UNIVERSITY EXAMINATIONS. UNIVERSITEITSEKSAMENS UNISA fe FIN3702 (498867) May/June 2013 FINANCIAL MANAGEMENT Durston 2 Hours 70 Marks EXAMINERS : FIRST MR MA PHENYA ‘SECOND MS MO PHANGO EXTERNAL PROF HP WOLMARANS Use of a non-programmable pocket calculator is 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 appendox A (pp 14-17, pages for rough work), instructions for the completion of a mark reading sheet and the following sections, questions and topics. ‘Sections Topic Marks: ‘Section A: ‘+ Alltopies 30 Section B. ‘Question 7 ‘Cash conversion cycle and inventory 20 ‘Question 2 ‘* Trade receivables, pledging and factonng 20 Total 70 } INSTRUCTIONS: SECTION A: Answer 30 multiple choice questions on the mark reading sheet. SECTION B: Answer the two long questions in the space provided below the questions. No rough work will be marked. [TURN OVER]iz FIN3702 MAY/JUNE 2013 SECTION A (30 MARKS) 1 All of the following are inflows of cash EXCEPT the decrease in accounts receivable net profit after taxes increase in accounts receivable increase in accruals RON= Cash flow that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of share, and cash outflow to pay cash dividends or repurchase of shares are called 1 operating cash flows 2. investment cash flows 3. financing cash flows 4. free cash flows Calculate the increase or decrease in cash for Monty Limited for last year given the following information decrease in marketable Securities R25 increase in debtors R50 increase in bills payable R30 decrease in creditors R20 increase in accrued wages R15 increase in inventories R35 retained earnings RS 1 +R20 2 -R30 3 +R40 4. -R50 Which one of the following accounts 1s classified as a cash inflow? Increases in marketable securities and trade payables Decreases in land and buildings and trade receivables Increases in vehicles and trade receivables Decreases in marketable secunties and vehicles Rone [TURN OVER]3 FIN3702 MAYI/JUNE 2013 During the year, Awethu Breweries Limited experienced an increase in net fixed assets of R300 000 and had depreciation of R200 000 The company also experienced an increase in current assets of R150 000 and an increase in accounts payables and accrual of R75 000 if the operating cash flow (OCF) for the year was R700 000, the company's free cash flow for the year equals 1 R 90000 2 R105 000 3 R115 000 4 R125 000 The primary purpose in preparing pro forma financial statement is cash planning to ensure ability to pay debts for nsk analysis for profit planning Rone The most common components of cash receipts are . . dividend income, cash sales and accounts payable cash sales, receivable collections and miscellaneous receipts acorual collections, cash sales and interest income tetained earings, dividends and cash sales Rona In April, a firm had an ending cash balance of R350 000 and, in May the firm had a total cash receipts of R400 000 and total cash disbursements of R500 000 The minimum cash balance required by the firm is R250 000 At the end of May, the firm had an excess cash balance of R250 000 an excess cash balance of RO a required financing of R100 000 a required financing of R250 000 Rone Which one of the following statement is incorrect? 1 Operating financial plans are intended to provide detailed implementation guidelines. 2 Financial planning provides road maps for guiding, coordinating and controlling the firm’s actions to achieve its objectives 3. Asaales forecast is a statement of the firm's planned inflows and outflows of cash 4 Profit planning typically involves the preparation of a pro forma income statement and balance sheet [TURN OVER]4 FIN3702 MAY/JUNE 2013 10 A firm has accounts receivable of R45 000, inventory of R55 000 and cash on hand that amounts to R2 000. The firm's accounts payable amount to R90 000 and it has an overdraft of R14 000 Its net working capital amounts to 1 R 2000 2. -R_ 2000 3 R204.000 4, -R204 000 FOR QUESTIONS 11 to 14 REFER TO THE FOLLOWING INFORMATION: Chiko (Pty) Limited manufactures and sells electronic products The following information was extracted from its financial statements Assets _ Current assets R10.000 Current habilites R 5000 Fixed assets R20 000 Long-term debt R12.000 eee Equity R13 000 Total R30 000 Total R30 000 The company eams 5% on current assets and 15% on fixed assets The current abilities cost 7% to maintain and the average annual cost of long-term funds 1s 20% 11. The firm's initial net working capital is. 1 -R 5000 2 R 5000 3 10000 4 R13000 12 The annual profit on total assets is, R2 500 3 000 R3 500 R4 500 RON [TURN OVER)13 14 15 16 7 5 FIN3702 MAYIJUNE 2013 If the firm was to move R3 000 of current assets to fixed, net