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Financial Management
FIN2601
Semesters 1 & 2
Department of Finance,
Risk Management and Banking
IMPORTANT INFORMATION:
Please register as a user of myUnisa as soon as possible. It is free of charge. Visit https://my.unisa.ac.za
for details. At myUnisa, you will be able to get in touch with fellow students, submit your assignments,
update your details, find self-assessment questions, and also participate in discussion forums.
It is also important that you provide Unisa with your cellphone number because important
announcements may be sent to you via sms.
Please note that this module carries 12 credits and requires at least 120 hours of study, including the
time required to complete the assignments and the examination. Devote at least 120 hours of your time to
this module in order to ensure your success.
Take note of Rule 12 contained in the my Registration @ Unisa brochure. You must pass at least 4
modules of 12 credits each or 2 modules of 24 credits each per year in order to be readmitted at the
University. Students who do not comply with this requirement will be excluded from further admission to the
University.
CONTENTS
Page
1 INTRODUCTION .......................................................................................................................... 3
1.1 Tutorial matter............................................................................................................................... 3
2 PURPOSE AND OUTCOMES FOR THE MODULE ..................................................................... 3
2.1 Purpose ........................................................................................................................................ 3
2.2 Outcomes ..................................................................................................................................... 3
3 LECTURER(S) AND CONTACT DETAILS................................................................................... 4
3.1 Lecturer(s) .................................................................................................................................... 4
3.2 Department ................................................................................................................................... 4
3.3 University ...................................................................................................................................... 4
4 MODULE-RELATED RESOURCES ............................................................................................. 4
4.1 Prescribed textbook(s) .................................................................................................................. 4
4.2 Recommended books ................................................................................................................... 4
4.3 Electronic Reserves (e-Reserves)................................................................................................. 5
4.4 MyFinanceLab....................................................................................................................5
5 STUDENT SUPPORT SERVICES FOR THE MODULE ............................................................... 7
6 MODULE-SPECIFIC STUDY PLAN ............................................................................................. 7
7 MODULE PRACTICAL WORK AND WORK-INTEGRATED LEARNING .................................... 7
8 ASSESSMENT ............................................................................................................................. 7
8.1 Assessment plan .......................................................................................................................... 7
8.2 General assignment numbers ....................................................................................................... 8
8.2.1 Unique assignment numbers ........................................................................................................ 9
8.2.2 Due dates for assignments ........................................................................................................... 9
8.3 Submission of assignments .......................................................................................................... 9
8.4 Assignments ............................................................................................................................... 11
8.4.1 Semester 1 ................................................................................................................................. 11
9 EXAMINATION ........................................................................................................................... 42
10 FREQUENTLY ASKED QUESTIONS ........................................................................................ 42
11 CONCLUSION............................................................................................................................ 47
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FIN2601/101
1 INTRODUCTION
Dear Student
We welcome you to the module: Financial Management (FIN2601).
In order to pass this module you will have to devote at least two hours per day reading and
summarising, as well as practicing the calculations.
On completion of this module you should be able to apply financial management knowledge and
tools necessary to perform the managerial finance function.
You will also receive Tutorial Letters 201 and 202 shortly after the closing dates of the
assignments, and these will contain the solutions to the assignment questions of
FIN2601.
2.2 Outcomes
On completion of this module, you should be able to
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3 LECTURER(S) AND CONTACT DETAILS
3.1 Lecturer(s)
Enquiries of purely academic nature concerning this module (such as an enquiry about a
specific calculation in the prescribed textbook) may be directed to:
Mr AB Sibindi Mr GPM Grebe
Head of Module or Lecturer
Fax 086 569 8848 Fax 086 754 9216
Course Contact email (First semester only) : Fin2601-14-S1@unisa.ac.za
(Second semester only) : Fin2601-14-S2@unisa.ac.za
3.2 Department
This module is offered by academic staff members from the Department of Finance, Risk
Management and Banking (DFRB).
Please note that you may get in touch with fellow students, download study material, submit
assignments, change your address and/or examination venue, view your assignment marks,
download previous examination papers, find self-assessment questions and get in touch with
your lecturer at https://my.unisa.ac.za
3.3 University
Administrative queries may be directed to the appropriate department as indicated in the my
Registration @ Unisa brochure. Examples of administrative queries are registration matters,
study material matters, account queries and graduation issues. Registration matters must be
directed to econ@unisa.ac.za
4 MODULE-RELATED RESOURCES
4.1 Prescribed textbook(s)
You must acquire the following prescribed textbook from one of the official Unisa bookstores
(indicated in section 13):
Gitman, LJ, et al. 2010. Principles of Managerial Finance: Global and Southern African
Perspectives. 1st Edition. Pearson 2010
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FIN2601/101
4.4 MyFinanceLab
Welcome to FIN2601 and MyFinanceLab! Your instructor has set up a MyFinanceLab course
for you so you can engage with your course content in an enjoyable and interactive manner.
The first thing you need to do is go and buy your new prescribed textbook from any official
Unisa bookseller.
