UNIVERSITY EXAMINATIONS UNIVERSITEITSEKSAMENS UNISA lesen FIN3702 (473709) October/November 2013 FINANCIAL MANAGEMENT Duration 2 Hows 70. Marks EXAMINERS FIRST MR MA PHENYA SECOND. MS MD PHANGO EXTERNAL PROF HP WOLMARANS Use of a non-programmable pocket calculator 1s permissible Closed book examination This examination question paper remains the property of the University of South Africa and may not be removed from the examination venue This paper consists of 17 pages including appendix A (pp14—17, pages for raugh work), instructions for the completion of a mark reading sheet and the following sections, questions and topics Sections Topic Marks Section A. + All topics 30 Section B Question 1 + Free cash flow and inventory management 22 ‘Question 2 + Gash budget 18 Total 70 INSTRUCTIONS: SECTION SECTION nswer 30 multiple choice questions on the mark reading sheet. : Answer the two long questions in the space provided below the questions, No rough work will be marked. [TURN OVER]2 FIN3702 OCTOBER/NOVEMBER 2013 SECTION A (30 MARKS) 1 Three important components of the statement of cash flows that must be obtained from the income statement include all of the following EXCEPT 1 depreciation and any non-cash charge 2 interest expenses 3 net profit after taxes 4 cash dividends paid on both preference and ordinary shares All of the following are operating cash flows EXCEPT 1. net profit/eamings after tax 2 increase or decrease in current labilties, 3. increase or decrease in fixed assets 4. depreciation For the year ended 31 December 2012, a company had a cash flow of R20 000 from operating activities, cash flow from investing activities of -R15 000, and cash flow from financing activities of -R10 000 The statement of cash flows would show anet in cash and marketable securities 1, increase of R5 000 2. decrease of R5 000 3 decrease of R15 000 4° increase of R25 000 A company has just ended the year making a sale to the amount of R200 000 of Inventory purchased during the year at a total cost of R150 500 Although the company paid in full for the inventory dunng the year, it has yet to collect from the customers at year end One possible problem this company will face is low profitability insolvency inability to receive credit high leverage aon A firm has just ended the calendar year by selling R150 000 worth of inventory that was purchased dunng the year at a cost of R112 500 Although the firm paid 1n full for during the year, it has yet to collect on the sale at year end The net profit and cash flow for the year are respectively RO and R150 000 R37 500 and -R150 000 R37 500 and -R112 500 R150 000 and R112 500 fons [TURN OVER}10 "4 Ba FIN3702 OCTOBER/NOVEMBER 2013 Which one of the following items should a company report directly in its monthly cash budget? its monthly depreciation expense cash proceeds from selling one of its divisions a write-off of the company’s bad debts accrued interest on zero coupon bonds that the company issued RON The stnct application of percent-of-sales method deals with preparing the pro forma income statement assuming all costs are 1 fixed 2 constant 3. independent 4 variable In August a firm had total cash receipts of R10 000, total cash disbursement of R8 000, depreciation expense of R1000, a minimum cash balance of R3 000 and a beginning cash balance of R500 The net cash balance for August is a/an required total financing of R500 excess cash balance of R5 500 excess cash balance of R500 required total financing of R2 500 Ons The primary purpose in prepanng pro forma financial statement is 1 for cash planning 2 to ensure the ability to pay dividends 3 for nsk analysis 4 for profit planning For companies with high fixed costs, the percent-of-sales approach for preparing a pro forma income statement tends to 1 overestimate profits when sales are increasing 2 underestimate profit when sales are increasing 3 be an accurate predicator 4 bea difficult model to apply Which of the following will cause an increase in working capital? Cash 1s used to buy marketable secunties A cash dividend 1s declared Inventory 1s sold at a profit, but the sale is on credit Missing inventory 's wnttien off against retained earnings RoR (TURN OVER}12 13 14, 15 16 4 FIN3702 OCTOBER/NOVEMBER 2013 Relative to cash flows affecting net working capttal, all of the