Foreword In order to improve learning outcomes the Department of Basic Education conducted research to determine the specific areas that learners struggle with in Grade 12 examinations. The research included a trend analysis by subject experts of learner performance over a period of five years as well as learner examination scripts in order to diagnose deficiencies or misconceptions in particular content areas. In addition, expert teachers were interviewed to determine the best practicesto ensure mastery of thetopic by leamers and improve outcomes in terms of quality and quantity. The results of the research formed the foundation and guiding principles for the development of the booklets. In each identified subject, key content areas were identified for the development of material that will significantly improve learner's conceptual understanding whilst leading to improved performance in the subject The booklets are developed as part of a series of booklets, with each bookletfocussing onlyon one specific challenging topic. The selected content is explained in detail and include relevant concepts from Grades 10 - 12 to ensure conceptual understanding. The main purpose of these booklets is to assist learners to master the content starting from a basic conceptual level of understanding to the more advanced level. The content in each booklets is presented in an easy to understand manner including the use of mind maps, summaries and exercises to support understanding and conceptual progression. These booklets should ideally be used as part of a focussed revision or enrichment program by learners after the topics have been taught in class. The booklets encourage learners to take ownership of their own learning and focus on developing and mastery critical content and skills such as reading and higher order thinking skills. Teachers are also encouraged to infuse the content into existing lesson preparation to ensure in- depth curriculum coverage of a particular topic. Due to the nature of the booklets covering only one topic, teachers are encouraged to ensure learners access to the booklets in either print or digital form if a particular topic is taught.TABLE OF CONTENTS How to use this booklet ‘Study and Examination tips Broad Topic 1: Business Ventures eye 3.1 Investment Securities 3.2 Investment Insurance 4, Check your answers 5. Message to GR 12 leamers from the writers 6. Thank you PAGE 10 30 a 58 591. How to use this booklet Purpose of the study guide + This study guide was developed to assist you to respond to different types of questions on the topics included in this booklet + Itwill assist you to understand the relevant concepts. For this purpose, a glossary of related terminology is included. + Pay special attention to hints and tips on how to respond to different types of questions. + After each topic there is an activity and you can check your answers in Section 6 of the booklet + The activities are exam-type questions. + Ifyou get any answers incorrect, make sure you understand where you went wrong before you continue to the next section. Look out for the following icons used in this booklet: ees SE Coe ‘Study and Exam tips.2. Study and Examination Tips 24 Section A Section B Section c Structure of the question pape Answer all questions. Different types of short and objective questions are set using various assessment styles and covering the entire content for the year, e.g. multiple-choice, match columns, choose the correct word in brackets, etc. (20 short questions x 2) 10 marks per broad topic. Five questions are set and learners answer three questions. These questions are set on all the content covered during the year. Answers should be in paragraph style. Applicable verbs, e.g. discuss, motivate, compare, differentiate, explain, etc. Case studies (scenarios) or source-based questions will be included, Focus areas: Question 2 - Business Environment Question 3 - Business Ventures Question 4 - Business Roles Question 5 - Business Operations Question 6 - Miscellaneous FOUR questions are set covering the entire content for the year (use scenarios). Choose any TWO of the FOUR questions. (Two questions of 40 marks each) These are higher cognitive questions that assess insight and interpretation of theoretical knowledge. (Eg. design, plan, appraise, evaluate, etc.) Answers should be in paragraph style. Focus areas: Question 7- Business Environment Question 8- Business Ventures Question 9- Business Roles ‘Question 10- Business Operations Total \e 40 marks: 30 min 3x60= 180 marks 3x30 min= 90 min 80 marks. 2x30 min = 60 min 300 marks 3 hours.Take special note of the following: 32 Learners are advised to refer to page 6 of the 2017 Examination Guidelines. This page outlines FOUR main topics and sub-topics of each main topic. Take note of main topics, which are easy to understand. Make a checklist of topics that are well understood, as they may assist in the selection of choice questions during the final exam. You need to know all sub-topics that are covered in each main topic. ‘Take note of the structure of the question paper, mark and time allocation. Tips on how to answer different types of questions in Business Studies SECTION How to answer multiple choice questions Try to work out the answer without looking at the possi Read through the statement and all the options. Underline the key words in the statement Cross out the options that are definitely wrong. Read through the statement again and select the most appropriate option from the options remaining. ‘Write down your answer and move to the next question. Don't guess an answer - rather go back to the questions you are not sure of at the end of the paper, if there is time left. Example: ‘The business enterprise has full control over the. market - environment macro - business environment micro - business environment ¥ marketing function x A B c DHow to answer match-the-columns questions + Read through the entire list of statements in Column A and all the descriptions in Column B. + Read through each statement in Column A and find the best match in Column B. «Tick off the answers in Column B in pencil, so that you know that one has already been chosen. + Cross out the options that are definitely wrong. + First do the ones you are sure of then go back to the ones that you are not sure of and ‘choose an answer