To join your instructor's course, please complete the following two steps:
1. Register for MyFinanceLab; and,
2. enrol in your instructor's course.
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Step 1: Register for MyFinanceLab
1. Go to http://www.myfinancelab.com and click on the students button, in the Register section.
2. Follow the on-screen instructions for choosing the author and title.
3. Choose where it says: Register with an access code.
4. Follow the instructions to set up your login and password and register for your course.
Having trouble with registration and enrolment? Go to Pearson 24/7 customer support
Pearson has a 24/7 support website with professionals dedicated to helping you sort out any
technical problems that you may come across.
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FIN2601/101
send an e-mail
8 ASSESSMENT
8.1 Assessment plan
Assignments are seen as part of the learning material for this module. As you do the
assignments, study the reading texts, consult other resources, discuss the work with fellow
students or tutors or do research, you are actively engaged in learning. Paying attention to the
assessment criteria for each assignment will help you to understand what is required of you
more clearly.
You may submit written assignments and assignments done on mark-reading sheets either by
post or electronically via myUnisa. Assignments may not be submitted by fax or e-mail. For
detailed information and requirements as far as assignments are concerned, see the brochure
My studies @ Unisa that you received with your study material.
Compulsory assignment
There are two compulsory assignments for this module, and they are in a form of multiple-
choice questions There are non-negotiable submission deadlines for each of the assignments
for this module and you must submit these assignments so that you can be admitted to the
examination. Both these assignments contribute towards your year mark.
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Year marks
Your year mark, based on the mark obtained from the two compulsory assignments, contributes
20% towards your final mark, while your examination mark contributes 80%.
In order for you to pass this module, the combined average of your year mark and examination
mark must be 50% or higher. However, you must obtain a minimum of 40% in the examination,
regardless of your year mark. If you obtain less than 40% in the examination your year mark will
not be taken into account and you will fail.
For example:
Assignment 01 mark = 50% Assignment 02 mark = 90%. These marks each contribute 50%
towards the final 20% year mark.
01 50% 50% 25
02 90% 50% 45
70 x 20% of final = 14
You will need a final mark of at least 40% in order to qualify for a supplementary examination.
For general information and requirements as far as assignments are concerned, see the
brochure My studies @ Unisa, which you received with your study material.
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FIN2601/101
Each assignment has been allocated a unique number in order to identify it in the Unisa
assessment plans. Please ensure you always indicate the correct unique number when
submitting assignments.
8.2.2 Due dates for assignments
As indicated earlier, you should preferably submit your assignments through myUnisa by
logging at https://my.unisa.ac.za prior to the due date of each assignment. Do not wait until the
day just prior to the due date. Technical problems with the computer servers of myUnisa do
occur and they may prevent you from submitting your assignment if wait until the last minute.
If you have to submit your assignments by post, please ensure that your assignments reach the
Unisa main campus by the due dates. Requests for extension of due dates for assignments will
not be granted. These due dates have been set to allow you sufficient time for the completion of
other assignments and your preparation for the examination.
Information about whether Unisa has received your assignment and the mark attained for an
assignment can be obtained from https://my.unisa.ac.za.
Go to myUnisa at https://my.unisa.ac.za
Log in with your student number and password.
Select the module.
Click on assignments in the left-hand menu.
Click on the assignment number you want to submit.
Follow the instructions on the screen.
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Only if you do not have access to the internet should you submit your assignment by means of
a mark-reading sheet (for MCQs) or hard paper copy (for essay type questions) and mail it to
Unisa. If you are using a mark-reading sheet, remember to:
1. use an HB pencil
2. indicate your student number and the above-mentioned unique number on the mark-
reading sheet
3. follow the instructions for completing mark-reading sheets. Incomplete mark-reading
sheets will be returned to you unmarked
4. submit the assignment in good time. It must reached the Unisa main campus on or
before the due dates indicated in the assignments below, otherwise your assignment
might not be in time to be marked by the Assignment Section.
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FIN2601/101
8.4 Assignments
8.4.1 Semester 1
Aim: To evaluate your knowledge of some of the fundamental aspects of managerial finance
and important concepts in finance. You will need to study chapters 1, 2 and 4 of your
prescribed textbook before attempting this assignment.
When completing the mark-reading sheet or submitting this assignment via myUnisa, do not
forget to use the correct unique number as detailed below:
First registration
Due date Unique number
QUESTION 1
What is the primary function of the financial manager?
1. tax management and cost accounting
2. financial accounting
3. foreign exchange management
4. making investment and financing decisions
QUESTION 2
1. a, b, c
2. c, b, a
3. b, a, c
4. b, c, a
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QUESTION 3
Identify a type of agency cost likely to be borne by Underhand Dealings Pty (Ltd) from the
options listed below:
QUESTION 4
QUESTION 5
With all else kept equal, when comparing a firm that uses debt financing to a firm that does not,
the firm that uses debt will have... .
Extract for the statement of comprehensive income for XYZ Pty Ltd for the period ended 31 May
2014.
