SEMESTER : FINANCIAL MANAGEMENT 2 (FM202) CHAPTERS …

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ASSIGNMENT 1ST SEMESTER :

CHAPTERS COVERED

:

STUDY UNITS COVERED

:

DUE DATE

:

TOTAL MARKS

:

FINANCIAL MANAGEMENT 2 (FM202) CHAPTERS 1-4 STUDY UNITS 1-4 3:00 p.m. 18 March 2014 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, IMM GSM recognised Additional Tuition 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 made up from 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 18 March 2014. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 18 March 2014 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: immgsm.ac.za, on Friday, 2 May 2014.

Assignment: 1st Semester 2014

? IMM Graduate School of Marketing

FM202

Page 2 of 11

SPECIFIC INSTRUCTIONS: Answer ALL the questions The use of calculators is permitted unless stated otherwise. 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.

QUESTION 1

[10]

1.1. Which of the following would NOT improve the current ratio? a. Borrow short-term funds to finance additional property, plant and equipment b. Issue long-term debt to buy inventory c. Issue ordinary shares to reduce current liabilities d. Sell property, plant and equipment to reduce accounts payable

1.2. A non-cash charge is an expense that would be: a. deducted on a cash flow statement. b. deducted from free cash flows. c. added to operational cash flows. d. deducted on the statement of comprehensive income.

1.3. From the options below, the agency problem can best be described as ... a. a decision that will lead to shareholders' wealth. b. a decision made which is in the best interest of the company. c. decisions that will increase company profits over the short run based on pressure from a majority shareholder. d. something referred to in the real estate industry.

1.4. A pro-forma financial statement is one that: a. projects future years' income and/or financial position. b. is expressed as a percentage of the total assets of the organisation. c. is always expressed as a percentage of the total sales of the organisation. d. is always expressed relative to a chosen base year's financial statement.

1.5. An increase in __________ is MOST likely to be an indication of an accounts receivable policy that may be too restrictive? a. Bad debts b. Accounts receivable turnover rate c. Credit sales d. Operating cycle

Assignment: 1st Semester 2014

? IMM Graduate School of Marketing

FM202

Page 3 of 11

1.6. Which of the following are examples/indicative of agency costs? I. Forgoing an investment opportunity which would add to the market value of the owners' equity due to a conflict of interest II. Paying a dividend to each of the existing shareholders III. Purchasing new equipment which increases the value of each share IV. Hiring outside auditors to verify the accuracy of the company financial statements

a. II and III only b. I and III only c. I and IV only d. I, II, and IV only

1.7. Which of the following are included in current liabilities? I. Note payable to a supplier in eighteen months II. Debt payable to a mortgage company in nine months III. Accounts payable to suppliers IV. Loan payable to the bank in fourteen months

a. I and III only b. II and III only c. III and IV only d. II, III, and IV only

1.8. Which one of the following statements is CORRECT concerning ratio analysis? a. A single ratio is often computed differently by different individuals. b. Ratios do NOT address the problem of size differences among organisations. c. There is only a very limited number of ratios which can be used for analytical purposes. d. Each ratio has a specific formula that is used consistently by all analysts.

1.9. The components of the Du Pont system/formula can generally be described as: I. operating efficiency, asset use efficiency and organisation's profitability. II. financial leverage, operating efficiency and asset use efficiency. III. the equity multiplier, the profit margin and the total asset turnover. IV. the debt-equity ratio, the capital intensity ratio and the profit margin.

a. I and II only b. II and III only c. I and IV only d. I and III only

Assignment: 1st Semester 2014

? IMM Graduate School of Marketing

FM202

Page 4 of 11

1.10. Which of the following represent problems encountered when comparing the financial statements of one organisation with those of another organisation? I. Either one, or both, of the organisations may be conglomerates and thus have unrelated lines of business. II. The operations of the two organisations may vary geographically. III. The organisations may use differing accounting methods for inventory purposes. IV. The two organisations may be seasonal in nature and have different fiscal year ends.

a. I and II only b. II and III only c. I, III, and IV only d. I, II, III, and IV

QUESTION 2

[45]

You are the loan officer at BankBest Bank (BBB). Your main responsibility is to review applications for loans.

You are at present reviewing an application by the Hammer Tools Company (HTC). HTC manufactures various types of high quality punching and deep-drawing press tools for kitchen appliance manufacturers. John Smith, the financial manager of HTC, has submitted a justification to support the application for a short-term loan from BBB. Extracts of the Statement of Comprehensive Income and Statement of Financial Position of HTC, submitted with the justification to BBB, are provided below:

Extract of the Statement of Comprehensive Income

of Hammer Tools Company for the year ended 31 December 2012

2012

2011

R'000

R'000

Revenue (all credit)

45 000

40 909

Cost of sales

(23 000)

(20 909)

Gross profit

22 000

20 000

Selling and admin expenses

(13 000)

(11 818)

Other expenses (depreciation)

(3 000)

(2 000)

Finance costs

(412)

(400)

Profit before tax

5 588

5 782

Income tax expense

(2 235)

(2 313)

Profit for the year

3 353

3 469

An ordinary dividend of R733 000 was declared in 2012 and R758 000 in 2011.

Assignment: 1st Semester 2014

? IMM Graduate School of Marketing

FM202

Page 5 of 11

Statement of Financial Position

of Hammer Tools Company as at 31 December 2012

2012 R'000

2011 R'000

ASSETS Non-current assets

Land

1 000

1 000

Plant and equipment at carrying amount

18 000

16 000

Plant and equipment at cost Accumulated depreciation

31 000 (13 000)

26 000 (10 000)

Current assets Inventories Trade receivables Cash and cash equivalents TOTAL ASSETS

5 220 7 600 1 800 33 620

5 000 6 000 2 000 30 000

EQUITY AND LIABILITIES Equity attributable to equity holders Issued ordinary share capital Retained earnings

Non-current liabilities Debentures

Current liabilities Trade payables Accrued expenses TOTAL EQUITY AND LIABILITIES

4 000 16 620

4 000

2 600 6 400 33 620

4 000 14 000

4 000

2 000 6 000 30 000

Assignment: 1st Semester 2014

? IMM Graduate School of Marketing

FM202

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