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UNIVERSITEITSEKSAMENS
MBL922N
(121s14)
May/June 2013
1 Hours
EXAMINERS
FIRST
SECOND
100 Marks
MR GW DALTON
DR JW KRUGER
This paper consists of 11 pages PLUS instructions for the completion of a markreadmg sheet.
Student number
Exammat1on Centre
INSTRUCTIONS TO CANDIDATES.
ANSWER ALL QUESTIONS
Please use the mark-reading sheet supplied.
[TURN OVER]
2
MBL922N
MAY/JUNE 2013 (TEST)
ABC Ltd declared an interim dividend of 85 cents and a final dividend of 220 cents per share
ABC Ltd achieved earnings per share of 504 cents and the share traded at R72 75 at year end
An Eskom debenture will be issued at a par value of R1 000 each Interest 1s paid annually and
the required rate of return 1s equal to the debenture 's coupon interest rate of 12% The in1t1al
maturity is ten years Calculate the value of the debenture?
R322-00
R678-00
R708-40
R1 000-00
R1 200-00
[TURN OVER]
3
MBL922N
MAY/JUNE 2013 (TEST)
Growth Bank 1s expected to pay an annual d1v1dend of 90 cents per share indefinitely and the
required rate of return equals 18% Calculate the value of the share?
R1-00
R2-50
R5-00
R10-62
R16-20
Assume that the nsk-free rate 1s 5 percent, and that the market nsk premium 1s 7 percent
If a
1 25
1 35
1 37
1 60
1 96
The constant rate of d1v1dend growth for an investment 1s 8% The company 1s expected to pay
an annual d1v1dend of R2-50 next year The required rate of return equals 18%
The value of the share must be
1
R9-62
R13-90
R25-00
R31-25
R32-00
[TURN OVER]
4
MBL922N
MAY/JUNE 2013 (TEST)
Which of the following is not considered a capital component for the purpose of calculating the
weighted average cost of capital as it applies to capital budgeting?
1
Long-term debt
Incorrect. The WACC includes all investor supplied capital which includes long-term debt, preferred stock, and common stock.
Ordinary shares
Incorrect. The WACC includes all investor supplied capital which includes long-term debt, preferred stock, and common stock.
Accounts payable
Correct. The WACC includes all investor supplied capital which includes long-term debt, preferred stock, and common stock.
Preference shares
Incorrect. The WACC includes all investor supplied capital which includes long-term debt, preferred stock, and common stock.
Debentures
Incorrect. The WACC includes all investor supplied capital which includes long-term debt, preferred stock, and common stock.
Petersen Limited invested R36 000 per year for 10 successive years (at the end of each year}
in
a money market account at 15% p a compound interest What will be the end value in the
10
R73 094-40
R74 390-60
R83 094-40
R95 000-00
A company's target capital structure affects its weighted average cost of capital
If a company's tax rate increases, then, all else equal, its weighted average cost of
capital will increase
The cost of retained earnings 1s equal to the return stockholders could earn on
alternative investments of equal risk
[TURN OVER]
MBL922N
11
market risk premium (rM - rRF) 1s 6 percent What 1s the company's cost of ordinary shares, rs?
12
13
7 0%
7 2%
11 0%
12 2%
12 4%
Max1m1se return
Opt1m1se solvency
Optimise hqu1d1ty
If a project's internal rate of return (IRR) exceeds the cost of capital, then the project's
net present value (NPV} must be pos1t1ve
If Project A has a higher IRR than Project B, then Project A must also have
a higher
NPV
3
The lRR calculation 1mphc1tly assumes that all cash flows are reinvested at a rate of
return equal to the cost of capital
[TURN OVER]
,1.,
6
MBL922N
MAY/JUNE 2013 (TEST)
14
exclusive, and you only have the 1nformat1on that 1s provided, which should you accept?
