invest when the return on the investment is greater than the cost of the funds needed to
invest.
• The return on equity (ROE) and investment ratios indicated what return shareholders receive
on their funds invested in the company.
• WACC is calculated as follows:
o lmnn = (o# X 9# ) + po% X 9% q + (o& X 9' (' ) ) ; where
It will help you strengthen and embed your understanding of the course. You will not be able to
change your answers once you have submitted them, so make sure you have completed the
relevant section of coursework first. Where you see Select all that are relevant, be aware that
any number of the options presented could be correct. You will lose marks for incorrect
selections, so choose carefully. Your combined marks from these assessments count towards a
total of 20% of your course mark.
• Apply various financial planning techniques including budgeting, variance analysis, cash
Learning outcome
planning and capital budgeting
• Stoltz, A., Viljoen, M., Gool, S., Cronje, R. & Meyer, C. (2014) Financial Management:
Prescribed textbook
Fresh Perspectives. Pearson Education.
• Chapters 17 & 18 in Titman, S., Keown, A.J. and Martin, J. D. (2020) Financial
Additional textbook
Management: Principles and Applications, 14th Global Edition. Pearson International.
In this section we emphasise the importance of budgeting, and look at budgeting techniques
Section overview
and terminology.
6.7.1 Budgeting
As you have learnt, the role of the financial manager is to make decisions that maximise the wealth
of the owners or shareholders. You have also learnt that the financial manager must make the best
use of the limited resources available in order to generate wealth for the owners or shareholders.
Budgeting is the process of allocating scarce resources to the prioritised needs of an organisation.
Methods of budgeting
(1) Bottom up: This is where you establish all the components that must be part of the budget
and then build up the costs to get the total budget. This approach is a cost-based model.
(2) Top down: This is where you set a top budget and then allocate the total to the various
components of the budget.
(Woolley, 2014)
There are several approaches to budgeting. The following are the most common:
• Incremental budgeting considers last year’s budget and makes incremental adjustments to
the new budget (ACCA, 2014).
• Programme budgeting is planning and allocating resources in order of priority (Weetman,
2013).
• Activity-based budgeting is “A method of budgeting in which the activities that incur costs in
every functional area of an organization are recorded and their relationships are defined and
analysed. Activities are then tied to strategic goals, after which the costs of the activities
needed are used to create the budget” (Investopedia, 2014d).
• Zero-based budgeting is “A method of budgeting in which all expenses must be justified for
each new period. Zero-based budgeting starts from a ‘zero base’ and every function within
an organization is analysed for its needs and costs. Budgets are then built around what is
needed for the upcoming period, regardless of whether the budget is higher or lower than the
previous one” (Investopedia, 2014e).
Approaches to Budgeting
1. Think about the methods used in your organisation (department) or organisation you are familiar with. How would
you describe them, given the methods and approaches noted above? Incremental? According to programme
priorities? On an activity-based basis? From a zero base? Or a combination of these?
2. Interview a manager to determine why particular methods are used and, in one paragraph, explain your findings.
Now that you have watched the video clip, Nolwazi would like to know the following:
1. What are some examples of the variable costs of her coffee shop?
2. What are some examples of the fixed costs of her coffee shop?
3. Explain why budgeting is important.
Check your solutions to these questions against the model answers in Appendix 1.
Variance analysis is a process of identifying differences from what was initially expected,
investigating the reasons for these differences, and determining whether expectations should be re-
evaluated. A variance may be significant (eg greater than 5%) or insignificant (eg 5% or less),
depending on what the financial manager considers to be a material difference from the budget.
Nolwazi set a budget for January 2014. A section of the budget is shown below.
Budget for The Zulu Love Bean (Pty) Ltd for January 2014
Expenses Budget Actual Variance
Electricity 100 80 20
Stationery 50 55 -5
Printing 80 80 0
We know from the section that covered cash ratios, that cash flow is an indicator of the financial
stability of a company. Cash planning is important for ensuring that a company has enough cash to
settle its debt as it becomes due. If a company cannot settle its debt as it becomes due, the company
has a liquidity problem. A company with a liquidity problem may not be able to continue trading
without further funding. But with some good cash planning, a liquidity and going-concern problem
can be avoided.
A cash flow budget, also called a cash flow forecast, is generally used for effective cash planning.
Accounting statements cannot be used for effective cash planning as these are based on
adjustments and transactions that do not provide adequate information on the cash position of the
company. An example of an accounting adjustment is depreciation, which as you have learnt from
another section (statement of comprehensive income) is an adjustment made in accordance with
the matching principle in accounting and does not represent an inflow or outflow of cash.
Some companies use the format of the statement of cash flows (as shown in 7.2.2) to compile their
cash flow budget every month. This may be more useful in a larger company or listed company.
It will help you strengthen and embed your understanding of the course. You will not be able to
change your answers once you have submitted them, so make sure you have completed the
relevant section of coursework first. Where you see Select all that are relevant, be aware that
any number of the options presented could be correct. You will lose marks for incorrect
selections, so choose carefully. Your combined marks from these assessments count towards a
total of 20% of your course mark.
• Apply various financial planning techniques including budgeting, variance analysis, cash
Learning outcome
planning, and capital budgeting
• Chapter 12 in Stoltz, A., Viljoen, M., Gool, S., Cronje, R. & Meyer, C. (2014) Financial
Prescribed textbook
Management: Fresh Perspectives. Pearson Education.
Section overview In this section we explain when and how to use capital budgeting in decision-making.
“Capital budgeting is the process that companies use for decision-making on capital projects –
those projects with a life of a year or more.”
