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MNF2023/201/1/2011

DEPARTMENT OF FINANCE AND RISK MANAGEMENT AND BANKING

FINANCIAL MANAGEMENT (MNF2023)

TUTORIAL LETTER 201 MNF2023/201/1/2011

(First semester)

STREPIESKODE

BAR CODEUNISA P248(A)

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CONTENTS Page

1 INTRODUCTION

2 LECTURERS

3 SUGGESTED SOLUTIONS TO ASSIGNMENT 01

4 OVERVIEW OF DISCUSSION CLASSES

5 IMPORTANT INFORMATION

5.1 Answer books

5.2 Examination format

5.3 Assignments

5.4 Discussion classes, tutorial classes and discussion

forums on myUnisa

5.5 Calculators

6 CONCLUDING REMARKS

2

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11

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Dear Student

1 INTRODUCTION

The purpose of this tutorial letter is to suggest correct answers to the questions in Assignment 01.

Your prescribed book for this module is: Gitman, LJ,Principles of managerial finance.12th

edition.

2 LECTURERS

Direct youracademicqueries only to the two lecturers listed below.

Mr AB Sibindi

(Head of Module)

Office 3.118 AJH van der Walt Building [email protected]

Ms PL Makoni Office 3.116 AJH van der Walt Building [email protected]

Please contact the departmental helpdesk on 012 429 4949/6723 for all other queries.

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3 SUGGESTED SOLUTIONS TO ASSIGNMENT 01

Please work through the suggested solutions and note where you went wrong. Page references to the

12th edition of your prescribed book (Gitman: 2009) have been provided to assist you in

understanding the assignment solutions.

Question 1

The correct option is 1.

This question tested your knowledge of the DuPont formula.

The modified DuPont formula is given by ROE = ROA x FLM, where ROA = Net profit margin x Totalasset turnover.

Therefore, in order for Jade Ltd to maintain its ROA, it must increase utilisation of its assets in other

words, increase its total asset turnover (TAT). Alternatively, Jade Ltd can increase the amount of debt

(the financial leverage multiplier [FLM]) to maintain its ROE. Typically, a company with a low net profit

margin has a high total asset turnover, which provides a reasonably good return on investment.

Prescribed book reference: chapter 2, page 75.

Question 2


Steps:

1) Calculate the average age of inventory (AAI) for Jade Ltd (also known as the average number of

days sales in inventory) = (365 3.20) = 114.06 114 days.

2) Comparing this value with the AAI of the rival company (90 days), gives you option 1 as the correct

answer.


Question 3


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Debt ratio =assetsTotal

sliabilitieTotal

Steps:

1) Calculate the amount of total assets for Jade Ltd. This requires that you rearrange the formula,

that Total asset turnover = Sales Total assets (page 62) so that you end up with

Total assets = Sales Total assets turnover = 5 000 000 0,85 = 5 882 352

2) The debt ratio becomes =R3 500 000

R5 882 352= 59,5%

3) You can therefore conclude that a higher debt ratio for Jade Ltd than the industry average means

increased risk of bankruptcy for Jade Ltd.


Question 4


Return on investment/total assets =assetsTotal

rsshareholdeordinaryforavailableEarnings

=R 900 000

R 5 882 353

= 15,3% which is higher than the previous year and therefore indicates animproved ROI.

The higher the ROA or ROI, the better the overall effectiveness of management in generating profit

with the available assets.


Question 5


Market price of share = P/E ratio x EPS

Price/earnings (P/E) ratio =shareperEarnings

shareordinaryofshareperpriceMarket

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Earnings per share (EPS) =goutstandinsharesofNumber

rsshareholdeordinaryforavailableEarnings

If you have the book value per share and the ordinary share equity, you can find the number of

outstanding shares by rearranging the book value per share formula as follows:

Book value per share =Ordinary share equity

Number of shares outstanding

This can be rearranged to be:

Number of outstanding ordinary shares =Ordinary share equity

Book value per share

= 2 500 000 5 = 500 000 shares

Therefore, EPS =

900 000

500 000 = R1,80

Therefore the market price of an ordinary share = 15 x 1,80 = R27,00


Question 6


Steps:1) Calculate Jade Ltds market-to-book ratio by using the market price of the share as calculated in

question 5 above as follows:

M/B ratio = (Market price [M] of share Book value [B] of share)

= R27 R5

= R5,40

2) Compare Jade Ltds M/B ratio of 5,4 to Kukaya Holdings ratio of 1,2. You can therefore conclude

that investors have a more positive outlook on Jade Ltd than they do for Kukaya Holdings. You

know that a higher M/B ratio is indicative of higher investor expectations. As such, the investors of

Jade Ltd are willing to pay more for each share than the stated book value.


