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EXAMINATION DATE TIME ALLOWED TOTAL MARKS

: : : :

FINANCIAL MANAGEMENT 2 (FM202) 20 OCTOBER 2011 3 HOURS 100

INSTRUCTIONS TO CANDIDATES 1. Please refer to the examination rules and regulations as found in the examination answer book. 2. Answer ALL the questions. 3. The use of non-programmable financial calculators is permitted. Show ALL calculations. 4. Read all questions carefully to determine exactly what is required before attempting to answer. 5. Set your answers out in a systematic way under appropriate headings and subheadings. 6. Number your answers clearly. 7. IMPORTANT: Indicate the questions attempted by drawing a circle around the question number provided on the front cover of the answer book. NOTE: Examination books are the property of the IMM GSM and may not be removed from the examination hall. Answers to examination questions should not include appendices in the form of personal notes to the examining panel.

IMM Graduate School of Marketing October 2011 Examination FM202

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Answer ALL the questions QUESTION 1 [25]

Drum Manufacturers Ltd produces cylindrical drums for the mining industry. It has obtained requirements from its clients and prepared an income statement for the first 6 months of 2011 as follows:
Drum Manufacturers Ltd projected Income Statement for the period ended 2011 % Revenue 5 770 000 100.0% Less: Cost of Sales 3 470 250 60.1% Material 1 478 750 25.6% Labour 817 250 14.2% Overhead 995 750 17.3% Depreciation 178 500 3.1% Gross Profit 2 299 750 39.9% Less: Operating expenses 952 050 16.5% Selling expenses 461 600 8.0% General & administrative expenses 490 450 8.5% Operating profit for the year 1 347 700 23.4% Finance cost and interest expense 340 000 5.9% Earnings before tax 1 007 700 17.5% Taxation 302 310 5.2% Increase in accumulated profits 705 390 12.2%

You are required to use the information provided in the income statement above (refer to the percentages that are all expressed as a percentage of sales) to develop a projected income statement for the following 6 months (July to December) given the assumptions below. ALSO comment on the movement of profit after tax. 1. 2. 3. 4. 5. 6. Sales for the 6 months to December are projected at R6.5m. Labour cost will drop to 12.00% as a result of greater efficiency in the plant. The costs of materials are expected to rise to 28% as a result of a weakening rand against the euro. Overhead costs will rise by 10% in real terms over previous 6 months. Depreciation will increase by R36,000 as new equipment will be acquired. Selling expenses will rise in proportion (i.e., it will remain at 8% of sales before any additional provisions). An additional R25,000 is required for a marketing campaign. Interest charges is R285,000. Income tax is set at 28% of earnings before tax. Cost factors not specifically mentioned will rise in line with past trends (i.e., will remain at the same % of sales as reported in the previous period).

7. 8. 9.

Do not round off your answer.

IMM Graduate School of Marketing October 2011 Examination FM202

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QUESTION 2

[12]

Financial management is based on three (3) fundamental principles. Name these principles and discuss each principle in detail. QUESTION 3 3.1 [8]

Extra Traders orders R38,000 worth of goods from Product Manufacturers, whose credit terms are 0.75/10 net 30. a) What is the cost to Extra Traders if it decides to forfeit the cash discount? Assume 360 days per annum. b) Assume it can earn interest at 14.5% per annum, what would your advice be to Extra Traders? (4) Extra Traders wishes to borrow R150,000. SkyBank offers a rate of 7.55% for one year. Interest is payable in advance. EarthBank offers a rate of 7.95% with interest payable at maturity. What is the effective rate of interest to Extra Traders under each option? At which Bank should Extra Traders place the loan? (4) [10]

3.2

QUESTION 4

Amys Fashion is a retailer selling merchandise on credit. The management team has established that it takes an average of 32 days from stocking a product to selling it. Payments to suppliers are made on average after 72 days. On average accounts receivable are collected after 55 days. The firm spends R240,000 annually on operating cycle investment. The firm has negotiated to pay 12% finance charges on short-term loans and overdrafts. Assume 360 days per annum for your calculations. You are required to: a) Calculate the operating cycle for the firm. (2) b) Calculate the cash conversion cycle for the firm and indicate if it is a positive or a negative cycle. (3) c) Calculate the amount for which funding is required. (2) d) Calculate finance costs and explain the significance of this cost. (2) QUESTION 5 5.1 [25]

