MIDLANDS STATE UNIVERSITY FACULTY OF BUSINESS SCIENCES DEPARTMENT OF MANAGEMENT SCIENCES STRATEGIC FINANCIAL MANAGEMENT/ CORPORATE FINANCIAL MANAGEMENT CODE: MBM 742/MBM 706 SESSIONAL EXAMINATIONS APRIL 2022 DURATION: 4 Hours ——— INSTRUCTIONS 1. Answer all questions in Section A and B and any two (2) questions in Section C. 2. This question paper consists of SEVEN (6) questions. 3. Section A carries 40 marks, Section B 20 marks and Section C carries a total of 40 marks. REQUIREMENTS FORMULA BOOKLET DISCOUNTING TABLES Page 1 of 3SECTION A: COMPULSORY QUESTIONS, QUESTION ONE lanagement of JT limited is considering changing the credit policy t sustomers, who have moved to competitors with more favourable te1 firm, which sells goods on credit presently sells 160 000 units at a pric Ber unit The credit policy would result in an increase in the number of 80 000 but the price will remain the same. The present terms offer irm are 2/10 net 22. The suggested credit terms are 5/15 net 40. At 10% of the customers take advantage of the 2% discount. With the ne is expected that 35% of the customers will take advantage of fiscount. The average collection period is expected to increase from the 2 days to 40 days. The variable cost ratio is seventy percent and it is remain unchanged. The bad debt losses are expected to change tre to two percent of sales for which cash discounts are not tal PI reent. Required not, giving reasons. (20 marks) QUESTION TWO T Telecoms, an entity in the telecommunications industry is involved i perations that result in the company having stocks of cash resource. T griculture Note, a debt instrument, and ordinary shares of a company {to processing of Genetically Modified Foods. The intended investment griculture Notes is sixty percent and the remainder in ordinary shares. hances of occurring as well as annual returns are concerned. attract s. The of $42 nits to by the resent policy e new ‘urrent pected om six n. The portunity cost associated with an investment in working capital is thirty five valuate the new policy and advice the company on whether to implement it or in e ompany has thus decided to create a portfolio of investments comprising of hat is in orecasts have shown the following possibilities in as far as scenarios and their Scenarios | Probabilit | Return on Agric Return on y Notes ($) Ordinary Shares (8) Bumper 0.2 25 000 9 000 Harvest Normal 035 20 000 11 000 Harvest Low Harvest 03 18 000 22 000 Drought 0.15 10 000 28 000 Page 2 of 5Required a) Determine the annual expected return for each scenario for this portfolio. (4 marks) b) If the target of the company is to get at least $15 500/ annum fro: funds invested, does this portfolio presents such prospect overally? Support your answer with workings (3 marks) ©) Compute the risk of each investment in the portfolio if it were to stand alone and which one has greater risk. Use the standard deviation. marks) d) Determine the portfolio risk as measured by standard deviation and comment on whether diversification is possible or not, by combining these investments.(5 marks) €) If the objective of the portfolio manager is not to have expected returns fluctuating by more than $1 500/annum. Can it be concluded that this portfolio is ideal for the company and why? (3 marks) SECTION B: COMPULSORY QUESTION QUESTION THREE IG Ltd has the following capital situation: % Debt: 2000 stock of bonds that were issued five years ago at coupon rate of 15%/year. They had a fifteen year term and $1000 face value. They are now selling to yield 10% but interest is paid annually. Preferred stock: 4000 shares of preference stock are outstanding, each paying an annual dividend of 15% on face value of $50. They are now selling to yield 13%. > Equity: MG Ltd has 200 000 shares of common stock outstandin; currently selling at $15/share. The estimated cost of equity is 20%/year. v Required a) Determine MG Ltd’s market value based capital structure. (8 marks) b) Using market values, calculate the after tax cost of the debt for th firm.(2 marks) ©) Compute MG Ltd’s weighted average cost of capital, using market values and what advice can you give the company regarding a potential capital project with an expected rate return of 15,5% per annum? (3 marks) d) Calculate the capital gearing ratio of this company assuming preference shares are cumulative in nature. (3 marks) ©) What advice would you give the company, given that the average gearing for this industry is 30%? (4 marks) Page 3 of 5SECTION C: ANSWER ANY TWO QUESTIONS JUESTION FOUR sompany which is into manufacturing of rigid plastic products. The c as a sizeable fixed asset base and its raw materials are imported fue to stiff competition in the particular industry, prices of its prod ighly fluctuating. One of your major tasks in your new role ‘0 them on possible strategies the company should employ to manage i lake a presentation on only four strategies of risk management the c¢ ay use, clearly spelling out how they may benefit the firm. (20 marks) QUESTION FIVE Leasing is a special type of financing, where an entity gets access to t fan asset without necessarily paying for it in full. Discuss sale and le: and leveraged lease as financing options open to your organisation. (20 QUESTION SIX onsidering acquiring a new production line for its product. roduction line is expected to cost $400 000 but will also gobble $15 01 be installed. A new investment like this will require that net workin, ¢ increased by $24 000 per annum. This production line will have a i f eight years upon which it will have a residual value of $15 01 achine was being provided at $24 000 per year. The new investr hich will be sold at $7.50/crate but with variable cost stan the other hand financial markets require an annual return of 18% in fund such capital projects and the tax authorities levy a 25% tax on Page 4 of 5 ‘ou have just been recently appointed finance executive at a medium sized mpany jowever icts are is risk 's risks. mpany management. The top management has afforded you an opportunity to eae usage e back rks) thirsty Bunny Ltd is a beverage company in the production of soft ‘inh It is new 10 for it capital ife span 0 after depreciation applied on a straight line basis but may still fetch $22 000 on the market. The machine that the company wishes to replace has a current book alue of $36 000 but can only be disposed for $30 000. Depreciation on the old ment is expected to improve production from 38 000 crates to 75 000 crates per year, jing at 3.00/crate. In addition, fixed costs will increase by $32 000 per annum. On rder to profits.Assume that depreciation is tax allowable. ecision or not, giving reasons. Use the Net Present Value Appro: marks) QUESTION SEVEN ou have been hired by a struggling manufacturing entity to advise fey can possibly mobilize working capital, for their operations, which lard to come by. The company and its products are well known and uti the market but you also realize it has a big investment in book debtor: as not been aggressively pursued by its accounts receivable sectiot taff shortage. Previous records show that when the accounts re jection is adequately resourced, the average bad debts for the company 3% per annum. Advise on any four methods the company may use t orking capital resources, paying attention on how they work. (20 marl END. wired is ise the company on whether it should continue with the replacement ach.(20 n how s been ized by which due to eivable erage access Page 5 of S