Tutorial Letter: May 2014 examination session. Financial Management 2 (FM202) Semester One 2014

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Tutorial Letter: May 2014 examination session Financial Management 2 () Semester One 2014 Dear Student Please make note of the following key areas and notes pertaining to the Financial Management 2

1 Tutorial Letter: May 2014 examination session Financial Management 2 () Semester One 2014 Dear Student Please make note of the following key areas and notes pertaining to the Financial Management 2 Examination on 15 May You are reminded that the detail provided herein is merely a guideline for clarity and direction and you are encouraged to complete the entirety of the module content as outlined in the Learner Guide. Exam Structure The paper consists of seven (7) questions resulting in an exam total of 100 marks. All questions must be attempted and they flow on similarly to those of the previous exam session. Question 1 consists of five (5) multiple choice questions worth 10 marks (5 X 2 marks each) which must be answered on the space provided on the front page of your answer books. These questions are predominantly calculation based questions but there are elements of theory derived from all study units within. Question 2 (10 marks) comprises of two (2) short questions which are based on a case study. This question is pure application; students will have to apply their knowledge to the case study incorporating application based reasoning. This question is based on study unit 1. Question 3 (25 marks) is a financial ratio analysis question which is based on study unit 2. Students will be presented with a case scenario where by a financial/ratio analysis will have to be conducted on the company that is presented. This financial analysis consists of both calculations and interpretations of the calculations.

2 Page 2 of 13 Students are reminded that no marks will be awarded for stating whether the ratios have increased or decreased OR are good or bad to the industry or competition. Question 4 (10 marks), is based on study unit 3. Students will have to calculate and interpret certain effects on the company s cash flows. Question 5 (20 marks), is based on Time Value of Money study unit 4. Students will have to calculate various elements (FV, PV, I, PMT, N) under the different scenarios. (See page five). It is important to understand interest rates (nominal vs effective) and compounding periods. Question 6 (10 marks) is a two part question based on valuations, study unit 5. Again there is a mixture of calculations and discussion/application. Question 7 (15 marks) is also a two part question that is based on short term financial decisions unit 6. Students will have to interpret certain effects on a company s short term solvency. Calculations will also be required. Exam Content 49% (49 marks) of the paper is calculation based. There are theoretical components within all questions from all study units. You will be required to comment, analyse or interpret your results for various answers. Calculation focus: o Ratio analysis study unit 2, o Working capital (working capital cycle etc), o Time value of money (FV, PV, FVA n, PVA n, solving for other variables such as PMT etc.), o Valuation of future cash flows [calculating the market value of debt and equity, yield to maturity (YTM) on bonds, dividend valuation (constant growth) etc.], o Short term financial decisions (cash conversion cycle and its components etc.). You are reminded to have fully grasped the following concepts amongst others in order to master the topics covered in the examination: o Operating cash flows and free cash flows, o Inventory management, o Key concepts of financial management and the managerial finance environment, including stakeholders

3 Page 3 of 13 o Theory on bonds (bond yields, bond prices etc.) o Concepts of risk and return, o Ratio analysis theory (knowing what each ratio illustrates regarding solvency, liquidity, asset utilisation etc.) and o the theory and rationale behind short term financial decisions. Please note Appendix A and Appendix B on page 6 to 13 of this Tutorial Letter which provides the formula sheet and interest factor tables you will be given in your exam. These have been developed as standardised documents for both and FM303 in order to create some consistency. You are expected to familiarise yourself with the respective formulas that relate to the module you are studying prior to your exam. It is your responsibility to understand each formula and how it should be applied in the context of the study units of the module you are currently studying. You are reminded that a formula sheet is just a tool to aid in the calculation process and is certainly not an exhaustive list of all that will be tested. It also does not give guidance on the interpretation and understanding of results which are skills you must master in your studying process. General You are reminded to show your workings and calculations where necessary and ensure that they can be easily referenced. Examiners will not hunt for substantiating workings. Number all questions CLEARLY and indicate End when you have completed all questions in the exam. It will most certainly aid in being time efficient in an exam if you are able to master the use of a financial calculator for time value of money calculations, however, you will not be penalised should you choose to use a formula. It is a requirement to continue to illustrate all workings in any answer. (See the example provided on page 5 of this letter.) In questions requiring a formula driven answer (such as ratio analysis, OCF etc.) it is always best to first provide the formula being used, then show the applicable figures inserted in the formula and then your final answer/value and not simply an amount as an answer alone.