Question 7


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Calculate the interest the company pays on its long-term debt:

13 000 000 x 8% = 1 040 000 (interest paid on long-term debt)

Deduct the above amount from the total interest payment of 1 300 000:

Hence, 1 300 000 1 040 000 = R260 000 (this balance is the interest paid on notes payables)

Therefore rate on notes payable =0005461

000260x 100 = 16,8%

Review balance sheet in prescribed book, reference: chapter 2, page 49.

Question 8


Statement of retained earnings:

Retained earnings opening balance R670 000

+Net profit after tax R100 000

- Cash dividends paid during the year (R210 000)

Retained earnings closing balance R560 000


Question 9


Sales R150 000 (not yet collected therefore sold on credit: no cash flow))

Less Purchases (R112 500) (paid for in cash: cash outflow)

Gross profit R37 500 (book value; no cash involved)

Question 10


RA = Rf+ (Rm Rf)

Risk premium, therefore 12% - 6% = 6%

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Questions 11 to 15

You have to use a timeline that is similar to the one below to calculate the time value of money. This

timeline enables you to identify all the important aspects of the question and when they occur.

Carefully study this timeline before you work through each of the solutions below.

0 1 2 3 4 5 6 7 8 9 10

Question 11


Using a financial calculator:

4 000 000 FV

(16% 4) = 4 I because the deposits are made quarterly

(4 6) = 24 N because there are four compounding periods in each year times six years

PMT = 102 347,33

Using tables:

PMT =

4%, 24years

FVA (future value amount)

FVIFA=

R4 000 000

39.082= 102 348,90

Market value of boatR4 000 000 buying price

Time zero: he plans tobuy a boat in six yearstime so he plans tomake annual quarterlypayments

16%

18%

Buy boat at end of six years andhire it out at end of every yearearning R60 000 at end of everyyear to tenth year

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Question 12



60 000 PMT

18 I

(10 6) = 4 N

FV = 312 925,92

Using tables:

60 000 FVIFA18%, 4 years = 60 000 x 5.215 = R312 900

Question 13



Set your calculator to BEGIN mode (2nd function BEG/BGN)

60 000 PMT

18 I

4 N

FV = 369 252,58

Question 14


Steps:

1) Discount the total cash flows received in Q12 (R312 925,92) back to (10-4) = 6 years at 18%.

2) Then discount the value you get further back to time zero at 16%.


312 925 FV

18 I

4 N

PV = -161 403,23

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Then,

161 403,71 FV

16 I6 N

PV = -66, 246,71

Using tables:

312 925 PVIF18%, 4 years = 312 925 x 0,516 = 161 469,30

161 469,30 PVIF16%, 6 years = 161 469,30 x 0.410 = 66 202,41

Question 15


Steps:

1) Calculate the future value of the R120 000 quarterly deposits over six years.

2) Deduct the cost price as well as the repair costs of the boat from this amount.

3) Deposit the balance into an account earning 18% for four years (ie to 10 years).

4) Calculate the annuities from the cash inflows/profits (already calculated in question 12).

5) Total the amounts.


120 000 PMT(164) = 4 I(4 x 6) = 24 N

FV = 4 689 912,50

4 689 912,50 (4 000 000 + 150 000) = 539 912,50

Deposit this amount into an account earning 18% over four years.

539 912,50 PV18 I4 N

FV = 1 046 770,35

60 000 PMT18 I4 N

FV = 312 925,92

Add the amount to the calculated FV of the cash inflows (R60 000) over four years.

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Total amount = (1 046 770,35 + 312 925,92) = 1 359 696,27

Prescribed book reference: Review all time value for money concepts in chapter 4.

Question 16


Prescribed book reference: pages 249 and 250.

Question 17


Refer to the formula for calculating portfolio betas on page 252 of your prescribed book.

p = [1 x 1] + [2 x 2] + [3 x 3]

Therefore, Bp = [1,5 X20 000

100 000] + [2 X

50 000

100 000] + [0,5 X

100 000 - (20000+50000)

100 000]

Therefore p = 0,3 + 1 + 0,15 = 1,45

Prescribed book reference: chapter 5, pages 253 and 254.

