MIDLANDS STATE UNIVERSITY
FACULTY OF COMMERCE
DEPARTMENT OF ACCOUNTING
FINANCIAL MANAGEMENT FOR ACCOUNTANTS: ACC216
SESSIONAL EXAMINATION
OCTOBER/NOVEMBER 2020
DURATION: 3 HOURS
100 MARKS
EXAMINATION REQUIREMENTS
Formula tables
INSTRUCTIONS
1. Answer questions in Section A and any three questions in Section B
2. Begin an answer to a new question on a new page.
3. In order to earn marks, show all your workings.
4. You should highlight any assumptions made in answering any question.
5. All your answers should be written in the answer booklet
SECTION A - COMPULSORY
Question 1
The finance team of Binga Ltd has produced the following forecasts of financial data of the
company's free cash flows, the accountant Was of the opinion that these can be used to estimate
the value of the firm if the forecast are accurate.
Financial year 1
Expected free cash flow for the firm( $000): 25
Required:
Calculate the value of the company if:
a) Cash flows are expected to remain at year 4 level into infinity.
b) Cash flows are expected to remain at year 4 level up to th
c) Cash flows are expected to grow at a rate of 3% per year
14 years.
d) Cash flows are expected to grow at a rate of 3`/)0 per yea
e) Cash flows are expected to grow at a rate of 5% per year aft
then at 4% indefinitely.
[Total 40 marks]
Page 2 of 5
SECTION B - ANSWER ANY 3 QUESTIONS
Question 2
Changamire University is a local private tertiary institution, a highly geared firm that wishes to
expand its operations. Six possible capital investments have been identified, but the company is
only planning to run half of these projects. The projects are divisible and may not be postponed
until a future period. After the projects end, it is unlikely that similar investment opportunities
will occur.
Expected net cash inflows (including salvage value) are as follows:
Project Year 1
S
Con 70,000
Para 75,000
Vs 48,000
Block 62,000
lire 40,000
Mcom 35.000
Projects Con and lire are mutually exclusive. All projects are believed to be of similar risk to
the company's existing capital investments. The money market may be assumed to be an
efficient market. Changamire's cost of capital is 12% per year.
Required:
Calculate
i) The expected net present value;
ii) The expected profitability index associated with each of the
projects according to both of these investment appraisal met
why these rankings differ.
'Total 20 marks]
Page 3 of 5
Question 3
Given below are financial records of MTN a newly ZSE listed firm located in the midlands province
i) Ordinary share were
follows
Year
2018
2017
2016
2015
2014
Dividends were assumed to be growing at a constant rate, ordinary shareholders required rate of
return of 17%
ii)
iii) The firm has,
iv)
calculated
Required:
Calculate market value of
a) Equity
b) Preference share
c) Debt
[Total 20 marksi
Page 4 of 5
Question 4
A firm is proposim2, an investment in two stocks that are affected by weather, given below, are the
expected returns from the stocks under four possible climatic conditions
Climatic conditions Probability
Very cold 0.15
Cold 0.20
Averau 0.25
Not 0.40
Required:
Question 5
an explanation of the following terms:
i) Business risk
ii) Financial risk
b) Which finance source would you recommend between short term and long term source
when financing working capital? Discuss with reference to any two theories. (10 marks)
[Total 20 marks]
"End of Examination"
Page 5 of 5
Formulae
Modigliani and Miller Proposition 2 With tax
The Capital Aset Pricing Model
= Rt
V
J3e
(Ve+Vd(1—T))
P
0
Gordon's growth approximation
g bre
The Weighted Average Cost of Capital
V
WACC
(1+h
S =So(
(l+hb)
Modified Internal Rate of Return
1
PV
MIRR =
PV
The Black Scholes option pricing theory
c = PaNW —P
1
Where
In(Pa Pe) + (r+0.5s2)t
d2 = d
1 — sAiri
The Put Call Parity relationship
P=c- P +pe-ri
e
PVTable
Presnt value of 1 i.e. (1 4-
r = discount rate
n = number of periods until payment
Discount rale (r)
Pe/4M's
(n) 1%
0.990
2 0.980
lit. 0.971
4 0.961
5 0.951
0942
0933
0•923
0.914
10 0905
0896
0.887
0879
14! 0.870
15! 0.861
0.901
0.812
0.731
4 0.659
6 0535
0482
0434
0391
0352
0317
0286
0258
0232
15 0209
Annuity Table
Present value of an annuity of 1
Where r = discount rate
n = number of periods
Discowil role (r)
Periods
(n) 1%
1 0990
1970
3 2941
4 3902
5 4853
6 5795
7 6728
8 7652
9 8566
10 9471
11
12
13
14
15
(n)
1
2
vais
4
5
6
7
8
9
10
11
12
%► 13
14
15
Page 6 of 6
2 4
27 30 38
(5 marks)
to remain at year 4 level up to the end of 14 years horizon(7 marks)
o grow at a rate of 3% per year after year 4 with overall horizon of
(8 marks)
to grow at a rate of 3`/)0 per year after year 4 into infinity(10 marks)
row at a rate of 5% per year after year 4 to year 6 inclusive and
(10 marks)
Year 2 Year 3 Year 4
$ $ $
70,000 70,000 70,000
87,000 64,000
48,000 63.000 73,000
62,000 62,000 62.000
50,000 60,000 70,000
82,000 82.000
(10 marks
dex associated with each of the six projects. Rank the
these investment appraisal methods and explain briefly
(10 marks)
20 000 with par value of $1 each and ordinary dividends paid were as
Total Dividends (S)
Preference capital amounted to 530 000, which was made up of 12% preference shares of $2
each and preference shareholder required a return of 10.5%
110 10% loan notes; these were redeemable in 5 years time at 5% premium.
Corporate tax is at the rate of 25% per annum and is paid in the year in which profits are
(5 marks)
(2 marks)
(6 marks)
d) State any 4 assumptions of the dividend v (3 marks)
e) Why is debt usually cheaper than equity (3 marks)
Return on stock 1 Return on stock 2
-15% 25%
-5% 15°A
10% l0%
30% -3%
Identify the two best stocks for the portfolio with the aid of relevant calculations.
a) Discuss the dangers to a company of high level of gearing. Your answer should include
[3i(E(rni) — R
The Asset Beta Formula
Vd (1 —
+
(V
The Growth Model
D (1+ g)
°
( re—g)
[ ]k + Nic
V, + Vd Ve +
The Fischer formula
(1+ 1) = (1+ r)(1+h)
Purchasing Power Parity and Interest Rate Parity
)
c
lf (
eN(Ci2)e-rt
2% 3% 4%
0•980 0971 0•962
0.961 0.943 0.925
0942 0.915 0889
0.924 0.888 0.855
0-906 0.863 0.822
0.888 0.837 0790
0.871 0.813 0.760
0.853 0.789 0-731
0.837 0.766 0-703
0.820 0.744 0676
0.804 0.722 0.650
0.788 0701 0.625
0.773 0.681 0601
0.758 0.661 0.577
0.743 0.642 0.555
13% 14%
0893 0.885 0 877
0 797 0.783 0.769