from the remaining options, + Don't guess an answer- rather go back to the questions you were not sure of at the end of the paper, if there is time left. Example: Column A Column B 4. The management level that i A Green peace x responsible for operational decisions. BF B _Lowerlevel =) 2. Deals with employee! employer C Shares « gtievances. E D Unit Trusts =v 3. Investments that allow a large group ‘of people to pool their capital E CCMA ¥ forinvestment. D F Middle level = 4, Ideas that are original and used to solve challenges. G G Creative thinking VSECTION B: How to answer case study, scenario and data response questions. Look at the heading and the pictures to get an idea of what the case study is about. Read through the case study carefully and slowly with understanding, Read each question and underline the keyword! verb. Read the case study again and underline each of the keywords in the case study. Now answer the questions, paying special attention to the action verbs. Look at the mark allocation as a guide to how many facts should be included in your answer. SECTION C + Anessay consists of three parts: introduction, body and conclusion. Introduction Start with the word “Introduction” as a heading. Write an opening statement that links to the instructions of the essay question. Give at least two meaningful facts to obtain a maximum of 2 marks. [2x 1 = 2] Do not repeat or use the words that are in the question paper either in the introduction or conclusion. Body Break up the information into logical parts, making use of headings and sub headings. ‘The maximum marks obtained for the body = 32 marks. Don't repeat facts - get to the point. Responses must be bulleted and in full sentences. Put your statements into context. Conclusion + Start with the word “conclusion” as a heading, + Briefly summarise the main point and focus of the essay «End your essay with a meaningful fact - do not repeat what was said in the introduction or body + Give at least one meaningful closing statement. [1 x 2 = 2] Insight [LASO] + Write the words Introduction and Conclusion to obtain full marks for layout, + Write sub-headings that appear in the question paper to obtain ONE mark for analysis. + Ensure that you write as many correct facts as you can that amount to at least 16 marks or more in the body to obtain another ONE mark for analysis. «Write only responses relevant to the questions asked to obtain two marks for synthesis. + Use at least TWO current examples to elaborate on facts to obtain two marks for originality.23 Action verbs commonly used in the Business Studies NSC examination Action verbs Identity Motivate / support your answer by quoting from the scenario. Justify the effectiveness Explain / discuss/ describe THREE! FOUR factors/ criteria! stages / business strategies! human rights, etc. Outline / mer Give /state Discuss / explain / describe / evaluate/analyse the negative impact Suggest / recommend / advise Elaborate Distinguish / differentiate Tabulate / compare the differences between two concepts Meaning Identify the name of the Act from the given. scenario/ statement. Quote as is from the scenario otherwise you will not be awarded marks for answers that are not quoted directly from the scenario, Explain the advantages and/or disadvantages this will depend on the nature of the question. State the heading (2 marks) and write an explanation (1 mark). This is usually seen when a number of facts have been specified in the question and verbs such as “explain, discuss and describe” have been used, Briefly explain in full sentences. Supply a one or two-word answer. Supply negative responses only. This means only give the disadvantages. Provide your own opinion with a valid argument. Explain a litte bit further. Explain the differences between concepts. The differences/ distinctions do not have to link, but the differences must be clear. Explain the differences between two concepts and the link between them. Refer to the glossary for specific important definitions of terminology To obtain full marks per fact, you are required to write a fact and a supporting statement, e.g. Workers may not work more than 45 hours ¥ a week. V This is applicable to Section B and C. Use the table below as a guide to responding to questions with the following verbs:Part marking 1 Deseribe Explain Distinguish (my use table) Discuss Analyse Elaborate Show the impact Apply a technique Evaluate Differentiate Compare Tabulate Justify ‘Two marks at end of statement VV Classify Name Suggest Advise Propose Define Motivate/ support Outline Recommend State One mark at end of phrase ¥ Give Identify List Mention Name State2.4 Study Tips = + Prepare a study time-table. Allow yourself enough time over a period of 4 weeks and focus ‘on at least 3-4 topics per week. + Geta study buddy, You will be able to assist one another with the difficult concepts/ skils. + Make use of the most recent question papers (preferably from 2015 onwards) while you study a topic and test yourself + This will help you understand how a topic can be asked in different ways in Section B and c. ‘Take note of the following aspects when using past question papers: + The phrasing of questions is not always the same, even though answers can be the same. + Different action verbs are used to assess the same topic. Please take note of how these verbs are used. «Each question consists of at least two or three scenarios. Practice how to quote directly from the scenario without including your own words or providing incomplete quotes. + Learn to respond to follow-up questions that are part of the scenario, but assess your subject knowledge. These questions must be answered independently of the scenario, + Practise questions that are more likely to require you to “suggest, advise, recommend, evaluate, analyse, justify, discuss/explain the impact’. + Practice answering those questions in detail to obtain good marks.3. BUSINESS VENTURES 3.1. INVESTMENT OPPORTUNITIESCONTENT TOPIC: BUSINESS VENTURES = SUB-TOPIC 1; INVESTMENT SECURITIES 4.1.1, Overview of the topic In this section, a detailed explanation of the different investment opportunities is provided. Investment opportunities will addressed in line with content learners are expected to know as outlined in the Examination Guidelines of 2017, which should be used by learners to check the scope