15
Payback (years)
IRR
18%
20%
20%
12%
NPV (M1ll1ons)
R40
R75
R35
R100
B and C
A project has an up-front cost of R100,000 The project's WACC 1s 12 percent and its net
present value is R10,000 Which of the following statements 1s most correct?
16
The pro1ect should be re1ected since its return 1s less than the WACC
Scott Corporation's new pro1ect calls for an investment of R10,000 It has an estimated life of
10 years The IRR has been calculated to be 15 percent If cash flows are evenly distributed
and the tax rate 1s 40 percent, what 1s the annual before-tax cash flow each year? (Assume
depreciation 1s a neghg1ble amount.)
R1, 993
R3, 321
R1, 500
R4, 983
R5, 019
[TURN OVER]
7
MBL922N
MAY/JUNE 2013 (Tesn
17
Two pro1ects being considered by a firm are mutually exclusive and have the following
projected cash flows
Project A
Project B
Year
Cash Flow
Cash Flow
(R100, 000)
(R100, 000)
R39, 500
R39, 500
R39, 500
R133, 000
Based only on the rnformat1on given,which of the two projects would be preferred, and why?
1
Include both 1n the capital budget, srnce the sum of the cash inflows exceeds the 1mt1al
investment in both cases
18
19
Which of the following is not a cash flow that results from the decision to accept a project?
1
Sunk costs
Opportunity costs
Externalities
Issue long-term debt and use the proceeds to purchase fixed assets
[TURN OVERJ
8
MBL922N
MAY/JUNE 2013 (TEsn
20
Which of the following alternatives could potentially result in a net increase in a companys free
cash flow for the current year?
21
Increasing the number of years over which fixed assets are depreciated
Good Hope Supplies L1m1ted has a current ratio of 3 0, a quick ratio of 2 4, and an inventory
turnover ratio of 6 Good Hope's total assets are R1 million and its debt ratio 1s 0 20 The firm
has no long-term debt What 1s Good Hope's cost of sales figure?
22
R 720,000
R 120,000
R1, 620,000
R 360,000
R 880,000
[TURN OVER]
..
,,
9
MBL922N
MAY/JUNE 2013 (TEST)
23
If easing a firm's credit policy lengthens the collection penod and results 1n a worsening of the
aging schedule, then why do firms take such actions?
24
,,
Suppose that you are told that an investment of R500 earned returns of 50%, 40%, and 30%
during each of the last three years, and that the proceeds, the pnnc1pal and interest were reinvested m the same asset every year What was the geometric average return during this
three year period?
25
39 76%
40 00%
41 27%
42 68%
If PlaatJe L1m1ted had sales of R2,027,773 per year (all credit) and its days sales outstanding
was equal to 35 days, what was its average amount of accounts receivable outstanding?
(Assume a 365-day year )
R194, 444
R 57,143
R 5, 556
R 97,222
R212, 541
(TURN OVER)
,.
'
10
MBL922N
MAY/JUNE 2013 (TEST}
26
A firm 1s offered trade credit terms of 3/15, net 45 days The firm does not take the discount,
and 1t pays after 67 days What 1s the nommal annual cost of not taking the discount?
(Assume a 365-day year )
21 71%
22 07%
22 95%
23 48%
24 52%
'1
..
111
27
28
The share tends to move with the market but to a lesser extent
The share tends to move against the market but to a lesser extent
The share tends to move with the market but to a greater extent
The share tends to move against the market but to a greater extent
The share does not move against the market to any extent
The vanance 1s a measure of how "spread out" the d1stnbut1on of the return 1s
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11
MBL922N
MAY/JUNE 2013 (TEST)
29
30
Levered/geared equity
R1skless equity
Unlevered equity
Risky equity
Preference equity
The firm will pay the d1v1dend to all shareholders who are registered owners on a spec1f1c date,
set by the board, called the
Declaration date
Reg1strat1on date
D1stribut1on date
Ex-d1v1dend date
Post-d1v1dend date
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