QUESTION 1 [10 MARKS] The Goal of Financial Management 1.1 Critically discuss the role of a financial manager with regards to strategic alignment of...

QUESTION 1

[10 MARKS]

The Goal of Financial Management

1.1 Critically discuss the role of a financial manager with regards to strategic

alignment of company resources.

(5)

1.2 "Profit maximisation is a short-term approach; while wealth maximisation is

based on long-term prospects."

Critically discuss this statement, using examples to demonstrate an insightful

understanding of the goals of strategic financial management.

(5)

QUESTION 2

[30 MARKS]

Analysing Financial Statements

Obtain the financial statements of a company of your choice for the five-year

period 2008/2009 - 2012/2013 (clearly state which company you have

selected). Utilising your chosen financial statements, write a report analysing

and commenting on the following areas:-

2.1 Profitability;

2.2 Asset management;

2.3 Liquidity; and

2.4 Solvency.

2.5 Your analysis must include comments that are consistent with the type

of industry (comparative ratios where appropriate) and your response

must reflect critically on the economic climate for the period 2009-2013.

Note: Attach copies of the financial statements that you have used.

QUESTION 3

[20 MARKS]

Risk and Return

3.1 Utilising relevant examples, discuss the concept of risk aversion. (5)

3.2 With the aid of a diagram, explain the concept of diversification. Your answer

should include a discussion of systematic and non-systematic risk and highlight

the effect of diversification on the two categories of risk.

(15)

QUESTION 4

[25 MARKS]

Capital Budgeting Techniques

4.1 Bombay Investments (BI) is a relatively small company that specialises in bulk printing for

different corporate clients. The company's current printing machine is old and due for

replacement. The company has a choice of two machines: a Xerox ColorQube 9301 and a

Bizhub C552. The ColorQube 9301 has a capacity of 7 300 sheets while the Bizhub C552 has a

capacity of 6 650 sheets. Both machines have colour printing capabilities and flexible print

speeds. The owner of BI is a friend of yours and has been struggling to choose between these

two machines. During the course of your routine chats, you mention that you have learnt different

capital budgeting techniques in your Strategic Financial Management course. Your friend asks

you to help him select the better machine. You agree to help and your friend later furnishes you

with the following information on the two machines that his bookkeeper has prepared:

Cash Flows (R)

Year Xerox ColorQube 9301 Bizhub C552

0 (250 000)              (300 000)

1 90 000                 91 000

2 93 000                 94 000

3 97 000                 99 000

4 96 000                120 000

5 95 000                115 000

The Xerox ColorQube 9301 has a scrap value of R20 000 while the Bizhub C552

has a scrap value of R25 000 at the end of the five years. BI has a cost of capital

of 15%.

Required:

4.1.1 Calculate the payback period for both machines.

4.1.2 Calculate the Net Present Value (NPV) for both machines.

4.1.3 Calculate the Internal Rate of Return (IRR) for both machines.

4.1.4 Based on your answers in 4.1.1-4.1.3 above, which machine would you

recommend?

(3)

(5)

(5)

(2)

4.2 It is possible for the NPV and IRR to suggest different projects. In such cases,

which approach would you use? Discuss.

(10)

QUESTION 5

[15 MARKS]

The Cost of Capital

Sonke Investments Ltd.'s capital structure is made up of 40% ordinary shares, 30% preference shares

and 30% debt. The company's ordinary shares are currently trading at R15, while the preference

shares are trading at R12. The preference shares have a par value of R10 and carry a dividend of

10%. The company's 10-year debentures are currently trading at a yield-to-maturity of 10%. The

average yield on South African government bonds is currently 7%. Analysts' consensus is that Sonke

Investments Ltd has a beta of 1.5. The average return on the JSE is 15%. Sonke Investments Ltd.'s

average tax rate is 28%.

Required:

5.1 Calculate Sonke Investments Ltd.'s cost of equity.

5.2 Calculate Sonke Investments Ltd.'s weighted average cost of equity

(WACC).

5.3 Assuming you are the financial manager, reflect critically on the

importance of the WACC and provide insightful comments on the uses of

this calculation in your organisation (or one with which you are familiar).

(3)

(6)

(6)