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 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 on plain A4 paper. You must show all working calculations, including and where appropriate multiple choice working calculations. 6. A separate assignment cover, which is provided by the IMM GSM, must be attached to the front cover 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 21 August 2012. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 21 August 2012 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, www.immgsm.ac.za, on Friday, 5 October 2012.
Page 2 of 11 SPECIFIC INSTRUCTIONS Answer ALL the questions 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. ANSWER ALL THE QUESTIONS QUESTION 1 [25] Indicate your answers to each of the following questions on the answer sheet provided. Each answer is worth one (1) mark. For each question below select the MOST APPROPRIATE answer from the choices given. Mark your answer with an X in the correct block on the ANSWER SHEET on page 11. 1.1. An analysis of the relationship between the sales volume and various measures of profitability is called analysis. a. forecasting b. scenario c. sensitivity d. simulation e. break-even 1.2. Variable costs a. change in direct relationship to the quantity of output produced. b. are constant in the short-run regardless of the quantity of output produced. c. reflect the change in a variable when one more unit of output is produced. d. are subtracted from fixed costs to compute the contribution margin. e. form the basis that is used to determine the degree of operating leverage employed by an organisation. 1.3. Fixed costs a. change as the quantity of output produced changes. b. are constant over the short-run regardless of the quantity of output produced. c. reflect the change in a variable when one more unit of output is produced. d. are subtracted from sales to compute the contribution margin. e. can be ignored in scenario analysis since they are constant over the life of a project.
Page 3 of 11 1.4. The difference between the unit sales price and the variable cost per unit is called a. operating leverage. b. the contribution margin. c. the gross profit. d. the net profit. e. the marginal revenue. 1.5. The degree to which an organisation relies on fixed production costs is called its a. operating leverage. b. financial break-even. c. contribution margin. d. cost sensitivity. e. fixed break-even. 1.6. The percentage change in operating cash flow relative to the percentage change in quantity sold is called the a. marginal profit. b. degree of operating leverage. c. gross profit. d. net profit. e. financial break-even. 1.7. Which ONE of the following is most likely a variable cost? a. Office rent b. Property taxes c. Property insurance d. Direct labour costs e. Management salaries 1.8. Which of the following statements concerning variable costs is/are correct? I. Variable costs minus fixed costs equal marginal costs. II. Variable costs are equal to zero when production is equal to zero. III. An increase in variable costs increases the operating cash flow. IV. Variable costs can be ascertained with certainty when evaluating a proposed project. a. II only b. IV only c. I and III only d. II and IV only e. I and II only 1.9. All else constant, as the variable cost per unit increases, the a. contribution margin decreases. b. sensitivity to fixed costs decreases. c. degree of operating leverage decreases. d. operating cash flow increases. e. net profit increases.
Page 4 of 11 1.10. As additional equipment is purchased, the level of fixed costs tends to and the degree of operating leverage tends to a. remain constant; remain constant. b. rise; rise. c. rise; fall. d. fall; rise. e. fall; fall. 1.11. Fixed costs I. are variable over long periods of time. II. must be paid even if production is halted. III. are generally affected by the amount of fixed assets owned by an organisation. IV. per unit remain constant over a given range of production output. a. I and III only b. II and IV only c. I, II, and III only d. I, II, and IV only e. I, II, III, and IV 1.12. Which one of the following is a fixed cost in the short-run? a. A lease on a copier b. The cost of a machine operator c. The cost of raw materials d. The cost of building maintenance e. Employee benefits for shop workers 1.13. The contribution margin must increase as a. both the sales price and variable cost per unit increase. b. the fixed cost per unit declines. c. the gap between the sales price and the variable cost per unit widens. d. sales price per unit declines. e. the sales price minus the fixed cost per unit increases. 1.14. Given a constant sales price, the larger the contribution margin, the a. higher the variable cost per unit as a percentage of the sales price. b. higher the cash break-even point. c. lower the financial break-even point. d. lower the fixed costs as a percentage of the sales price. e. lower the gross profit per unit sold. 1.15. You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could a. lower the degree of operating leverage. b. lower the contribution margin. c. increase the initial cash outlay. d. increase the fixed costs per unit while lowering the contribution margin. e. lower the operating cash flow of the project.