covered Glossary of concepts % Itis when interest is paid on the original amount only Simple interest and not on the accrued interest Dividends Itis the return or earning that shareholders receive after they have bought shares. Capital gain Itis the extra money the investor makes from selling an asset Debenture The lender agrees to lend money to the company on certain conditions for a certain period. Compound interest Itis when interest is earned on the interest accrued, as well as on the original amount invested. Return on investment It refers to the income from the investment, e.g. interest, dividends, capital gain on the original amount. Risk It refers the possibilty that the invested amount may. be lost over a period of time due to unexpected circumstances. Investment period/ term This refers to the duration of the investment, which may influence the return on investment. Inflation rate Itis the percentage rate at which the price of goods and services increase. Fixed rate The rate of return stays the same for the specified period of time. Accumulated Interest earned over the investment period. Capital market! securities market _ Itis the market for shares, where companies and the government can raise long-term funds. Shareholder ‘An owner or part-owner of a company. e Se Sn Oe ea Se Cen iCom eeu co utc4.1.3. Factors to consider when making investment decisions: Return on Investment/ ROI «Refers to the income made from the investment, e.g. interest, dividends, capital gain (increase). « The retum should be expressed as net after-tax gains on the investment + The return on the investment may be affected by the inflation and economic conditions, e.g. market price of shares. Risk + Refers to the possibilty that the invested amount may be lost over a period of time due to unexpected circumstances. + Generally, there will be a direct link between risk and return + Investments with higher risk usually yield a higher return. (The higher the risk, the higher the return.) Investment period + This refers to the duration of the investment, which may influence the return on investment. + Investments with a short duration are usually easy to cash in + The longer the period of the investment, the more the interest that will be eared. Inflation rate + Itis the rate at which the price of goods and services increase. + If the inflation rate is higher than the interest rate on the investment, the investment does not yield a return. + It should always be above the inflation rate, in order to beat inflation, The investment options listed below should be studied in terms Caen ha Rie 4.1.4 Arange of available business investment opportunities/ options + Fixed deposit + Shares + Unit trusts + RSA Government retail savings bonds + Property investment + Endowment/life insurance policies + Retirement annuity + Money market funds + Offshore investments + Notice deposit accounts + Debentures + Stokvels/ mutual funds + Venture capital Fixed Depo: + Money is deposited in a bank account for a pre-determined period at a fixed interest rate. + The investor receives interest when the term expires. «Fixed deposits may not beat the effect of inflation over a long period. + The duration of a fixed deposit can be short or long term, as the time period varies from a few days to up to five years. + Most fixed deposits are invested at commercial banks. Risk + The risk is low, as the interest rate is usually fixed, + The retum will not be affected by economic conditions.Shares + Companies sell a portion of their ownership to shareholders in the form of shares. + When you buy shares in a company, you become a part-owner of that company. + Shares of listed companies are traded (bought and sold) on the JSE. + Shares can be bought through a registered stock broker or using an online share account ‘ona broker's electronic/ intemet platform. + Shareholders have the right to receive a dividend (portion of the profit) when the company makes a profit. Risk + The risk in shares is high, as the investor may lose the initial amount or part of it in the short term «Share prices change frequently Check this illustration to try to understand shares better: Share Certeate lssued Ra) tg oo. es Cena) Dividends from Profit made ty the Company Unit trusts «These are a collection of investment options made up of shares in different companies. +The money of a large number of investors is combined in a fund, which is managed by a fund manager. + They can be obtained from accredited service providers, i.e. stock brokers, financial institutions and companies listed on the JSE. + Investors earn dividends on an investment in unit trusts. «The duration of most unit trusts ranges from medium to long term, but they may be sold at any time. Risk + Investment may be made in high and low risk shares. + The risk is spread throughout the fund and this lowers the risk for all the investors/ fund members. + Fund managers are able to manage the risk level of the fund on behalf of the investors. TICLE na CO CC On a nues een Mea key100000 spd to iteront companies Cee eer Porras Government! RSA Retail Savings Bonds The SA Government offers citizens the opportunity to invest in bonds so as to encourage saving/ investment. There are two types of retail bonds, i.e. fixed rate or inflation linked retail bonds. Interest is earned and paid into the savings account twice a year. There are two, three and five-year bonds available. Retail bonds are easy to buy or sell at many supermarket chains, the Post Office, National Treasury and online. There is no administration fee or commission payable on transactions. Aminimum of R1 000 and a maximum of R1 million may be invested. Risk Low risk is involved in investing in government retail bonds. The investor will receive the investment together with the guaranteed (promised) interest back at maturity.Activity 1 ‘Assume you are the financial advisor of Mr Nakedi, who is 40 years old and has inherited 3m from his late father. He approached you to work out a medium term portfolio for the next 3 years for how his money could best be invested, 1.1 List any SIX possible forms of investment options that Mr Nakedi could consider. (6) 1.2 Elaborate on the risk factor for each of the following investment options: + Fixed deposit . ‘Shares + RSA Retail Savings bond + Property investment @) Use the table below as a guide for your answer : Investment option Risk factor =) °)§]=Activity 2 2.1. Identify EACH type of investment described below: 2.1.1 A combination of different shares and securities are selected and managed by a fund manager as a balanced portfolio. 