(CFA Institute, 2012b)
Nolwazi feels that she needs to replace one of the coffee machines with a more efficient one. She
has found two machines but is not sure which one to buy and therefore needs Siyanda’s help to
make decision. To help Nolwazi make her decision, Siyanda starts with some simple explanations
and calculations on capital budgeting.
Replacement projects
Consider that equipment wears out and is no longer of economic value (ie beyond its useful life), or
new technology may become available, or equipment must be replaced to increase efficiencies. In
each case, a capital budgeting exercise is required to determine the most viable way forward.
An expansion project was demonstrated in the time value of money section. Nolwazi was looking at
expanding her business to Cape Town and therefore increasing the size of her company. Again,
capital budgeting is required to make the best use of scarce resources.
Nolwazi added a new product by introducing personalised bags of coffee. Introducing a new product
and or service requires capital budgeting calculations, to ensure profitability.
Regulations, particularly those relating to health and safety and environmental impact, require
owners to use capital budgeting techniques to identify the most effective and efficient ways of
following them.
“The net present value (NPV) is the present value of the future after tax cash flows minus the
investment outlay.”
(CFA Institute, 2012b)
The equation is given below followed by a simple example that shows if the net present value (NPV)
of the project is positive then the investment is worthwhile. The equation is as follows:
!
CF3
NPV = } − Outlay
(1 + r)3
34/
10 10 10
NPV = /
+ 5
+ − 20
1.12 1.12 1.12"
NPV = 24.02 − 20
NPV = 4.02
Therefore the investor’s wealth would be increased by R4.02 if he or she chose this investment. It is
important to note that one should not invest if the NPV is a negative.
“IRR is the discount rate that makes the present value of the future after-tax cash flows equal that
investment outlay.”
(CFA Institute, 2012b)
Again, the equation is provided followed by an example. In the case of the internal rate of return
(IRR) the project with the higher IRR is chosen. The equation is as follows:
!
CF3
} = Outlay
(1 + IRR)3
34/
!
CF3
} − Outlay = 0
(1 + IRR)3
34/
Using our previous example, we are looking for a discount rate that makes the total present value of
all cash flows equal to zero.
10 10 10
0 = /
+ 5
+ − 20
(1 + IRR) (1 + IRR) (1 + IRR)"
Payback period
In the payback method, the objective is to find out the period over which the initial investment is
recovered (recouped). The following table best explains how to calculate the payback period:
Year 0 1 2 3 4 5
Based on the above, the original investment is recouped between year three and four. Two thirds of
year four’s cash flow is required for the cumulative cash flow to reach R10 000. Therefore the
payback period is 3.67 years.
“The discounted payback period is the number of years it takes for the cumulative discounted
cash flows from a project to equal the original investment.”
(CFA Institute, 2012b)
The limitation of the payback method is that it does not recognise the principle of time value of
money. Therefore, in the discounted payback period method, the cash flows are discounted using
an appropriate discount rate. Table 18 best explains how to calculate the discounted payback period.
Year 0 1 2 3 4 5
Cumulative cash
-5 000 -3 500 -2 000 -500 1 000 2 500
flow
Discounted cash
-5 000 1 364 1 240 1 127 1 025 931
flow
Cumulative
discounted cash -5 000 -3 636 -2 396 -1 269 -244 687
flow
(CFA Institute, 2012b)
In this example, the payback period is 3.33 years but the discounted payback period is 4.26 years
(four years plus 244/931).
Please view the following YouTube clips, which illustrate how to calculate NPV and IRR using Excel.
This could be very useful if you do not have a financial calculator at hand.
Concept Description
A sunk cost “A sunk cost is one that has already been incurred. You cannot change a sunk cost.”
Today’s decisions should not be affected by sunk costs.
(CFA Institute, 2012b)
An opportunity cost “A benefit, profit or value of something that must be given up to acquire or achieve
something else. Since every resource (land, money, time, etc) can be put to alternative
uses, every action, choice or decision has an associated opportunity cost.”
Now that Siyanda has shown us when and how to use capital budgeting for decision-making, let us help Nolwazi
choose between the two coffee machines.
1. Using the NPV technique and a 12% rate of return, should Nolwazi invest in either of the coffee machines?
2. Calculate the IRR for each of the coffee machines and decide based on the IRR which coffee machine she
should buy based on the IRR of each.
3. What is the main difference between NPV or IRR capital budgeting techniques and the payback method?
• Capital budgeting is the process that companies use for decision-making on capital projects.
• Important capital budgeting techniques include:
o Net present value (NPV);
o Internal rate of return (IRR);
o Payback period (PP); and
o Discounted payback period (DPP).
It will help you strengthen and embed your understanding of the course. You will not be able to
change your answers once you have submitted them, so make sure you have completed the
relevant section of coursework first. Where you see Select all that are relevant, be aware that
any number of the options presented could be correct. You will lose marks for incorrect
selections, so choose carefully. Your combined marks from these assessments count towards a
total of 20% of your course mark.
CFA Institute. (2012a) Financial Reporting and Analysis, Volume 3. Pearson Education.
CFA Institute. (2012b) Corporate Finance and Portfolio Management, Volume 4. Pearson
Education.
Correia, C., Flynn, D., Uliana, E. & Wormald, M. (2011) Financial Management. Juta & Co. Ltd.
Els, G. ed. (2010) Corporate Finance: A South African Perspective, Cape Town: Oxford University
Press.
Gitman, L.J. 2010, Principles of Financial Management: Global and Southern African Perspectives,
Cape Town: Pearson Education.