Page 5 of 11 1.16. Which ONE of the following statements is generally correct about a project with a high degree of operating leverage? I. The project has relatively high variable costs. II. The project is capital intensive. III. The amount of the initial cash outlay is generally relatively large in relation to the size of the project. IV. The forecasting risk of the project is high. a. I and II only b. III and IV only c. I, II, and III only d. II, III, and IV only e. I, II, and IV only 1.17. Which one of the following could lower the risk of a project by lowering the degree of operating leverage? a. You could hire temporary workers from an employment agency rather than hire part-time employees. b. You could use sub-contractors to produce sub-assemblies of your product rather than purchase new equipment to do the work in-house. c. You could lease equipment on a long-term basis rather than buy the equipment. d. You could lower the projected selling price per unit. e. You could change the production method to one which relies more on fixed costs and less on variable costs than the current proposed method of production. 1.18. Ralph is in charge of a project that has a degree of operating leverage of 2.5. What will happen to the operating cash flows if Ralph increases the number of units sold by 5 per cent? a. Increase by 2 per cent b. Increase by 12.5 per cent c. Increase by 50 per cent d Decrease by 12.5 per cent e. Decrease by 50 per cent 1.19. Ann Marie has noted that every time the sales quantity increases by 3 per cent for a particular project, the operating cash flow for the project increases by 5 per cent. What is the degree of operating leverage for this project if the contribution margin is R4? a. 0.42 b. 1.67 c. 2.33 d. 4.51 e. 5.67
Page 6 of 11 1.20. The fixed costs of a project are R8 000. The depreciation expense is R3 500 and the operating cash flow is R20 000. What is the degree of operating leverage for this project? a. 0.40 b. 0.71 c. 0.87 d. 1.40 e. 2.50 1.21. Webster and Words manage a product with a 3,5 degree of operating leverage. Sales of the product are expected to decline by 15 per cent next year. What is the expected change in the operating cash flow for this product for next year? a. Increase by 23.3 per cent b. Increase by 52.5 per cent c. Decrease by 4.3 per cent d. Decrease by 23.3 per cent e. Decrease by 52.5 per cent Use the following information from the 2009 financial statements of Analytics Ltd to answer Questions 1.22-1.25: Cash 19 000 Trade receivables 33 000 Inventory 65 000 Investment in associates 9 500 Property, plant and equipment at cost 470 000 Accumulated depreciation 110 500 Trade payables 58 500 Tax payable 6 000 Short-term loans 7 000 Long-term loans 40 000 Ordinary share capital 220 000 Preference share capital 25 000 Reserves 21 500 Retained profit 108 000 Turnover 290 000 Cost of sales 204 000 Operating expenses 28 000 Investment income 3 500 Finance cost 6 500 Tax 16 500 Preference share dividends 2 000 Ordinary share dividends 17 500
Page 7 of 11 1.22. Analytics Ltd s current ratio is a. 1.22 b. 1.37 c. 1.64 d. 1.81 e. 1.57 1.23. Analytics Ltd s debt to equity ratio is a. 0.11 b. 0.23 c. 0.30 d. 0.32 e. 0.29 1.24. Analytics Ltd s return on total assets is a. 7.92% b. 10.43% c. 11.32% d. 11.93% e 8.45% 1.25. Analytics Ltd s inventory turnover ratio is a. 1.32 times b. 3.19 times c. 4.46 times d. 7.48 times e. 5.85 times QUESTION 2 [25] 2.1 CEO Manufacturing Limited is considering a new product and is unsure about its price as well as the variable cost associated with it. CEO s marketing department believes that the organisation can sell the product for R5 000 per unit, but feels that if the initial market response is weak, the price may have to be 20% lower in order to be competitive with existing products. The organisation s best estimates of its costs are fixed costs of R36 million and variable cost of R3 250 per unit. Concern exists with regard to the variable cost per unit due to currently volatile raw material and labour costs. Although the organisation expects this cost to be about R3 250 per unit, it could be as much as 8% above that value. The organisation expects to sell about 500 000 units per year. Answer the following questions (round to the nearest rand): a) Calculate the organisation s break-even volume, assuming its initial estimates are accurate. (2) b) Perform a sensitivity analysis by calculating the break-even point for all combinations of the sale price per unit and variable cost per unit. (Hint: There are four scenarios and combinations.) (8) c) In the best case, how many units will the organisation need to sell to break even? (1)
Page 8 of 11 d) In the worst case, how many units will the organisation need to sell to break even? (1) 2.2 Grey Products has fixed operating costs of R380 000, variable operating costs of R16 per unit, and a selling price of R63.50 per unit. a) Calculate the break-even point in units. (2) b) Calculate the organisation s earnings before interest and tax (EBIT) at 9 000, 10 000 and 11 000 units respectively. (3) c) With 10 000 units as base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in b)? (4) d) Use the percentages computed in c) to determine the degree of operating leverage (DOL). (1) e) Use the formula for degree of operating leverage to determine the DOL at 10 000 units. (3) QUESTION 3 [20] The following items from the 2009 financial statements of Unsorted Ltd are provided to you: Cash 19 000 Trade receivables 33 000 Inventory 65 000 Investment in associates 9 500 Property, plant and equipment at cost 470 000 Accumulated depreciation 110 500 Trade payables 58 500 Tax payable 6 000 Short-term loans 7 000 Long-term loans 40 000 Ordinary share capital 220 000 Preference share capital 25 000 Reserves 21 500 Retained profit 108 000 Turnover 290 000 Cost of sales 204 000 Operating expenses 28 000 Investment income 3 500 Finance cost 6 500 Tax 16 500 Preference share dividends 2 000 Ordinary share dividends 17 500 You are required to: Compile the company s statement of financial position (balance sheet) and statement of comprehensive income (income statement) based on this information.