working capital would .., the annual profit on total assets would, and the nsk of technical insolvency would respectively 1 increase, decrease, increase 2 decrease, increase, decrease 3. increase, decrease, decrease 4 decrease, increase, increase The 1s the time period that elapses from the point when the firm makes the outlay to purchase raw matenal on account to the point when payment is made to the supplier of the goods 1 cash conversion cycle 2 average payment period 3 average age of inventory 4 average collection period In theory, the conservative financing strategy ignores 1. all current liabilities 2. the spontaneous forms of short-term financing 3 current assets 4. the high nisk associated with this strategy In the economic order quantity (EOQ), costs are variable cost per unit of holding an item of inventory for a specific time period basic order carrying processing AONa Mpho uses 35 baskets each day to pack apples for shipping It takes five days to receive shipment of baskets after an order has been placed and she would like a safety stock of three days in inventory At what level of inventory should she place an order for baskets? 280 baskets 314 baskets 450 baskets 500 baskets Rone [TURN OVER]18 FIN3702 MAY/JUNE 2013 Because managing inventory 1s just like managing any other investment, decisions about the level of inventory should be guided by 1 the value of the nventory 2. the effect of inventory 3 a cost-benefit analysis 4 the effect of inventory levels on customer relations The firm's credit ... defines the minimum cntena for extension of credit to a customer sconng terms Policy standards sons FOR QUESTIONS 20 to 22 REFER TO THE FOLLOWING INFORMATION: Tiger Brands purchased a new machine on 20 February 2013 for R1 million on credit. The supplier has offered Tiger Brands terms of 2/10, net 45 The current interest rate the bank 1s offenng 1s 16% NB: Use 365 days for a year. 20 21. 22 The cost of giving up the cash discount is 11,09% 14,24% 21,28% 23,74% RON The firm decides to take the cash discount by borrowing the money on a discount basis of 13,19% pene & B 2 The aggressive financing strategy 1s risky in two respects: the firm operates with a low level of and the firm has only a limited amount of ... capacity. current liabilities, short-term borrowing net working capital; short-term borrowing current assets; long-term borrowing net working capital, long-term borrowing ReN> [TURN OVER]23 24 25 26 1 7 FIN3702 MAY/JUNE 2013 A firm expects to have R150 000 idle for 60 days If the firm could purchase marketable securities yielding 10 percent and pay brokerage fees of R1 500, the firm should 1 make the investment since interest earned exceeds brokerage fees 2 not make the mvestment since brokerage fees exceed interest eamed 3 leave the R150 000 in cash 4 invest the funds for more than 60 days due to the favourable rate The effective interest rate 1s 1 2 3 4 high on a loan if interest 1s paid at matunty lower if the loan ts a discount loan higher if the loan 1s a discount loan not affected by whether the loan 1s a discount loan or a loan with interest paid at matunty Ina line credit arrangement, the firm pays interest on 1 2 3 4 the full line of credit the unused portion of the line of credit only the amount actually borrowed only the amount borrowed and commitment fees on any unused portion of the loan Revolving credit agreements are 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 firm can owe the bank any one time credit arrangements made in cooperation with suppliers that allow the fims to roll over accounts payable each month unsecured long-term promissory notes issued by firms with a high credit standing 27 Abank lends a firm R1 000 000 for one year at 12% on a discounted basis and requires compensating balances of 10% of the face value of the loan The effective annual interest rate associated with this loan is, aon 12,0% 13,3% 13,6% 18.4% [TURN OVER]28 29 30 8 FIN3702 MAY/JUNE 2013 A firm has a line of credit and borrows R25 000 at 9% annual interest for 180 days or half a year If the interest ts paid in advance, the effective interest rate 1s. 1 47% 2 94% 3 99% 4 103% ‘A firm arranged for a 120 day bank loan at an annual rate of interest of 10% If the loan 1s for R100 000, how much interest in rands will the firm pay? (Assume a 360 day year) 1 R 1000 2 R 3333 3 R10000 4 — R30000 As credit standards are relaxed, sales are expected to and the investment in accounts receivable 1s expected to 1 increase, increase 2 increase, decrease 3 decrease, decrease 4 ~~ decrease, increase [TURN OVER]9 FIN3702 MAY/JUNE 2013 SECTION B (40 marks) QUESTION 1 {20} Best Bid (Pty) pays trade and other payables