R
Sales 1 329 512
Cost of sales 684 871
Gross profit 644 641
Operating expenses 285 650
Taxes 96 928
Interest payments 55 000
Net profit 207 063
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FIN2601/101
Extract from the statement of financial position for XYZ Pty Ltd as at 31 May 2014
R
Fixed assets 5 250 000
Inventory 679 532
Cash 53 874
Accounts receivable 154 921
QUESTION 6
1. 15,57%
2. 30,23%
3. 32,12%
4. 48,49%
QUESTION 7
1. 0,27
2. 0,36
3. 1,16
4. 1,52
QUESTION 8
1. 12%
2. 20%
3. 23%
4. 66%
QUESTION 9
What is the times interest earned ratio for XYZ Pty Ltd?
1. 3,76
2. 4,76
3. 6,53
4. 11,72
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QUESTION 10
Let us assume XYZ Pty Ltd has 800 000 ordinary shares issued and a P/E ratio of 15.4, what is
the market price of each ordinary share?
1. R3,99
2. R5,04
3. R12,41
4. R59,50
QUESTION 11
If a company has total assets of R1 560 500, ordinary shareholders equity of R680 350, and a
return on assets ratio of 7%, what is the return on equity (ROE) for the company?
1. 2,29%
2. 3,05%
3. 16,06%
4. 43,60%
QUESTION 12
Chemicals corporation has a return on assets of 13,3%, sales of R3 650 129, a net profit margin
of 7,2 % and total liabilities of R619 961. What is the company's return on equity (ROE)?
1. -44,92%
2. 7,93%
3. 16,02%
4. 19,38%
QUESTION 13
What is the present value of R55 000 received 12 years from now, assuming an interest rate of
6% per year?
1. R3 260,24
2. R26 819,45
3. R27 333,32
4. R110 670,81
QUESTION 14
What will R21 000 be worth in 15 years time assuming an interest rate of 7%?
1. R2 305,69
2. R7 611,37
3. R57 939,66
4. R59 827,88
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FIN2601/101
QUESTION 15
Let us assume that you are presented with two options for a retirement savings annuity.
For the first option you will have to make equal annual payments of R 60 000 at the end of each
year for a period of 40 years. For the second option you would have to make equal annual
payments of R59 000 at the start of each year for a period of 40 years. At the end of the 40 year
period, what would be the difference between the amounts saved if the interest rate on both
investments is 6%?
1. R154 761,97
2. R164 047,68
3. R393 095,39
4. R711 905,04
QUESTION 16
Match Ltd, a private company, wants to purchase a new machine for production purposes.
The machine will cost R560 450 and is expected to generate the following cash inflows from the
increased production:
1 85 471
2 92 150
3 145 730
4 129 360
5 188 000
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QUESTION 17
You are offered a 48 months bank loan to buy a new car. The bank offers you an interest rate of
13% per annum. If the car that you want to buy costs R300 000, how much will your monthly
repayment be?
1. R 6 250
2. R 8 048,25
3. R 9 500
4. R 10 483,32
QUESTION 18
What is the difference between the future values of R80 500 invested over a 15-year period at
8% interest compounded annually and 8% interest compounded quarterly?
1. R0
2. R2 084,2
3. R8 763,37
4. R81 622,98
QUESTION 19
What effective annual rate (EAR) will Bill need to earn if he deposits R1 000,00 per month
beginning one month from today in order to have a total of R1 000 000 in 30 years?
1. 4,87%
2. 5,98%
3. 6,14%
4. 6,55%
QUESTION 20
Fran is paying back a loan on a plot. The payments are equal end of year payments over a
period of 6 years. The plot cost Fran R1 800 000 and financing was arranged through a bank.
The interest rate on the loan is 9% per annum.
What will the balance of the capital that Fran has to repay be at the end of the third year of the
loan?
1. R284 269,59
2. R705 853,23
3. R1 015 696,19
4. R1 299 955,78
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FIN2601/101
Aim: To evaluate your knowledge of some of the fundamental aspects of managerial finance
and important concepts in finance. You will need to study chapters 5, 6 and 7 of your
prescribed textbook before attempting this assignment.
When completing the mark-reading sheet or submitting this assignment via myUnisa, be sure to
use the correct unique number as detailed below:
QUESTION 1
1. Security A
2. Security B
3. Both are equally risky
4. There is no risk involved in any of the options
QUESTION 2
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Use the following information to answer questions 3 5.
Assets A and B has the following probability distributions associated with them based on
expected economic conditions:
QUESTION 3
Choose the correct option below to indicate the expected returns of the two assets.
1. Security A: 7,1% ; Security B: 7,5%
2. Security A: 7,5% ; Security B: 7,1%
3. Security A: 5,0% ; Security B: 6,0%
4. Security A: 6,0% ; Security B: 5,0%
QUESTION 4
Calculate the standard deviation for both assets and choose the correct option showing the
standard deviations as well as the asset with the lowest risk based on the standard deviation.