Page 9 of 11 QUESTION 4 [30] 4.1 Use the following information for Johnson International and the industry averages for Johnson s line of business to: a. Construct the DuPont system of analysis for both Johnson and the industry for the three year period. (6) b. Evaluate Johnson and the industry over the 3 year period. (3) c. Indicate in which areas Johnson requires further analysis. Motivate? (3) Johnson 2007 2008 2009 Financial leverage multiplier 1.75 1.75 1.85 Net profit margin 0.059 0.058 0.049 Total asset turnover 2.11 2.18 2.34 Industry averages Financial leverage multiplier 1.67 1.69 1.64 Net profit margin 0.054 0.047 0.041 Total asset turnover 2.05 2.13 2.15 4.2 Home Health Ltd has come to you for a yearly financial check-up. As a first step, you have prepared a complete set of ratios for the fiscal years 2008 and 2009. You will use them to look for significant changes in the company s situation from one year to the next. Home Health Ltd Financial Ratios Ratio 2008 2009 Current ratio 3.25 3.00 Quick ratio 2.50 2.20 Inventory turnover 12.80 10.30 Average collection period 42.6 days 31.4 days Total asset turnover 1.40 2.00 Debt ratio 0.45 0.62 Times interest earned ratio 4.00 3.85 Gross profit margin 68% 65% Operating profit margin 14% 16% Net profit margin 8.3% 8.1% Return on total assets 11.6% 16.2% Return on ordinary shareholders equity 21.1% 42.6% Price/earnings ratio 10.7 9.8 Market/book ratio 1.40 1.25
Page 10 of 11 a. To focus on the degree of change, calculate the year-to-year proportional change by subtracting the year 2008 ratio from the year 2009 ratio, then dividing the difference by the year 2008 ratio. Multiply the result by 100. Preserve the positive or negative sign. The result is the percentage change from 2008 to 2009. Calculate the proportional change for the ratios shown here. Show in tabular form with the following headings: Ratio 2008 2009 Difference Proportional difference b. For any ratio that shows a year-to-year difference of 10% or more, state whether the difference is in the company s favour or not. Show in tabular form with the following headings: (7) Ratio Proportional difference Company s favour c. For the most significant changes (25% or more), look at the other ratios and cite at least one other change that may have contributed to the change in the ratio you are discussing. (2) (9) ASSIGNMENT TOTAL: 100
Page 11 of 11 ANSWER SHEET (DETACH THE ANSWER SHEET AND INCLUDE IT WITH YOUR ASSIGNMENT) ASSIGNMENT: DATE: 21 August 2012 QUESTION One (1) STUDENT NUMBER: Financial Management 2 () QUESTION NO. SELECTED ANSWER 1.1 a b c d e 1.2 a b c d e 1.3 a b c d e 1.4 a b c d e 1.5 a b c d e 1.6 a b c d e 1.7 a b c d e 1.8 a b c d e 1.9 a b c d e 1.10 a b c d e 1.11 a b c d e 1.12 a b c d e 1.13 a b c d e 1.14 a b c d e 1.15 a b c d e 1.16 a b c d e 1.17 a b c d e 1.18 a b c d e 1.19 a b c d e 1.20 a b c d e 1.21 a b c d e 1.22 a b c d e 1.23 a b c d e 1.24 a b c d e 1.25 a b c d e