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Faculty of Economic and Management Sciences

Department: Financial Management

Examination period: 1st Semester

FBS 112

Exam

Date: 7 June 2019

Total Marks: 80 Marks
Duration: 120 Minutes

Internal examiner: Mr E Toerien

External examiner: Mrs L Ncube

Instructions:
◊ Answer all the questions and show all your calculations.
◊ The question paper consists of 10 pages.
◊ Mark allocation per question is indicated after each question.
◊ Non-programmable calculators may be used.
◊ You may keep the question paper.

Question Topic Marks Minutes

Question 1 Various chapters 30 45
Question 2 Various chapters 9 14
Question 3 Various chapters 15 22
Question 4 Various chapters 5 7
Question 5 Various chapters 4 6
Question 6 Various chapters 17 26
Total 80 120

FBS 112 Exam – June 2019 Page 1 of 10

 UNIVERSITY OF PRETORIA
FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES

Important information

1. The results of examinations and supplementary examinations for first year students only
will be displayed on the notice-boards next to the Human Sciences Building.
2. The results for first, second and third year, as well as postgraduate students will be
available on the MTN line and Students Online (SOS).
Results will be mailed to individual candidates after the examination period.
Results will be available at telephone nr. 083 123 1111 also on the Intranet address:
http://www.up.ac.za, students online.

LECTURERS AND ADMINISTRATIVE STAFF WILL NOT GIVE CANDIDATES THEIR

RESULTS PERSONALLY OR PER TELEPHONE.

2. Supplementary examinations are not granted automatically, but are subjected to current
Departmental policy.

3. Supplementary examinations take place from 24 June – 29 June 2019. Timetables to

determine the date, time and place of their supplementary examinations are available on:
3.1 Noticeboards at the main entrance to the Merensky Library;
3.2 Students Online (SOS);
3.3 MTN telephone nr. 083 123 1111.

4. The regulations concerning multiple choice examination papers are brought to your
attention

PERUSAL OF EXAMINATION and RE-EXAMINATION SCRIPTS

Perusal implies the right of students to verify their results and that the framework of the marking
memorandum be made available to them for perusal.

All communication with students arising from the perusal and feedback process will be handled
in writing on the prescribed form. Lecturers will not debate the allocation of marks with
students, but will obviously be prepared to correct possible marking mistakes.

The perusal of examination scripts is available to all students. The following procedure for
perusal is to be followed: Students requesting perusal must present a valid student card before
the script and a copy of the evaluation framework used during the marking process, will be
handed over to the student.

PERUSAL WILL ONLY BE ALLOWED ON THE FOLLOWING DATE AND TIME:

DAY DATE LOCATION TIME

FRIDAY 14 JUNE 2019 HB 3-24 09:30 – 11:30

FBS 112 Exam – June 2019 Page 2 of 10

QUESTION 1 (15 x 2 = 30 Marks)

ANSWER THE FOLLOWING QUESTIONS IN PENCIL ON SIDE 1 OF THE MULTIPLE

CHOICE SHEET PROVIDED

1. George Smith is a 72-year-old tax-paying South African. Which of the following

rebates and exemptions from personal income tax is George entitled to?

i. Primary rebate of R14 067

ii. Secondary rebate of R7 713
iii. Third rebate of R2 574
iv. Exempt interest to R23 800
v. Exempt interest to R34 500

A. i, iv.
B. i, ii, iii, v.
C. i, ii, v.
D. All of the above. (2)

2. During the year ended 30 September 2015 Happy Ltd. bought a fixed asset for
R125 000. The company charges depreciation at the rate of 20% per annum on the
reducing balance basis, with a full year’s depreciation in the year of acquisition and
none in the year of disposal. During the year ended 30 September 2018 the asset
was sold for R45 000. What was the loss on sale of the asset?

A. R5 000
B. R6 200
C. R19 000
D. R35 000 (2)

3. What is the difference between profit and comprehensive income?

A. Comprehensive income includes unrealised gains that are excluded from profit.
B. Profit is calculated in accordance with International Financial Reporting
Standards (IFRS) and comprehensive income is not.
C. Profit must be disclosed but comprehensive income need not.
D. Comprehensive income covers a longer period of time than profit. (2)

4. Which one of the following is a source of short-term finance whereby a company in

need of finance sells its trade debtors to another entity?

A. Lease.
B. Factoring.
C. Commercial paper.
D. Bills of exchange. (2)

FBS 112 Exam – June 2019 Page 3 of 10

5. The purchase of a business for more than the aggregate of the fair value of its
separate identifiable assets less liabilities results in the creation of a:

A. Goodwill account.
B. Share premium account.
C. Reserve account.
D. Suspense account. (2)

6. Springbok Group plc owns 45% of the voting rights in Duiker Industries and exacts
significant influence on the decision-making of Duiker Industries. As which one of the
following will Duiker Industries be considered in the accounts of Springbok Group
plc?