Question 18



1 000 FV (par value)

-1158,91 PV (current selling price)

(14 2 ) = 7 I (semi-annually)

(10 x 2) = 20 N

PMT = 84,91 (semi-annual)

Hence, the annual coupon rate = (84,91 x 2) = 16.98% rounded up to 17%

1 000

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Using tables:

B0 = (PMT x PVIFA7%,20) + (R1 000 x PVIF7%,20) ,

R1 158,91 = (PMT x 10.594) + (1 000 x 0.258)

10.594 (PMT) + 258 = 1 158,91

10.594PMT = 1 158,91 258 = 900.91

Therefore, PMT = 900,91 = R85.04

10.594

So the annual coupon rate = (83,25 x 2) = 17.0080 17%

1 000

Prescribed book reference: chapter 6, pages 302 to 311.

Question 19


Use the CAPM to find the required return on the share as follows:

Ks = RF + [KM RF] = 3 + 1.2 (8 3) = 9%

Use the Gordon Model (constant growth model) to find the fair value of the share:

Po = D1 =0

s

D (1 g)

K g

+

=5.5 (1 0.05)

9% - 4%

+= R144,38

Now, comparing the fair (or intrinsic/ fundamental/ underlying) value of the Tangshan share with its

current selling price, you can conclude that the share is currently overvalued in the market as it is

selling for R160 when it is actually worth only R144,38.

Prescribed book reference: pages 347 and 348.

Question 20


Ending cash balance + net cash flow minimum cash balance required

= 35 000 + 40 000 25000

= R50 000 excess


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4 OVERVIEW OF DISCUSSION CLASSES

Chapter references for this tutorial letter and organised discussion classes for this semester are taken

from your prescribed book by Gitman (2009).Please note that the prescribed chapters of this book for

this module are chapters 1 to 7, and 14 and 15. Questions from each of these chapters will constitute

your MNF2023 exam. The discussion classes will centre on problem areas from each of these

chapters. The topics below provide a brief overview of what you will be expected to know.

TOPIC 1: INTRODUCTION TO MANAGERIAL FINANCE

Study unit 1: Overview of Managerial Finance

Chapter 1: The role and environment of managerial finance (pp 232).

We provide a broad overview of the nature of the financial function and the task of the financial

manager to ensure optimum acquisition and allocation of funds. Funds are available in the form of

equity and loan capital, and are used to procure both fixed and current assets. The financial manager

should pursue the primary goal of the enterprise, which is to maximise the wealth of the enterprises

owners (ie the ordinary shareholders) in the long term.

Study unit 2: Institutions, Securities, Markets and Rates

Chapters 1 and 6: The role and environment of managerial finance (pp 22 - 34) and Interest

rates and bond valuation (pp 280 320)

Study the information in the study guide and in the prescribed book.

Study unit 3: Financial Statements, taxes, depreciation and cash flow

Chapters 2 and 3: Financial statements and analysis (pp 42 - 80) and Cash flow and financial

planning (pp 104 - 135)

The information in the study guide is sufficient. Concentrate on South African tax laws and rates. Note

that the tax rates are subject to change after the next budget review. The tax rate in your study guide

is for 2004. You are required to study the operating cash-flow concept in detail. You need not study

the sections dealing with accelerated depreciation because you will only have to use straight-line

depreciation. Study the shareholders report, the income statement, the balance sheet, the statement

of retained earnings and the cash-flow statement.

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Study unit 4: Financial statement analysis

Chapter 2: Financial statements and analysis (pp 42 80)

You have to study all the financial ratios in the study unit as well as the income statement, balance

sheet and statement of changes in equity. You should memorise all the various ratio formulae.

Formulae will not be provided during the final exam.

TOPIC 2: IMPORTANT FINANCIAL CONCEPTS

Study unit 5: The time value of money

Chapter 4: The time value of money (pp 160 204)

The time value of money means that a Rand has a higher value today than a Rand to be received in a

years time, since it can earn interest in the meantime or be used for other purposes to generate

income.

The calculation of the future and present values of single amounts, a mixed stream of cash flows and

annuities will be explained. This will include the following:

future and present values over various time intervals

the application of compound and present value equations in determining the value of annuities,

growth rates and amortisation payments

the use of tables A-1 to A-4 in Gitman

Study unit 6: Risk and Return

Chapter 5: Risk and Return (pp 226 274)

Risk can be defined as the chance of financial loss and can be measured by means of probability

distribution of expected earnings.