1. Security A: 2, 25% ; Security B: 1, 13% ; Security B is less risky
2. Security A: 4, 74% ; Security B: 3, 35% ; Security B is less risky
3. Security A: 2, 25% ; Security B: 1, 13% ; Security A is less risky
4. Security A: 4, 74% ; Security B: 3, 35% ; Security A is less risky
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FIN2601/101
QUESTION 5
QUESTION 6
If the correlation coefficient between two assets is - 0,7, then the assets are ... .
1. positively correlated and moves in opposite directions
2. negatively correlated and moves in the same direction
3. positively correlated and moves in the same direction
4. negatively correlated and moves in opposite directions
QUESTION 7
A security on the JSE has a required return of 10% associated with it. The risk free rate of return
is 7% and the market return is 9%.
Calculate Beta for the company and choose the correct option indicating Beta and the
company's movement in relation to the market.
1. -3,00, moves in the opposite direction to the market.
2. 0,50, moves in the same direction as the market.
3. 0,67, moves in the opposite direction to the market.
4. 1,50, moves in the same direction as the market.
QUESTION 8
If the return on a government issue bond is 5%, the market return is 9,5%, what is the required
return on a security that is 1.8 times as responsive as the market in the same direction?
1. -13,1
2. -9
3. 9
4. 13,1
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QUESTION 9
If a retail bond pays interest of 7,5%, inflation is 5% and the risk premium on the bond is 1,2%,
what is the real rate of interest?
1. 1,3%
2. 1,5%
3. 2,5%
4. 6,3%
QUESTION 10
What would rational investors do if expected return is less than the required rate of return?
1. They would need to buy the asset, which would drive the price up and cause expected return
to reach the level of the required return.
2. They would need to sell the asset, which would drive the price down and cause the expected
return to reach the level of the required return.
3. They would need to sell the asset, which would drive the price up and cause the expected
return to reach the level of the required return.
4. They would need to buy the asset since the price is expected to increase and hence surpass
the required return.
QUESTION 11
A financial manager faced with a normal yield curve is more likely to rely heavily on ... .
1. cheaper long term financing
2. more expensive long term financing
3. more expensive short term financing
4. cheaper short term financing
QUESTION 12
What is the present value of a bond that has semi-annual coupon payments of R20,00 and a
par value of R1 000,00 if similar bonds have a yield to maturity of 7%?
The bond will mature in 5 years' time.
1. R 794,99
2. R 875,25
3. R1 133,56
4. R1 134,74
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FIN2601/101
QUESTION 13
QUESTION 14
What is the yield to maturity of a bond with a par value of R1000, 4 years left to maturity and a
coupon rate of 11%, that is currently selling for R1258?
1. -5,57 %
2. 3,90 %
3. 11, 00 %
4. 19,30 %
QUESTION 15
A R1 000,00 par value bond is currently selling for R958,00 in the market.
The time to maturity for the bond is 9 years and its yield to maturity 14%.
The bond has semi-annual coupon payments.
What is the bonds annual coupon rate?
1. 6,6%
2. 7,5%
3. 13,2%
4. 14,9%
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QUESTION 16
You have just bought a share in a company that is expected to start paying dividends at the end
of next year.
The expected dividends for the next three years are as follows:
1 1,20
2 1,89
3 2,56
You expect to sell the share for R17,00 at the end of the three year period.
What is the share currently worth, assuming a required return of 13%?
1. R 4,32
2. R11,78
3. R16,10
4. R18,19
QUESTION 17
QUESTION 18
Kudu Ltd. Is listed on a stock exchange and has just paid a dividend of R2,50.
The company's dividends are expected to grow at a constant rate of 9% each year for the
foreseeable future.
An analyst estimates that a suitable required return for Kudu Ltd. is 12%.
What is the company's shares worth at the moment?
1. R22,71
2. R83,33
3. R90,83
4. R93,33
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FIN2601/101
QUESTION 19
QUESTION 20
Pinboard Ltd. is a manufacturer of thumbtacks and has entered a period of stable growth.
The company had free cash flow of R855 430 this year and expects this to grow by 4% each
year for the foreseeable future.
The company has a weighted average cost of capital of 9%.
Determine the value of the company today.
1. R 9 504 777,78
2. R17 108 600,00
3. R17 792 944,00
4. R18 648 374,00
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8.4.2 Semester 2
Aim: To evaluate your knowledge of some of the fundamental aspects of managerial finance
and important concepts in finance. You will need to study chapters 1, 2 and 4 of your
prescribed book before attempting this assignment.
When completing the mark-reading sheet or submitting this assignment via myUnisa, be sure to
use the correct unique number as detailed below:
First registration
Due date Unique number
QUESTION 1
Which of the following actions is consistent with social responsibility but is necessarily
inconsistent with stockholder wealth maximisation?