2.1.2. Refers to buying capital goods like a piece of land, a house or buildings, which are suitable as a long term investment. 2.1.3 Money is deposited in a bank account for a pre-determined period at a fixed interest rate. 2.1.4 Companies sell a portion of their ownership through the JSE. 2.1.5 Aminimum of R1 000 is required to invest in this investment option (10) SS Rete amet kodaece) a Cee TS Wont ent Se er ee eet acs 3.1.5 Evaluating positives and negatives of investment Advantages Disadvantages Fixed deposit + The level of risk is low, so. Lower return, a lower risk the investors are guaranteed —_investment has a lower of their final payment. retum. + Amount is guaranteed. + Interest received may not The amount invested plus keep up with inflation / the the interest eamed is paid investment may yield a at maturity date, as itis lower return during high guaranteed lation periods, e.g. + Interest earned is guaranteed _if rate guaranteed is regardless of economic below the inflation target. conditions.Form of ‘Advantages Disadvantages investment ‘Shares ‘Shares may be sold ata ‘Share prices may drop and higher price ia fulure. theinvestor may nol make a Much nigner return gain compared to other ‘Very risky. a5 shares are investments. (The higher affected by economia the risk, the higher the ‘conditions and the success of return.) other companies, ‘The value of shares may Dividends may net be increase with the expansion | received during difficuit of a pompany. financial times for the particular company in which | shares are bought. Unit trust They are eaey fo buy and Investors may not get the sell and can be bought expected return oniine. Hf companies do not perforrn, Itis sffordable 10 invest in the growth of the unit trust unit trusts because a small | willbe affected, amount can be invested Service fees are paki to fund monthly. managers to manage the Itis easy to cashin it invastment. money is needed by the investor. Safe investment. ‘The money is spread over vanous portfolios. Managed according to rules and regulations. investment ‘Advantages: Disadvantages option RSA ‘Accessible - Retail bonds Low relum compared to other ‘Government sre easy to buy or sell at investments, because of the Retail Bonds many supermarket chains, | low risk level ‘the post office and online. Investors may lose their Affordable - there 1s no investment during tines of administration fee ar political and ecanamic chaos. ‘commission paysble on Nay yield a nagativa retun vansactions. ‘when the inflation rate is high ‘Only & minimum of Rt 000 is needed. ‘Sate - paid electronically directly into investor's ‘eccourt. Returns are guaranteed - the investor receives the amount invested plus the interest promise3.1.6 Other investment options Managed portfolio. + An investor instructs a financial institution/bankifinancial advisor to manage his/her various investments/assets in one portfolio. + Ifthe portfolio does not perform well/as expected, the portfolio/parts thereof may be changed with/without informing the investor. Risk «Risk is lower over a longer termiperiod. + Investments are made in various sectors/ companies, so that the risk is spread and better managed by the portfolio manager. Debentures + Adebenture is issued to raise borrowed capital from the public. + The lender (debenture holder) agrees to lend money to the company (borrower) on certain conditions for a certain period. + Most types of debentures can be traded on the JSE, + Debenture holders receive an annual interest payment, based on the terms/ amount of debentures held. Risk + Debentures have a low risk, as they must be paid back, + Companies are liable to repay the amount of the debenture plus interest, which decreases the risk for the investor. Mutual funds/ Stokvels + These are informal savings schemes to which a relatively small group of people contribute + Each member makes a monthly contribution to the stokvel and usually the same amount is contributed by each member is made + Astokvel is usually managed by a trustworthy chairmanitreasurer, who will be responsible for keeping records and managing the bank account. Risk + The level of risk may be low. + Money in a savings account is a safe investment, but with low interest rates, returns are low Business ventures/ Venture capital «Venture capital is contributed by investors/ businesses to start a new business or to expand an existing one. + In return, the investor will have a share in the new/ expanded business if venture capital is contributed. Risk «High risk for the investor, if research is not done properly. + Inexperienced business owners that make wrong business decisions may experience big losses or may have to close down an existing bu Endowment/ Life insurance policies + Amonthly payment is paid to an insurance company in the hope of receiving a pre-determined amount on a specified future date + They are an important way to provide for future expenses and give peace of mind to the investor and the dependants of the insured.Risk + Low risk, as the insured amount will be paid out regardless of circumstances. Retirement Annuity + Amonthly payment to an insurance company in return for a certain amount of money at retirement age Risk + Low risk, as the insured amount will be paid out regardless of circumstances. 