Reference no: EM132593787

MBA5903 Strategic Financial Management - University of South Africa

Question 1
You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save R5 000 at the end of the first year, and you anticipate that your annual savings will increase by 10% annually thereafter. Your expected annual return is 10%.
Required:
How much will you have for a down payment at the end of Year 3?

Question 2
An investment will pay R100 at the end of each of the next 3 years, 8200 at the end of Year 4, R300 at the end of Year 5 and R500 at the end of Year 6.
Required:
2.1. If other investments of equal risk earn 8% annually, what is its present value? (4)
2.2. If other investments of equal risk earn 8% annually, what is its future value? (4)

Question 3
Roban Corporation is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Roban have decided to make their own estimate of the company's ordinary share value. The company's CFO has gathered data for performing the valuation using the free cash flow valuation model.

The company's weighted average cost of capital is 10%. and it has R1 400 000 of debt at the market value and 8500 000 of preferred shares at its assumed market value. The estimated free cash flows over the next five years, 2021 through 2025, are given below. Beyond 2025 to infinity, the company expects its free cash flow to grow by 5% annually.

Year (t)	Free cash flow (FCFt) On rands)
2021	R250 000
2022	290	000
2023	320	000
2024	360	000
2025	400	000

3.1. Estimate the value of Roban Corporation's entire company by using the free cash flow approach. (7)
3.2. Use your finding in part (3.1), along with the data provided above, to find Roban Corporation's ordinary share value. (4)
3.3. If the company plans to issue 300 000 ordinary shares. what is its estimated value per share? (4)

Question 4

Given the mixed streams of cash flows shown in the following table, answer parts (4.1) and (4.2):

		Cash flow stream (in rands)
Year		A	B
	1	R50 000	R10 000
	2	40 000	20 000
	3	30 000	30 000
	4	20 000	40 000
	5	10 000	50 000
Totals		150 000	150 000

4.1. Find the present value of each stream, using a 12% discount rate.
4.2. Compare the calculated present values and discuss them in light of the fact that the undiscounted total cash flows amount to R150 000 in each case.

Question 5
Gina Coulson has just contracted to sell a small parcel of land that she inherited a few years ago. The buyer is willing to pay R24 000 at closing of the transaction or will pay the amounts shown in the following table at the beginning of each of the next five years. Because Gina doesn't really need the money today, she plans to let it accumulate in an account that earns 7% annual interest. Given her desire to buy a house at the end of five years after closing on sale of the lot. she decides to choose the payment alternative - R24 000 lump sum or mixed stream of payments in the following table - that provides the highest future value at the end of five years.

Mixed Stream
Beginning of Year (t)	Cash flow (CFt) (in rands)
1	R2 000
2	4 000
3	6 000
4	8 000
5	10 000

5.1. What is the future value of the lump sum at the end of Year 5?
5.2. What is the future value of the mixed stream at the end of Year 5?
5.3. Based on your findings in parts (5.1) and (5.2), which alternative should Gina take?
5.4. If Gina could earn 12% rather than 10% on the funds. would your recommendation in part (5.3) change? Explain.

Question 6
Given the balance sheets and selected data from the income statement of SMG Industries that follow. answer part (6.1) - (6.4).
6.1. Calculate the company's net operating profit after taxes (NOPAT) for the year ended 31 December 2019.
6.2. Calculate the company's operating cash flow (OCF) for the year ended 31 December 2019.
6.3. Calculate the firm's free cash flow (FCF) for the year ended 31 December 2019.
6.4. Interpret, compare and contrast your cash flow estimates in parts (6.2) and (6.3).

SMG Industries statement of financial position (R in millions)
	31-Dec
Assets	2019	2018
Cash	R 3 500	R 3 000
Marketable securities	3 800	3 200
Accounts receivable	4 000	3 800
Inventories	4 900	4 800
Total current assets	16 200	14 800
Gross fixed assets	31 SOO	30 100
Less: Accumulated depreciation	14 700	13 100
Net fixed assets	16 800	17 000
Total assets	33 000	31 800
Liabilities and stockholders' equity
Account payable	R 3 600	R 3 500
Notes payable	4 800	4 200
Accruals	1 200	1 300
Total current liabilities	9 600	9 000
Long-term debt	6 000	6 000
Common stock	11 000	11 000
Retained earnings	6 400	5 800
Total stockholders' equity	17 400	16 800
Total liabilities and stockholders' equity	33 000	31 800
Statement of comprehensive income data
(2019, R in millions)

Depreciation	R 1 600
Earnings before interest and taxes (EBIT)	4	500
Taxes	1	300
Net profits after taxes	2	400

Question 7
A bond trader bought each of the following bonds at a yield to maturity of 8%. A few weeks after the purchase of the bonds, interest rates fell to 7%. The par value of the bond is R1 000.

Maturity	Coupon	Price at 8%	Price at 7%	Percentage change
10-year	10% annual coupon
10-year	zero
5-ar	zero
30-year	zero
R100 Perpetuity	R100 Perpetuity

Required:
Complete the missing information in the above table.

Question 8
A company's share return has the following distribution:

Demand for the company's products	Probability of this demand occurring	Rate of return if this demand occurs (%)
Weak	0.1	-50
Below average	0.2	-5
Average	0.4	16
Above average	0.2	25
Strong	0.1	60

Required:
Calculate the share's expected return, standard deviation and coefficient of variation.