1. investing in a smokestack "scrubber" to reduce the firm's air pollution as mandated by
law
4. each of the above actions is consistent with social responsibility and none are
necessarily inconsistent with stockholder wealth maximisation
QUESTION 2
Maximo Corporation has recently been declared bankruptcy. The price of Maximo's shares has
dropped from approximately R10 per share one year ago to R1 today. Shareholders are not
happy that the value of their shareholding has dropped so drastically. At the same time the
financial position of the firm was deteriorating, Maximos executives increased their salaries and
perquisites substantially. Nothing they did violated any laws or was considered an unethical act.
How can you best describe this situation?
1. An accounting glitch
2. The agency problem
3. An appropriate use of tax laws
4. A fraudulent activity and unethical conduct
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FIN2601/101
QUESTION 3
Compared to corporations, what is the primary disadvantage of partnerships as forms of
business organisation?
1. The tax rates applied to partnership are higher than the tax rates applied to corporations
2. Any dividends paid to the owners of a partnership business are taxed twice once at the
partnership level and once at the individual level
3. Partnerships generally are much easier to form (start up) than corporations
4. The partners have unlimited liability when it comes to business obligations whereas the
owners of a corporation have limited liability
QUESTION 4
A firm has a profit margin of 15 percent on sales of R20 000 000. If the firm has debt of
R7 500 000, total assets of R22 500000, and an after-tax interest cost on total debt of 5 percent,
what is the firm's return on assets (ROA)?
1. 8.4%
2. 10.9%
3. 12.0%
4. 13.3%
QUESTION 5
Kaprivi Corporation has total interest charges of R10,000 per year, sales of R1 million, a tax
rate of 40 percent, and a net profit margin of 6 percent. What is Kaprivi Corporations times-
interest-earned ratio?
1. 7,0%
2. 10,0%
3. 11,0%
4. 16,0%
QUESTION 6
Meryl Corporation's ordinary share is currently selling at R100 per share, which represents a
P/E ratio of 10. If the firm has 100 ordinary shares outstanding, a return on equity of 20 percent,
and a debt ratio of 60 percent, what is its return on total assets (ROA)?
1. 8,0%
2. 10,0%
3. 12,0%
4. 16,7%
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QUESTION 7
Gringo Supplies has a current ratio of 3.0, a quick ratio of 2.4, and an inventory turnover ratio of
6. Gringo Supplies total assets are R1 million and its debt ratio is 0.20. The firm has no long-
term debt. What is Gringo Supplies sales figure if the total cost of goods sold is 75% of sales?
1. R 720 000
2. R 960 000
3. R1 200 000
4. R1 620 000
QUESTION 8
Sales: R1 000
Total Assets: R1 000
Total debt/Total assets: 35%
EBIT: R 200
Tax rate: 40%
Interest rate on total debt: 4,57%
1. 11,04%
2. 12,31%
3. 16,99%
4. 28,31%
QUESTION 9
Based only on the information above, the most appropriate conclusion is that, over the period
2010 to 2012, the company's_____ .
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FIN2601/101
QUESTION 10
Given the following information, calculate the market price per share of Eastdale Corporation.
1. R2
2. R4
3. R8
4. R20
QUESTION 11
A recent advertisement in the financial section of the Business Chronicle newspaper carried the
following claim: "Invest your money with us at 14 percent, compounded annually, and we
guarantee to double your money sooner than you can imagine." Ignoring taxes, how long would
it take to double your money at a simple rate of 14 percent, compounded annually?
1. Approximately 3,5 years.
2. Approximately 5 years.
3. Exactly 7 years.
4. Approximately 10 years.
QUESTION 12
On the day Harry was born, his parents put R10 000 into an investment account that promises
to pay a fixed interest rate of 4 percent per year. How much money will Harry have in this
account when he turns 18?
1. R 17 200
2. R 20 260
3. R 28 040
4. R 48 060
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QUESTION 13
Helen is saving to start a business. If she invests R100, 000 in a savings account now, which of
the following is the minimum interest rate required to ensure that she has R250,000 in her
account in ten years' time?
1. 2,5%
2. 6,4%
3. 9,6%
4. 10,2%
QUESTION 14
An investment pays you R20 000 at the end of this year, and R10 000 at the end of each of the
four following years. What is the present value (PV) of this investment, given that the interest
rate is 4% per year?
1. R 42 150
2. R 45 913
3. R 54 134
4. R 58 614
QUESTION 15
A bank is negotiating a loan. The loan can either be paid off as a lump sum of R100 000 at the
end of five years, or as equal annual payments at the end of each year in the next five years. If
the interest rate on the loan is 10%, what annual payments should be made so that both forms
of payment are equivalent?
1. R12 000
2. R16 380
3. R19 588
4. R20 000
QUESTION 16
Your company is planning to borrow R1 000 000 on a 5-year, 15 per cent, annual payment, fully
amortised term loan. What fraction of the payment made at the end of the second year will
represent repayment of the principal debt?