following statements are true EXCEPT 1 cash inflows are generally more predictable than cash outflows 2 cash outflows for current labtities are relatively predictable 3 the more predictable the cash inflows, the less net working capital a firm needs 4 because most firms are unable to match cash inflows to outflows with certainty, current assets that more than cover outflows for current liabilities are necessary Companies generally choose to finance temporary net operating working capital with short-term debt because 1 matching the matunties of assets and habilities reduces risk 2a firm that borrows heavily long-term is more likely to be unable to repay the debt than a firm that borrows heavily short-term debt 3. short-term interest rates have traditionally been more stable than long-term interest rates 4. the yield curve has traditionally been downward sloping ABC Ltd has a cash conversion cycle of 60 days The company's annual outlays 1s R12 million and cost of negotiated financing is 12 per cent If the frm reduces ils average age of inventory by 10 days, the annual savings Is Assume 360 days 1 R 28000 2 R 40000 3 104000 4 R144.000 Mac Manufacturer turns over its inventory eight times each year, has an average payment period of 35 days and has an average collection period of 60 days The firm has a current annual outlay of R2,5 million on operating cycle nvestment Assume a 365 day year The firm's daily cash operating expenditure 1s closest to RS 479 12 4521 50 RS 564 23 R6 849 31 RON A firm can reduce its cash conversion cycle by 1 increasing the average age of ventory 2 increasing the average collection period 3. decreasing the average payment period 4 increasing the average payment period [TURN OVER]5 FIN3702 OCTOBER/NOVEMBER 2013 17 The inventory contains the basic components of the production process raw material work-in-process finished goods capital goods RONH FOR QUESTIONS 18 to 19 REFER TO THE FOLLOWING INFORMATION: Demos Ltd uses 800 units of a product per year on a continuous basis The product has a carrying cost of R50 per unit per year and order costs of R300 per order It takes 30 days to receive a shipment after an order 1s placed and the firm requires a safety stock of 5 days usage in inventory Assume 360 days 18 The economic order quantity for Demos Ltd ts closest to 58 units 89 units 98 units 108 units RONs 19 The reorder point for Demos Ltd 1s closest to 78 units 89 units 108 units 120 units RON 20 The financing strategy requires the firm to pay interest on excess funds borrowed but not needed through the entire year 1 aggressive “3 conservative 3 permanent 4 seasonal 21 The firm's _ specifies the repayment terms required of all credit customers credit scoring credit terms 1 fet 3 credit policy 4 credit standard (TURN OVER}6 FIN3702 OCTOBER/NOVEMBER 2013 22 An applicant's capacity to repay the requested credit 1s shown by 1 financial statement analysis. 2 bank account balances 3 the applicant's payment history 4 the level of assets the applicant can pledge toward the loan 23 Macs Ltd borrowed R125 000 under the line of credit agreement While the company normally maintains a cheque account balance of R15 000 tn the lending bank, the credit line requires a 20% compensating balance The stated interest rate on the borrowed funds 1s 10% The effective annual rate of interest on the line of credit is closest to 1 861% 2 10 87% 3 15.30% 4 16 12% FOR QUESTIONS 24 to 25 REFER TO THE FOLLOWING INFORMATION: Nandos Ltd 1s in the process of negotiating a line of credit with two banks The pnme rate 1s currently 8% The terms are listed on the following table Bank Loan terms | Bank A One per cent above prime rate on a discount basis and a 20% compensating balance on the face value of the loan Bank B Two per cent above prime rate and a 15% compensating balance 24 The effective interest rate for bank Ais and bank Bis 12 68%,11 76% 15 10%,12 18% 18 21%,13 25% 19 58%,14 17% BONS 25 Nandos Ltd must choose the credit line of bank A bank B both banks none of the banks Rona (TURN OVER]26 A 28 7 FIN3702 OCTOBER/NOVEMBER 2013 18 a type of loan made to a business by a commercial bank This type of loan Is made when the borrower needs additional funds for a short period but does not believe the need will continue or reoccur on a seasonal basis RONH revolving credit