ASSIGNMENT 1 SEMESTER : FINANCIAL MANAGEMENT 3 ... - imm
Page 1 of 4
ASSIGNMENT 1ST SEMESTER : FINANCIAL MANAGEMENT 3 (FM303) CHAPTERS COVERED
: CHAPTERS 1 - 4
DUE DATE
: 3:00 p.m. 20 MARCH 2012
TOTAL MARKS
: 100
INSTRUCTIONS TO CANDIDATES FOR COMPLETING AND SUBMITTING ASSIGNMENTS The complete „Instructions to Students for Completing and Submitting Assignments‟ must be collected from any IMM GSM office, the relevant Student Support Centre or can be downloaded from the IMM GSM website. It is essential that the complete instructions be studied prior to commencing your assignment. The following points highlight only a few important notes. 1. You are required to submit ONE assignment per subject. 2. The assignment will contribute 20% towards the final examination mark, and the other 80% will be made up from the examination, however the examination papers will count out of 100%. 3. Although your assignment will contribute towards your final examination mark, you do not have to earn credits for admission to the examinations; you are automatically accepted on registering for the exam. 4. Number all the pages of your assignment (e.g. page 1 of 4) and write your name and surname, student number and subject at the top of each page. 5. The IMM GSM requires assignments to be presented on plain A4 paper. You must show all working calculations, including and where appropriate multiple choice working calculations. 6. A separate assignment cover, which is provided by the IMM GSM, must be attached to the front cover of each assignment. 7. Retain a copy of each assignment before submitting, in case the original does not reach the IMM GSM. 8. The assignment due date refers to the day up to which assignments will be accepted for marking purposes. The deadline is 3:00 p.m. on 20 March 2012. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 20 March 2012 and up to 5:00 p.m. the following day, after which no assignments will be accepted. 9. If you fail to follow these instructions carefully, the IMM Graduate School of Marketing cannot accept responsibility for the return of the assignment. It may even result in your assignment not being marked. Results will be available on the IMM GSM website, www.immgsm.ac.za, on Friday, 4 May 2012.
Assignment: 1st Semester 2012
© IMM Graduate School of Marketing FM303
Page 2 of 4
SPECIFIC INSTRUCTIONS Answer ALL questions The use of calculators is permitted. Show ALL calculations. Read all questions carefully to determine exactly what is required before attempting to answer. Number your answers clearly and set them out under appropriate headings and sub-headings. ANSWER ALL QUESTIONS QUESTION 1
[10]
Illustrate your understanding of financial management by differentiating between the three (3) fundamental principles of the module. QUESTION 2
[50]
2.1 The summarised income statements for the past two years are shown below for a firm listed on the JSE: (40) 2011
2010
R’000
R’000
Operating profit
44 777
48 075
Interest expenses
17 900
16 500
Profit before tax
26 877
31 575
7 526
8 841
19 351
22 734
Tax at 28% Profit after tax
Further information is as follows: 1. The increase in allowance for doubtful debts was R4,035,000 for 2010, and R4,930,000 for 2011 respectively. 2. Research and development costs of R4,395,000 were incurred during 2010 and R4,640,000 during 2011 on Project Alpha. These costs were expensed in the income statement, as they did not meet the requirements of financial reporting standards for capitalisation. Project Alpha is not completed yet. 3. At the end of 2009, the firm had completed another research and development project, Project Delta. Total expenditure on this project was R3,600,000, none of which was capitalised in the financial statements. The product developed by Project Delta went on sale on 1 January 2010, and the product was a great success. The product‟s lifecycle is three years, and no further sales of the product are expected after 2012. 4. The firm incurred non-cash expenses of R29,205,000 in 2010 and R32,135,000 during 2011.
Assignment: 1st Semester 2012
© IMM Graduate School of Marketing FM303
Page 3 of 4
5. Capital employed (equity plus debt) per the statement of financial position was R450,000,000 at 1 January 2010, and R510,000,000 at 1 January 2011. 6. The pre-tax cost of debt was 16% in each year. The estimated cost of equity was 14% in 2010 and 15% in 2011. The rate of corporate income tax was 28% during both years. 7. The firm‟s capital structure was 72% equity and 28% debt in 2010 and it was 65% equity and 35% debt in 2011. 8. There was no provision for deferred tax. Required: Calculate Economic Value Added (EVATM) for the firm. Structure your answer in a proper understandable format (see the five step format in your learner guide). Also comment on the result of the calculated values. Direct copying from your textbook and learner guide will not be considered for marking. 2.2 The following information for the past two years are shown below for a firm listed on the JSE. (10)
Number of ordinary shares issued
Prior year
Current year
452 278 000
454 591 000
R 15.50
R 14.55
7 400 000
7 400 000
R 90.50
R 99.85
Ordinary share price Number of preferred shares issued Preferred share price Book value of invested capital
5 836 126 000 5 970 715 000
Required: Calculate Market Value Added (MVA) for the firm for each year and make appropriate comments. QUESTION 3
[5]
Explain the concept “average rate of return” to a fellow student using a practical example to highlight your explanation.
