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UNIVERSITY EXAMINATIONS

UNIVERSITEITSEKSAMENS

MBL922N

(121s14)

May/June 2013

STRATEGIC FINANCIAL MANAGEMENT


Duration

1 Hours

EXAMINERS
FIRST
SECOND

100 Marks
MR GW DALTON
DR JW KRUGER

Use of a non-programmable pocket calculator 1s permissible


Closed book examination
This exammat1on question paper remains the property of the University of South Africa and may not be
removed from the examination venue.

This paper consists of 11 pages PLUS instructions for the completion of a markreadmg sheet.

This 1s a CLOSED-BOOK test.

Student number

Exammat1on Centre

INSTRUCTIONS TO CANDIDATES.
ANSWER ALL QUESTIONS
Please use the mark-reading sheet supplied.

[TURN OVER]

2
MBL922N
MAY/JUNE 2013 (TEST)

The capital market is involved with the following?


1

The supply and demand of short-term funds

The supply and demand of long-term funds

The JSE Securities Exchange only

The primary market only

The South African Reserve Bank

ABC Ltd declared an interim dividend of 85 cents and a final dividend of 220 cents per share
ABC Ltd achieved earnings per share of 504 cents and the share traded at R72 75 at year end

ABC Ltd's dividend yield at year end 1s 4,19%

ABC Ltd's dividend cover is 1,6525

ABC Ltd's d1v1dend payout ratio 1s 0,6052

The dividend payout ratio is the inverse of the dividend cover

All of the above

When discounting dividends you should use?

The weighted average cost of capital

The after tax weighted average cost of capital

The equity cost of capital

The before tax cost of debt

The after tax cost of debt

An Eskom debenture will be issued at a par value of R1 000 each Interest 1s paid annually and
the required rate of return 1s equal to the debenture 's coupon interest rate of 12% The in1t1al
maturity is ten years Calculate the value of the debenture?

R322-00

R678-00

R708-40

R1 000-00

R1 200-00

[TURN OVER]

3
MBL922N
MAY/JUNE 2013 (TEST)

Growth Bank 1s expected to pay an annual d1v1dend of 90 cents per share indefinitely and the
required rate of return equals 18% Calculate the value of the share?

R1-00

R2-50

R5-00

R10-62

R16-20

Assume that the nsk-free rate 1s 5 percent, and that the market nsk premium 1s 7 percent

If a

share has a required rate of return of 13 75 percent, what 1s its beta?

1 25

1 35

1 37

1 60

1 96

The constant rate of d1v1dend growth for an investment 1s 8% The company 1s expected to pay
an annual d1v1dend of R2-50 next year The required rate of return equals 18%
The value of the share must be
1

R9-62

R13-90

R25-00

R31-25

R32-00

[TURN OVER]

4
MBL922N
MAY/JUNE 2013 (TEST)

Which of the following is not considered a capital component for the purpose of calculating the
weighted average cost of capital as it applies to capital budgeting?
1

Long-term debt

Incorrect. The WACC includes all investor supplied capital which includes long-term debt, preferred stock, and common stock.

Ordinary shares

Incorrect. The WACC includes all investor supplied capital which includes long-term debt, preferred stock, and common stock.

Accounts payable

Correct. The WACC includes all investor supplied capital which includes long-term debt, preferred stock, and common stock.

Preference shares

Incorrect. The WACC includes all investor supplied capital which includes long-term debt, preferred stock, and common stock.

Debentures

Incorrect. The WACC includes all investor supplied capital which includes long-term debt, preferred stock, and common stock.

Petersen Limited invested R36 000 per year for 10 successive years (at the end of each year}
in

a money market account at 15% p a compound interest What will be the end value in the

money market account?

10

R73 094-40

R74 390-60

R83 094-40

R93 940 -60

R95 000-00

Which of the following statements about the cost of capital is incorrect?


1

A company's target capital structure affects its weighted average cost of capital

Weighted average cost of capital calculations should be based on the after-tax-costs of


all the md1v1dual capital components

If a company's tax rate increases, then, all else equal, its weighted average cost of
capital will increase

The cost of retained earnings 1s equal to the return stockholders could earn on
alternative investments of equal risk

Flotation costs can increase the cost of preference shares

[TURN OVER]

MBL922N

MAY/JUNE 2013 (TEST)

11

The ordinary shares of Real Steel have a beta of 1 20

The risk-free rate 1s 5 percent and the

market risk premium (rM - rRF) 1s 6 percent What 1s the company's cost of ordinary shares, rs?

12

13

7 0%

7 2%

11 0%

12 2%

12 4%

The financial goal of a company is to


1

Max1m1se return

Opt1m1se solvency

Max1m1se shareholders' wealth

Optimise hqu1d1ty

L1m1t bad debts

Which of the following statements 1s correct?

If a project's internal rate of return (IRR) exceeds the cost of capital, then the project's
net present value (NPV} must be pos1t1ve

If Project A has a higher IRR than Project B, then Project A must also have

a higher

NPV
3

The lRR calculation 1mphc1tly assumes that all cash flows are reinvested at a rate of
return equal to the cost of capital

Answers 1 and 3 are correct

None of the above answers are correct

[TURN OVER]

,1.,

6
MBL922N
MAY/JUNE 2013 (TEST)

14

Your company has a cost of capital equal to 10%

If the following projects are mutually

exclusive, and you only have the 1nformat1on that 1s provided, which should you accept?

15

Payback (years)

IRR

18%

20%

20%

12%

NPV (M1ll1ons)

R40

R75

R35

R100

B and C

A project has an up-front cost of R100,000 The project's WACC 1s 12 percent and its net
present value is R10,000 Which of the following statements 1s most correct?

