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FIN4801Testbank
2022
,UNIVERSITY EXAMINATIONS
June/July 2021
FIN4801
Advanced Financial Management
100 Marks
Duration: 4 Hours
Instructions:
This paper consists of 12 pages, plus appendix A (financial tables) on pages 9 to 12.
This is an open-book examination.
As the examination is an assessment, it should be your own work and you should remember
to tick the Declaration of Honesty.
Plagiarism checks will be run on your submission on Turnitin and manual checks will be done.
Remember to save your file as a PDF before submitting it and to start submitting it as soon
as the writing time for the paper has stopped (i.e. after four [4] hours). Do not use your upload
time to answer the paper but rather ensure that your answers are uploaded on time. We cannot
help you in the last 15 minutes of the upload time and you should contact us immediately if
you are experiencing any issues with uploading.
Answer all the questions.
Show all your calculations clearly and label your answers.
Submit your paper on the myExams platform only (go to myexams.unisa.ac.za).
, CONFIDENTIAL FIN4801
Page 2 of 12 JUNE/JULY 2021
QUESTION 1 [5 marks]
This question is comprised of five short multiple-choice questions (MCQs). Answer them on
the provided template or alternatively only write down the question number and the
corresponding answer option you chose, for example: Question 7: A.
Question 1.1 (1 mark)
If a company is wholly financed by equity and a large amount of debt is suddenly introduced
into its capital structure, how would you expect the company’s beta to respond?
The company’s beta would … .
a. stay the same
b. decrease due to the lower cost of capital
c. increase due to the increase in financial risk
d. not be measurable due to the use of debt
Question 1.2 (1 mark)
In the context of capital budgeting, if future cash flows are estimated in nominal terms, how
would you adjust the cash flows for inflation?
a. I will make no adjustment as the nominal cash flows are in future terms and the
discount rate includes inflation.
b. I will adjust the discount rate to account for inflation.
c. I will inflate the cash flows according to the rate of inflation and leave the discount rate
as is.
d. I will deflate the cash flows to real terms and adjust the discount rate for inflation.
Question 1.3 (1 mark)
If a company strictly follows the residual approach to paying out dividends but has a schedule
of fully divisible, net present value positive projects exceeding its available funds, which of the
following statements would be MOST likely to be true?
The company would … .
a. pay only a small dividend and rather undertake more projects
b. pay no dividends and undertake all profitable projects
c. pay a dividend out of the remaining funds after all projects had been undertaken
d. retain its earnings after all profitable projects had been undertaken
, CONFIDENTIAL FIN4801
Page 3 of 12 JUNE/JULY 2021
Question 1.4 (1 mark)
If a small, stable, low return and old private shoe repair company were to require financing for
an expansion, which of the following options would be most viable for the company to source
financing?
a. a public listing
b. borrowing on the bond market
c. obtaining funds from a crowdfunding platform
d. borrowing from a bank through a loan product
Question 1.5 (1 mark)
Capital structure decisions can take into consideration internal and external factors and many
theories exist that attempt to explain financing decisions. In terms of only the market timing
theory, however, which of the following statements would be MOST true?
a. When inflation is high, it would generally be a good time to use debt financing.
b. While interest rates are low, it would be an opportune time for a company to issue
equity.
c. If a company’s shares are trading at below their intrinsic value, it would bea good time
for the company to issue equity.
d. When a company’s shares are trading above their intrinsic value, it would be a good
time for the company to issue equity.
QUESTION 2 [20 marks]
Wagon Ltd produces bespoke horse-drawn wagons for parks and operates in the leisure
sector. The company is in the process of deciding whether it should invest in a new machine
to expand its production capabilities and expand horizontally. The new machine will allow the
company to also manufacture household furniture for which a large market exists.
Currently, the company has a beta of 1.2 associated with its shares while the beta of the
household furniture sector is 2.0. The risk free rate is 3% while the market risk premium is
estimated at 6%. Inflation is projected to remain at the current 2% for the foreseeable future.
The company is wholly financed by equity. To obtain, install and get the machine up and
running will cost R5 000 000.
Projected operating cash flows presented in real terms (that is, inflows after variable and fixed
costs had been subtracted, but not tax or working capital requirements and unadjusted for
inflation) generated by the project are as follows:
Item Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Sales R0 R1 000 000 R1 000 000 R1200 000 R1 500 000 R2 000 000
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