32-day notice accounts! Call deposits + Money is invested at a fixed rate, and withdrawals may be made, provided the bank is given 32 days’ notice of the withdrawal + Iteams better interest than a current! cheque/ savings account, but less interest than a fixed deposit. Risk + Low risk, as investment plus interest will be paid out on the maturity date of the investment. + Interest is calculated on the daily balance, which increases the return on the investment. Property investment/ Fixed Property + This means buying capital goods, such as a suitable as a long term investment. + Property is bought to rent out or to be sold at a profit in future. + Areturn on property is earned in the form of rent/ sales/ capital gains. «The property is usually sold at a higher price than was paid (including the transfer costs and taxes) + Buying property is expensive as the costs are usually paid by the buyer, e.g. high registration fees/ annual property taxes/ rates, ce of land or a house and bi ings that are Risk + The risk is low over the long term. + Risk may be determined by economic conditions, which may ultimately determine the value of the property. DOU ee Sa cece) Be eee nee eee Can Cie g)3.1.7 Different types of shares ‘Type of shares Preference shares Ordinary shares Founders' shares Bonus shares Discussion More expensive type of share, because the owner is more entitled to preferential dividends. Shareholders receive dividends first, before any other shareholders receive their dividends. Shareholders are guaranteed a fixed rate of dividend if a company makes a profit. The shareholders do not have voting rights and do not attend AGMs (except in particular circumstances). This is the most common type of share and it is less expensive, Dividends are paid only after preference shareholders have received a dividend Dividends are paid out according to the number of ordinary shares owned in the business. Shareholders have voting rights. Ordinary shares have no special rights, so there are restrictions. Issued to the founders/ incorporators of the company, ie. those who established it They will be the last to receive a dividend. Owners of these shares are entitled to all remaining profits. Shares are issued to existing shareholders as compensation for loss of dividends. It serves as a gift or payment in the form of shares given to shareholders. They are not sold - shareholders receive them without having to pay for them. Usually issued by companies with a large reserve fundiretained income to existing shareholders.Activity 3 3.1 Identify the type of shares represented by EACH statement below. 1.1 Shares are issued to existing shareholders as compensation for loss of dividends. Shareholders receive their dividends before others can be paid out. ‘These shares are issued to shareholders who started the company. ‘These shareholders may receive a higher dividend if the company has made a large profit. (8) Id 3. 34 34 34 BON 4.1.8. Types of preference shares They are classified into the following SEVEN types: Cumulative preference shares Shareholders are paid dividends for past years when they were not paid because there was 1o profit from which to distribute a dividend. Non-cumulative preference shares Shareholders are not paid for past dividends that were not paid in a year when there was not enough profit from which to distribute a dividend. Participating preference shares The shareholders will share in a second dividend in a year when surplus profit remains, i.e. from profit which remains after shareholders have been paid a dividend, Non-participating preference shares Shareholders only receive a fixed dividend, i.e. they will not share in surplus profit Redeemable preference shares The company may buy back these shares after a specified period. Non-redeemable preference shares ‘These shares are only bought back when the company closes down for reasons other than bankruptcy.ACTIVITY 4 4.1 Identify the type of preference shares explained in the following statements: l Shares may be converted to ordinary shares after a fixed period Shareholders will share in a second dividend in a year when surplus profit remains, Shareholders are not paid for past dividends. The company may buy back these shares after a speci 44 at en 44 44 Re d period. @) 3.1.8 The rights of preference shareholders Receive dividends regardless of how much profit is made Receive a fixed rate of return/ dividend. They are paid first/ enjoy preferential rights to dividends. They have a preferred claim on company assets in the event of bankruptcy! liquidation of the company. «Receive interim and annual reports. + They only have voting rights at the AGM under particular circumstances/for certain resolutions. + Cumulative shareholders must receive outstandinglaccrued dividends from previous years, + Participating preference shareholders have the right to share in surplus profits. 3.1.9. Distinguishing between ordinary and preference shares In studying the differences between ordinary and preference shares, try and use the following as a guide: Is it cheap or expensive? Do shareholders have voting rights? How do shareholders receive dividends? Which entitlements/preferences do shareholders have? Preference shares Ordinary shares + Shareholders receive dividends first, + They receive dividends only after before any other shareholders preference shareholders have been pai. may receive a dividend + Will receive dividends regardless of + The higher the profit, the higher the profits made, dividend, + Shareholders promised/guaranteed a fixed rate of dividend, if company makes a profit. Dividends are paid out according to the number of ordinary shares owned in the business. + The shareholders do not have voting rights and do not attend AGMs, Shareholders have voting rights and also attend AGMs.4.1.9 Definition of concepts Dividends + This is the return/or eaming that shareholders receive for investing in a company by buying shares. + Profit is distributed to shareholders in the form of dividends. Capital gain + Itis the money the investor makes from selling an asset. + An asset bought is sold for a profit and the capital has gained. + Capital gain takes place when the value of the capital invested increases. Debentures «The lender/debenture holder agrees to lend money to the company on certain conditions for a certain period. + Debenture holders are creditors, as the company is liable to repay the amount of the debenture. + Itis issued to raise borrowed capital from the public, Simple interest Interest is paid on the original amount only and not on the accrued interest. Compound interest Interest is earned also on the interest accrued, not only on the amount invested 3.4.10 Differences between simple and compound interest Compound interest |. Interest is paid on the original amount only and not on the accrued interest. Interest is also eamed on the interest acerued and not only on the amount invested, |. The amount invested (the principal amount) remains the same over the period of the investment. The principal amount {the amount invested) grows with the addition of interest to it. |. The interest earned is kept separate unless itis reinvested. Interest earned is constantly added to the original amount invested, - Total interest eared is usually lesser as amount is fixed and principal amount remains the same. Total interest eared on the investment is higher.ACTIVITY 5 5.1 Identify a relevant concept for each of the following statements: d 5.1.1 Interest is paid on the original amount only and not on the accrued interest. 