agreement Ine of credit short-term self-liquidating loan single payment note 27 Revolving credit agreements are 1 2 3 4 guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time non-guaranteed loans that specify the maximum amount that a fim can owe the bank at any one time credit arrangements made by the company with suppliers that allows the firms to roll over accounts payable each month none of the above The interest rate charged on a secured short-term foan to a company 1s typically the interest rate on an unsecured loan. Rowe lower than same as unrelated high than FOR QUESTIONS 29 to 30 REFER TO THE FOLLOWING INFORMATION: Tiger Brands has obtained a R10 000, 90 day bank loan at an annual interest rate of 15% payable at matunty Assume a 365 day year 29 30 The interest that the company will pay on the 90 day loan 1s closest to 1 2 3 4 R101 36 R210 36 R369 86 R489 25 The effective 90 day rate on the loan is 1 2 3 4 3.70% 410% 5 60% 6 80% [TURN OVER]8 FIN3702 OCTOBER/NOVEMBER 2013 SECTION B (40marks) Question 1 consists of two separate questions, QUESTION 1 (a) [10] Monty (Pty) Ltd manufactures and sells electronic products The following information was extracted from its 2011 and 2012 financial statements 2011 ~) 2012 R R Depreciation "3 000 EBIT 30.000 Interest expense 3.000 | Taxes 8.000, Cash 21.000 24.000 | Accounts receivable 39 000 45 000 | Inventory 27 000 30.000 Net fixed assets 22.000 24 000 Accounts payable 25.000 30 000 Notes payable 50.000 40 000 Accruals 1000 2.000 | REQUIRED 11 Calculate the operating cash flow of Monty (Pty) Ltd for the year ended 2012 (3) [TURN OVER]9 FIN3702 OCTOBER/NOVEMBER 2013 1 2 Calculate the free cash flow of Monty (Pty) Ltd for the year ended 2012 (7) [TURN OVER]10 FIN3702 OCTOBER/NOVEMBER 2013 QUESTION 1 (b) [12] Reality Concepts (Pty) 1s a fast growing company specialising in the creation of reality settings for television broadcasting As a result of the success of the Big Brother series, the company has decided to lengthen its credit period from 30 days to 60 days in order to take advantage of the project opportunities, thereby giving clients more time to settle their accounts All customers will continue to pay on the net date The firm currently has sales of R450 000 with vanable cost amounting to R345 000 The lengthening of the credit period 1s expected to increase sales to R510 000 The company has a required rate of return on equal-nsk investments of 20% (Assume a 365 day year) REQUIRED 1 1Calculate the additional profit contribution expected from the increased credit period (6) [TURN OVER]W FIN3702 OCTOBER/NOVEMBER 2013 12 Calculate the increase in the company’s average investment in accounts recewable and the resulting annual cost attnibutable to the proposed increase in the credit penod 6) [TURN OVER]12 FIN3702 OCTOBER/NOVEMBER 2013 QUESTION 2 (13) The following information is obtained from the records of Monto Electrical Manufacturers for 2012 Month Sales January R100 000 February 92 000 March 88 000 April 70 000 May 56 000 June 38.000 Eighty per-cent of sales are cash An analysis of the payment by debtors reveals the following + Ten per cent of sales is collected during the month after sale ‘+ Five per cent of sales is collected dunng the second month after sale ‘+ Five per cent is irrevocable Expenses will be paid as follows: * Purchases represent 59% of sales The firm pays cash for 40% of its purchases and 60% the following months Overheads cost equal 10% of the preceding month’s total purchase Salaries and wages amount to 11% of the preceding month’s total sales Sales commission amount to 5% of each month's total sales Depreciation amounts to R1 000 every month The firm has beginning cash in Apri of R10 000 and maintained a minimum cash balance of R3 000 [TURN OVER}13, FIN3702 OCTOBER/NOVEMBER 2013 REQUIRED Given the above information, prepare the cash budget of Monto Electrical Manufacturer for the months of Apri, May and June [TURN OVER]14 FIN3702 OCTOBER/NOVEMBER 2013 APPENDIX A ROUGH WORKFIN3702 OCTOBER/NOVEMBER 2013 (TURN OVER}FIN3702 OCTOBER/NOVEMBER 2013 (TURN OVER]7 FIN3702 OCTOBER/NOVEMBER 2013 © UNISA 2013 [TURN OVER]UNIVERSITY OF SOUTH AFRICA UNI SA lee EXAMINATION MARK READING SHEET UNIVERSITEIT VAN SUID-AFRIKA EKSAMEN-MERKLEESBLAD. . 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