Gitman, L.J. and Zutter, C.J. 2014, Principles of Managerial Finance, England: Pearson Education.
IASB, 2014, A Guide Through IFRS, London: IASC Foundation Publications Department.
Management Study Guide, 2013, Financial Management – Meaning, Objectives and Functions,
http://managementstudyguide.com/financial-management.htm (accessed 13 August 2022).
Marx, J., Swardt, C., Smith, M.B. and Erasmus, P. 2009, Financial Management in South Africa,
Cape Town: Pearson.
McClure, B. 2014, ROA And ROE Give Clear Picture Of Corporate Health,
http://www.investopedia.com/articles/basics/05/052005.asp?rp=i (accessed 13 August 2022).
Sethi, C.J. and Gupta, C.H. 2013, Accounting and Business Decisions,
https://books.google.co.za/books?id=PHtBsZbRLv4C&pg=PA124&lpg=PA124&dq=%22compare+
actual+and+standard+costs%22+%22calculate+variances%22&source=bl&ots=DwWisFlmlw&sig=
DFc5bDxUidpTDow8Wb5J48Dt_g4&hl=en&sa=X&ei=2bM2Ve_9HM7y7AbQjoHQDQ&ved=0CBw
Q6AEwAA#v=onepage&q=%22compare%20actual%20and%20standard%20costs%22%20%22ca
lculate%20variances%22&f=false (accessed 13 August 2022).
Van Wyk, K., Botha, Z. and Goodspeed, I. 2012, Understanding South African Financial Markets,
Pretoria, Van Schaik Publishers.
Term Explanation
Accounts payable Amounts that the company owes to its suppliers for goods and services that were
(trade payables) purchased from them but which have not yet been paid for.
(CFA, 2012c)
Accrual basis In preparation of financial statements, recognises revenue at the time of sale and
recognises expenses when they are incurred.
(Gitman, 2010)
Amortised cost The historical cost (initially recognised cost) of an asset adjusted for amortisation and
impairment. Amortisation is the process of allocating the cost of intangible long-term assets
having a finite useful life to accounting periods; the allocation of the amount of a bond
premium or discount to the periods remaining until bond maturity.
(CFA, 2012c-G-2)
Annuity A stream of equal periodic cash flows, over a specified time period. These cash flows can
be inflows of returns earned on investments or outflows of funds invested to earn future
returns.
(Gitman, 2010)
Asset An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity.
(Conceptual Framework: A36)
Beta coefficient A relative measure of non-diversifiable risk. An index of the degree of movement of an
asset’s return in response to a change in the market return. A beta of 1 is considered more
volatile than the market, and vice versa.
(Gitman, 2010)
Bond Long-term debt instrument used by business and government to raise large sums of
money, generally from a diverse group of lenders.
(Gitman, 2010)
Business risk The risk to the firm of being unable to cover operating costs.
(Gitman, 2010)
Capital asset pricing The basic theory that links risk and return for all assets; describes the relationship between
model (CAPM) the required return and the non-diversifiable risk of the firm as measured by the beta
coefficient.
(Gitman, 2010)
Capital budgeting The process of evaluating and selecting long-term investments that are consistent with the
firm’s goal of maximising owner wealth.
(Gitman, 2010)
Capital expenditure Expenditure of physical capital (fixed assets).
Exchanges Formal marketplace where financial instruments are bought and sold.
(Van Wyk, Botha and Goodspeed, 2012)
Future value The value at a given future date of a present amount placed on deposit today and earning
interest at a specified rate. Found by applying compound interest over a specified period of
time.
(Gitman, 2010)
Historical cost In reference to assets, the amount paid to purchase an asset, including any costs of
acquisition and//or preparation; with reference to liabilities, the amount of proceeds received
in exchange in issuing the liability.
(CFA, 2012c)
Liability The present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
(Conceptual Framework: A36)
Liquidity A firm’s ability to satisfy its short-term obligations as they become due.
(Gitman, 2010)
Long-term debt Debts for which payment is not due in the current year.
(Gitman, 2010)
Over-the-counter An over-the-counter market is a market where trades are conducted outside formal
markets exchanges and therefore directly between two counterparties.
(Van Wyk et al, 2012)
Present value The current rand value of a future amount – the amount of money that would have to be
invested today at a given interest rate over a specified period to equal the future amount.
(Gitman, 2010)
Profitability The relationship between revenues and costs generated by using the firm’s assets – both
current and fixed – in productive activities.
(Gitman, 2010)
Primary market The market for the original sale or new issue of securities.
(Van Wyk et al, 2012)
Retained earnings The cumulative total of all earnings, net of dividends that have been retained and
reinvested in the firm since its inception; earnings not distributed to owners as dividends – a
form of internal financing.
(Gitman, 2010)
Secondary market The market in which previously issued securities are resold.
(Van Wyk et al, 2012)
Shareholders The owners of a company, whose ownership, or equity, is evidenced by either by ordinary
shares or preference shares.
(Gitman, 2010)
Solvency With respect to financial statements, the ability of a company to fulfil its long-term
obligations.
(CFA, 2012c)
Stakeholders Groups such as employees, customers, suppliers, creditors, owners, and others who have
a direct economic link to the firm.
(Gitman, 2010)
Standard deviation The most common statistical indicator of an asset’s risk; it measures the dispersion around
the expected value.
(Gitman, 2010)
Working capital The difference between current assets and current liabilities.