5.1.2. The return/or earning that shareholders receive for investing in shares. 5.1.3 Itis the money the investor makes from selling an asset. 5.1.4. The lender agrees to lend money to the company on certain conditions for a certain period, 5. interest is also earned on the interest accrued and not only on the amount invested. (10) Remember! Your responses must link when you are asked to tabulate. ACTIVITY 6 Tabulate the differences between simple and compound interest. (4) CALCULATION OF THE SIMPLE AND COMPOUND INTEREST Formulae Simple interest Compound interest xrxn rincipal amount A=P(t4r)" P = principal amount rate N= period Ea Se gtk enn ae eMac ACTIVITY 7 7.4 Calculate the interest for the following TWO options. OPTION 1 «R300 000 was invested with SABA Bank at 9% interest per annum over a period of 3 years. (Use the simple interest method.) OPTION 2 + R300 000 invested in DEN Bank in a 32-day notice account at 9% compound interest per annum over a period of 3 years. (4) (6) Work igs - Activity 7ACTIVITY 8 You are the financial advisor who must assist a client who wants to invest RS million for three years in ONE of the following investment options: + Afixed-deposit bank account for three years at simple interest of 8.5% per year. + Government retail bonds for three years at 8% per year, compounded annually. Instructions + Calculate the interest for each of the above investments. (Show calculations clearly and show the formulae.) + Recommend the best investment option to your client and motivate your recommendation. Workings - Activity 8 ACTIVITY 9 Mary invested R5 000 for three years, at 10% interest per year, with CAPITAL BANK. The interest on her investment is compounded annually. 9.1 Calculate the amount of interest Mary will earn. (Provide the formula and show ALL calculations.) Workings - Activity 9ACTIVITY 10: Essay type question Tom is a first-year commerce student who inherited a large sum of money recently. He wants to invest this money to start his own business in three years’ time. Tom is considering investing in ordinary shares on the Johannesburg Security Exchange Ltd (JSE) and RSA Retail Savings Bonds/ Government Retail Bonds Advise Tom on the following investment aspects: Discuss the factors to be considered when making investment decisions. Explain the functions of the JSE. Distinguish between compound interest and simple interest. Evaluate the impact of RSA Retail Savings Bonds/Government Retail Bonds on investors. [40] 3.2. INVESTMENT: INSURANCE = “tt4.2.1. Overview of the topic Business insurance protect businesses from losses due to events that might occur during the normal course of business. There are many types of insurance for businesses, including cover for property damage, legal liability and employee-related risks. Insurance is extremely beneficial to businesses and individuals as it provides finan: relief in times of unforeseen financial losses. Insurance plays a vital role in ensuring that businesses are sustainable 4.2.2 Key concepts 4 Term Definition Insurance ‘A contract between an insurer requiring insurance cover and the insurer bearing the financial risk. Insurance contract ‘An agreement whereby the insurer undertakes to indemnify the insured in the event of a specified loss in exchange for a premium. Insurer ‘An insurance company that will take over specified risks. Insured The individual or business that takes out insurance coverage. Indemnity Tocompensat, protect or re-pay the insured in the Risk The potential of losing something of value. Premium The payment made by the insured to be covered in the event of a loss. Life insurance Long term insurance taken out on the life of a human being and cover for the loss of life. Insurable interest This is expressed in financial terms and is the interest that the insured stands to lose if there are losses or damages. Unemployment Insurance Fund (UIF) This fund provides benefits to workers who have been working and who are now unemployed for reasons, such as retrenchment. Road Accident Fund (RAF) Road Accident Benefit Scheme (RABS) This fund pays compensation when a person is disabled or injured in a road accident and to the dependents of the individual if he/she is killed in a road accident. Compensation for Occupational injuries and Diseases (COIDA) ‘This fund compensates workers financially for disability that may arise as a result of accidents that occur while staff are performing their duties in the workplace.4.2.3 The meaning of insurance + Itrefers to a contract between the insured and the insurer. + With this type of contract, the insurer agrees to cover the insured for a specific loss/ damage in exchange for a premium. 4.2.4 Non-compulsory insurance = tis voluntary insurance, because the insured has a choice regarding whether or not to. enter into an insurance agreement. + The insured often enters into an agreement with the insurer through a broker. + Examples: theft, fire and life insurance. + Monthly or annual premiums must be paid in order to enjoy cover for a specified risk. 4.2.5 Compulsory insurance «Insurance required by law. + Does not require an insurance broker and is regulated by government. + Examples include: RAF, UIF and COIDA. 