SEMESTER : FINANCIAL MANAGEMENT 2 (FM202)...

of 11

© IMM Graduate School of Marketing Assignment: 1

st Semester 2014 FM202

ASSIGNMENT 1ST SEMESTER : FINANCIAL MANAGEMENT 2 (FM202)

CHAPTERS COVERED : CHAPTERS 1-4

STUDY UNITS COVERED : STUDY UNITS 1-4

DUE DATE : 3:00 p.m. 18 March 2014

TOTAL MARKS : 100

INSTRUCTIONS TO CANDIDATES FOR COMPLETING AND SUBMITTING

ASSIGNMENTS The complete ‘Instructions to Students for Completing and Submitting Assignments’ must be collected from any IMM GSM office, IMM GSM recognised Additional Tuition Centre or can be downloaded from the IMM GSM website. It is essential that the complete instructions be studied prior to commencing your assignment. The following points highlight only a few important notes. 1. You are required to submit ONE assignment per subject.

2. The assignment will contribute 20% towards the final examination mark, and the other 80% will be made up from the examination, however the examination papers will count out of 100%.

3. Although your assignment will contribute towards your final examination mark, you do not have to earn credits for admission to the examinations; you are automatically accepted on registering for the exam.

4. Number all the pages of your assignment (e.g. page 1 of 4) and write your name and surname, student number and subject at the top of each page.

5. The IMM GSM requires assignments to be presented on plain A4 paper. You must show all working calculations, including and where appropriate multiple-choice working calculations.

6. A separate assignment cover, which is provided by the IMM GSM, must be attached to the front cover of each assignment.

7. Retain a copy of each assignment before submitting, in case the original does not reach the IMM GSM.

8. The assignment due date refers to the day up to which assignments will be accepted for marking purposes. The deadline is 3:00 p.m. on 18 March 2014. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 18 March 2014 and up to 5:00 p.m. the following day after which no assignments will be accepted.

9. If you fail to follow these instructions carefully, the IMM Graduate School of Marketing cannot accept responsibility for the return of the assignment. It may even result in your assignment not being marked.

Results will be available on the IMM GSM website: www.immgsm.ac.za, on Friday, 2 May 2014.

http://www.immgsm.ac.za/

of 11



SPECIFIC INSTRUCTIONS: Answer ALL the questions The use of calculators is permitted unless stated otherwise. Show ALL calculations. Read all questions carefully to determine exactly what is required before attempting to answer. Number your answers clearly and set them out under appropriate headings and sub-headings.

QUESTION 1 [10]

1.1. Which of the following would NOT improve the current ratio? a. Borrow short-term funds to finance additional property, plant and

equipment b. Issue long-term debt to buy inventory c. Issue ordinary shares to reduce current liabilities d. Sell property, plant and equipment to reduce accounts payable

1.2. A non-cash charge is an expense that would be:

a. deducted on a cash flow statement. b. deducted from free cash flows. c. added to operational cash flows. d. deducted on the statement of comprehensive income.

1.3. From the options below, the agency problem can best be described as …

a. a decision that will lead to shareholders’ wealth. b. a decision made which is in the best interest of the company. c. decisions that will increase company profits over the short run based on

pressure from a majority shareholder. d. something referred to in the real estate industry.

1.4. A pro-forma financial statement is one that: a. projects future years’ income and/or financial position. b. is expressed as a percentage of the total assets of the organisation. c. is always expressed as a percentage of the total sales of the organisation. d. is always expressed relative to a chosen base year’s financial statement. 1.5. An increase in __________ is MOST likely to be an indication of an accounts

receivable policy that may be too restrictive? a. Bad debts b. Accounts receivable turnover rate c. Credit sales d. Operating cycle

of 11



1.6. Which of the following are examples/indicative of agency costs? I. Forgoing an investment opportunity which would add to the market value of

the owners’ equity due to a conflict of interest II. Paying a dividend to each of the existing shareholders III. Purchasing new equipment which increases the value of each share IV. Hiring outside auditors to verify the accuracy of the company financial

statements

a. II and III only b. I and III only c. I and IV only d. I, II, and IV only 1.7. Which of the following are included in current liabilities? I. Note payable to a supplier in eighteen months II. Debt payable to a mortgage company in nine months III. Accounts payable to suppliers IV. Loan payable to the bank in fourteen months a. I and III only b. II and III only c. III and IV only d. II, III, and IV only 1.8. Which one of the following statements is CORRECT concerning ratio

analysis? a. A single ratio is often computed differently by different individuals.

b. Ratios do NOT address the problem of size differences among organisations.

c. There is only a very limited number of ratios which can be used for analytical purposes.

d. Each ratio has a specific formula that is used consistently by all analysts. 1.9. The components of the Du Pont system/formula can generally be described

as: I. operating efficiency, asset use efficiency and organisation’s profitability.

