FM202. DUE DATE : 3:00 p.m. 19 MARCH 2013

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1 Page 1 of 11 ASSIGNMENT 1 ST SEMESTER : FINANCIAL MANAGEMENT 2 () CHAPTERS COVERED : CHAPTERS 1 to 4 LEARNER GUIDE : UNITS 1, 2, 3 and 4 DUE DATE : 3:00 p.m. 19 MARCH 2013 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 contributed by 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 in a typed format, on plain A4 paper. Unless otherwise specified, this assignment must be completed within a limit of 1500 words, excluding the bibliography. Students who exceed the word limit may find that only part of the submitted assignment will be marked. 6. A separate assignment cover, which is provided by the IMM GSM, must be attached to the front 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 19 March Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 19 March 2013 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, on 3 May 2013.

2 Page 2 of 11 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 QUESTION 1 [20] For each of the questions below you are provided with four alternatives, a- d. You are required to select the most appropriate/ correct answer by writing only the question number and the respective answer in your assignment. E.g b 1.1 The key variables in the owner wealth maximization process are a. earnings per share and risk. b. cash flows and risk. c. earnings per share and share price. d. profits and risk The goal of profit maximization would result in priority for a. cash flows available to shareholders. b. risk of the investment. c. earnings per share. d. timing of the returns Cash flow and risk are the key determinants in share price. Increased risk, other things remaining the same, results in: a. a lower share price. b. a higher share price. c. an unchanged share price. d. an undetermined share price. 1.4 Financial managers evaluating decision alternatives or potential actions must consider: a. only risk. b. only return. c. both risk and return. d. risk, return, and the impact on share price The key participants in financial transactions are individuals, businesses, and governments. Individuals are net of funds, and businesses are net of funds. a. demanders; suppliers b. users; providers c. suppliers; demanders d. purchasers; sellers

3 Page 3 of Firms that require funds from external sources can obtain them in the following ways EXCEPT from: a. financial institutions. b. financial markets. c. government. d. private placement. 1.7 Which of the following is NOT a financial institution? a. A commercial bank b. An insurance company c. A pension fund d. A newspaper publisher 1.8. Which of the following serve as intermediaries channeling the savings of individuals, businesses and governments into loans and investments? a. Financial Institutions b. Financial Markets c. Securities Exchanges d. OTC market 1.9 The market is where securities are initially issued and the market is where pre-owned securities (not new issues) are traded. a. primary; secondary b. money; capital c. secondary; primary d. primary; money One of the most influential documents issued by a publicly-held corporation is the a. letter to shareholders. b. annual report. c cash flow statement. d. income statement Which one of the following items would a shareholder s report most likely NOT include? a. a cash budget. b. an income statement. c. a statement of cash flows. d. a statement of retained earnings Total assets less net fixed assets equals: a. gross assets. b. current assets. c. depreciation. d. liabilities and equity.

4 Page 4 of Gross profit is defined as: a. operating profits minus depreciation. b. operating profits minus cost of goods sold. c. sales revenue minus operating expenses. d. sales revenue minus cost of goods sold Operating profit is defined as: a.. gross profits minus operating expenses. b. sales revenue minus cost of goods sold. c. earnings before depreciation and taxes. d. sales revenue minus depreciation expense Which of the following accounts would NOT be classed as a current liability? a. accounts receivable. b. accounts payable. c. accrued expenses. d. notes payable A firm's operating cash flow (OCF) is defined as: a. gross profit minus operating expenses. b. gross profit minus depreciation. c. EBIT times one minus the tax rate plus depreciation. d. EBIT plus depreciation Which of the following items would NOT be a non-cash charge? a. depreciation. b. provisional tax payment. c. depletion. d. amortization Which of the following is a source of cash flows? a. Cost of goods sold b. Depreciation c. Interest expense d. Taxes 1.19 An analysis involves comparison of current to past performance and the evaluation of developing trends. a. Time-series b. Cross-sectional c. Marginal d. Quantitative 1.20 The primary concern of creditors when assessing the strength of a firm is the firm's: a. profitability. b. leverage. c. short-term liquidity. d. share price.

5 Page 5 of 11 QUESTION 2 [55] Carefully study the contents of the case study, Track Software Ltd, attached at the end of this assignment taken from Gitman, L.J Principles of Managerial Finance. 1 st ed. Pearson. Pp Answer the questions that follow. Required: Which financial goal does Stanley seem to be primarily focussed on? Would you consider this goal to be the correct goal or not for Stanley in his capacity as Financial Manager? Provide reasons for your answers. (3) Explain if a potential agency problem could exist in this firm. (In your answer you are required to give a brief understanding into what an agency problem could be defined as.) (2) 2.2 Calculate the firm s earnings per share (EPS) for each year ( ), recognising that the number of ordinary shares issued has remained unchanged since the firm s inception. Comment on the EPS performance in view of your response in question 2.1 (a). (For 2009 you are required to use the net profit after tax as shown in Table 1 and not that of Table 2.) (5) 2.3 Use the financial data presented in the case study to determine the following for Track Software limited for 2009: Operating cash flow (OCF). (3) Free cash Flow (FCF). (4) Evaluate your findings in and in light of the firm s cash flow difficulties. (3) 2.4 Analyse the firm s financial condition in 2009 as it relates to liquidity, activity, debt and profitability, using the financial statements provided in Table 2 and 3 and the ratio data included in Table 5. Evaluate the firm on both a crosssectional (CS) and a time series (TS) basis. (A suggest format with headings has been provided on the next page with the current ratio given as an example as to how to set out your answers. You are required to complete the table in a neat and understandable format for all relevant ratios. Be sure to provide written analysis of the performance of Track Ltd using the ratios calculated as set out below the table.) Show all your calculations. (32)

