P PSPNI. nnmibin UFIIVERSITY EXAMINER(S) FACULTY OF MANAGEMENT SCIENCES QUALIFICATION: BACHELOR OF ACCOUNTING OF SCIENCE FII'ID TECHI IOLOGY

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1 nnmibin UFIIVERSITY OF SCIENCE FII'ID TECHI IOLOGY FACULTY OF MANAGEMENT SCIENCES DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE QUALIFICATION: BACHELOR OF ACCOUNTING QUALIFICATION CODE: 0BAC LEVEL: COURSE CODE: MFN0 COURSE NAME: MANAGERIAL FINANCE 0 SESSION: NOVEMBER 0 PAPER: THEORY AND CALCULATIONS DURATION: HOURS MARKS: 00 FIRST OPPORTUNITY EXAMINATION QUESTION PAPER EXAMINER(S) E. Mushonga and L. Odada MODERATOR: G. Bowa INSTRUCTIONS Answer ALL the questions. P PSPNI Start each question on a new page Write clearly and neatly. Number the answers clearly. Round f only final answers to two decimal places PERMISSIBLE MATERIALS. Scientific calculators THIS QUESTION PAPER CONSISTS OF PAGES (Including this front page)

2 V QUESTION [ Marks] You have been called upon by Marine Fisheries which is an established company looking to expand its fishing interest by investing NSlOO 000 in shares in the industrial sector the Namibian Stock Exchange. You have gathered data and assigned probabilities to expected returns under four possible market conditions. The following probabilities have been assigned to two individual shares, and to a unit trust. The unit trust is a widely diversified portfolio with a beta. % Expected Returns Market condition Probability Share A Share B Unit Trust Poor Moderate Good Exceptional Assume that despite the small number, the distributions all have characteristics a normal distribution and that borrowing and lending is possible at the risk free-free rate 0%. Required: a) Calculate the standard deviation and coefficient variation for shares A and B (0 marks) b) Find the correlation coefficient the returns from shares A and B ( marks) c) Calculate the beta share B (8 marks) cl) If your client invested N$0 000 in share A and N in share B, calculate the expected return and total risk the portfolio ( marks) Page

3 QUESTION Dischem (Pty) Ltd. operates in the agricultural chemicals industry. [ Marks] The company was launched 8 years ago. It has developed aggressively and has branches throughout Southern Africa. Although not listed, it has managed to grow its market share in the face competition from some larger listed chemical companies. The following summarized balance sheets and income statements have been obtained for analysis. Balance sheet as at 0 June NS OOO N$ 000 Assets Non-current assets- Net plant and equipment Current assets Inventory 0 08 Accounts receivable 0 0 Cash % Q Total current assets 8 M Total assets w w Equity and liabilities Share capital Retained prit m Total equity 0 0 Non-current liabilities - Long-term borrowings 0 8 Current liabilities Trade and other payables Short-term borrowings E Total current liabilities gag 8% Total equity and liabilities mg g Page

4 Income statement for the year ended 0 June 0 0 NS'OOOs 008 NS'OOOs Sales 00 0 Cost sales Depreciation fl 0 Prit Before Interest and Tax 0 0 Interest _ Net prit before tax 0 0 Taxes Net prit after tax ; w Dividends Additions to retained prits 8 8 Industry ratios: Current ratio Acid-test ratio Inventory turnover Debtors collection Debt ratio Times interest earned :;.; times; 0 days; 0%; 0 times Required: Calculate the following ratios for 0 and 0. Use a day year a) b) C) d) e) f) g) h) i) Current ratio Quick ratio Inventory turnover Debtors collection period Creditors settlement Debt ratio Times interest earned Gross margin Return on assets ( marks) ( marks) ( marks) ( marks) ( marks) ( marks) ( marks) ( marks) ( marks) ') Return on equity; and comment on the potential to increase return on equity by introducing more debt into the capital structure. What would be the advantages and disadvantages such a strategy? ( marks) Page

5 QUESTION [ Marks] Rio Tinto is a leading global mining group that focuses on finding, mining and processing the Earth's mineral resources. The company has grown through a long series mergers and acquisitions to place itself among the world leaders in the production many commodities, including aluminium, iron ore, copper, uranium, coal, and diamonds. Although primarily focused on extraction minerals, Rio Tinto also has significant operations in refining, particularly for refining bauxite and iron ore. Rio Tinto has an equity beta.0; the market risk premium in Namibia is expected to be % and the yield on the Namibian government bonds has been and remains at.%. The company has issued N$0 Million worth NSlOO par value bonds to finance an excavation project for new minerals. The bonds whose coupon rate is 8% are currently giving a yield to maturity % and they are redeemable in five years. The tax rate is 8%; interest on the bonds is paid annually in arrears and the companyjust paid the coupon for the current year. Recently, Rio Tinto paid a dividend N$0. per share which is expected to grow at % indefinitely. The company s share price is N$.0 Required: a) What is the company s cost equity based on the Capital Asset Pricing Model (CAPM)? ( marks) b) What is the market value the bond? ( marks) c) What is the after tax cost debt? ( marks) d) What is the company s cost equity using the Dividend Growth Model? ( marks) e) Using the cost equity as per CAPM, determine the Weighted Average Cost Capital if the debt- ratio is 0% ( marks) f) Identify and describe any three limitations the Dividend Growth Model ( marks) Page

6 QUESTION [ Marks} a) Mr Miller is a young Financial Director a listed company. Although he enjoys his work, he wants to retire at the age (in 0 years time) and will require a monthly income N$0 000 for 0 years after retirement date. If the return he can obtain is % per annum with interest compounded monthly, how much should Mr Miller contribute every month for the next 0 years in order to obtain an annuity N$0 000 per month for 0 years after the retirement date? (8 marks) bl Purchasing a home is usually considered a good investment. However, a bad credit history can be an even bigger obstacle for potential buyers than it was in the past, as the recent economic crisis has caused lenders to tighten their standards for loaning money and providing mortgages. However, it is not impossible. You can buy your first home with bad credit by accessing local resources and saving for a larger down payment. Suppose Jimmie borrows N$0,000 at % interest towards the purchase a home and his mortgage is for 0 years. i) How much will his annual payment be? ( marks) ii) Show the amount loan balance outstanding at the end each year up to year 8 years. (8 marks) Interest rate is the proportion a loan that is charged as interest to the borrower, typically expressed as an annual percentage the loan outstanding. Identify and explain the three interest rate theories ( marks) END OF EXAMINATION QUESTION PAPER Page

7 FORMULAE FVn = PV (+r)n FVAdue = PMT [(%) FVA = PMT [( (+T)n )] T ] Effective annual rate = [ + (%)]m PV = (+r) " 'PVA = - : ; r (+r)n] _ PVAdue ={[ + " ] ] +

8 TABLE A Future value interest factor $ per period at i% for n periods, FV F(i,n). Period % % % % % % % 8% % 0% % % % % % % % 8% % 0%

9 TABLE B Present value interest factor $ per period at i% for n periods, PV F(i,n). Period % % % % % % % 8% % 0% % % % % % % % 8% % 0%

10 TABLE C Future value Interest factor an ordinary annuuty $ per perlod at I% for n periods, FVIFA(I,n). Period % % % % % % % 8% % 0% % % % % % % % 8% % 0%, , ,0.,.,8.,., ,0.,.0,.,0.8,.,.,.8, ,.,8.8,00.0,.,.,. 0,,00,8,,

11 TABLE D Present value interest factor an (ordinary) annuity $ per period at i% for n periods, PVIFA(i,n). Period % % % % % % % 8% % 0% % % % % % % % 8% % 0% % % %