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MFN710S-MANAGERIAL FINANCE 320-1ST OPP-NOV 2025 |
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nAmlBIA UnlVERSITY
OF SCIEnCE AnD TECHnOLOGY
FACULTY OF COMMERCE, HUMAN SCIENCES, AND EDUCATION
DEPARTMENT OF ECONOMICS, ACCOUNTING, AND FINANCE
QUALIFICATION: BACHELOR OF ACCOUNTING
QUALIFICATION CODE: 0?BOAG LEVEL:?
COURSE CODE: MFN71 OS
COURSE NAME: MANAGERIAL FINANCE 320
SESSION: NOVEMBER 2025
DURATION: 3 HOURS
PAPER: THEORY AND CALCULATIONS (PAPER 1)
MARKS: 100
EXAMINERS
FIRST OPPORTUNITY EXAMINATION QUESTION PAPER
Lameck Odada, Dr Moses Nyakuwanika and Laban Nashinwe
MODERATOR Alfred Makosa
INSTRUCTIONS
1. This examination question paper consists of FOUR (4) questions
2. Answer ALL the questions in blue or black ink only. NO PENCIL.
3. Start each question on a new page and number the answers correctly and clearly.
4. Write clearly and neatly, showing all your workings/assumptions.
5. Round off only final answers to two (2) decimal places.
6. Questions relating to this examination may be raised in the initial 30 minutes after the start
of the examination . Thereafter, candidates must use their initiative to address any
perceived errors or ambiguities, and any assumptions they make should be clearly stated.
PERMISSIBLE MATERIALS
1. Silent, non-programmable calculators
THIS QUESTION PAPER CONSISTS OF _5_ PAGES (including this front page)
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QUESTION 1
[30 MARKS]
Sisedi Investment Group (SIG) represents the ownership and accountability taken by its
female founders for the deveiopment of Namibia. Sisedi, meaning 'it is ours' in the Namibian
Khoekhoegowab language. The firm, which is 100% owned by black Namibian females and
owner-managed, was founded in 2018 and commenced operations in 2019. SIG operates in
the 'trust business' and seeks to safeguard and grow its clients' life savings to secure their
financial futures. With a combination of seasoned investment expertise and intuitive feminine
insights, SIG aims to make a meaningful impact in the investment management industry.
SIG has allocated N$5 million for capital expansion in the 2026 financial year. The
management of SIG believes that the company must spread its risk by investing in projects
with different risk profiles and has identified two possible investments (projects 1 and 2). The
two projects are mutually exclusive. There is a 40% chance that the economic growth will be
3% and an equal chance that the economic growth will be zero or 6%.
The following information has been made available:
Economic growth (annual average)
ExistinQ investments
Project 2
Project 1
Book value (Million N$)
Market value (Million N$)
Zero
3%
Estimated return%
6
12
8
6
14
10
Existing investments Project 2
10
5
15
5
6%
16
22
8
Project 1
5
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As the accountant, the management of SIG has requested that you determine which of the
two projects should be accepted in line with the portfolio theory.
REQUIRED
Calculate the standard deviation of project 1, project 2, and the existing
a)
investments
Determine the expected return if SIG forms two separate portfolios with
b) each project. Which of the two projects would you recommend that SIG
select?
Determine the standard deviation if SIG forms two separate portfolios with
c) each project. Which of the two projects would you recommend that SIG
select?
MARKS
9
7
14
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QUESTION 2
[20 MARKS]
Build It is a division of the SPAR Group Limited, South Africa . A voluntary trading group of
individually owned retail stores with more than 10 000 employees across the group. They
currently have stores in South Africa , Namibia, Swaziland, Lesotho, and Mozambique, with
plans to expand into Botswana and Zambia in the near future. With each of their stores being
owner-run and managed, their customers can be assured of the best possible service and
advice. They view themselves not only as a supplier of materials, but as a partner to their
valued customers in accomplishing their building or renovation projects. Build It produces one
product, an angle grinder. Last year, 50 000 grinders were sold at N$20 each. The income
statement of Build It for the year ended December 31st, 2024, is as fo llows:
Build It Income Statement for the year ended December 31st, 2024
N$
N$
Sales
Less variable costs
Fixed costs
EBIT
Less interest
Net income before tax
Income tax at 40%
Net income
(400 000)
(200 000)
Earnings per share (100 000 shares)
1 000 000
(600 000)
400 000
(125 000)
275 000
(110 000)
165 000
1.65
Build It is considering a new production process in 2026, which would involve manufacturing
the grinders. Highly automated and capital-intensive , the new process will double fixed costs
to N$400 000 but will decrease variable costs to N$4 per unit. If the new equipment is financed
with bonds, interest will increase by N$70 000; if it is financed by ordinary shares, the total
number of shares outstanding will increase by 20 000 shares.