4.2.6. Types of compulsory insurance Unemployment Insurance Fund/ UIF «The UIF provides benefits to workers who have been working and who become unemployed for various reasons « Businesses contribute 1% of the total basic wages towards UIF, which reduces the cost of providing UIF benefits themselves + Employees contribute 1% of their basic wage to UIF. + Businesses are compelled to register their employees with the fund and to pay the contribution to the fund. «All employees who work at least 24 hours per month are required to be registered for UIF and to contribute to UIF. The benefits of the Unemployment Insurance Fund/ UIF + Unemployment benefits + Illness benefits + Maternity benefits + Adoption benefits + Dependant benefits Road Accident Fund/ RAF/ Road Accident Benefit Scheme / RABS + RAF / RABS insures road-users against the negligence of other road users, + The RAF / RABS provides compulsory cover for all road users in South Africa, including South African businesses. « RAF / RABS is funded by a levy on the sale of fuel/diesel/petrol. + The next of kin of workers/breadwinners who are injuredi/killed in road accidents, may claim directly from RAF / RABS. «Injured parties and negligent drivers are both covered by RAF / RABS. Compensation Fund / Compensation for Occupational Injuries and Diseases + Compensates employees for injuries and diseases that happen at work. + Compensation paid is determined by the degree of disability + Employees do not have to contribute towards this fund, + Employees receive medical assistance provided there is no other party/ medical fund involved.4.2.7 The differences between insurance and assurance Insurance: + Cover for a specified event that MAY happen, e.g. damage to a building due to a fire, natural disaster, theft or car accident.Assurance + Cover for a specified event that WILL happen, but the time of the event is uncertain e.g. death of a partner/ key personnel Bampet Example 2 Insurable and non-insurable risks INSURABLE RISKS + These are risks that insurance companies are prepared to cover. Examples include: + Fire + Theft and burglary + Storm damage/ damage caused by natural disasters + Life insurance + Vehicle insurance + Disability cover NON-INSURABLE RISKS + These are risks that insurance companies are not prepared to cover. Examples include + Losses caused by war + Risks occurring in the period between placing an order and receiving the goods Changes in fashion Shoplifting Losses caused by marketing malpractices ‘Advancement in technology/ new machinery invention 4.2.8 Importance/advantages of insurance for businesses Transfers the risk from the business/insured to an insurance company/insurer. such as floods, damage and theft business is responsible for. Protects the business against deeds of dishonesty by employees: Protects the business against losses due to the death of a debtor. Life insurance can be taken out on the life of partners in a partnership. Protects the business against theftloss of stock/damages caused by natural disasters Valuable business assets (e.g, vehicles/equipment/buildings) need to be insured against Insurance protects the business against claims made by the public for damages that the «The business will be compensated for insurable losses, e.g. destruction of property through fire. + Businesses are protected against a loss of earnings caused by strikes,gine ec) Clee icnitcs tact 4.2.9 Principles of insurance Security + This applies to a long term insurance agreement, whereby the insurer undertakes to pay out an agreed amount in an event like death, reaching a specified age, etc «Long term insurance (assurance) agreements include retirement annuities, disability cover, life policies, ete + The aim is to provide financial security to the insured or the dependants of the deceased Indemnity! Indemnification + This principle applies to short term insurance agreements, whereby the insurer agrees to ‘compensate the insured for specified losses. + The insured must be placed in the same position as he/she was in before the damages occurred + The insured may not profit from insurance. Insurable interest + The insured must prove that he/she will suffer a financial loss if the insured object is damaged/lost/ceases to exist. + Insurable interest must be expressed in financial terms. Utmost good faith «The insurer/ insured has to be honest when supplying details when entering into an insurance contract + Both parties must disclose all relevant facts. + Detailed information supplied when claiming should be true. 4.10 Insurance Concepts Reinstatement + The insured is restored to almost the same financial position as before the loss occurred + The insurer rebuilds/ replaces the damaged property instead of paying out cash. + Reinstatement may be applied if the item was over-insured. + The reinstatement value will not be higher than the market value of the loss. Excess + An excess is the first amount payable by the insured in the event of a loss. + Itis the uninsured portion of the loss. + Itis applicable to short term insurance agreements. Average clause + The insurer will only pay the average between the actual value and the insured value. «This means that the insured will have to carry the part of the risk that is not insured. + This applies to items that are under-insured.Over-insurance + Over-insurance is when the item is insured for more than the actual market value + Businesses/ individuals will not receive a pay-out larger than the value of the loss at market value, + This means that the extra money paid for the premiums will not be paid out to the insurer. Under-insurance + The item is insured for less than the actual market value. + Ifthe item is not insured for its full value, the insured will be responsible for the balance. + In the event of under-insurance, the average clause will apply. Calculation of under-insurance Always use this formula: (amount insured + market value) x damages Example: Peter has a house with a market value of R800 000. He insured his house for R600 000. A fire resulted in damages of R400 000 to his house. The insurance company will use the formula above to proportiona;‘ly indemnify Peter as follows: Amount insured Market value x damages 600 000 800 000 X 400000 = R300 000ACTIVITY 1 d Choose the description of insurance concepts and principles from COLUMN B that matches a term in COLUMN A. Write only the letter (A-J) next to the question number (1.3.1 -1.3.5) in the ANSWER BOOK. 14 Column A Column B 1.1.1 [Average clause | A | Financial loss suffered by the insured B | Over-insurance 11.1.2. |Indemnity C | To provide for the dependants of the deceased D | Provide the insurer with information that may affect a claim. 1.1.3 Security E |_For valuable assets like jewellery. F | insurer will only reimburse the insured partially 1.1.4] Excess G|_ Right of insurer to repair the loss. H | Too much life insurance. 1.1.5| Utmost good faith | 1 | Insured makes a payment to a service provider to receive repaired/ replacement goods. J | Places the insured in the same position as before the loss occurred 1.2. Classify EACH statement below as compulsory or non-compulsory insurance: 1.2.1 Sam claimed from the Road Accident Fund for losing his arm in a car accident. 