1. 29,83%
2. 35,02%
3. 57,18%
4. 64,45%
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FIN2601/101
QUESTION 17
Courage Bravo, who is 60, plans to retire in 2 years, and he expects to live independently for 3
years. He wants a retirement income which has, in the first year, the same purchasing power as
R400 000 has today. However, his retirement income will be of a fixed amount, so his real
income will decline over time. His retirement income will start the day he retires, 2 years from
today, and he will receive a total of 3 retirement payments. Inflation is expected to be constant
at 5 percent. Courage has R1 000 000 in savings now, and he can earn 8 percent on savings
now and in the future. How much must he save each year, starting today, to meet his retirement
goals?
1. R18 630
2. R20 340
3. R27 160
4. R53 500
QUESTION 18
QUESTION 19
Find the present value of the following stream of cash flows by assuming that the company has
an opportunity cost of 9%.
Years Amount
1. R 16 896
2. R 25 997
3. R120 850
4. R121 555
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QUESTION 20
What is the effective annual rate for a credit card that charges 18%, compounded monthly?
1. 15,38%
2. 18,81%
3. 19,56%
4. 20,26%
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FIN2601/101
Aim: To evaluate your knowledge of important concepts in finance. You will need to study
chapters 5, 6 and 7 of your prescribed book before attempting this assignment.
When completing the mark-reading sheet or submitting this assignment via myUnisa, be sure to
use the correct unique number as detailed below:
First registration
QUESTION 1
Asset A has a beta of 0,8. The risk-free rate of return is 4%, while the return on the market
portfolio is 11%. What is the assets market risk premium?
1. 5,60%
2. 7,00%
3. 9,60%
4. 15,00%
QUESTION 2
1. The coefficient of variation is a better measure of risk than the standard deviation if the
expected returns of the securities being compared differ significantly.
2. Managers cannot act in the best interests of their shareholders unless they know their
shareholders' average time preference for receiving their money and what risks a typical
shareholder is prepared to assume.
3. Companies should deliberately increase their risk relative to the market only if the actions
that increase the risk also increase the expected rate of return on the firm's assets by
enough to completely compensate for the higher risk.
4. If the expected rate of return for a particular investment, as seen by the marginal investor,
exceeds its required rate of return, we should soon observe an increase in demand for the
investment, and the price will likely increase until a price is established that equates the
expected return with the required return.
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QUESTION 3
What is the standard deviation () of the returns for Asset A given below?
Pr Return
0,10 -10%
0,40 25%
0,50 10%
1. 10,67%
2. 10,71%
3. 14,82%
4. 18,19%
QUESTION 4
Assume that a new law is passed in South Africa which restricts investors to holding only one
asset. A risk-averse investor is considering two possible assets as the asset to be held in
isolation. The assets' possible returns and related probabilities (i.e., the probability distributions)
are as follows:
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QUESTION 5
As the investment banker for Unisa Inc., you are tasked with constructing a portfolio for a risk-
averse client accordingly. As an initial investment, you receive R100 000 and decide to invest in
Marx, Makina and Young shares, as well as in some government treasury bills for short-term
liquidity. An amount of R10 000 will be allocated to Marx shares with a beta of 2; R30 000 will
be allocated to Makina shares with a beta of 1.5; R15 000 will be allocated to Young shares with
a beta of 0,5 and the balance will be invested in the treasury bills. What is the portfolio beta?
1. 0,725
2. 1,333
3. 1,725
4. 4,000
QUESTION 6
Consider the following information relating to the Scientific Fund of South Africa: Which one is
correct?
Asset Investment Beta
A 200 000 1,5
B 300 000 -0,5
C 500 000 1,25
D 1 000 000 0,75
You are told that the Scientific Investment Fund of South Africa has a total investment of R 2
million. The market requires a return of 15%, and the three month Treasury Bill rate is 7%. What
would the required rate of return of this fund be?
1. 10,3%
2. 12,7%
3. 13,1%
4. 14,2%
QUESTION 7
If the risk-free rate is 7%, the expected market return is 10% and the expected return on
Security J is 13%, what is the beta of Security J?
1. 1,0
2. 2,0
3. 3,0
4. 4,0
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QUESTION 8
QUESTION 9
1. Any bond sold outside the country of the borrower is called an international bond.
2. Foreign bonds and Eurobonds are two important types of international bonds.
3. Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of
the country in which the issue is sold.
4. The term Eurobond specifically applies to any foreign bonds denominated in the US
currency
QUESTION 10
If you buy a bond that is selling for less than its face or maturity value, what will happen to the
price (value) of the bond as the maturity date nears if market interest rates do not change during
the life of the bond?
1. Because interest rates remain constant, nothing happens to the market value of the bond.
2. The price of the bond should decrease even further below the bonds face value because
the rates in the market are too high.
3. The price of the bond will increase as the bond gets closer to its maturity because the
bonds value has to equal its face value at maturity.
4. Inflationary expectations would result in the bond value decreasing below its face value
due to the increased perceived risk.
QUESTION 11
You are considering the purchase of a R1000,00 par value bond that pays interest of R70 semi-
annually and has 10 years to go before it matures. If you buy this bond, you expect to hold it for
5 years and then to sell it in the market. Investors currently require a simple annual rate of 16%,
but you expect the market to require a rate of only 12% when you sell the bond due to a general
decline in interest rates. How much should you be willing to pay for this bond?