A. Investment.
B. Non-controlling interest.
C. Subsidiary.
D. Associate. (2)

7. Africa Brothers Ltd. has a inventory turnover of 40 days, trade receivables turnover
of 45 days and trade payables turnover of 47 days. How long, on average, does
each R1 invested in working capital stay tied up?

A. 38 days.
B. 42 days.
C. 85 days.
D. 132 days. (2)

8. In the United Kingdom, statutory requirements are based on the UK Companies Act
(2006). This act requires companies to produce which of the following documents?

i. Statement of profit or loss.

ii. Statement of financial position.
iii. Directors’ report.
iv. Auditors’ reports.
v. Notes accompanying the financial accounts.

A. i, ii.
B. i, ii, iv.
C. i, ii, iii, iv.
D. All of the above. (2)

FBS 112 Exam – June 2019 Page 4 of 10

9. Which one of the following is NOT a valid ratio for the calculation of return on capital
employed (ROCE)?

A. (Net profit before tax and interest) / (Share capital + reserves + long term debt)
B. (Net profit before tax) / (Share capital + reserves)
C. (Net profit before tax) / (Share capital + reserves + long term debt)
D. (Net profit before tax and interest) / (Total assets) (2)

10. A typical cash flow statement adds depreciation back to operating profit in order to
arrive at cash generated from operations. Which one of the following best explains
the treatment of depreciation?

A. Depreciation affects cash flow but not profit.

B. Depreciation affects profit but not cash flow.
C. Depreciation is an objective estimate.
D. Depreciation is not an operating expense. (2)

11. Which one of the following could cause the earnings per share figure to be diluted?

A. Decline in revenues.
B. A loss on the revaluation of an asset.
C. The correction of an accounting estimate.
D. The issue of a convertible bond. (2)

12. A company’s human capital, social capital and intellectual capital can be included in
which one of the following documents to provide a better holistic measure of
performance for the company?

A. Statement of financial position.

B. Integrated report.
C. Notes to the financial accounts.
D. Directors’ report. (2)

13. Protea Ltd. has 20 million outstanding shares priced at R5 a share. A rights issue
will allow one share to be purchased for every five shares currently held by
shareholders for R3 each. Which one of the following statements would be true if the
rights issue is concluded?

A. The number of shares outstanding will fall to 16 million shares.

B. The firm will raise R32 million.
C. The stock price is likely to fall to R4.67.
D. The company’s total value will decrease to R88 million. (2)

FBS 112 Exam – June 2019 Page 5 of 10

14. Which one of the following statements regarding intangible assets is true?

A. Intangible assets cannot be depreciated as they do not lose value over time.
B. Intangible assets cannot be purchased or sold, only created within an entity.
C. Intangible assets can be created when one company takes over another
company.
D. Intangible assets only have value if a designated assessor determines that the
intangible asset is worth more than market value. (2)

15. Which one of the following best describes the role of the stock market in motivating
company directors to make sound decisions?

A. A badly managed company can be identified by comparing it to other quoted

companies.
B. A badly managed company may have its stock market quotation suspended.
C. A badly managed company will have a low share price and it may be possible to
buy a controlling interest and replace the board.
D. A badly managed company will report poor profits and the shareholders will
complain. (2)

QUESTION 2 (9 Marks)

Billies Group plc currently has issued share capital to the value of R690 million.
Billies Group plc is considering funding a capital expansion program by issuing enough
new ordinary shares to raise the number of issued ordinary shares to 3 000 000 shares.
The ordinary shares were originally issued at a par value of R250 per share. A 1-for-4
rights issue at a subscription price of R280 is being considered. The shares of
Billies Group plc are currently trading at R330 per share on the stock exchange.

Required:

a. Calculate the theoretical ex-rights price of the shares if Billies Group plc decides to
continue with the rights issue. (3)

b. How much total capital is Billies Group plc hoping to raise with the rights issue? (2)

c. Discuss the advantages and disadvantages of Billies Group plc’s decision to finance
their capital expansion with a rights issue. (4)

FBS 112 Exam – June 2019 Page 6 of 10

QUESTION 3 (15 Marks)

You have been asked to assist Moo-Moo’s Manufacturers, a company

that produces farm equipment, to prepare its annual accounts. The
following information has been obtained from the company’s bookkeeping
records:

Selected account balances and totals from Moo-Moo’s Manufacturers accounting

records as at 31 December 2018:
R
Cash 790 000
Debentures 1 240 000
Dividends paid 1 260 000
Factory and land – cost 10 000 000
Factory and land – accumulated depreciation 31/12/2017 4 000 000
Goodwill 2 700 000
Inventory – 31/12/2018 560 000
Machinery and equipment – cost 1 000 000
Machinery and equipment – accumulated depreciation 31/12/2017 500 000
Ordinary share capital – par value of R2.50 5 000 000
Proceeds from share issue 1 350 000
Profit before tax – 31/12/2018 3 450 000
Retained earnings 650 000
Sales revenue 9 470 000
Share premium 280 000
Tax payable 90 000
Trade payables 620 000
Trade receivables 930 000

Additional information:

1. The transactions listed below have not yet been recorded and still have to be
included in the balances and totals for the year ended 31 December 2018. All other
balances and totals are assumed to be correct.