6 Page 6 of 11 Track Software Ltd Ratio analysis Ratio Actual 2008 Calculated 2009 Industry Average 2009 Comment TS CS 1. Current Ratio TS: CS: Improving Poor 2. Quick ratio 0.63????? 1.10 TS: CS:???????? Analysis of Track Software Ltd based on ratio data: a. Liquidity: b. Activity:. c. Debt:... d. Profitability: What recommendations would you make to Stanley regarding employing a new software developer? Relate your response again to your reasoning given in question 2.1(a). (3) QUESTION 3 [25] To answer the following questions ( ) you will need a financial calculator. In each instance indicate in your answer book the following key strokes used in arriving at your answer: N (number of periods) I (interest rate) PV (Present value) PMT (Payment) FV (Future value) Show all workings and round off your answers to the nearest whole cent. An example for your reference is provided below: E.g.) Susan invests R2 500 in a money market account every quarter and will withdraw the lump sum in 5 years time. If the account earns interest at 6% compounding quarterly, how much will her lump sum be in 5 years if she makes her first payment 3 months from now. Answer) PMT= I = 6 / 4 = 1.5% per quarter solve for FV = R N= 5 x 4 = 20 quarters

7 Page 7 of Peter wishes to purchase a motor vehicle from a dealer in Johannesburg for R His bank, ABSA, is prepared to lend him the money on condition that he undertakes to repay the loan monthly in advance over a period of 36 months. If interest is to be charged at 16,5% per annum compounded monthly in advance, what will his monthly instalment be? (5) 3.2 Cecilia decided to extend her house by adding an extra bedroom. The extension will cost her R First National Bank has agreed to give her a loan at a nominal rate of 13,5% per annum compounded monthly in arrears, provided that she is able to put down a deposit of 10% on the cost price of R What will her monthly payments be if the loan is to be paid over a period of 36 months? (5) 3.3 You have a choice of receiving 30 payments of R a year, with the first payment to be received one year from now, or R in cash today. If you could earn an interest rate of 20% per annum, which one would you prefer? (Hint: Compare the PV of the cash flows) (5) 3.4 A person must pay back a debt of R in a lump sum after five years. Suppose that the loan was repaid in semi-annual payments instead, the first due six months from now and the last at loan termination, what would the amount of each instalment be if the interest rate was 14% compounded semiannually? (5) 3.5 You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive R at the end of each year for the 30 years between retirement and death (a psychic told you that you would die exactly 30 years after you retire). You know that you will be able to earn 11% per year during the 30-year retirement period How large a fund will you need when you retire in 20 years in order to provide the 30-year R retirement annuity? (2) How much would you need to provide today as a single amount to the fund as calculated in (a) if you earn only 9% per year during the 20 years preceding retirement? (3) ASSIGNMENT TOTAL: 100

8 Page 8 of 11 Integrative Case 1 - Track Software, Ltd Seven years ago, after 15 years in accounting, Stanley Booker, CA (SA), resigned his position as Manager of Cost Systems for Davis, Cohen and O Brien Accountants and started Track Software, Ltd. In the two years preceding his departure from Davis, Cohen and O Brien, Stanley had spent nights and weekends developing a sophisticated cost-accounting software programme that became Track s initial product offering. As the firm grew, Stanley planned to develop and expand the software product offerings all of which would be related to streamlining the accounting processes of medium- to large-sized manufacturers. Although Track experienced losses during its first two years of operation 2003 and 2004 its profit has increased steadily from 2005 to the present (2009). The firm s profit history, including dividend payments and contributions to retained earnings, is summarized in Table 1. Stanley started the firm with a R1, 000,000 investment his savings of R 500,000 as equity and a R 500,000 long term loan from the bank. He had hoped to maintain his initial 100 percent ownership in the corporation, but after experiencing a R 500,000 loss during the first year of operation (2003), he sold 60 percent of the stock to a group of investors to obtain needed funds. Since then, no other share transactions have taken place. Although he only owns 40 percent of the firm, Stanley actively managers all aspects of its activities; the other shareholders are not active in management of the firm. The firm s share was valued at R45.00 per share in 2008 and at R52.80 per share in Stanley has just prepared the firm s 2009 statement of comprehensive income, statement of financial position and statement of retained earnings, shown in Tables 2, 3 and 4, along with the 2008 statement of financial position. In addition, he has compiled the 2008 ratio values and industry average ratio values for 2009, which are applicable to both 2008 and 2009 and are summarized in Table 5. He is quite pleased to have achieved record earnings of R480,000 in 2009, but he is concerned about the firm s cash flows. Specifically, he is finding it more and more difficult to pay the firm s bills in a timely manner and generate cash flows to investors both creditors and owners. To gain insight into these cash flow problems, Stanley is planning to determine the firm s 2009 operating cash flow (OCF) and free cash flow (FCF). Table 1 Track Software, Ltd, Profit, dividends and retained earnings, Net profits after taxes Dividends paid Year (1) (2) (3) Contribution to Retained earnings [(1) - (2)] 2003 (R500,000) R 0 (R500,000) 2004 ( 200,000) 0 ( 200,000) , , , , ,000 10, , ,000 30, , ,000 50, ,000