Questions:
(1) Calculate the public interest score for The Zulu Love Bean (Pty) Ltd if Nolwazi has 20
employees, she is the only stakeholder, her total liabilities are R726 384 and her total
turnover is R390 000.
(2) Does The Zulu Love Bean (Pty) Ltd need to have financial statements prepared in terms
of IFRS or IFRS for SMEs?
Answers:
(1) The Zulu Love Bean (Pty) Ltd is a very small company in terms of the public interest
score and scores only 21.
(2) The Zulu Love Bean (Pty) Ltd does not need to prepare financial statements in terms of
IFRS or IFRS for SMEs in terms of the Companies Act. Even though they are not
required by the act, third parties (such as banks and tax authorities) may request
financial statements to be prepared at least in terms of IFRS for SMEs.
Questions:
Answers:
(1) Yes, a company can be solvent (its assets are greater than its liabilities), but not liquid if
it is unable to settle its short-term debt. In other words a company may be solvent as it
has enough assets to settle its debt, but not liquid as it is unable to convert those assets
into cash in the short term to settle debt that becomes due in the short term.
(2) Yes, its assets are greater than its liabilities by R360 516 in the current year.
Questions:
(1) What does it mean if Nolwazi’s coffee shop has a current ratio of less than 1?
(2) Which ratio must Nolwazi calculate to get an indication of the percentage of the sales
amount remaining after the business has paid for its goods?
(3) Siyanda explains to Nolwazi that it is important to have positive net working capital value.
What does this mean?
(1) Its short-term obligations are greater than its short-term assets.
(2) Gross profit margin
(3) It is the difference between current assets and current liabilities.
Questions:
(1) What will the future value be in 20 years’ time if she purchases the property today?
(2) What will the monthly instalments on the property be?
(3) Based on these calculations, recommend to Nolwazi whether she should purchase or
lease the property advertised in Cape Town.
Answers:
/
1−
(/90)!
PVA = PMT x Ç É
r
/
1 − (/.77<)"#$
PVA = PMT x Ç É
0.005
1000 000
PMT =
140.00
PMT = R 7143
See page 90 of your recommended textbook for more examples. You can also use Table A-5 in
your recommended textbook to obtain the factor amount and then multiply it by the loan amount
to get the monthly payment amount (see page 90 and 100 in your textbook). If you are using the
table in the textbook, some answers might differ due to rounding off.
(3) If she owns the property then her instalments will be R7 143 per month, which is less
than if she leases the property. She will also have an asset worth approximately R6-
million if she keeps the property for 20 years. Therefore, based on these findings, she
should purchase the property.
She should, however, seek further advice concerning the time value of money on similar
properties available so that she purchases the property with the best value.
Questions:
(1) What are some examples of the variable costs of her coffee shop?
(2) What are some examples of the fixed costs of her coffee shop?
(3) Explain why budgeting is important.
Answers:
Questions:
Now that Siyanda has shown us when and how to use capital budgeting for decision-making, let
us help Nolwazi choose between the two coffee machines.
Answers:
Coffee machine 1:
!
CF3
NPV = } − Outlay
(1 + r)3
34/
NPV = 371 (due to rounding off, some answers might differ slightly)
Siyanda has explained cost of capital. Let’s assist Nolwazi with the following:
Coffee machine 2:
!
CF3
NPV = } − Outlay
(1 + r)3
34/
Both the coffee machines have a positive NPV and therefore she could invest in either.
However, Nolwazi is clearly only looking to buy one coffee machine (mutually exclusive). It does
not make sense to buy coffee machine 1 and coffee machine 2 when she could just buy more of
the coffee machine that has the higher NPV. As coffee machine 2 has a higher NPV, Nolwazi
should buy coffee machine 2.
Coffee machine 1:
N = 4
PV = 30 000
PMT = 10 000
FV = 0
I/YR = X
Coffee machine 2:
N = 3
PV = 28 000
PMT = 12 000
FV = 0
I/YR = X
X = 14% therefore IRR = 14%
The IRR of coffee machine 2 is higher than coffee machine 1, therefore this confirms that
Nolwazi should buy coffee machine 2.
The NPV and IRR methods take into account the time value of money.
Question:
Siyanda has explained cost of capital. Let’s assist Nolwazi with the following:
(1) Consider whether you think Nolwazi should be satisfied with a ROE achieved of 20.75%.
(2) Why do we calculate a firm’s weighted average cost of capital?
(3) How does a firm’s tax rate affect its cost of capital?
(1) Many professional investors look for a ROE of at least 15%” (McClure, 2014). The ROE
of the company is exceptional in comparison to other companies in a similar industry and
for any investors. Nolwazi could use her exceptional results to bring in more investors
and therefore more financing.
(2) Capital invested in a company can be in the form of equity or borrowed capital. Each has
a different cost, and the two components are seldom applied in equal parts. Thus it is
necessary to calculate the weighted average cost of capital.
(3) Interest on a loan is tax deductible. Therefore, the actual interest cost is reduced
because the interest has the effect of reducing the taxable income. You pay less tax
because you pay interest.
The table includes the users of financial statements and their particular information needs.
Competitors To determine the strength of the company in terms of market share and to evaluate the
direction of the company.
Stock exchanges To assess compliance especially in terms of corporate governance.