4 Page 4 of 13 You are reminded to layout each answer clearly and logically in a format that can be easily followed by the marker. An indication as to how many decimal places should be applied in your answers will be provided wherever necessary. You are encouraged to follow the indicated units carefully. Use mark allocation as a guide as to how much information is required when formulating your responses. Analysis of questions must show insight and evidence of understanding of the academic content. Not adhering to the instructions provided as well as the guidance herein will result in you forfeiting marks. May we remind you that we are always available to assist with academic queries. Academic queries should be submitted in writing to: academic-ug@immgsm.ac.za We wish you a successful May 2014 examination session. Kind regards The IMM GSM Team

5 Page 5 of 13 EXAMPLE OF HOW TO SET OUT A TIME VALUE OF MONEY CALULATION BASED ANSWER Q) You have an annuity receiving 30 payments of R a year, with the first payment to be received one year from now. The interest rate is 20% per annum, What is the Present Value of this annuity? POSSSIBLE LAYOUT ALTERNATIVES FOR ANSWERS: 1. Using a calculator: 2. Using a formula: 3. Using interest factor tables:

6 Chapter 1: Appendix A Formula Sheet Page 6 of 13 MVA = Market value of shares Equity capital supplied by shareholders EVA = EBIT (1 Tax rate) (Total net operating capital) (WACC) EVA = (Operating capital) (ROIC WACC) Chapter 2: Financial statements and analysis Current ratio = Quick (acid-test) ratio = Inventory turnover = Average collection period = Average payment period = Total asset turnover = Debt ratio = Times interest earned ratio = Gross profit margin = Operating profit margin = Net profit margin = EPS= ROA = ROE= Price/earnings (P/E) ratio = Market/book (M/B) ratio =

7 Page 7 of 13 Chapter 4: Time Value of Money [ ] [ ] Chapter 5: Risk and return Chapter 6: Interest rates and bond valuation [ ] [ ]

8 Page 8 of 13 Chapter 7: Share Valuation Zero growth: Constant growth: Variable Growth: [ ] FCF Value of entire company Chapter 9: Long term investment decisions

9 Page 9 of 13 Chapter 11: The cost of capital After tax cost of debt: Cost of preference shares: Cost of ordinary shares using constant growth model: Weighted average capital (WACC): ( ) Chapter 12: Leverage and capital structure DOL = DOL at base sales level = ( ) DFL = DFL at base level EBIT = DTL = DTL = DOL x DFL Chapter 14: Working capital and current assets management Operating Cycle = AAI + ACP Cash Conversion Cycle = OC APP

10 Appendix B: Factor Tables Table A-1: Future value interest factors for one rand compounded at I percent for n periods: n 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% IMM Graduate School of Marketing

11 Table A-2: Present value interest factors for one rand compounded at I percent for n periods: Page 2 of 13 n 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

12 Table A-3: Future value interest factor for a one-rand annuity discounted at I percentage for n periods: n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% Page 3 of 14% 13 15%

13 Table A-4: Present value interest factor for a one-rand annuity discounted at I percentage for n periods: Page 4 of 13 n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

Tutorial Letter: May 2014 examination session. Financial Management 3 (FM303) Semester One 2014

Tutorial Letter: May 2014 examination session Financial Management 3 () Semester One 2014 Dear Student Please make note of the following key areas and notes pertaining to the Financial Management 3 Examination