Tutorial Letter Financial Management 3 (FM303) - Second ... - imm
Tutorial Letter Financial Management 3 (FM303) - Second Semester 2013 CAPM Questions in the Assignment Dear Student With reference to Question 1.5 and Question 4 in the Semester 2-2013 assignment: Some students may get confused as the learner guide mentions the following with regards to the CAPM:
Question 4 is a very straight forward situation assessing the understanding of the concepts inherent through the use of the CAPM and is set as an extension type question. As this is an assignment and resources are available, it was decided to assess the CAPM and beta principles in short. You are referred to the information in chapter 5 (page 225) of your textbook for further guidance. The equation is identified in the textbook as follows:
Alternatively, due to the categorical statement made in your learner guide relating to this section, an alternate option for Question 4 has been provided below. You can choose to answer either the ‘CAPM’ question or the ‘Payback Period’ question shown below. They both count 10 marks towards the assignment total and will be marked independently. You CANNOT submit an assignment with both alternatives being attempted.
QUESTION 4 (Alternate option)
[10]
You are provided with the cash flows (CF’s) of four projects, Axel, Bitter, Croxley, and Duel. Projects Cost CF1 CF2 CF3 CF4 CF5 CF6
Axel R10 000 R4 000 R4 000 R4 000 R4 000 R4 000 R4 000
Bitter R25 000 R2 000 R8 000 R14 000 R20 000 R26 000 R32 000
Croxley R45 000 R10 000 R15 000 R20 000 R20 000 R15 000 R10 000
Duel R100 000 R40 000 R30 000 R20 000 R10 000 R0 R0
REQUIRED: 4.1
Using the Payback Period decision model, you are required to clearly state which projects you would accept and which projects you would reject with a three year cut-off period for recapturing the initial cash outflow? (Assume that the cash flows are at the end of each year for Payback Period calculations. Show ALL your workings clearly.) (8)
4.2
In your own words briefly describe what the payback period represents and also why one should consider other capital budgeting techniques when assessing projects. (2)
May we remind you that we are always available to assist with academic queries. Academic queries should be submitted in writing to: [email protected] Kind regards The IMM GSM Team
Question 4 is a very straight forward situation assessing the understanding of the concepts inherent through the use of the CAPM and is set as an extension type question. As this is an assignment and resources are available, it was decided to assess the CAPM and beta principles in short. You are referred to the information in chapter 5 (page 225) of your textbook for further guidance. The equation is identified in the textbook as follows:
Alternatively, due to the categorical statement made in your learner guide relating to this section, an alternate option for Question 4 has been provided below. You can choose to answer either the ‘CAPM’ question or the ‘Payback Period’ question shown below. They both count 10 marks towards the assignment total and will be marked independently. You CANNOT submit an assignment with both alternatives being attempted.
QUESTION 4 (Alternate option)
[10]
You are provided with the cash flows (CF’s) of four projects, Axel, Bitter, Croxley, and Duel. Projects Cost CF1 CF2 CF3 CF4 CF5 CF6
Axel R10 000 R4 000 R4 000 R4 000 R4 000 R4 000 R4 000
Bitter R25 000 R2 000 R8 000 R14 000 R20 000 R26 000 R32 000
Croxley R45 000 R10 000 R15 000 R20 000 R20 000 R15 000 R10 000
Duel R100 000 R40 000 R30 000 R20 000 R10 000 R0 R0
REQUIRED: 4.1
Using the Payback Period decision model, you are required to clearly state which projects you would accept and which projects you would reject with a three year cut-off period for recapturing the initial cash outflow? (Assume that the cash flows are at the end of each year for Payback Period calculations. Show ALL your workings clearly.) (8)
4.2
In your own words briefly describe what the payback period represents and also why one should consider other capital budgeting techniques when assessing projects. (2)
May we remind you that we are always available to assist with academic queries. Academic queries should be submitted in writing to: [email protected] Kind regards The IMM GSM Team