II. financial leverage, operating efficiency and asset use efficiency. III. the equity multiplier, the profit margin and the total asset turnover. IV. the debt-equity ratio, the capital intensity ratio and the profit margin. a. I and II only b. II and III only c. I and IV only d. I and III only

of 11



1.10. Which of the following represent problems encountered when comparing the financial statements of one organisation with those of another organisation?

I. Either one, or both, of the organisations may be conglomerates and thus have unrelated lines of business.

II. The operations of the two organisations may vary geographically. III. The organisations may use differing accounting methods for inventory

purposes. IV. The two organisations may be seasonal in nature and have different fiscal

year ends. a. I and II only b. II and III only c. I, III, and IV only d. I, II, III, and IV

QUESTION 2 [45] You are the loan officer at BankBest Bank (BBB). Your main responsibility is to review applications for loans. You are at present reviewing an application by the Hammer Tools Company (HTC). HTC manufactures various types of high quality punching and deep-drawing press tools for kitchen appliance manufacturers. John Smith, the financial manager of HTC, has submitted a justification to support the application for a short-term loan from BBB. Extracts of the Statement of Comprehensive Income and Statement of Financial Position of HTC, submitted with the justification to BBB, are provided below:

Extract of the Statement of Comprehensive Income

of Hammer Tools Company for the year ended 31 December 2012

2012 2011

R’000 R’000

Revenue (all credit) 45 000 40 909

Cost of sales (23 000) (20 909)

Gross profit 22 000 20 000

Selling and admin expenses (13 000) (11 818)

Other expenses (depreciation) (3 000) (2 000)

Finance costs (412) (400)

Profit before tax 5 588 5 782

Income tax expense (2 235) (2 313)

Profit for the year 3 353 3 469

An ordinary dividend of R733 000 was declared in 2012 and R758 000 in 2011.

of 11



Statement of Financial Position

of Hammer Tools Company as at 31 December 2012

2012 2011

R’000 R’000

ASSETS

Non-current assets

Land 1 000 1 000

Plant and equipment at carrying amount 18 000 16 000

Plant and equipment at cost 31 000 26 000

Accumulated depreciation (13 000) (10 000)

Current assets

Inventories 5 220 5 000

Trade receivables 7 600 6 000

Cash and cash equivalents 1 800 2 000

TOTAL ASSETS 33 620 30 000

EQUITY AND LIABILITIES

Equity attributable to equity holders

Issued ordinary share capital 4 000 4 000

Retained earnings 16 620 14 000

Non-current liabilities

Debentures 4 000 4 000

Current liabilities

Trade payables 2 600 2 000

Accrued expenses 6 400 6 000

TOTAL EQUITY AND LIABILITIES 33 620 30 000

of 11



You have obtained the following industry averages:

Gross profit margin 50%

Operating profit margin 15%

Net profit margin 8%

Return on assets 10%

Return on equity 20%

Current ratio 1.5

Quick ratio 1.0

Debt : Total assets 0.5

Times interest earned 25

Receivables days 45 days

Inventory turnover 8

Asset turnover 1.6

REQUIRED Prepare a MEMORANDUM to submit to your boss, as to whether finance should be granted to Hammer Tools Company. (45) Hint:

Use the format (tables) that follow in order to complete the ratio analysis portion of the memorandum.

One mark will be awarded for a correct ratio including its relevant unit of measurement.

Provide comments and evaluations under the respective topics provided.

NO MARKS will be awarded for stating an increase or decrease in the ratios.

Each valid statement within your comments will earn one mark.

You may assume 365 days in a given year and you are not required to use averages.

Assume credit purchases are equal to cost of sales.

Show all your workings and round to 2 decimal points.

of 11



Format: Profitability

Ratio 2012 2011 Industry

Gross profit margin

= 50%

Operating profit margin

= 15%

Net profit margin

= 8%

Comment:

Activity and Liquidity


Total asset turnover

= 1.6

Inventory turnover

= 8.0

Comment:

Current ratio

= 1.5

Comment:

Quick ratio

= 1.00

Comment:

Receivables days

(Collection period)

= 45 days

Comment:

of 11



Payables days

(Payment period)

Unknown

Comment:

Return on capital


Return on assets

= 10%

Return on equity

= 20%

Comment:

Capital Structure


Debt ratio

(Total debt : Total assets)

= 50%

Interest cover

(Times interest earned)

= 25

Comment:

of 11



QUESTION 3 [20]

(This question consists of TWO (2) parts) PART A Sale-It Pty Ltd is a family owned business with Mr. Marketer as the controlling shareholder in the company as well as the CEO. During the year Sale-It (Pty) Ltd experienced an increase in net non-current assets of R1 000 000 and had deprecation of R300 000. It also experienced an increase in current assets of R500 000 and an increase in trade and other payables and accruals of R400 000. Sale-it Pty Ltd had revenue of R30 000 000 with cost of sales at R25 000 000. Operational expenses were reported at R3 000 000.