9 Page 9 of 11 Stanley is further frustrated by the firm s inability to afford to hire a software developer to complete development of a cost estimation package that is believed to have blockbuster sales potential. Stanley began development of this package two years ago, but the firm s growing complexity has forced him to devote more of his time to administrative duties, thereby halting the development of this product. Stanley s reluctance to fill this position stems from his concern that the added R800,000 per year in salary and benefits for the position would certainly lower the firm s earnings per share (EPS) over the next couple of years. Although the project s success is in no way guaranteed, Stanley believes that if the money were spent to hire the software developer, the firm s sales and earnings would significantly rise once the 2- to 3-year development, production and marketing process was completed. With all these concerns in mind, Stanley set out to review the various data to develop strategies that would help to ensure a bright future for Track Software. Stanley believed that as part of this process, a thorough ratio analysis of the form s 2009 results would provide important additional insights. Table 2 Track Software, Ltd, Statement of comprehensive income (R000) For the year ended 31 December 2009 Revenue R 15,500 Cost of Sales (10,300) Gross profit R 5,200 Total operating expense (4,180) Sales expense R1,500 General and administrative expenses 2,570 Depreciation expense 110 Operating profits (EBIT) R 1,020 Finance cost (290) Net profit before tax R 730 Less: Taxes (30%) (219) PROFIT FOR THE YEAR 511

10 Page 10 of 11 Table 3 Track Software, Ltd, statement of financial position (R000) 31 December ASSETS Non-current assets Gross non-current assets 1,910 1,450 Accumulated depreciation Net non-current assets 1,320 1,280 Current assets Inventories 1,910 1,450 Trade receivables 1,520 1,040 Cash and cash equivalents 780 1,130 Total current assets 4,210 3,620 Total assets 5,530 4,900 EQUITY AND LIABILITIES Share capital (500,000 shares issued) Paid-in capital in excess of par Retained earnings 1, Total equity 1,520 1,090 Non-current liabilities Long-term loan Current liabilities Trade and other payables R1,360 R1,260 Short term borrowings 2,000 1,900 Accruals Total current liabilities R3,630 R3,410 Total liabilities 4,010 3,810 Total equity and liabilities R5,530 R4,900

11 Page 11 of 11 Table 4 Statement of changes in equity for the year ended 31 December 2009 Ordinary share capital Share premium Retained earnings Total 31 December ,090 Shares issued Total comprehensive income for the year Ordinary share dividend December ,020 1,520 Table 5 Actual Industry average Ratio Current ratio Quick ratio Inventory turnover Average collection period 29.6 days 20.2 days Total asset turnover Debt ratio Times interest earned ratio Gross profit margin 32.1% 42.3% Operating profit margin 5.5% 12.4% Net profit margin 3.0% 4.0% Return on total assets (ROA) 8.0% 15.6% Return on common equity (ROE) 36.4% 34.7% Price/earnings (P/E) ratio Market/book (M/B) ratio Case study reference: Gitman, L.J Principles of Managerial Finance. 1 st ed. Pearson. Pp

FM202. CHAPTERS COVERED : CHAPTERS 1-4 and 16 LEARNER GUIDE : STUDY UNITS 1-3 DUE DATE : 3:00 p.m. 21 AUGUST 2012 TOTAL MARKS : 100

FM202. CHAPTERS COVERED : CHAPTERS 1-4 and 16 LEARNER GUIDE : STUDY UNITS 1-3 DUE DATE : 3:00 p.m. 21 AUGUST 2012 TOTAL MARKS : 100 Page 1 of 11 ASSIGNMENT 2 ND SEMESTER : FINANCIAL MANAGEMENT 2 () CHAPTERS COVERED : CHAPTERS 1-4 and 16 LEARNER GUIDE : STUDY UNITS 1-3 DUE DATE : 3:00 p.m. 21 AUGUST 2012 TOTAL MARKS : 100 INSTRUCTIONS