1. R842,00
2. R966, 69
3. R1115,81
4. R1359,26
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QUESTION 12
If interest rates fall from 8% to 7%, which of the following bonds will have the largest percentage
increase in its value?
QUESTION 13
Assuming other things are held constant, which of the following statements is not true about
bonds?
QUESTION 14
MicroManage (Pty) Ltd has 10 million authorised ordinary shares, and 8 million shares
outstanding, each with a par value of R1. The firms additional paid-in capital account has a
balance of R18 million. The previous years retained earnings account was R124 million. In the
year just ended, MicroManage (Pty) Ltd generated a net income of R16 million, and the firm has
a dividend payout ratio of 40%. What will MicroManages book value per share be based on the
final year-end balance sheet?
1. R15,00
2. R18,75
3. R19,95
4. R20,75
QUESTION 15
A preference share shares pays an annual dividend of R6 per share. If investors require a 12%
rate of return, what should the price of this preference share be?
1. R2,00
2. R6,72
3. R50,00
4. R57,25
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QUESTION 16
What will be the change in the share price, assuming that the share was in equilibrium before
the changes?
1. R16,97
2. R4,87
3. +R6,28
4. +R12,11
QUESTION 17
Consider an ordinary share whose current price is R82,50 and is expected to grow at a constant
rate of 10%. If you require a 14% rate of return, what is the current dividend on this share?
1. R3,00
2. R3,81
3. R4,29
4. R4,75
QUESTION 18
What is the real rate of interest on your investment if the current inflation rate is 4% and you
have an investment opportunity that pays 10%?
1. 5,8%
2. 6,0%
3. 10,0%
4. 14,0%
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FIN2601/101
QUESTION 19
Burger Inc has just paid a dividend of R2. Its share is now selling for R48 per share. The firm is
half as risky as the market. The expected return on the market is 14%, and the yield on the 3-
month Treasury Bill is 11%. If the market is in equilibrium, what growth rate is expected?
1 -2%
2 4%
3 8%
4 12,5%
QUESTION 20
Da Gama (Pty) Ltd has a current dividend of R3. Analysts expect that the dividend will grow at a
rate of 25% per annum for the next 3 years. Thereafter, it will grow at a constant 10% per
annum. The companys cost of equity capital is estimated to be 15%. What is the current share
price of Da Gama?
1. R88,55
2. R95,42
3. R110,00
4. R128,91
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Assignment 03 SELF EVALAUATION (NOT TO BE SUBMITTED)
i. Construct the DuPont system of analysis using the following financial data for Alpha-
Omega Industries. [11 marks]
ii. Determine which areas of the firm need further analysis, and comment on these and how
the firm can improve on them . [4 marks]
Alpha-Omega Industries:
Sales R4 500 000
Profit after taxes R 337 500
Total assets R6 750 000
Total liabilities R3 375 000
Industry Averages:
Total asset turnover 0.71
Debt ratio 33%
Financial leverage multiplier 1.5
Return on total assets 6.75%
Return on equity 10%
Net profit margin 9.5%
Answer:
4,500,000
Total asset turnover = = 0,67 (2 marks)
6,750,000
3,375,000
Debt ratio = = 50% (2 marks)
6,750,000
1
Financial leverage multiplier = =2 (2 marks)
1 0.5
337,500
ROA = = 5% (2 marks)
6,750,000
337,500
Net profit margin = = 7,5% (1 mark)
4,500,000
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FIN2601/101
According to the return on equity, Alpha-Omega Industries perform equally/ at par with
the industry.
However, when dissecting the financial data further into the three key components of the
DuPont system (a profit-on-sale, efficiency-of-asset use, and a use-of-leverage
component), some areas of improvement may be highlighted.
Alpha-Omega Industries has a lower net profit margin and return on total assets than the
industry average.
Nevertheless, the firm makes up for the low profit margin through excessive use of
leverage (a 50 percent debt ratio versus 33 percent for the industry).
Financial risk could be reduced resulting in the same return on equity by increasing the
net profit margin and reducing debt.
Champion Breweries must choose between two asset purchases. The annual rate of return and
related probabilities given below summarise the firm's analysis.
Asset A Asset B
Rate of return Probability Rate of return Probability
10% 30% 5% 40%
15% 40% 15% 20%
20% 30% 25% 40%
(a) Compute the expected rate of return for each asset. [2 marks]
(b) Find the standard deviation of the expected return for each asset [8 marks]
(c) Calculate the coefficient of variation of the return for each asset. [2 marks]
(d) Which asset would you advise Champion Breweries to select? Why? [3 marks]
Answers:
(a)
(b) Asset A
(10% - 15%)^2 0.30 = 7,5% 1 mark
(15% - 15%)^2 0.40 = 0% 1 mark
(20% - 15%)^2 0.30 = 7,5% 1 mark
15%
Asset B
(5% - 15%)^2 0,40 = 40% 1 mark
(15% - 15%)^2 0,20 = 0% 1 mark
(25% - 15%)^2 0,40 = 40% 1 mark
80%
(d) Asset A (1 mark); for 15% rate of return (1 mark) and lesser risk as reflected by the lower
CV (1 mark).