16

The pro1ect should be re1ected since its return 1s less than the WACC

The project's internal rate of return 1s greater than 12 percent

The pro1ect's mod1f1ed internal rate of return 1s less than 12 percent

All of the above answers are correct

None of the above answers 1s correct

Scott Corporation's new pro1ect calls for an investment of R10,000 It has an estimated life of
10 years The IRR has been calculated to be 15 percent If cash flows are evenly distributed
and the tax rate 1s 40 percent, what 1s the annual before-tax cash flow each year? (Assume
depreciation 1s a neghg1ble amount.)

R1, 993

R3, 321

R1, 500

R4, 983

R5, 019

[TURN OVER]

7
MBL922N
MAY/JUNE 2013 (Tesn

17

Two pro1ects being considered by a firm are mutually exclusive and have the following
projected cash flows
Project A

Project B

Year

Cash Flow

Cash Flow

(R100, 000)

(R100, 000)

R39, 500

R39, 500

R39, 500

R133, 000

Based only on the rnformat1on given,which of the two projects would be preferred, and why?
1

Project A, because 1t has a shorter payback period

Project B, because 1t has a higher IRR

Indifferent, because the projects have equal IRRs

Include both 1n the capital budget, srnce the sum of the cash inflows exceeds the 1mt1al
investment in both cases

18

19

Choose neither, since their NPVs are negative

Which of the following is not a cash flow that results from the decision to accept a project?
1

Changes in working capital

Sh1pp1ng and 1nstallat1on costs

Sunk costs

Opportunity costs

Externalities

Which of the following actions will increase a company's quick ratio?


1

Reduce mventones and use the proceeds to reduce long-term debt

Reduce rnventones and use the proceeds to reduce current hab1httes

Issue short-term debt and use the proceeds to purchase inventory

Issue long-term debt and use the proceeds to purchase fixed assets

Issue equity and use the proceeds to purchase inventory

[TURN OVERJ

8
MBL922N
MAY/JUNE 2013 (TEsn

20

Which of the following alternatives could potentially result in a net increase in a companys free
cash flow for the current year?

21

Reducing the days-sales-outstanding ratio

Increasing the number of years over which fixed assets are depreciated

Decreasing the accounts payable balance

All of the answers above are correct

Answers 1 and 2 are correct

Good Hope Supplies L1m1ted has a current ratio of 3 0, a quick ratio of 2 4, and an inventory
turnover ratio of 6 Good Hope's total assets are R1 million and its debt ratio 1s 0 20 The firm
has no long-term debt What 1s Good Hope's cost of sales figure?

22

R 720,000

R 120,000

R1, 620,000

R 360,000

R 880,000

In the real world, we find that dividends

Usually exh1b1t greater stability than earnings

Fluctuate more widely than earnings

Tend to be a lower percentage of earnings for mature firms

Are usually changed every year to reflect earnings changes

Are usually set as a fixed percentage of earnings

[TURN OVER]

..

,,

9
MBL922N
MAY/JUNE 2013 (TEST)

23

If easing a firm's credit policy lengthens the collection penod and results 1n a worsening of the
aging schedule, then why do firms take such actions?

24

It normally stimulates sales


To meet competitive pressures

To increase the firm's deferral penod for payables

Statements 1 and 2 are correct

All of the statements above are correct

,,

Suppose that you are told that an investment of R500 earned returns of 50%, 40%, and 30%
during each of the last three years, and that the proceeds, the pnnc1pal and interest were reinvested m the same asset every year What was the geometric average return during this
three year period?

25

39 76%

40 00%

41 27%

42 68%

Some other figure

If PlaatJe L1m1ted had sales of R2,027,773 per year (all credit) and its days sales outstanding
was equal to 35 days, what was its average amount of accounts receivable outstanding?
(Assume a 365-day year )

R194, 444

R 57,143

R 5, 556

R 97,222

R212, 541

(TURN OVER)

,.

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10

MBL922N
MAY/JUNE 2013 (TEST}

26

A firm 1s offered trade credit terms of 3/15, net 45 days The firm does not take the discount,
and 1t pays after 67 days What 1s the nommal annual cost of not taking the discount?
(Assume a 365-day year )

21 71%

22 07%

22 95%

23 48%

24 52%

'1

..

111

27

28

A calculated beta statistic of 0 80 would imply that

The share tends to move with the market but to a lesser extent

The share tends to move against the market but to a lesser extent

The share tends to move with the market but to a greater extent

The share tends to move against the market but to a greater extent

The share does not move against the market to any extent

Which of the following statements 1s false?

When an investment 1s nsky, there are different returns 1t may earn

In finance, the variance of a return 1s also referred to as its volat1hty

The expected or mean return 1s calculated as a weighted average of the possible


returns, where the weights correspond to the probab1ht1es

The vanance 1s a measure of how "spread out" the d1stnbut1on of the return 1s

The standard dev1at1on 1s the square root of the variance

..
l
(

' '

11
MBL922N
MAY/JUNE 2013 (TEST)

29

30

Equity 1n a company with debt 1s called

Levered/geared equity

R1skless equity

Unlevered equity

Risky equity

Preference equity

The firm will pay the d1v1dend to all shareholders who are registered owners on a spec1f1c date,
set by the board, called the

Declaration date

Reg1strat1on date

D1stribut1on date

Ex-d1v1dend date

Post-d1v1dend date

UNISA 2013

UNIVERSITY OF SOUTH AFRICA

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