Assignment: 1st Semester 2012
© IMM Graduate School of Marketing FM303
Page 4 of 4
QUESTION 4
[25]
You are required to answer the following questions about Mayflower Manufacturers. Mayflower Manufacturers
Sales Less: Cost of sales (variable 55% of sales) Gross Profit Less: Fixed operating costs EBIT Less interest Earnings after interest before tax Less: Taxes (28%) Earnings after taxes
4.1
a) b) c)
4.2
a) b) c)
1 500 000 600 000 900 000 320 000 580 000 105 000 475 000 133 000 342 000
Explain the term “financial leverage”. (4) Give the alternative formula to calculate the degree of financial leverage of a firm. (1) Calculate the degree of financial leverage for the firm. (4) Explain the term “operating leverage”. Give the alternative formula to calculate the degree of operating leverage of a firm. Calculate the degree of operating leverage for the firm.
(2) (1) (4)
4.3
Calculate the degree of combined leverage for the firm.
(3)
4.4
If sales should increase by 25% for this firm: a) by what percentage would the earnings after tax increase? b) What is the new Rand value of earnings after tax?
(3) (3)
QUESTION 5
[10]
You are required to calculate the WACC of the firm Action Ltd. which has the following capital structure. The firm has a 30% marginal tax rate. Action Ltd Source of finance Debt Preference shares Ordinary shares Retained earnings
Amount Pre-tax cost 5 092 000 11.00% 2 680 000 14.00% 4 690 000 12.50% 938 000 15.00%
TOTAL:
Assignment: 1st Semester 2012
100
© IMM Graduate School of Marketing FM303
ASSIGNMENT 1ST SEMESTER : FINANCIAL MANAGEMENT 3 (FM303) CHAPTERS COVERED
: CHAPTERS 1 - 4
DUE DATE
: 3:00 p.m. 20 MARCH 2012
TOTAL MARKS
: 100
INSTRUCTIONS TO CANDIDATES FOR COMPLETING AND SUBMITTING ASSIGNMENTS The complete „Instructions to Students for Completing and Submitting Assignments‟ must be collected from any IMM GSM office, the relevant Student Support Centre or can be downloaded from the IMM GSM website. It is essential that the complete instructions be studied prior to commencing your assignment. The following points highlight only a few important notes. 1. You are required to submit ONE assignment per subject. 2. The assignment will contribute 20% towards the final examination mark, and the other 80% will be made up from the examination, however the examination papers will count out of 100%. 3. Although your assignment will contribute towards your final examination mark, you do not have to earn credits for admission to the examinations; you are automatically accepted on registering for the exam. 4. Number all the pages of your assignment (e.g. page 1 of 4) and write your name and surname, student number and subject at the top of each page. 5. The IMM GSM requires assignments to be presented on plain A4 paper. You must show all working calculations, including and where appropriate multiple choice working calculations. 6. A separate assignment cover, which is provided by the IMM GSM, must be attached to the front cover of each assignment. 7. Retain a copy of each assignment before submitting, in case the original does not reach the IMM GSM. 8. The assignment due date refers to the day up to which assignments will be accepted for marking purposes. The deadline is 3:00 p.m. on 20 March 2012. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 20 March 2012 and up to 5:00 p.m. the following day, after which no assignments will be accepted. 9. If you fail to follow these instructions carefully, the IMM Graduate School of Marketing cannot accept responsibility for the return of the assignment. It may even result in your assignment not being marked. Results will be available on the IMM GSM website, www.immgsm.ac.za, on Friday, 4 May 2012.