REQUIRED:
MARKS
(a) Define and calculate the following for the Build It 2024 level of sales
(i) The degree of operating leverage
(ii) The degree of financial leverage
(iii) The degree of combined leverage
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(b) If sales remain constant, calculate for each of the two proposed financing
methods :
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(i) The earnings per share
(ii) The combined leverage effect.
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QUESTION 3
[25 MARKS]
Orange River Co operates a chain of vegetarian restaurants and has the following abbreviated
Statement of Financial Position as at 30 November 2024.
N$m
Total assets less current liabilities
37.5
Share capital
12.5
Retained earnings
15.0
Non-current liabilities
27.5
Debt capital
10.0
37.5
Over the past four years , the company has generated the following after-tax profits.
After-tax profits
Year ended 30 November
2021
2022
2023
2024
N$m
3.97
4.29
4.63
5.00
The board of directors of Orange River Co. is currently considering whether to recalculate the
company's cost of capital. When evaluating investment decisions, the board employs the net
present value method, using a cost of capital of 16%. This figure, however, was calculated
four years ago, and since then, the company has undergone various changes.
The following information is also available:
1. The debt capital consists of 8% bonds that are redeemable in three years . The current
market value of the bonds is N$95 per N$100 nominal value . The debt capital will be
redeemed at its nominal value in three years.
2. The company has 25 million equity shares in issue, and these shares are currently
trading at a P/E ratio of 7.6 times.
3. The dividend policy of the company is to maintain a dividend cover of 2 times.
4. At a recent board meeting, the directors decided to maintain the current capital
structure of the company for the foreseeable future.
5. Assume a tax rate of 25% and that tax relief on interest is received in the year that the
interest is paid .
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REQUIRED
MARKS
Discuss the arguments of Modigliani and Miller concerning capital structure
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a)
and its effect on the value of a company, assuming a world without taxes
Calculate, for Orange River Co., each of the following to the nearest%
i.) The cost of debt capital.
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b)
ii.) the cost of equity capital ; and,
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iii.) the weighted average cost of capital
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Identify and describe the THREE (3) key assumptions that underpin the
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c) use of the weighted average cost of capital as a discount rate in investment
appraisal.
QUESTION 4
[25 MARKS]
Damaraland Co expects annual demand for product X to be 255 380 units. Product X has a
selling price of N$19 per unit and is purchased from a supplier, MKR Co. , for N$11 .
Damaraland Co. places an order for 50 000 units of Product X at regular intervals throughout
the year. As the demand for product Xis to some degree uncertain , Damaraland Co. maintains
a safety (buffer) inventory of product X, which is sufficient to meet demand for 28 working
days. The cost of placing an order is N$25, and the storage cost for Product X is 10 cents per
unit per year.
Damaraland Co. typically pays trade suppliers after 60 days, but MKR has offered a 1%
discount for a cash settlement within 20 days.
Damaraland Co. has a short-term cost of debt of 8% and operates on a 365-day working year.
REQUIRED
MARKS
Calculate the annual cost of the current ordering policy. Ignore financing
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a)
costs in this part of the question .
Calculate the annual savings if the economic order quantity model is used
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b)
to determine an optimal ordering policy. Ignore financing costs in this part
of the question .
Determine whether the discount offered by the supplier is financially 10
c)
acceptable to Damaraland Co.
END OF EXAMINATION QUESTION PAPER
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