1.2.2. Yugo Manufactures insured their workers against injuries and diseases that may occur in the workplace. 1.2.3 Floyd's Tiling insured its building against theft and fire. 1.2.4 James claimed from the Unemployment Insurance Fund while he was unemployed. 1.2.5 Lisa insured her life against any event that may render her incapable of working (10)ACTIVITY 2 2.1 Read the statement below and answer the questions that follow. Sarie bought a business property worth R1 000 000, but she insured it for R800 000. Flooding destroyed part of the property and damages were estimated at R400 000. 2.1.1 Identify the insurance clause that applies to Sarie’s situation in the scenario above. (2) 2.1.2 Name the principle of insurance that is applicable above. (2) 2.1.3 Calculate the amount the insurer will pay Sarie for damages. (5) 2.2 Suggest THREE possible reasons why Sarie insured her business property. (6) 2.3 Distinguish between over-insurance and under-insurance. (8) ACTIVITY 3. TR 3.1. Identify insurance or assurance in the statements below. 3.1.1 John makes monthly contributions towards an insurance premium that will pay him a specified amount when he dies. (2) 3.1.2 Xolani insured his vehicle against possible damages. (2) 3.2. Distinguish between insurance and assurance. (8) ACTIVITY 4 4.1 Read the scenario below and answer the questions that follow. Martin is the owner of a clothing shop. He approached his insurance ‘company to insure him against losses due to a change in fashion and shoplifting. His insurer was not prepared to cover his business against these losses. 4.1.1 Quote TWO examples of non-insurable risks from the scenario above. (2) 4.1.2 Differentiate between insurable and non-insurable risks by providing TWO examples of each. (8)ACTIVITY 5 5.1. Identify the type of compulsory insurance represented by the statements below. 5.1.1. Itis financed through a levy that is included in the price of fuel. 5.1.2 John adopted a baby and was forced to be away from work for more than two weeks. 5.1.3 Employers must make contributions to a fund from which claims will be made if employees are injured during working hours. 3x2 (6) 5.2 Discuss THREE types of benefits covered by the Unemployment Insurance Fund (9) ACTIVITY 6: Essay type question Insurance companies offer a variety of insurance products that are vital to businesses. Some businesses argue that insurance and assurance decrease their profit, while others feel that insurance products provide peace of mind for any eventuality. Businesses are also required to contribute to compulsory insurance. With reference to the above scenario, write an essay on the following : istinguish between insurance and assurance. Discuss the THREE types of compulsory insurance. Elaborate on the meaning of the average clause and explain how it is calculated Evaluate the positive impact of insurance on businesses4. Check your answers 4.1 Investment: Securities ACTIVITY 1 4.1. SIX possible investment options that Mr Nakedi could consider. + Fixed deposit ¥ + Shares ¥ + Unit trust RSA Retail Savings bond ¥ + Property investment ¥ + 32-day notice deposit V + Stokvel ¥ + Venture capital ¥ + Debentures ¥ . Manage portfolio ¥ + Any other relevant investment option. Any (6 x 1) (6) 4.2 Elaborate on the risk factor for each of the following investment options: Investment option | Risk factor Fixed deposit + The risk is very low, ¥ as the investor will receive his/her investment when the fixed deposit matures/the term expires. + The interest rate is fixed, Vso the return will not be affected by economic conditions/ market fluctuations. ¥ Sub max 2 Shares «The risk of losing the initial investment (or part of it) can be high over the short term, ¥ + Share prices fluctuate/change ¥ a lot and are dependent on ‘economic conditions. ¥ Sub max 2 RSA Retail + Low/No risk is involved in investing in government retail Savings bond bonds, ¥ as the investor will receive his investment back at maturity. + The investor will only lose during times of war V in the country. ‘Sub max 2 Property investment| + The level of risk can be low ¥ or high. ¥ + The property may lose value (depreciate) over time and will have to be sold at lower than the initial investment. + Property can be sold at a higher value ¥ when economic conditions are good. ¥ ‘Sub max 2 Max (8)ACTIVITY 2 2.1 Unit trustvV 2.2 Property investmentyy 2.3 Fixed depositvy 2.4 SharesvV 2.5 RSA Government retail savings bondvV (10) ACTIVITY 3 3.1 Bonus shares VV 3.2 Preference shares VV 3.3 Founder's shares VV 3.4 Ordinary shares VV (8) ACTIVITY 4 Identify the type of preference shares explained in the following statements: 4.1 Convertible preference sharesvv 4.2 Participating preference sharesvV 4.3 Non-participating shares VV 4.4 Redeemable preference sharesvV (8) ACTIVITY 5 Provide a relevant concept for each of the following explanations: Simple interest Vv Dividends VV Capital gain vy Debentures VV Compound interest VV (10) ohonsACTIVITY 6 6.1 Tabulate the differences between simple and compound interest. Simple interest Compound interest + Interest is paid on the original + [tis when interest is eared on the interest amount only accrued, ¥ as well as on the amount invested. V and not on the accrued interest. + The amount invested + The principal amount (amount invested) (principal amount) remains the grows’ as interest is added to it. V samev over the period of the investment. ¥ + The interest eared is kept | + Interest eamed is constantly addedy to the separate, unless itis reinvested. ¥ original amount invested. V + Total interest earned is usually + Total interest earned on investment is higher, less, v as the amount is fixed and as interest is added to the original amount. principal amount remains the same. ¥ Sub max 2 ‘Sub max 2 Max (4) CALCULATION OF SIMPLE AND COMPOUND INTEREST ACTIVITY 7 Solution Activity 7 Option 1: Fixed deposit using the simple interest method Formula: P x rx nv R300 000 X 9%\x3yrsv R81 000 VV Option 2: 32-day notice account using the compound interest method Formula: A = P (1+ r)n¥ OR A = P (1+i)n (Accept 't’ for 'n') ¥ R300 000(14+9%) _ R3000 000(1+0.03)_ = R388 508.70 V Interest earned R388 508.70 - R300 000 ¥ = R 88 508.70 v