Assignment: 1st Semester 2012
© IMM Graduate School of Marketing FM303
Page 2 of 4
SPECIFIC INSTRUCTIONS Answer ALL questions The use of calculators is permitted. Show ALL calculations. Read all questions carefully to determine exactly what is required before attempting to answer. Number your answers clearly and set them out under appropriate headings and sub-headings. ANSWER ALL QUESTIONS QUESTION 1
[10]
Illustrate your understanding of financial management by differentiating between the three (3) fundamental principles of the module. QUESTION 2
[50]
2.1 The summarised income statements for the past two years are shown below for a firm listed on the JSE: (40) 2011
2010
R’000
R’000
Operating profit
44 777
48 075
Interest expenses
17 900
16 500
Profit before tax
26 877
31 575
7 526
8 841
19 351
22 734
Tax at 28% Profit after tax
Further information is as follows: 1. The increase in allowance for doubtful debts was R4,035,000 for 2010, and R4,930,000 for 2011 respectively. 2. Research and development costs of R4,395,000 were incurred during 2010 and R4,640,000 during 2011 on Project Alpha. These costs were expensed in the income statement, as they did not meet the requirements of financial reporting standards for capitalisation. Project Alpha is not completed yet. 3. At the end of 2009, the firm had completed another research and development project, Project Delta. Total expenditure on this project was R3,600,000, none of which was capitalised in the financial statements. The product developed by Project Delta went on sale on 1 January 2010, and the product was a great success. The product‟s lifecycle is three years, and no further sales of the product are expected after 2012. 4. The firm incurred non-cash expenses of R29,205,000 in 2010 and R32,135,000 during 2011.
Assignment: 1st Semester 2012
© IMM Graduate School of Marketing FM303
Page 3 of 4
5. Capital employed (equity plus debt) per the statement of financial position was R450,000,000 at 1 January 2010, and R510,000,000 at 1 January 2011. 6. The pre-tax cost of debt was 16% in each year. The estimated cost of equity was 14% in 2010 and 15% in 2011. The rate of corporate income tax was 28% during both years. 7. The firm‟s capital structure was 72% equity and 28% debt in 2010 and it was 65% equity and 35% debt in 2011. 8. There was no provision for deferred tax. Required: Calculate Economic Value Added (EVATM) for the firm. Structure your answer in a proper understandable format (see the five step format in your learner guide). Also comment on the result of the calculated values. Direct copying from your textbook and learner guide will not be considered for marking. 2.2 The following information for the past two years are shown below for a firm listed on the JSE. (10)
Number of ordinary shares issued
Prior year
Current year
452 278 000
454 591 000
R 15.50
R 14.55
7 400 000
7 400 000
R 90.50
R 99.85
Ordinary share price Number of preferred shares issued Preferred share price Book value of invested capital
5 836 126 000 5 970 715 000
Required: Calculate Market Value Added (MVA) for the firm for each year and make appropriate comments. QUESTION 3
[5]
Explain the concept “average rate of return” to a fellow student using a practical example to highlight your explanation.
Assignment: 1st Semester 2012
© IMM Graduate School of Marketing FM303
Page 4 of 4
QUESTION 4
[25]
You are required to answer the following questions about Mayflower Manufacturers. Mayflower Manufacturers
Sales Less: Cost of sales (variable 55% of sales) Gross Profit Less: Fixed operating costs EBIT Less interest Earnings after interest before tax Less: Taxes (28%) Earnings after taxes
4.1
a) b) c)
4.2
a) b) c)
1 500 000 600 000 900 000 320 000 580 000 105 000 475 000 133 000 342 000
Explain the term “financial leverage”. (4) Give the alternative formula to calculate the degree of financial leverage of a firm. (1) Calculate the degree of financial leverage for the firm. (4) Explain the term “operating leverage”. Give the alternative formula to calculate the degree of operating leverage of a firm. Calculate the degree of operating leverage for the firm.
(2) (1) (4)
4.3
Calculate the degree of combined leverage for the firm.
(3)
4.4
If sales should increase by 25% for this firm: a) by what percentage would the earnings after tax increase? b) What is the new Rand value of earnings after tax?
(3) (3)
QUESTION 5
[10]
You are required to calculate the WACC of the firm Action Ltd. which has the following capital structure. The firm has a 30% marginal tax rate. Action Ltd Source of finance Debt Preference shares Ordinary shares Retained earnings
Amount Pre-tax cost 5 092 000 11.00% 2 680 000 14.00% 4 690 000 12.50% 938 000 15.00%
TOTAL:
Assignment: 1st Semester 2012
100
© IMM Graduate School of Marketing FM303
