Exam (elaborations)
FIN4801 EXAM PACK 2024
- Course
- Fin4801
- Institution
- University Of South Africa
LATEST EXAM PACK QUESTIONS AND ANSWERS AND SUMMARIZED NOTES FOR EXAM PREPARATION. UPDATED FOR 2024 EXAMS.
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FIN4801EXAM PACK
2024
LATEST EXAM PACK QUESTIONS AND ANSWERS
AND SUMMARIZED NOTES FOR EXAM
PREPARATION.
UPDATED FOR 2024 EXAMS.
, CONFIDENTIAL FIN4801
Page 3 of 13 JANUARY/ FEBRUARY 2022
QUESTION 1 [5 marks]
This question is comprised of three multiple-choice questions (MCQs). Write down only the
question number and the corresponding answer option you choose, for example:
Question 7.9: C.
Question 1.1 (1 mark)
Brundle Ltd is a reseller of dried foods, which is a burgeoning market. The company requires
funding to expand. With inflation expectations increasing rapidly, the owners wish to raise
equity rather than debt. If the company were to raise a significant amount of equity from purely
new sources, with all else staying the same as before, what would you expect would change
for the company?
Choose the most correct option below.
The company’s … .
a. EPS would increase, beta would increase and the current control would be diluted
b. EPS would decrease, beta would increase and the current control would be
consolidated
c. EPS would decrease, beta would decrease and the current control would be diluted
d. EPS would decrease, beta would decrease and the current control would be
consolidated
Question 1.2 (3 marks)
Rad Ltd supplies clothing products to retail outlets and has recently spun off its growing online
operations into a separate company. The management and board of the company resolved to
follow a strict residual approach to dividend pay-outs in the future, as limited growth is
expected from the retail sector. In the current year, of which we are at the end, the company
has generated a net profit (available to ordinary shareholders) of R30 000 000 and has
150 000 ordinary shares outstanding. The company expects capital requirements of
R10 000 000 in the coming year. If the company raises half of its funds from debt, what per-
share dividend would it pay this year?
a.) R100
b.) R125
c.) R166
d.) R200
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, CONFIDENTIAL FIN4801
Page 4 of 13 JANUARY/ FEBRUARY 2022
Question 1.3 (1 mark)
Links Ltd, a logistics company, is considering buying a smaller competitor in the same
industry. The competitor, Smartmove Ltd, has a current share price of R10. Links Ltd’s
shares trade at R50.
Determine the exchange ratio based on market values and choose the nearest option
below.
a. 0.10
b. 0.20
c. 0.25
d. 5.00
QUESTION 2 [20 Marks]
Trains Ltd produces train carriages locally. 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 also allow the company to manufacture
luxury panelling for aeroplanes, for which a large market exists, in a new division.
Currently, the company has a beta of 1.5 associated with its shares, while the beta of
the aerospace sector is 1.1. The risk-free rate is 5%, while the market risk premium is
estimated at 6%. Inflation is projected to remain at the current 4% for the foreseeable
future. The company is wholly financed by equity. To obtain, install and get the
machine up and running will cost R8 000 000.
Projected operating cash flows presented in real terms (that is, inflows after variable
and fixed costs have 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 R3 000 000 R3 000 000 R2500 000 R2 800 000 R3 100 000
The CFO of the company has indicated that they prefer to adjust cash flows for inflation
by inflating them to nominal cash flow values.
It is expected that an outlay of R1 000 000 in working capital will be required but the
same amount (in nominal terms) can be recouped at the end of the life of the machine.
The machine has an expected life of five years and can be depreciated over the course
of its life by way of the straight-line method. At the end of the machine’s life, it is
expected that the company will be able to sell it for R1 000 000 (in nominal terms). A
tax rate of 28% is applicable and capital gains are taxed on 67% of the capital gain.
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, CONFIDENTIAL FIN4801
Page 5 of 13 JANUARY/ FEBRUARY 2022
Required:
Perform a net present value analysis on the project (14 marks), indicate the
acceptability of the project (1 mark) and briefly summarise your findings regarding the
viability of the project, the effect of risk on the project and the effect of inflation on the
analysis, in such a manner that it would assist the decision-makers with their choice
(5 marks).
QUESTION 3 [25 marks]
Question 3.1 (10 marks)
Clothing Ltd sells apparel and accessories in retail outlets with all their clients utilising store
credit due to the favourable terms offered. Currently, the company has sales of R90m per
annum with a gross profit margin of 50%, while offering favourable repayment terms of 120
days to make payment with no interest charged. Bad debts are currently amounting to 8% of
sales, leading to a current days sales outstanding (DSO or ACP) of 150 days. The financial
manager of the company wants to change the terms to 10/30 net 60, which she expects will
drive the DSO down to 70 days but increase bad debts to 9% of sales. It is also expected that
the discount on offer for early payment will lead to sales increasing to R100m and will be taken
up by half of all customers, if the terms are adopted. The company can invest excess funds in
short term securities at a rate of 10% per annum. Assume a 365-day year.
Required:
Determine the effect of the change in credit terms and advise Clothing Ltd on the feasibility of
the new terms.
Question 3.2 (10 marks)
Flour Pty (Ltd) is currently planning its cash requirements for the next quarter, June 2022 to
August 2022. The company sells baking supplies on credit, leading to a constant flow of sales
and payments from debtors, with occasional large inflows when goods are supplied for large
contracts. The ageing report on the accounting system of the company gives the following
breakdown of collection from debtors:
• 20% one month after the sales have taken place
• 80% two months after the sales have taken place
The sales recorded for both April and May were R400 000, respectively. Sales are expected
to remain unchanged until at least August 2020.
Further to this, e-mails from other branches and sales personnel indicate that the company
can expect payments from large contracts worth R100 000 in June, R30 000 in July and
R200 000 in August.
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