on the tenth day after purchase. The average collection period is 30 days and the average age of inventory 1s 40 days. The firm currently has annual sales of R18 million and pays 12% per year for its resource Investment. The firm is considenng a plan that would stretch its trade and other payables by 20 days (Assume a 365-day year) REQUIRED 11 Calculate the annual savings that the firm can realise by implementing the proposed plan. (16) {TURN OVER)10 FIN3702 MAY/JUNE 2013 12 List and discuss four strategies for management of the cash conversion cycle. (4) [TURN OVER}14 FIN3702 MAY/JUNE 2013 QUESTION 2 [20] Joan Hunter, a credit manager, has been asked to investigate a proposed change in the firm's credit terms Joan believes that by increasing the credit period from 30 to 65 days, sales will increase Annual sales are estimated to increase from the current level of R3 000 000 to R3 600 000 Eighty percent of this increase Is expected to be attributable to new customers, and the other 20% are expected to result from existing customers Joan's investigations indicate that with the extended credit period, the firm's average debtors collection period will increase from 45 to 90 days In addition, bad debts is expected to increase from 1% to 2,5% of sales The firm's variable costs are expected to continue to amount to 80% of each R1 of sales The firm currently requires a 16% rate of return on accounts receivable. (Assume a 365-day year) REQUIRED 21 Calculate the additional profit contnbution expected from the increased credit period (3) [TURN OVER]12 FIN3702 MAY/JUNE 2013 22 Calculate the increase in the company's average investment in accounts receivable and the resulting annual cost attnbutable to the proposed increase in the credit period ©) 23 Calculate the annual cost expected to result from the increase in bad debt expenses attnbutable to the proposed lengthening of the credit period ) [TURN OVER]13 FIN3702 MAY/JUNE 2013 24 Describe and compare the basic features of the following methods of using trade receivables to obtain short-term financing (a) pledging trade receivable, and (b) factoning trade recewable @) [TURN OVER]14 FIN3702 MAY/JUNE 2013 APPENDIX A ROUGH WORKFIN3702 MAY/JUNE 2013 [TURN OVER]FIN3702 MAY/JUNE 2013 [TURN OVER]17 FIN3702 MAY/JUNE 2013 © UNISA 2013,UNIVERSITY OF SOUTH AFRICA U N ] SA [feo EXAMINATION MARK READING SHEET PART 1 (GENERAL/ALGEMEEN) DEEL 1 8 yekesrauaomnen ngauensenr nue (ov PRETORIA UNIVERSITEIT VAN SUID-AFRIKA EKSAMEN-MERKLEESBLAD- eos eos eos cores co» «bs -03] [ras cas a> eo» «ws ca Vo fisasenenasepenen| [tain arenes a zs eas eau 2s 2s r25e20 e23]feza 2s «2s ed» 2 2 ces nS] [ba gee as a eR QP Eea) los Peal tee MP cis) frsie REP es ol fas ces ces creas cass] [esr cgoeas co a PES aS] ESS ol For use by examination invigtlator Vir gebruik deur eksamenopsiener 4 fe eber aera! low Dae ca Jess eGo eBs ds eds eGo Gs e8a] [ets coy Go oa cD ey USE ONLY AN HO PENCIL TO COMPLETE Tas SHEET “CHECK THAT YOUR INITIALS ANO SUANAMS HAS LEN FILLED IN CORRECTLY {CHECK Tua YOUR STUDENT NUMBER HAS BIEN FLED IN CORRECTLY ‘Gate Tat THE UNIGLE NUMBER HAS BEES FLED IN CORRECT Y {GaECX TAT ONLY ONE ANSWER ER QUESTION HAS BEEN MAARLED (GEARUIK SLEGS 8 HE POTLOOD OM HIERDIE BLAD TE VOLTOOI MEREAS VOLE. ote ONTROLEER DAT U VOORLEITERS &N WAN REG NGEVUL IS PART 2 (ANSWERS/ANTWOORDE) DEEL 2 Dea sy = che ai ee 2 a # creda ea ea erespereriney o Wee ay Hiden a cy Hse ec) (ap ay Hoebi ga oy sei 32s eds cas Sy 4 ‘ mem ws) Yo eaeto eds ea oy a oa ay Fa eas es 162 39 fa ease ras 4 Haigh oy Hae ah eb oy maces) we maaan ny maaan! ria 2s es eas 2 diets eas rerenriec) Bo weeben si Hea gs eb 9 Mo tharaien a Hadras ety EEE) [EE fea eee supemel |e gas aeea) | yaa TE |p a eet ‘A eee’: Qe ee: EGOS as ERT ee PERN E es fee suseeel |f uanue ragga |e pean PSE) |p EE PESEN [EERE eee eee russe |e kage ragga |p pasa PEE | ESS Pane) [EEEES Thaw a @ naa Rowe ees Wr Siar pen es Booties Ww aes) Hotbars M9 ED Qian ea Bodie wo Mo Gigs seas ob eo eee aes m aaa) To Haeds eds as es Hz ap eds canes B Mee Ma eee ea ee BMD wd fa dnegeeg cares & (ipa cee HB sds ets e435 Bt etree ease Mp emer eta eda eo eds el Wo aca ce BDI ee Aiea asses es 1g Ha eds eh es Dey Hse eb cae | 1 deep eas as es Daw a 12 H3e25 eds ses fs eda epee 9 1 Hees a sl e} eho egrds eb mw aD io ol RM ra te omimmerarel 8 raed We sade ee esl Shida ea es ey 1 aa So coeds a 6 i qian ears B Hawa, We dies as ass Be Siegran a es ie Maen cal & perma i meres 9 chee cae Ro degrades B cheese Rowaaac! | B cya aio) TH queda: eb to js eps eau eas by waa wy cis cry egy can coy cena] M2515 20 30 242 By ets eds ea) case Pods a3 5 HB cca et a po eds i Sy fe epee: as ee po eds 2 3 MW see ew |