Question 1 (20 marks)
A company can invest in either Project X or Project Y. The company’s required return is 12%. Assuming no depreciation or taxation, you are required to select either Project X or Project Y. The cost of either Project is R20 million.

Year Project X Cash Flow (Rm) Project Y Cash Flow (Rm)
0 -20 -20
1 4 10
2 4 10
3 12 5
4 12 5

1. What is the NPV?
2. What is the IRR?
3. What is the payback of each project?

Question 2 (20 marks)
Pillay Trading Ltd’s management is concerned about the way in which the company will be financed. The three alternative plans that have been proposed are shown below:

  Plan 1 Plan 2 Plan 3
  Rm Rm Rm
Current assets 22.5 22.5 22.5
Non-current assets 40.0 40.0 40.0
Current liabilities 22.5 15.0 7.5
Long-term debt (12%) 7.5 22.5
Share capital & reserves 32.5 47.5 32.5

Irrespective of which plan is chosen, sales are expected to be R250m, and operating profit (EBIT) will be R40m. The tax rate is 28%. Short-term loans (interest rate – 10%) make up 50% of the current liabilities.
For each plan, calculate the following:
1. Current ratio
2. Net working capital
3. Debt ratio
4. Return on equity.
Compare the risk and return associated with each plan. Which plan would you accept?

Question 3 (20 marks)
The working capital (or operating) cycle requires financing is the length of time between payment for materials entering into inventory and receipt of the proceeds of sales.
The table below gives information extracted on Numdumiso Ltd for the past three years:

2001                       2002                       2003

R000                      R000                      R000


Raw materials                                    108000                  145000                  180000

Work-in-progress                               75600                    97200                    93360

Finished goods                                    86400                  129600                  142875

Purchases – raw materials           518400                  702000                  720000

Cost of goods sold                           756000                  972000               1098360

Sales revenue                                   864000                  1080000                1188000

Trade receivables                             172800                  259200                  297000

Trade creditors                                    86400                  105300                  126000

a) Calculate the length of the working capital (operating cycle) year by year (assuming 365 days in a year).
b) List the possible actions that may be taken to reduce the length of that cycle, and the possible disadvantages of each.

Question 4 (20 marks)
The following information was extracted from the records of ABC Ltd:

Month Sales Purchases Overheads
December      R 600 000 R 400 000 R 10 000
January R 650 000 R 450 000 R 11 000
February R 700 000 R 600 000 R 12 000
March R 500 000 R 620 000 R 15 000

Additional information
• 60% of the company’s sales are in cash and the balance is collected one month later.
• 80% of the purchases are all paid in cash in the month incurred. This entitles the company to a 15% cash discount; the balance is paid in the following month.
• The overheads amount includes the monthly depreciation figure of R2 000 and is paid in the month incurred.
• The firm receives rental income of R5 000 per month.
• Dividends of R2 500 will be paid in February.
• Equipment costing R100 000 will be purchased in February for cash.
• The company has a favourable cash balance of R30 000 on 31 December.

Prepare the cash budget of ABC Ltd for the months of January, February, and March.

Question 5 (20 marks)
1. What are the advantages to be obtained from a listing on the stock market:
a) For a company.
b) For the major shareholders?
2. Explain what you understand by primary and secondary issues in the capital markets.
3. Why might companies in the same industries have different capital structures?

Answers to Above Questions on Corporate Finance and Decision Making

Answer 1: The calculation of NPV and IRR is performed as follows:


Get completed answers on the above questions on financial management from the accounting assignment help South Africa experts of Student Life Saviour.

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