1. According to the principle of risk return trade off, how do investors decide where to invest their money?

1. by requiring a higher return when exposed to higher risk (4 marks )

2. Identify two problems of having profit maximization as the goal of an organisation.

(2 marks)

3. Explain why in finance, cash flows rather than accounting profits are considered in determining the value of an asset. (6 marks)

4. Differentiate between the following:

i. Profit maximisation and shareholder wealth maximisation. (6 marks) ii. Debt and equity. (6 marks)

5. State four activities that drive a companys profits. (4 marks)

6. Describe two advantages of having a money market portfolio to an organisation. (4 marks)

7. Explain how the use of the 5 Cs of Credit for credit analysis can deter loan defaults for companies. (10 marks)

8. Calculate at what rate an investment would have to grow eightfold in nine years? (4 marks)

9. Explain the meaning of the following credit terms

i. 2/10, net 30. (2 marks) ii. 5/20, net 60. (2 marks) SECTION B - ESSAY TYPE QUESTIONS [50 MARKS]

There are THREE questions in this section. Answer ANY TWO.

QUESTION 1 [25 MARKS]

Use the following information to answer the questions that follow.

Neftec Industries

Statement of Financial Position as at 31 December 2020 and

December 2021

2020 2021

Non- Current Assets

Land 20,000 26,000

Buildings and equipment 70,000 100,000

Less: allowance for depreciation (28,000) (38,000)

Total Non-current assets 62,000 88,000

Current Assets

Cash 9,000 500

Accounts receivable 12,500 16,000

Inventories 29,000 45,500

Total current assets 50,500 62,000

TOTAL ASSETS 112,500 150,000

Equity and Liabilities

Equity

Ordinary shares 31,500 31,500

Retained earnings 24,750 26,550

Total Equity 56,250 58,050

Non-Current Liabilities

Long term debt 28,750 22,950

Total Non-Current liabilities 28,750 22,950

Current Liabilities

Accounts payable 10,500 22,000

Bank notes 17,000 47,000

Total Current Liabilities 27,500 69,000

TOTAL EQUITY AND LIABILITIES 112,500 150,000

Neftec Industries

Statement of Income for years ended December 31, 2020 and

31 December 2021

2020 2021

Sales 125,000 160,000

Cost of goods sold (75,000) (96,000)

Gross profit 50,000 64,000

Operating expenses

- Fixed cash operating expenses 21,000 21,000

- Variable operating expense 12,500 16,000

- Depreciation 4,500 10,000

Total operating expense 38,000 47,000

Earning before interest and taxes 12,000 17,000

Interest (3,000) (6,100)

Earnings before taxes 9,000 10,900

Taxes (4,500) (5,450)

Net Income 4,500 5,450

Industry Norms

Current ratio

Acid-test ratio

Average collection period

Inventory turnover

Debt ratio

Gross profit margin

Operating profit margin

Total asset turnover

Fixed asset turnover

Return on total assets

Return on common equity 1.8

0.70

31.00

2.50

0.58

38%

10%

1.14 1.40

4.0%

9.5%

Required:

Evaluate the firms performance for the year 2020 and 2021 by:

a. Calculating the same ratios as the industry norms. (20 marks)

b. Remark on the performance of Neftec based on your calculations. (5 marks)

QUESTION 2 [25 MARKS]

ABC ltd has the following capital structure

Equity: P10,400,000 20thebe ordinary shares with a market price of P5.20

Reserves: P2,200,000

Preference shares: P1,050,000 8% P1 preference shares with a market price of 70thebe

Loan stock: P800,000 6% debentures with a market price of par (i.e. P80 per

P100 nominal value of stock)

The ordinary shares dividend recently paid was 50thebe per share.

Dividends are expected to grow at 5% per annum for the foreseeable future.

The preference shares and loan stock can be assumed to be irredeemable. ABC ltds marginal rate of corporation tax is 30%.

Note: 100 thebe = P1

Required:

a. Using market values, calculate the following:

i. Cost of equity. (3 marks) ii. Cost of preference shares. (3 marks) iii. Cost of loan stock (3 marks)

b. Based on the above calculations determine ABC ltds weighted average cost of capital.

(10 marks)

c. Identify and explain three factors that could influence the cost of the above sources of finance.

(6 marks) QUESTION 3 [25 MARKS]

A company is considering investing in either Project A or Project B. Relevant financial information is as follows:

Project A Project B

P P

Initial capital cost of equipment

Estimated Profits: 100,000 100,000

Year 1 25,000 10,000

Year 2 20,000 36,000

Year 3 14,000 40,000

Year 4

40,000 42,000

Life of project

4 years 4 years

Anticipated re-sale value of equipment

at the end of Year 4 10,000

nil

The companys cost of capital is 8% and the applicable discount rates are as follows:

Year 1 0.926

Year 2 0.857

Year 3 0.794

Year 4 0.735

Required:

a. Calculate, in years and months, the simple payback period for each project. Assume that there are 12 months in a year, that each month has 30 days and that annual cash flows occur at an

even rate throughout the year. (6 marks)

b. Calculate, to the nearest P1, the net present value of each project. Assume that net cash inflows are received at the end of each year and the anticipated re-sale value of equipment is achieved.

(8 marks)

c. Identify five advantages of NPV as a capital budgeting technique. (5 marks)

d. Explain three reasons why capital budgeting decisions are important. (6 marks)

END OF ASSESSMENT