2. Moo-Moo’s Manufacturers issued 300 000 ordinary shares on 1 July 2018 to finance
a new project. The shares were issued at R4.50 per share. Moo-Moo’s
Manufacturers makes use of a share premium account to record the premium of
shares issued above par value.

3. The current year’s depreciation still has to be accounted for as follows:

• Factory and land at 15% straight line method.
• Machinery and equipment at 20% reducing balance method.

FBS 112 Exam – June 2019 Page 7 of 10

4. Management decided to revalue the factory and land on 31 December 2018 to its
current market value of R5 500 000.

5. Moo-Moo’s pays 28% income tax on their accounting profit. Accounting profit is
assumed to be the same as taxable income.

Required:

Prepare the statement of financial position of Moo-Moo’s Manufacturers as at

31 December 2018. Notes to the financial statements are not required. (15)

QUESTION 4 (5 Marks)

Agency theory underpins many of the theoretical models used in finance. Explain the
logic underlying agency theory, briefly referring to the role of monitoring in managing the
relationship between principal and agent. (5)

QUESTION 5 (4 Marks)

Mr Gajesh Rupta is a wealthy South African businessman that has been implicated in
some dodgy business dealings. He is looking to move abroad and is selling some of his
assets before he leaves:

• Mr Rupta has an assessed capital loss carried over from the previous year to the
value of R280 000.
• The value of shares in one of Mr Rupta’s businesses decreased significantly after
the business was implicated in wrongdoing. Mr Rupta managed to dispose of the
shares at a loss of R1 300 000.
• An almost new Bentley Bentayga W1, valued at R3 980 000, was sold to a close
business associate for R1 500 000.
• Mr Rupta sold a luxurious apartment in an upscale neighborhood of Sandton for
R11 950 000. Although he would stay at the property when he had business in town,
it is not listed as his primary residence. The property has an assessed base cost of
R7 350 000 and he spent R1 600 000 on renovations and improvements during the
previous financial year.

Required:

Calculate the capital gain that will be included in Mr Gajesh Rupta’s taxable income for
the year ended February 2019. (4)

FBS 112 Exam – June 2019 Page 8 of 10

QUESTION 6 (17 Marks)

Fun Aliens Ltd. is a party supply store that supplies party decorations
and catering services for various events and parties. Fun Aliens Ltd.
has in the past predominately bought and sold inventory on a cash
basis. Recently, one of Fun Aliens Ltd’s biggest suppliers started
offering very favourable credit terms.

The following extracts from the monthly financial statements of Aliens Ltd. are provided
to you:

January 2019 February 2019 March 2019

R R R
Sales
- Cash 800 000 950 000 1 000 000
- Credit ______- 1 600 000 2 400 000
Total 800 000 2 550 000 3 400 000

Cost of sales 520 000 1 660 000 2 210 000

Inventory 420 000 1 330 000 1 770 000

Trade receivables 600 000 1 450 000 3 820 000
Bank __50 000 ________ ________
1 070 000 2 780 000 5 590 000

Trade payables 590 000 1 250 000 1 800 000

Overdraft ______- 40 000 60 000
590 000 1 290 000 1 860 000

Additional information:

1. Fun Aliens Ltd. decided to make use of the offer to purchase inventory on credit from
one of its biggest suppliers. Credit purchases for the months February and March
amounted to R930 000 and R1 240 000 respectively.

2. In order to sell the additional inventory, Fun Aliens Ltd. started offering sales on
credit to some of their bigger clients. Fun Aliens Ltd. is delighted with the increase in
revenue but is concerned about the effect of using credit on its liquidity.

3. Fun Aliens Ltd. assumes there are 30 working days in a month and 365 working
days in a year for analysis purposes.

FBS 112 Exam – June 2019 Page 9 of 10

Required:

a. Analyse and compare Fun Aliens Ltd.’s liquidity position before and after making use
of the credit offer from their supplier by calculating the appropriate liquidity ratios. (6)

b. Calculate and compare the efficiency ratios before and after making use of credit
purchases and credit sales. (6)

HINT: Make use of the monthly figures. Do NOT use average amounts.

c. Taking the above ratios into account, discuss whether it is a good idea for
Fun Aliens Ltd. to make use of the credit offer from their supplier. (2)

d. Discuss the potential risks and benefits associated with having very rapid
receivables and inventory turnover ratios. (3)

SHOW ALL YOUR CALCULATIONS!

END OF PAPER

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