QUESTION 3
3.1 State the Efficient Market Hypothesis (EMH) propositions and briefly outline their
implications to investors. [6]
Answers:
All information contained in past price movements is fully reflected in current market
prices. Therefore information about past trends is of no use to an investor in selecting
winning investments.
(b) Semi-strong form (2)
Current market prices reflect all publicly available information. In this case it does no
good to an investor to scrutinize such published data as a corporations financial
statements to seek abnormal returns, because market prices will adjust to any good
news or bad news contained in such reports as soon as they are made public.
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FIN2601/101
Current market prices reflect all pertinent information, whether it is publicly available
or privately held. The implication for investors would be that there is impossible to
realise abnormal returns even if insider trading is possible
3.2 Pitco Corporations share is currently selling for R160,00 per share, and the firm's
dividends are expected to grow at 5% indefinitely. In addition, Pitco Corporations most
recent dividend was R5,50. The expected risk-free rate of return is 3%, the expected market
return is 8%, and Pitco Corporation has a beta of 1,20.
REQUIRED:
(a) Determine the expected return based on the dividend valuation model. (4 )
(b) Determine the required return based on the Capital Asset Pricing Model (CAPM). (3)
(c) Would Pitco Corporation be a good investment at this time? Explain your answer. (2 )
Answers:
# Allocate 1 mark for correct formula, 1 mark for calculating D1 and 2 marks for the
final answer
(b) Required return is calculated as below: (3)
re rf ( rm rf )
0.03 1.2(0.08 0.03)
0.03 1.2(0.05)
0.09
9%
Allocate 1 mark for correct formula, 1 mark for substituting correctly and 1 mark for
the final answer
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(c) Pitco would not be a good investment as its expected return of 8,61% is lower than the
required return of 9. A loss would be incurred if it was to be bought. (2)
9 EXAMINATION
Examination admission will be granted to all students who submit the compulsory assignment.
Students who do not submit the assignment will NOT be allowed to write the examination.
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What happens if I fail any papers?
Unfortunately a student who fails his/her module would have to reregister for the same
module. Students who get a certain percentage of marks (40%-49%) may, at the
discretion of the University, be granted admission to write the supplementary examination
scheduled for the next examination. Any enquiries in this regard should be directed to the
Head: Examinations, Box 392, Unisa, 0003 or exams@unisa.ac.za
What will happen if I do not write any of the papers during the supplementary
examination?
In such a case you will have to obtain a registration form, complete it, pay the required
fees and register again.
What do I need to bring to the examination venue?
Bring your identity document (ID), your timetable, student card, an HB pencil, black pen,
financial calculator, ruler, eraser, and pencil sharpener.
Will this be an open-book examination?
No.
Could you give me an idea of the scope of the examination paper?
The examination paper is based on your prescribed textbook and the learning outcomes
provided in your study guide. Each learning outcome statement and assessment criterion
may be used to set examination questions. Please do not call us to enquire about the
scope of the examination paper.
4 RESULTS
I am going to be away when the examination results are due to be released. Could
you please tell me what mark I obtained for this paper?
The results should be available four (4) weeks after completion of the examination
period. Please do not call the lecturers to request your results.
How will the results be announced?
The results are normally mailed to students. They are also published at myUnisa
https://my.unisa.ac.za and the MTN results facility, cellphone number: 083 1234.
5 STUDY GUIDE AND TUTORIAL LETTERS
I have lost my study guide and tutorial letters. Could you please mail or fax me a
copy?
Please download a copy from the myUnisa. Register as a user at https://my.unisa.ac.za.
The lecturers do not mail or fax copies of study guides to students. You may also order
replacement copies of study guides from Unisas Despatch Department. Please send an
e-mail to: despatch@unisa.ac.za or a letter to The Head, Despatch, PO Box 392, Unisa,
0003.
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FIN2601/101
2 CALCULATORS
No.
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FIN2601/101
No. It is unlikely that you will be adequately prepared by studying only the assignment
questions. The assignment questions represent a sample of the work and cannot be
regarded as being representative of all the study material.
Can you give me the scope of or any hints for the exam?
No hints are provided to students. Please do not call the lecturers about the scope of
or hints for the exam. Base your preparation for the examination on the learning
outcome statements.
11 CONCLUSION
This tutorial letter provided you with the purpose and outcomes of the module. The contact
details of the lecturer(s) were also provided, as well as module-related resources and student
support services.
It is important that you now prepare a study plan for yourself and devote 120 hours to this
module in order to succeed with your studies.
We also provided you with the details of your assessment, including your assignments for the
semester/year.
Some frequently asked questions (FAQs) have been provided in order to save you a time of
making that telephone call or sending an e-mail.
Your lecturers
UNISA 2013
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