Table A-1 Future Value Interest Factors for One Rand Compounded at k Percent for n Periods: FVIF k,n = (1 + k) n
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 20% 24% 25% 30%
Period
1.0100 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000 1.1100 1.1200 1.1300 1.1400 1.1500 1.1600 1.2000 1.2400 1.2500 1.3000
1
1.0201 1.0404 1.0609 1.0816 1.1025 1.1236 1.1449 1.1664 1.1881 1.2100 1.2321 1.2544 1.2769 1.2996 1.3225 1.3456 1.4400 1.5376 1.5625 1.6900
2
1.0303 1.0612 1.0927 1.1249 1.1576 1.1910 1.2250 1.2597 1.2950 1.3310 1.3676 1.4049 1.4429 1.4815 1.5209 1.5609 1.7280 1.9066 1.9531 2.1970
3
1.0406 1.0824 1.1255 1.1699 1.2155 1.2625 1.3108 1.3605 1.4116 1.4641 1.5181 1.5735 1.6305 1.6890 1.7490 1.8106 2.0736 2.3642 2.4414 2.8561
4
1.0510 1.1041 1.1593 1.2167 1.2763 1.3382 1.4026 1.4693 1.5386 1.6105 1.6851 1.7623 1.8424 1.9254 2.0114 2.1003 2.4883 2.9316 3.0518 3.7129
5
1.0615 1.1262 1.1941 1.2653 1.3401 1.4185 1.5007 1.5869 1.6771 1.7716 1.8704 1.9738 2.0820 2.1950 2.3131 2.4364 2.9860 3.6352 3.8147 4.8268
6
1.0721 1.1487 1.2299 1.3159 1.4071 1.5036 1.6058 1.7138 1.8280 1.9487 2.0762 2.2107 2.3526 2.5023 2.6600 2.8262 3.5832 4.5077 4.7684 6.2749
7
1.0829 1.1717 1.2668 1.3686 1.4775 1.5938 1.7182 1.8509 1.9926 2.1436 2.3045 2.4760 2.6584 2.8526 3.0590 3.2784 4.2998 5.5895 5.9605 8.1573
8
1.0937 1.1951 1.3048 1.4233 1.5513 1.6895 1.8385 1.9990 2.1719 2.3579 2.5580 2.7731 3.0040 3.2519 3.5179 3.8030 5.1598 6.9310 7.4506 10.604
9
1.1046 1.2190 1.3439 1.4802 1.6289 1.7908 1.9672 2.1589 2.3674 2.5937 2.8394 3.1058 3.3946 3.7072 4.0456 4.4114 6.1917 8.5944 9.3132 13.786
10
1.1157 1.2434 1.3842 1.5395 1.7103 1.8983 2.1049 2.3316 2.5804 2.8531 3.1518 3.4785 3.8359 4.2262 4.6524 5.1173 7.4301 10.657 11.642 17.922
11
1.1268 1.2682 1.4258 1.6010 1.7959 2.0122 2.2522 2.5182 2.8127 3.1384 3.4985 3.8960 4.3345 4.8179 5.3503 5.9360 8.9161 13.215 14.552 23.298
12
1.1381 1.2936 1.4685 1.6651 1.8856 2.1329 2.4098 2.7196 3.0658 3.4523 3.8833 4.3635 4.8980 5.4924 6.1528 6.8858 10.699 16.386 18.190 30.288
13
1.1495 1.3195 1.5126 1.7317 1.9799 2.2609 2.5785 2.9372 3.3417 3.7975 4.3104 4.8871 5.5348 6.2613 7.0757 7.9875 12.839 20.319 22.737 39.374
14
1.1726 1.3728 1.6047 1.8730 2.1829 2.5404 2.9522 3.4259 3.9703 4.5950 5.3109 6.1304 7.0673 8.1372 9.3576 10.748 18.488 31.243 35.527 66.542
16
1.1843 1.4002 1.6528 1.9479 2.2920 2.6928 3.1588 3.7000 4.3276 5.0545 5.8951 6.8660 7.9861 9.2765 10.761 12.468 22.186 38.741 44.409 86.504
17
1.1961 1.4282 1.7024 2.0258 2.4066 2.8543 3.3799 3.9960 4.7171 5.5599 6.5436 7.6900 9.0243 10.575 12.375 14.463 26.623 48.039 55.511 112.455
18
1.2081 1.4568 1.7535 2.1068 2.5270 3.0256 3.6165 4.3157 5.1417 6.1159 7.2633 8.6128 10.197 12.056 14.232 16.777 31.948 59.568 69.389 146.192
19
1.2202 1.4859 1.8061 2.1911 2.6533 3.2071 3.8697 4.6610 5.6044 6.7275 8.0623 9.6463 11.523 13.743 16.367 19.461 38.338 73.864 86.736 190.050
20
1.2324 1.5157 1.8603 2.2788 2.7860 3.3996 4.1406 5.0338 6.1088 7.4002 8.9492 10.804 13.021 15.668 18.822 22.574 46.005 91.592 108.420 247.065
21
1.2447 1.5460 1.9161 2.3699 2.9253 3.6035 4.4304 5.4365 6.6586 8.1403 9.9336 12.100 14.714 17.861 21.645 26.186 55.206 113.574 135.525 321.184
22
1.2572 1.5769 1.9736 2.4647 3.0715 3.8197 4.7405 5.8715 7.2579 8.9543 11.026 13.552 16.627 20.362 24.891 30.376 66.247 140.831 169.407 417.539
23
1.2697 1.6084 2.0328 2.5633 3.2251 4.0489 5.0724 6.3412 7.9111 9.8497 12.239 15.179 18.788 23.212 28.625 35.236 79.497 174.631 211.758 542.801
24
1.2824 1.6406 2.0938 2.6658 3.3864 4.2919 5.4274 6.8485 8.6231 10.835 13.585 17.000 21.231 26.462 32.919 40.874 95.396 216.542 264.698 705.641
25
1.3478 1.8114 2.4273 3.2434 4.3219 5.7435 7.6123 10.063 13.268 17.449 22.892 29.960 39.116 50.950 66.212 85.850 237.376 634.820 807.794 *
30
1.4166 1.9999 2.8139 3.9461 5.5160 7.6861 10.677 14.785 20.414 28.102 38.575 52.800 72.069 98.100 133.176 180.314 590.668 * * *
35
1.4308 2.0399 2.8983 4.1039 5.7918 8.1473 11.424 15.968 22.251 30.913 42.818 59.136 81.437 111.834 153.152 209.164 708.802 * * *
36