0-712 0•693 0.675
0.636 0.613 0.592
n r,, A.CA1
n.c10
0507 0480 0456
0452 0425 0400
0404 0376 0351
0361 0333 0308
0322 0295 0270
0287 0261 0237
0257 0231 0208
0229 0204 0.182
0205 0181 0160
0183 0160 0140
2% 3% 4%
0980 0971 0962
1942 1913 1886
2884 2829 2775
3808 3717 3630
4713 4580 4452
5601 5417 5242
6472 6230 6002
7325 7020 6.733
8.162 7786 7435
8983 8530 8.111
10368 9787 9253
11.255 10575 9954
12.134 11.348 10635
13.004 12106 11296
13.865 12849 11938
I1% 12% 13%
0901 0893 0885
1713 1690 1668
2444 2402 2361
3102 3037 2974
3696 3605 3517
4231 411 3998
4712 4564 4423
5146 4968 4799
5537 5328 5132
5889 5650 5426
6207 5938 5687
6492 6194 5918
6750 6424 6122
6982 6628 6302
7191 6811 6462
Year 5 Initial
$ Outlay (5)
70,000 246,000
180,000
175,000
180.000
40.000 180,000
150,000
Return on stock 3
-10%
-7°A
I5%
16%
[20 marks]
(10 marks)
f )
+ Vd(1— T)) 13d
kd(I -1
5% 6% 7% 8% 9% 10%
0.952 0•943 0.935 0-926 0.917 0.909 1
0.907 0.890 0.873 0.857 0.842 0826 2
0.864 0840 0.816 0.794 0772 0.751 3
0823 0-792 0.763 0.735 0.708 0.683 4
0•784 0.747 0.713 0.681 0•650 0.621 5
0.746 0•705 0.666 0630 0596 0.564 6
0.711 0665 0.623 0.583 0.547 0.513 7
0.677 0-627 0.582 0.540 0.502 0.467 8
0.645 0.592 0544 0-500 0.460 0.424 9
0.614 0.558 0.508 0463 0422 0•386 10
0.585 0.527 0.475 0.429 0.388 0•350 11
0.557 0.497 0.444 0-397 0.356 0.319 12
0.530 0.469 0.415 0368 0•326 0.290 13
0.505 0-442 0.388 0-340 0.299 0.263 14
0.481 0.417 0.362 0.315 0.275 0.239 15
15% 16% 17% 18% 19% 20%
0.870 0 862 0•855 0.847 0.840 0833 1
0756 0.743 0 731 0.718 0.706 0•694 2
0.658 0.641 0.624 0.609 0.593 0.579 3
0.572 0-552 0.534 0.516 0.499 0.482 4
0.407 0•47A h•JSA 0,1;7 0,410 0.40'7
0432 0410 0390 0370 0352 0•335 6
0.376 0354 0333 0314 0296 0279 7
0327 0.305 0285 0266 0249 0.233 8
0284 0•263 0243 0225 0209 0.194
0247 0227 0208 0.191 0.176 0 • 162 10
0215 0.195 0.178 0.162 0-148 0-135 11
0 • 187 0.168 0.152 0-137 0• 124 0-112 12
0.163 0.145 0.130 0.116 0.104 0093 13
0141 0125 0111 0099 0088 0078 14
0123 0108 0095 0084 0074 0065 15
5% 6% 7% 8% 9% 10%
0952 0943 0935 0926 0917 0909 1
1859 1833 1808 1783 1759 1736 2
2723 2.673 2624 2577 2531 2487 3
3546 3465 3387 3312 3240 3170 4
4329 4212 4100 3993 3890 3791 5
5076 4917 4767 4623 4486 4355 6
5786 5582 5389 5206 5033 4868 7
6463 6210 5971 5747 5535 5.335 8
7.108 6802 6515 6247 5995 5759 9
7722 7360 7024 6710 6418 6.145 10
8760 8306 7887 7499 7.139 6805 6495 11
9385 8863 8.384 7943 7536 7161 6814 12
9986 9394 8853 8358 7904 7487 7103 13
10563 9899 9295 8745 8244 7786 7367 14
11118 10380 9712 9108 8559 8061 7606 15
14% 15% 16% 17% 18% 19% 20%
0877 0870 0862 0855 0847 0840 0833 1
1647 1626 1605 1585 1.566 1547 1.528 2
2322 2283 2246 2210 2174 2140 2106
2914 2855 2798 2743 2690 2639 2589 4
3433 3352 3274 3199 3127 3058 2991 5
3889 3784 3685 3589 3498 3410 3326 6
4288 4160 4039 3922 3812 3706 3605 7
4639 4487 4344 4207 4078 3954 3837 8
4946 4772 4607 4451 4303 4163 4031 9
5216 5019 4833 4659 4494 4339 4192 10
5453 5234 5029 4836 4656 4486 4327 11
5660 5421 5197 4988 4793 4611 4439 12
5842 5583 5342 5118 4910 4715 4533 13
6002 5724 5468 5229 5008 4802 4611 14
6142 5847 5575 5324 5092 4876 4675 15