An investor had shares worth R800 at the beginning of 2009. At the end of 2009 he received a dividend of R20 and the share price increased to R810. At the end of 2010 (the second period) he received a dividend of R22 and the share price increased to R850. You are required to determine the average return over the two periods using the arithmetic mean method. (7)

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5.2

Crown Manufacturers is considering investing in a number of new projects. For one of the projects the following information is available: 1. Equipment will cost R420,000 and installation will amount to R18,000. 2. The firm uses straight-line depreciation and the asset may be depreciated over 5 years. Installation costs can be capitalised. 3. The old equipment has R0 book value and can be sold to scrap metal dealers for R3,000. 4. The firm is subject to a 28% tax rate. 5. There will be an increase in NOPAT of R34,000 per annum over the next five years. You are required to calculate the following: a) Initial investment b) Incremental net operating cash inflows

(3) (3)

5.3

The cost of capital for Crown Manufacturers is 13%. It has completed its investigation into alternative projects and requires equipment investments. It has shortlisted two potential suppliers. Machine A has an initial investment of R365,000 and will yield net incremental operating cash flows of R105,000 per annum over five years. Machine B has an initial investment requirement of R345,000 and will yield net incremental operating cash flows of R92,000 per annum over five years. The PVIF are provided below.
13% PVIF Year 1 0.8850 Year 2 0.7831 Year 3 0.6931 Year 4 0.6133 Year 5 0.5428

You are required to: a) Calculate the NPV for both investments. (8) b) Indicate what happens if both investments are acceptable. (2) c) Advise the firm about the outcome of the NPV calculation so that they can make a decision about the best investment between the two machines. (2) QUESTION 6 [20]

Refer to the financial reports for Package Delivery Service (PDS), and perform a financial analysis by calculating the ratios and commenting on each observation. Note: You must calculate ratios for every year. a) Calculate the gross profit margin and comment. b) Calculate the Return on Equity (ROE) and comment. c) Calculate the two liquidity ratios and comment on each. (2) (2) (5)

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d) Calculate the average collection period (you can assume that all sales are on credit) and comment. (2) e) Calculate the debt/equity ratio and interest cover ratio and comment on each. (5) f) Summarise the financial position of the firm with reference to its profitability, liquidity and debt management situation. (2)

Package Delivery Service (PDS)

Income Statement for the period ending
Total Revenue Cost of Sales Gross Profit Operating Expenses Selling General and Administrative Other expenses Operating Income or Loss Other Income Earnings (Profit) Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Net Income 29 945 1 747 3 801 10 3 811 445 3 366 1 214 2 152 32 412 1 814 5 382 75 5 457 442 5 015 2 012 3 003 37 336 1 745 578 99 677 246 431 49 382 31-Dec-10 31-Dec-09 31-Dec-08 45 297 9 804 35 493 51 486 11 878 39 608 49 692 10 033 39 659

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Package Delivery Service (PDS)

Balance Sheet as at Assets Non-Current Assets Property Plant and Equipment Other Assets Long Term Investments Goodwill Other Intangible Assets Total Non-Current Assets Current Assets Cash And Cash Equivalents Debtors Inventory Total Current Assets Total Assets Equity & Liabilities Owners equity Ordinary shares Retained earnings Total owners equity Liabilities Non-Current Liabilities Long-term loans Current Liabilities Accounts Payable Short-term loans Total Current Liabilities Total Liabilities Total Equity & Liabilities 4 197 2 042 6 239 24 253 31 883 3 291 4 526 7 817 25 099 31 879 3 673 6 167 9 840 26 859 39 042 18 014 17 282 17 019 10 7 620 7 630 10 6 770 6 780 10 12 173 12 183 2 100 6 507 668 9 275 31 883 1 049 6 688 1 108 8 845 31 879 2 604 8 414 742 11 760 39 042 17 979 1 607 337 2 089 596 22 608 18 265 1 796 476 1 986 511 23 034 17 663 5 983 431 2 577 628 27 282 31-Dec-10 31-Dec-09 31-Dec-08

EXAM TOTAL: 100

IMM Graduate School of Marketing October 2011 Examination FM202