1.4889 2.2080 3.2620 4.8010 7.0400 10.286 14.974 21.725 31.409 45.259 65.001 93.051 132.782 188.884 267.864 378.721 * * * *
40
1.6446 2.6916 4.3839 7.1067 11.467 18.420 29.457 46.902 74.358 117.391 184.565 289.002 450.736 700.233 * * * * * *
50
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 20% 24% 25% 30%
Period
1.0000 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000 1.1100 1.1200 1.1300 1.1400 1.1500 1.1600 1.2000 1.2400 1.2500 1.3000
1
2.0100 2.0200 2.0300 2.0400 2.0500 2.0600 2.0700 2.0800 2.0900 2.1000 2.1100 2.1200 2.1300 2.1400 2.1500 2.1600 2.2000 2.2400 2.2500 2.3000
2
3.0301 3.0604 3.0909 3.1216 3.1525 3.1836 3.2149 3.2464 3.2781 3.3100 3.3421 3.3744 3.4069 3.4396 3.4725 3.5056 3.6400 3.7776 3.8125 3.9900
3
4.0604 4.1216 4.1836 4.2465 4.3101 4.3746 4.4399 4.5061 4.5731 4.6410 4.7097 4.7793 4.8498 4.9211 4.9934 5.0665 5.3680 5.6842 5.7656 6.1870
4
5.1010 5.2040 5.3091 5.4163 5.5256 5.6371 5.7507 5.8666 5.9847 6.1051 6.2278 6.3528 6.4803 6.6101 6.7424 6.8771 7.4416 8.0484 8.2070 9.0431
5
6.1520 6.3081 6.4684 6.6330 6.8019 6.9753 7.1533 7.3359 7.5233 7.7156 7.9129 8.1152 8.3227 8.5355 8.7537 8.9775 9.9299 10.980 11.259 12.756
6
7.2135 7.4343 7.6625 7.8983 8.1420 8.3938 8.6540 8.9228 9.2004 9.4872 9.7833 10.089 10.405 10.730 11.067 11.414 12.916 14.615 15.073 17.583
7
8.2857 8.5830 8.8923 9.2142 9.5491 9.8975 10.260 10.637 11.028 11.436 11.859 12.300 12.757 13.233 13.727 14.240 16.499 19.123 19.842 23.858
8
9.3685 9.7546 10.159 10.583 11.027 11.491 11.978 12.488 13.021 13.579 14.164 14.776 15.416 16.085 16.786 17.519 20.799 24.712 25.802 32.015
9
10.462 10.950 11.464 12.006 12.578 13.181 13.816 14.487 15.193 15.937 16.722 17.549 18.420 19.337 20.304 21.321 25.959 31.643 33.253 42.619
10
11.567 12.169 12.808 13.486 14.207 14.972 15.784 16.645 17.560 18.531 19.561 20.655 21.814 23.045 24.349 25.733 32.150 40.238 42.566 56.405
11
12.683 13.412 14.192 15.026 15.917 16.870 17.888 18.977 20.141 21.384 22.713 24.133 25.650 27.271 29.002 30.850 39.581 50.895 54.208 74.327
12
13.809 14.680 15.618 16.627 17.713 18.882 20.141 21.495 22.953 24.523 26.212 28.029 29.985 32.089 34.352 36.786 48.497 64.110 68.760 97.625
13
14.947 15.974 17.086 18.292 19.599 21.015 22.550 24.215 26.019 27.975 30.095 32.393 34.883 37.581 40.505 43.672 59.196 80.496 86.949 127.913
14
16.097 17.293 18.599 20.024 21.579 23.276 25.129 27.152 29.361 31.772 34.405 37.280 40.417 43.842 47.580 51.660 72.035 100.815 109.687 167.286
15
18.430 20.012 21.762 23.698 25.840 28.213 30.840 33.750 36.974 40.545 44.501 48.884 53.739 59.118 65.075 71.673 105.931 157.253 173.636 285.014
17
19.615 21.412 23.414 25.645 28.132 30.906 33.999 37.450 41.301 45.599 50.396 55.750 61.725 68.394 75.836 84.141 128.117 195.994 218.045 371.518
18
20.811 22.841 25.117 27.671 30.539 33.760 37.379 41.446 46.018 51.159 56.939 63.440 70.749 78.969 88.212 98.603 154.740 244.033 273.556 483.973
19
22.019 24.297 26.870 29.778 33.066 36.786 40.995 45.762 51.160 57.275 64.203 72.052 80.947 91.025 102.444 115.380 186.688 303.601 342.945 630.165
20
23.239 25.783 28.676 31.969 35.719 39.993 44.865 50.423 56.765 64.002 72.265 81.699 92.470 104.768 118.810 134.841 225.026 377.465 429.681 820.215
21
24.472 27.299 30.537 34.248 38.505 43.392 49.006 55.457 62.873 71.403 81.214 92.503 105.491 120.436 137.632 157.415 271.031 469.056 538.101 *
22
25.716 28.845 32.453 36.618 41.430 46.996 53.436 60.893 69.532 79.543 91.148 104.603 120.205 138.297 159.276 183.601 326.237 582.630 673.626 *
23
26.973 30.422 34.426 39.083 44.502 50.816 58.177 66.765 76.790 88.497 102.174 118.155 136.831 158.659 184.168 213.978 392.484 723.461 843.033 *
24
28.243 32.030 36.459 41.646 47.727 54.865 63.249 73.106 84.701 98.347 114.413 133.334 155.620 181.871 212.793 249.214 471.981 898.092 * *
25
34.785 40.568 47.575 56.085 66.439 79.058 94.461 113.283 136.308 164.494 199.021 241.333 293.199 356.787 434.745 530.312 * * * *
30
41.660 49.994 60.462 73.652 90.320 111.435 138.237 172.317 215.711 271.024 341.590 431.663 546.681 693.573 881.170 * * * * *
35