We also indicate that the standard deviation and the coefficient of variation can be used as measures

of risk. Note that the standard deviation is an absolute measure of risk and the coefficient of variation

is a relative (and hence better) measure of risk.

The use of the capital asset pricing model (CAPM) in determining the required rate of return on an

asset will also be illustrated.

Study unit 7: Bond and share valuation

Chapters 6 and 7: Interest rates and bond valuation (pp 275 320) and Stock valuation (pp 236

368)

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The valuation of debentures will be discussed. The Gordon model (constant growth model), which is

used to determine the value of ordinary shares, will be explained and we will show how the capital

asset pricing model can be used to calculate the required rate of return. The latter can also be used in

the Gordon model for determining the value of a share.

Use the following equation to calculate the value of an ordinary share:

P0 = D1

Ks - g

where Po = current share price

D1 = expected dividend = Do (1 + g)

Ks = required rate of return

If the dividend is indicated as Do, this mean the current (or just paid) dividend. The above equation

expressly uses D1, which is the next or expected dividend. D1 could also be calculated by taking Do

and raising its value by the constant growth rate.

Therefore D1 = D0(1 + g)

TOPIC 3: SHORT-TERM FINANCIAL DECISIONS

Study unit 8: Financial planning

Chapter 3: Cash flow and financial planning (pp 104 150)

This chapter introduces you to the financial planning process, with the emphasis on short-term

(operating) financial planning and its two key components: cash planning and profit planning. Cash

planning requires preparation of the cash budget, and profit planning involves preparation of a pro

forma income statement and balance sheet. This chapter in Gitman illustrates by means of examples

how these budgets and statements are developed.

Study units 9 to 11: Net working capital and short-term financing, Cash and marketable

securities, and Working capital and asset management

Chapters 14 and 15: Working capital and current assets management (pp 628 664) and

Current liabilities management (pp 670 700)

Working capital management refers to the management of a companys current assets and liabilities.

The concept of net working capital is an important one. The aggressive and conservative

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approaches to working capital management will be discussed, with special reference to the risk and

cost considerations associated with each approach. This chapter should be studied in detail.

Study units 8 to 11 (chapters 3, 14 & 15) which cover cash flow and financial planning, working

capital and current assets management as well as current liability management have to be studied

in detail.

5 IMPORTANT INFORMATION

5.1 Answer books

Please note that for the May/June and October/November examinations, NO answer books will be

provided. The answers are to be presented in the booklet with the examination questions, in thedesignated spaces. Adequate ruled space will be provided for this purpose as well as enough space

for rough work. Note that the exam books MUST be handed in.

5.2 Examination format

The examination paper consists of Section A which has 40 multiple-choice questions counting 1 mark

each (taken from all the prescribed chapters: 1-7, 14 and 15) and Section B contains two long

questions (taken from chapters 2 and 5) accounting for a total of 30 marks. Your total mark will be out

of 70 and will account for 90% of your final exam mark, and your assignment mark will account for

10% to make a total of 100%. The duration of the examination is two hours.

5.3 Assignments

Please note that both Assignments 01 and 02 for this semester constitute an integral part of your final

exam because they contribute 10% of the year mark and the final exam mark you will obtain. Each of

these assignments will contribute 5% to this year mark. We encourage you to submit both these

assignments on or before the set deadline dates in order to capitalise on the year mark and increase

your chances of passing this module. However, please note that you will be required to obtain 40%

and above in the final exam for your year mark/assignment marks to be considered.

5.4 Discussion classes, tutorial classes and discussion forums on myUnisa

We would like to encourage you to attend the discussion classes scheduled for this semester at your

respective venues. These classes will help you to discuss with your lecturers the various challenges

you are facing in this module. Details about these discussion classes are as given below:

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contained in appendix 1 of your study guide. Instructions on how to use the EL733 and EL735 are

similar to those contained in your prescribed book.

6 CONCLUDING REMARKS

Lastly, do not hesitate to contact any of your module lecturers with queries and/or problems related to

this module. Please note that lecturers will only be able to assist you with problems of an academic

nature related to this module. The contact details of all the lecturers who are responsible for this

module are contained on page 2 of this tutorial letter.

The lecturers in Financial Management wish you every success in your preparation for the

examination.

Best wishes!

Your Lecturers

DEPARTMENT OF FINANCE AND RISK MANAGEMENT AND BANKING AT UNISA

UNISA 2011

2011_tutorial_letter_201_(1)

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