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MFN710S - MANAGERIAL FINANCE 320 - 2ND OPP - JAN 2020 |
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NAMIBIA UNIVERSITY
OF SCIENCE AND TECHNOLOGY
FACULTY OF MANAGEMENT SCIENCES
DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE
QUALIFICATION: BACHELOR OF ACCOUNTING
QUALIFICATION CODE: 07BAC
LEVEL: 7
COURSE CODE: MFN710S
COURSE NAME: MANAGERIAL FINANCE 320
SESSION: JANUARY 2020
DURATION: 3 HOURS
PAPER: THEORY AND CALCULATIONS
MARKS: 100
SECOND OPPORTUNITY EXAMINATION QUESTION PAPER
EXAMINER(S) | E. Mushonga and L. Odada
MODERATOR: |A- Mokosa
INSTRUCTIONS
Answer ALL the questions in blue or black ink only. STRICTLY NO PENCIL
Start each question on a new page, number the answers correctly and clearly.
Show all your workings/calculations and round all calculations to two decimal places
Questions relating to this examination may be raised in the initial 30 minutes after
the start of the paper. Thereafter, candidates must use their initiative to deal with
any perceived error or ambiguities and any assumptions made by the candidate
should be clearly stated.
PERMISSIBLE MATERIALS
e Silent, non-programmable calculators
THIS QUESTION PAPER CONSISTS OF _4_ PAGES (Including this front page)
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QUESTION 1
[35 MARKS]
An investor wishes to invest in two shares that have the following risk/return profiles:
Economic State | Probability
1
0.3
2
0.5
3
0.2
Return
Share A
2%
10%
12%
Return
Share B
15%
22%
-2%
The following market information is available:
The risk-free rate is 3%
The Market return is 12%
The standard deviation of expected market returns is 6%
The covariance of share A returns with those of the market is 25.2
The covariance of share B returns with those of the market is 39.6
Required:
a) Calculate the expected returns of shares A and B; the covariance of returns between the two
shares, standard deviations and the correlation between share A and share B.
(17)
b) Determine the expected return of a portfolio consisting of 40% share A and 60% share B
together with the risk of the portfolio and discuss whether you would advise the investor to
purchase the portfolio.
(8)
c) Calculate the required return of shares A and B according to the Capital Asset Pricing Model,
and discuss whether you would advise the investor to invest in either share A or share B (10)
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QUESTION 2
[35 MARKS]
Palma Ltd, a manufacturer of games accessories and boys toys, is engaged in rapid expansion.
Management has been advised that discounted cash flow techniques provide the most acceptable
appraisal methods for their needs.
Palma Ltd has the following extract from its financial position:
Authorised share capital
Issued share capital
Share premium
Revaluation reserve
Other reserves
Shareholders’ funds
15 000 000 @ 50c
10 000 000 @ 50c
NSOOO
7500
5 000
2 340
1610
4615
13 565
12% NS100 irredeemable debentures
10% N$100 redeemable debentures
14% Long term loan
NSOOoO
2 500
2 000
3 000
7 500
Palma Ltd.’s shares have a current market value of N$1.56 cum div. A dividend of 18c is due to be
paid shortly. All debt interest is paid annually in arrears and has just been paid. The company has
been growing at a rate of 5 %. This growth should be maintained in the foreseeable future.
The 12% debentures have a market value of NS80. The 10% debentures are to be redeemed in eight
years’ time at N$95 per $100 nominal. The company has a current market required return of 16.67%
before tax.
The 14% loan is not traded on the open market, but its effective pre-tax cost has been estimated at
18%, It is redeemable at par in three years’ time.
The company tax rate for Palma Ltd is 40%
Required:
a) Calculate the after tax Weighted average cost of capital (WACC) of Palma Ltd. (NB. The
weighting should be based on market values).
(28)
b) Discuss what is meant by a “target WACC” and how can company use this concept to finance
an investment project.
(7)
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QUESTION 3
[30 MARKS]
Areva Resources Namibia Ltd. is undertaking a project involving the construction of a seawater
desalination plant at Wlotzkasbaken near Swakopmund. The directors of Areva believe their
multimillion dollar project shall be able to supply all the water to be consumed at Trikkopje mine,
some 40km into the dessert. This project shall be financed using funds raised in the Namibian
market. The cash flow from the selling of uranium concentrate begins weeks from the
commencement of the project and such cash flow shall be invested short term in order to be
ploughed back into the project when needed. The company’s return for the first six months is
estimated to be 14%. Its equity multiplier is 1.2 and the total assets exceed NS5O Million.
As part of their financial strategy, the directors shall invest NS200 000 with Old Mutual at the
beginning of every quarter. The target is to reach NS2 000 000 in two years’ time from the Old
Mutual investment. The investment yields annual returns of 8% compounded quarterly. One of the
directors is of the opinion that they should use their connections at Old Mutual to get a fair deal on
their investment but in return of some fees payable to their connections while one other director
does not really care whatever interest they will be charges arguing that it will not benefit them
individually.
Required:
a) Identify and explain the type of market from which Areva’s directors will raise funds for their
desalination plant.
(4)
b) Advise the management of Areva Resources of any three short term securities which they
can buy in Namibia. Explain each of these securities.
(6)
c) Do directors act in the interest of the shareholders always? Explain.
(3)
d) What other four legitimate goals can the company pursue other than wealth maximization?
(4)
e) What is the annual return of Areva Resources Ltd.?
(2)
f) Determine the debt to equity ratio and the total debt ratio of the company.
(4)
g) Will the company be able to reach their target of NS2 000 000 in 2 years? If not, how much
more should they deposit quarterly to reach this target?
(7)
END OF EXAMINATION QUESTION PAPER
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