43.077 51.994 63.276 77.598 95.836 119.121 148.913 187.102 236.125 299.127 380.164 484.463 618.749 791.673 * * * * * *
36
48.886 60.402 75.401 95.026 120.800 154.762 199.635 259.057 337.882 442.593 581.826 767.091 * * * * * * * *
40
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 20% 24% 25% 30%
Period
0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8333 0.8065 0.8000 0.7692
1
0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972 0.7831 0.7695 0.7561 0.7432 0.6944 0.6504 0.6400 0.5917
2
0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118 0.6931 0.6750 0.6575 0.6407 0.5787 0.5245 0.5120 0.4552
3
0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355 0.6133 0.5921 0.5718 0.5523 0.4823 0.4230 0.4096 0.3501
4
0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674 0.5428 0.5194 0.4972 0.4761 0.4019 0.3411 0.3277 0.2693
5
0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 0.4803 0.4556 0.4323 0.4104 0.3349 0.2751 0.2621 0.2072
6
0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523 0.4251 0.3996 0.3759 0.3538 0.2791 0.2218 0.2097 0.1594
7
0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039 0.3762 0.3506 0.3269 0.3050 0.2326 0.1789 0.1678 0.1226
8
0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 0.3329 0.3075 0.2843 0.2630 0.1938 0.1443 0.1342 0.0943
9
0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220 0.2946 0.2697 0.2472 0.2267 0.1615 0.1164 0.1074 0.0725
10
0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.3173 0.2875 0.2607 0.2366 0.2149 0.1954 0.1346 0.0938 0.0859 0.0558
11
0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2858 0.2567 0.2307 0.2076 0.1869 0.1685 0.1122 0.0757 0.0687 0.0429
12
0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2575 0.2292 0.2042 0.1821 0.1625 0.1452 0.0935 0.0610 0.0550 0.0330
13
0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2320 0.2046 0.1807 0.1597 0.1413 0.1252 0.0779 0.0492 0.0440 0.0254
14
0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.2090 0.1827 0.1599 0.1401 0.1229 0.1079 0.0649 0.0397 0.0352 0.0195
15
0.8444 0.7142 0.6050 0.5134 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1696 0.1456 0.1252 0.1078 0.0929 0.0802 0.0451 0.0258 0.0225 0.0116
17
0.8360 0.7002 0.5874 0.4936 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1528 0.1300 0.1108 0.0946 0.0808 0.0691 0.0376 0.0208 0.0180 0.0089
18
0.8277 0.6864 0.5703 0.4746 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1377 0.1161 0.0981 0.0829 0.0703 0.0596 0.0313 0.0168 0.0144 0.0068
19
0.8195 0.6730 0.5537 0.4564 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1240 0.1037 0.0868 0.0728 0.0611 0.0514 0.0261 0.0135 0.0115 0.0053
20
0.8114 0.6598 0.5375 0.4388 0.3589 0.2942 0.2415 0.1987 0.1637 0.1351 0.1117 0.0926 0.0768 0.0638 0.0531 0.0443 0.0217 0.0109 0.0092 0.0040
21
0.8034 0.6468 0.5219 0.4220 0.3418 0.2775 0.2257 0.1839 0.1502 0.1228 0.1007 0.0826 0.0680 0.0560 0.0462 0.0382 0.0181 0.0088 0.0074 0.0031
22
0.7954 0.6342 0.5067 0.4057 0.3256 0.2618 0.2109 0.1703 0.1378 0.1117 0.0907 0.0738 0.0601 0.0491 0.0402 0.0329 0.0151 0.0071 0.0059 0.0024
23
0.7876 0.6217 0.4919 0.3901 0.3101 0.2470 0.1971 0.1577 0.1264 0.1015 0.0817 0.0659 0.0532 0.0431 0.0349 0.0284 0.0126 0.0057 0.0047 0.0018
24
0.7798 0.6095 0.4776 0.3751 0.2953 0.2330 0.1842 0.1460 0.1160 0.0923 0.0736 0.0588 0.0471 0.0378 0.0304 0.0245 0.0105 0.0046 0.0038 0.0014
25
0.7419 0.5521 0.4120 0.3083 0.2314 0.1741 0.1314 0.0994 0.0754 0.0573 0.0437 0.0334 0.0256 0.0196 0.0151 0.0116 0.0042 0.0016 0.0012 *
30
0.7059 0.5000 0.3554 0.2534 0.1813 0.1301 0.0937 0.0676 0.0490 0.0356 0.0259 0.0189 0.0139 0.0102 0.0075 0.0055 0.0017 0.0005 * *
35
0.6989 0.4902 0.3450 0.2437 0.1727 0.1227 0.0875 0.0626 0.0449 0.0323 0.0234 0.0169 0.0123 0.0089 0.0065 0.0048 0.0014 * * *
36
0.6717 0.4529 0.3066 0.2083 0.1420 0.0972 0.0668 0.0460 0.0318 0.0221 0.0154 0.0107 0.0075 0.0053 0.0037 0.0026 0.0007 * * *
40
0.6080 0.3715 0.2281 0.1407 0.0872 0.0543 0.0339 0.0213 0.0134 0.0085 0.0054 0.0035 0.0022 0.0014 0.0009 0.0006 * * * *
50
