This paper consists of 17 pages, including two pages for rough work (pages 16 and 17),
Appendix A (interest tables, pages i–iv), and the instructions for the completion of the
mark-reading sheet.
THIS PAPER CONSISTS OF THE FOLLOWING QUESTIONS:
Topic Questions Mark
allocation
Section A
The role of managerial finance 1 to 4 4
Financial statements and analysis 5 to 13 9
The time value of money 14 to 23 10
Interest rates and bond valuation 24 to 30 7
Risk and return 31 to 33 3
Share valuation 34 to 40 7
Section B
Risk and return 1.1 to 1.4 10
Interest rates and bond valuation 1.5 5
Share valuation 2 15
TOTAL 70
ANSWER ALL THE QUESTIONS IN BOTH SECTIONS.
, 2 FIN2601
May/June 2016
SECTION A: MULTIPLE-CHOICE QUESTIONS [40 MARKS]
Choose the correct option in each of the following questions:
1. A basic distinction between a primary and secondary market is that …
1. proceeds from sales in the primary market go to the current owner of a security, while
proceeds in a secondary market go to the original owner.
2. primary markets involve direct dealings with regional exchanges.
3. only new securities are sold in the primary market, while only outstanding (issued)
securities and sold in the secondary market.
4. primary markets deal exclusively in debentures, while secondary markets deal
primarily in ordinary shares.
2. Which one of the following statements is correct regarding profit maximisation as the
primary goal of a firm?
1. Profit maximisation considers the firm's risk level.
2. Profit maximisation will not lead to an increase in short-term profits at the expense of
expected future profits.
3. Profit maximisation does consider the impact on individual shareholders' earnings per
share (EPS).
4. Profit maximisation is more concerned with maximising profits than the share price.
3. If all else were equal, in which of the following forms of business would the possibility of
an agency problem be the greatest?
1. A sole proprietorship
2. A foreign corporation that is publicly traded
3. A foreign corporation with concentrated ownership – that is, relatively few owners
4. A partnership in which all partners share management and decision-making
responsibilities equally
4. Which one of the following is the advantage of both a close corporation and company?
1. The owners have unlimited liability, which guarantees that they cannot lose more than
they invested.
2. The owners have limited liability, which guarantees that they cannot lose more than
they invested.
3. The shareholders have unlimited liability and total wealth can be taken to satisfy
debts.
4. The shareholders enjoy unlimited liability, meaning that they are not personally liable
for the firm’s debts.
[TURN OVER]
, 3 FIN2601
May/June 2016
5. Andy Corporation had a profit after tax of R1 080 000, and preference share dividends of
R40 000. There were 100 000 shares outstanding and no interest expense. What were
Andy Corporation’s earnings per share?
1. R 7,42
2. R 9,61
3. R10,40
4. R10,80
6. The financial ratios of Boomer Products Inc for the past two years were as follows:
2014 2015
Financial leverage multiplier 1,56 1,70
Net profit margin 6,10% 5,60%
Total asset turnover 2,56 2,28
What was Boomer Products Inc return on equity (ROE) in the year 2015?
1. 20,36%
2. 21,71%
3. 23,96%
4. 24,36%
7. Humphrey Manufacturing had sales of R25 000 000 in the previous year. The company
reported total equity of R480 000 and total asset turnover was 8,0. The company is
financed entirely with debt and equity. What is Humphrey’s debt ratio?
1. 25,36%
2. 35,01%
3. 69,25%
4. 84,64%
8. As a short-term creditor concerned with a company’s ability to meet its financial obligation
to you, which one of the following combinations of ratios would you most likely prefer?
Current ratio Time interest earned ratio Debt ratio
1. 0,5 0,5 0,33
2. 1,0 1,0 0,50
3. 1,5 1,5 0,50
4. 2,5 0,5 0,71
[TURN OVER]
, 4 FIN2601
May/June 2016
9. Ruth Company currently has R2 000 000 in accounts receivable. Its days of sales
outstanding were 50 days (based on a 365-day year). What is Ruth’s total asset turnover if
the total assets amount is R36 500 000?
1. 0,4
2. 2,5
3. 3,7
4. 4,2
10. Charlie Investment Company’s current ratio has steadily increased over the past five
years, from 1,9, five years ago, to 3,8 today. What would a financial analyst be most
justified in concluding?
1. The company’s debt position probably has improved.
2. The company’s market turnover probably has improved.
3. The company's liquidity position probably has improved.
4. The company’s fixed assets turnover probably has improved.
11. Russell Supply has a total asset turnover of 2,0 on sales of R75 000. If the company has
profit for the year of R13 500, what is Russell’s return on assets (ROA)?
1. 9%
2. 15%
3. 25%
4. 36%
12. Herbal Company reported current liabilities of R3 000 and a quick ratio of 1,2. The
company has current assets of R6 000. If the company reports cost of goods sold at
R4 000 for the given year, what is the inventory turnover?
1. 0,16
2. 0,42
3. 1,33
4. 1,67
13. If your goal is to determine how effectively a firm is managing its assets, which of the
following sets of ratios would you examine?
1. Quick ratio, debt ratio, time interest earned.
2. Profit margin, current ratio, fixed charge coverage ratio.
3. Debt ratio, price/earnings ratio, return on total assets.
4. Inventory turnover ratio, days sales outstanding, fixed asset turnover ratio.
[TURN OVER]
