INSTITUTE OF BUSINESS AND ACCOUNTING STUDIES (IBAS)

DIPLOMA

MAY 2024 ASSIGNMENT QUESTIONS

INTRODUCTION TO FINANCIAL MANAGEMENT

SUBMISSION DEADLINE: 03 MAY 2024

Instructions to Candidates:
1. Answer any two (2) questions
2. All workings must be shown

Diploma Level:
Introduction to Financial Management Assignment Question Paper: May 2024 Page 1
Question 1

Jojo has $10 000 that he can deposit in any of three savings accounts for a 3 year period. Bank
A compounds interest on an annual basis, bank B compounds interest twice each year and bank
C compounds interest each quarter. All three banks have a stated annual interest rate of 4%

Required:

(a) What amount would Jojo have at the end of the third year, leaving all interest paid on
deposit in each bank? (9 marks)

(b) What effective annual rate would he earn in each of the banks? (9 marks)

(c) On the basis of your findings in (a) and (b), which bank should Jojo deal with?
Why? (2 marks)
[Total: 20 marks]

Question 2

A company is considering two capital expenditure proposals. Both proposals are for similar
products and both are expected to operate for four (4) years. Only one proposal can be accepted.

The following information is available:

Proposal A Proposal B
$ $
Initial Investment 46 000 46 000

Profit/(loss)
Year 1 6 500 4 500
Year 2 3 500 2 500
Year 3 13 500 4 500
Year 4 (1 500) 14 500

Estimated scrap value at the end of year 4 4 000 4 000

Cashflows are expected to be double the profitability/loss for each period.

The company estimates its cost of capital at 20% per annum

Discount Factor

Year 1 0,833
Year 2 0,694
Year 3 0,576
Year 4 0,482

Diploma Level:
Introduction to Financial Management Assignment Question Paper: May 2024 Page 2
Required:

(a) Calculate the following for both proposals:

(i) The payback period. (10½ marks)
(ii) The return on capital employed on average. (4½ marks)

(b) Give two advantages for each of the methods of appraisal used in (a) above. (5 marks)

[Total: 20 marks]

Question 3

Summary financial information for ABC Co is given below, covering the last two years.

Current year Previous year

Statement of Profit and Loss (Extract) $’000 $’000
Revenue 74,521 68,000
Cost of sales 28,256 25,772
Salaries and wages 20,027 19,562
Other costs 11,489 9,160
Profit before interest and tax 14,749 13,506
Interest 1,553 1,863
Tax 4,347 3,726
Profit after interest and tax 8,849 7,917
Dividends payable 4,800 3,100

Current year Previous year

Statement of Financial Position (Extract) $’000 $’000
Shareholders’ funds 39,900 35,087
Long term debt 14,000 17,500
Other information
Number of shares in issue (‘000) 14,000 14,000
P/E ratio (average for year)
ABC Co 14.0 13.0
Industry 15.2 15.0

Required:

a) Calculate the profitability, debts, and shareholders’ investment ratios. (13 marks)

b) Discuss the performance of ABC Co over the last two years. (7 marks)
[Total: 20 marks]

Diploma Level:
Introduction to Financial Management Assignment Question Paper: May 2024 Page 3
Question 4

Seti Company achieved a turnover of $16 million in the year that has just ended and expects
turnover growth of 8.4% in the next year.

The financial statements of Seti Company for the year that has just ended contain the following
Statement of Financial Position:
$m $m
Non-current assets 22.0
Current assets
Inventory 2.4
Trade receivables 2.2 4.6
Total assets 26.6

Equity finance: $m $m
Ordinary shares 5.0
Reserves 7.5 12.5
Long-term bank loan 10.0
22.5
Current liabilities
Trade payables 1.9
Overdraft 2.2 4.1
Total equity and liabilities 26.6

The long-term bank loan has a fixed annual interest rate of 8% per year. Seti Co pays taxation at
an annual rate of 30% per year.

The following accounting ratios have been forecast for the next year:
Gross profit margin: 30%
Operating profit margin: 20%
Dividend pay-out ratio: 50%
Inventory turnover period: 110 days
Trade receivables period: 65 days
Trade payables period: 75 days

Overdraft interest in the next year is forecast to be $140,000. No change is expected in the level
of non-current assets and depreciation should be ignored.

Required:

(a) Prepare the following forecast financial statements for Seti Co using the information provided:
(i) A Statement of Profit or Loss for the next year.
(ii) A Statement of Financial Position at the end of the next year. (10 marks)

(b) Analyse and discuss the working capital financing policy of Seti Co. (10 marks)
[Total: 20 marks]

Diploma Level:
Introduction to Financial Management Assignment Question Paper: May 2024 Page 4
Question 5

Tambo Limited provides telephone services over the internet. The company expects that its capital
expenditure in the coming year will amount to $40 million. The company’s net income after tax is
$32,4 million. Tambo Limited follows the residual approach to dividends. The company’s target
capital structure is represented by a debt to equity ratio of 60%.

Required:

Calculate Tambo’s dividend pay-out ratio. [20 marks]

END OF ASSIGNMENT QUESTION PAPER

Diploma Level:
Introduction to Financial Management Assignment Question Paper: May 2024 Page 5