Tax is at 28%

REQUIRED

3.1 Calculate Sale-It Pty Ltd’s free cash flows (FCF) for the year. (5)

3.2 Discuss why depreciation is considered a non-cash charge. (3)

3.3 Explain how the agency problem can arise with regard to the role of the financial manager and state if the agency problem could possibly exist within Sale-it Pty Ltd. (2)

PART B PDR Ltd expects sales during 2014 to rise from the 2013 level of R5.5 million to R6.6 million. Because of a scheduled large loan repayment the interest expense in 2014 is expected to drop to R400 000. The organisation plans to increase its cash dividend payments during 2014 to R380 000. The organisation’s 2013 year end statement of comprehensive income is provided below:

PDR Ltd Statement of Comprehensive Income for the year ended 31 December 2013

Revenue R 5 500 000

Cost of sales R 3 025 000

Gross profit R 2 475 000

Operating expenses R 660 000

Operating profit R 1 815 000

Finance cost R 550 000

Profit before tax R 1 265 000

Income tax expense (28%) R 354 200

Additional Information: Cash dividends

R 325 500

REQUIRED 3.4 Use the percentage-of-sales method to prepare a 2014 pro-forma statement of

comprehensive income for PDR Ltd. (7)

3.5 Explain why the statement (in 3.4) may underestimate or possibly overestimate the company’s actual 2014 pro forma income. (3)

of 11



QUESTION 4 [25]

(This question consists of FIVE (5) parts) PART A 4.1 Distinguish between an annuity, annuity due as well as a perpetuity. (3) PART B

An organisation will purchase a new delivery vehicle in 6 years’ time as its old vehicle will be scrapped by then. It decides to set up a fund to prepare for the replacement of the old vehicle, starting at the end of the first year. It calculates that it will need R235 000 to finance the new vehicle in 6 years’ time. REQUIRED 4.2 Calculate, by way of an applicable formula, how much money must be

invested each year if the interest on money invested in the fund is expected to be 17 % p.a. compounded annually. (4)

PART C You are tracking the inflation on the prices of new vehicle as you would like to buy a new one in 5 years. Your research shows that the price of the car you want will increase by 4% per year over the next 5 years. The car costs R140 000 today. REQUIRED 4.3 Estimate the price of the car at the end of five years. (2)

4.4 How much cheaper will car be in five years if the rate of inflation was 2%

rather than 4%? (3) PART D Jolly Roger furnishes you with his expected annual income from 2001 to 2005.

Year Cash flow 2001 2002 2003 2004 2005

R50 000 R56 000 R64 000 R72 000 R80 000

REQUIRED 4.5 Calculate the compound annual growth rate (i) associated with the income

stream. (2)

of 11



4.6 Calculate the expected cash flow for 2006 taking into consideration the growth rate calculated in (a) above. (1)

4.7 Calculate the deposit that Jolly Roger needs to invest today at 11,5 % p.a. interest, if he wishes to receive a steady annual cash flow of R80 000 at the end of each year from now on until eternity. (3)

PART E Ross wants to buy a car worth 50 000 by financing it over a period of 36 months. The bank offers Ross an interest rate of 20% per annum, compounded monthly. They also offer him a 6 month grace period.(I.e. Ross does not have to pay anything until 6 months have passed, however, interest will still be charged during the grace period, from the beginning of the finance contract. Assume an ordinary annuity is in effect where necessary.) REQUIRED 4.8 How much would Ross have to pay per month (‘x’), starting in 6 months’ time?

(7)

ASSIGNMENT TOTAL: 100

Mo

nth

36

Mo

nth

1

R5

0 0

00

bo

rro

wed

no

w

Mo

nth

2

Mo

nth

4

Mo

nth

6

Mo

nth

5

Mo

nth

3

Mo

nth

7

Payment grace period Monthly payments ‘x’ are made

x

SEMESTER : FINANCIAL MANAGEMENT 2 (FM202)...

Documents

Transcript of SEMESTER : FINANCIAL MANAGEMENT 2 (FM202)...