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 20% 24% 25% 30%
Period
0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8333 0.8065 0.8000 0.7692
1
1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257 1.6052 1.5278 1.4568 1.4400 1.3609
2
2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2.2832 2.2459 2.1065 1.9813 1.9520 1.8161
3
3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.1024 3.0373 2.9745 2.9137 2.8550 2.7982 2.5887 2.4043 2.3616 2.1662
4
4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6959 3.6048 3.5172 3.4331 3.3522 3.2743 2.9906 2.7454 2.6893 2.4356
5
5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.2305 4.1114 3.9975 3.8887 3.7845 3.6847 3.3255 3.0205 2.9514 2.6427
6
6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.7122 4.5638 4.4226 4.2883 4.1604 4.0386 3.6046 3.2423 3.1611 2.8021
7
7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 5.1461 4.9676 4.7988 4.6389 4.4873 4.3436 3.8372 3.4212 3.3289 2.9247
8
8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.5370 5.3282 5.1317 4.9464 4.7716 4.6065 4.0310 3.5655 3.4631 3.0190
9
9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.8892 5.6502 5.4262 5.2161 5.0188 4.8332 4.1925 3.6819 3.5705 3.0915
10
10.368 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 6.2065 5.9377 5.6869 5.4527 5.2337 5.0286 4.3271 3.7757 3.6564 3.1473
11
11.255 10.575 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.4924 6.1944 5.9176 5.6603 5.4206 5.1971 4.4392 3.8514 3.7251 3.1903
12
12.134 11.348 10.635 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.7499 6.4235 6.1218 5.8424 5.5831 5.3423 4.5327 3.9124 3.7801 3.2233
13
13.004 12.106 11.296 10.563 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.9819 6.6282 6.3025 6.0021 5.7245 5.4675 4.6106 3.9616 3.8241 3.2487
14
13.865 12.849 11.938 11.118 10.380 9.7122 9.1079 8.5595 8.0607 7.6061 7.1909 6.8109 6.4624 6.1422 5.8474 5.5755 4.6755 4.0013 3.8593 3.2682
15
15.562 14.292 13.166 12.166 11.274 10.477 9.7632 9.1216 8.5436 8.0216 7.5488 7.1196 6.7291 6.3729 6.0472 5.7487 4.7746 4.0591 3.9099 3.2948
17
16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.3719 8.7556 8.2014 7.7016 7.2497 6.8399 6.4674 6.1280 5.8178 4.8122 4.0799 3.9279 3.3037
18
17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.6036 8.9501 8.3649 7.8393 7.3658 6.9380 6.5504 6.1982 5.8775 4.8435 4.0967 3.9424 3.3105
19
18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.8181 9.1285 8.5136 7.9633 7.4694 7.0248 6.6231 6.2593 5.9288 4.8696 4.1103 3.9539 3.3158
20
18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.2922 8.6487 8.0751 7.5620 7.1016 6.6870 6.3125 5.9731 4.8913 4.1212 3.9631 3.3198
21
19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.201 9.4424 8.7715 8.1757 7.6446 7.1695 6.7429 6.3587 6.0113 4.9094 4.1300 3.9705 3.3230
22
20.456 18.292 16.444 14.857 13.489 12.303 11.272 10.371 9.5802 8.8832 8.2664 7.7184 7.2297 6.7921 6.3988 6.0442 4.9245 4.1371 3.9764 3.3254
23
21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.7066 8.9847 8.3481 7.7843 7.2829 6.8351 6.4338 6.0726 4.9371 4.1428 3.9811 3.3272
24
22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.8226 9.0770 8.4217 7.8431 7.3300 6.8729 6.4641 6.0971 4.9476 4.1474 3.9849 3.3286
25
25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.274 9.4269 8.6938 8.0552 7.4957 7.0027 6.5660 6.1772 4.9789 4.1601 3.9950 3.3321
30
29.409 24.999 21.487 18.665 16.374 14.498 12.948 11.655 10.567 9.6442 8.8552 8.1755 7.5856 7.0700 6.6166 6.2153 4.9915 4.1644 3.9984 3.3330
35
30.108 25.489 21.832 18.908 16.547 14.621 13.035 11.717 10.612 9.6765 8.8786 8.1924 7.5979 7.0790 6.6231 6.2201 4.9929 4.1649 3.9987 3.3331
36
32.835 27.355 23.115 19.793 17.159 15.046 13.332 11.925 10.757 9.7791 8.9511 8.2438 7.6344 7.1050 6.6418 6.2335 4.9966 4.1659 3.9995 3.3332
40
39.196 31.424 25.730 21.482 18.256 15.762 13.801 12.233 10.962 9.9148 9.0417 8.3045 7.6752 7.1327 6.6605 6.2463 4.9995 4.1666 3.9999 3.3333
50
Please complete the following self-assessment questionnaire relating to this short course.