TUTORIAL 1

Question 1 (40 marks; 60 minutes)

1. The value of the nominal interest rate if the effective interest rate is 12% and
compounding takes place quarterly is….

a) 12.40%
b) 11.49%
c) 12.55%
d) 11.65% (2 marks)

2. Kabza has taken out a loan of R1 500 000 to buy a townhouse in Waverley. The loan
term is 20 years, and the interest rate quoted in the loan agreement is 7%. Payments
are made at the beginning of every month. What will the outstanding balance be at the
end of the 8th year?

a) R11 629.48
b) R1 130 853.55
c) R1 124 295.04
d) R6 587.41 (2 marks)

3. Sarah has just turned 10 and parents have decided to start savings for her wedding so
that she can have everything that she could ever want on her “big” day. They estimate
that this would cost R450 000 and they can save a maximum of R1 400 at the end of
every month. This money will be transferred to an investment account earning 9% per
annum, compounded monthly. At what age will Sarah be able to have her dream
wedding?

a) 164 years old

b) 24 years old
c) 14 years old
d) 34 years old (2 marks)

4. Which of the following business forms have a limited lifespan, meaning that when one
of the associates dies, leaves, or a new associate becomes part of the business entity,
a new business entity then has to be formed?

a) Private company
b) Public company
c) Close corporation
d) Partnership (1 mark)
5. Which of the following is considered to be a working capital management decision?

a) Which long-term projects should be invested in in order to ensure maximization

of shareholder wealth
b) Which long-term projects should not be invested in in order to ensure the focus
of value creation is adhered to
c) Which sources of funds to use in order to fund the operations of the company
d) Which creditors we should negotiate with for extended payment terms
(1 mark)

6. Felicia is interested in purchasing a growing perpetuity which has recently paid out a
dividend of R9 500. This perpetuity is expected to grow at 6%. Felicia has an opportunity
cost of capital of 15%. What is the present value of this instrument?

a) R111 888.89
b) R105 555.56
c) R190 000
d) R63 333.33 (2 marks)

7. Brew Ltd is listed on the JSE. The risk-free rate is 5.5%. The company's beta
factor is 1.4 and the return on the JSE as a whole is 15%. The required rate of
return on equity using the Capital Asset Pricing Model (CAPM) is:

a. 26.50%
b. 18.80%
c. 13.60%
d. 17.50% (2 marks)

8. Rea plans to retire in 10 years’ time. She estimates that in order to receive
a certain pension at the beginning of each month for 20 years after retirement,
She will need to have an investment of R5 million on the day she retires. If she
expects to earn interest in her investment at a nominal rate of 7% per annum,
compounded monthly, what is the amount that she hopes to withdraw each
month for the 20 years of her retirement?

a. R38 540.13
b. R38 764.95
c. R36 754.25
d. R35 487.13 (2 marks)
9. You have decided to purchase a new motorbike. With the salary that you have
been offered for next year you have determined that you can afford a monthly
payment of R875. Absa Bank has offered you an interest rate of 8.9% over a
period of 72 months with the payments being made in arrears. You have
managed to save R5 000 for a deposit. What is the maximum you can spend
on the motor vehicle?

a. R48 676.16
b. R49 037.17
c. R53 676.16
d. R54 037.17 (2 marks)

10. Manzi Te Ltd is listed on the JSE. The risk-free rate is 4.5%. The company’s beta
factor is 0.95 and the return on the JSE as a whole is 13%. The required rate of return on
equity using the Capital Asset Pricing Model (CAPM) is:

a. 12.575%
b. 13.35%
c. 12.075%
d. 5.87% (2 mark)

11. Frans Ltd quotes you a deposit rate of 7.50% per annum, interest compounded daily.
The effective annual rate is:

a. 7.76%
b. 7.32%
c. 7.79%
d. 7.85% (2 mark)

12. If you have R20 000 available to invest, how long will it take to double your money at an
interest rate of 9.5% per year if interest is compounded quarterly:

a. 29.53 years
b. 29.53 months
c. 29.53 quarters
d. 10 years (2 marks)
13. If the nominal annual rate is 15%, what is the effective rate if the interest is
compounded monthly?

a. 15.5%
b. 16.08%
c. 16.5%
d. None of the above (1 mark)

14. Which one of the following is not considered an external user of financial statements?

a. Shareholders
b. Government agencies
c. Creditors
d. Employees (1 mark)

15. A public company is distinguishable by the following abbreviation after the name of the
company:

a. Ltd
b. (Pty) Ltd
c. CC
d. Inc. (1 mark)

16. Should risk and time value of money (TVM) be considered when making investment
and financing decisions?

a. YES – TVM only: Firm value is affected by the size and timing of cash flows.
b. YES – TVM & Risk: Firm value is affected by the size and timing cash flows. The discount
rate used to discount future cash flows will be made of a risk-free rate plus a risk premium
c. No – They both only play a negligible role.
d. Only risk – TVM should not be considered as it is a future cash flow and not a present one
(1 mark)
17. I am planning to attend a European Champions soccer match. The travel agent
estimates the cost for the week to be R50 000. I have R15 000 to deposit now and intend
depositing R1 000 thereafter at the end of every month. If I receive 7.5% interest per
annum, compounded monthly, how long will it take me to save the R50 000 needed for the
trip? (Round off the answer to the nearest decimal.)
a. 8.33 months
b. 16.33 months
c. 24.33 months
d. 29.33 months (2 marks)

18. What is the difference between R2 000 invested for 1 year at 12% p.a. compounded
annually versus R2 000 invested for 1 year at 12% p.a. compounded quarterly?
a. R0,00
b. R180
c. R11.02
d. None of the above (2 marks)

19. If the annual effective rate, compounded semi-annually, is 16%, the nominal rate is
closest to ...

a. 8,00%
b. 15,41%
c. 18,00%
d. 32,00% (1 mark)

20. Nthabiseng takes a R500 000 loan from Trust Bank in order to buy a new house. The
term of the loan is 20 years, and the rate of interest is 14% per annum. Nthabiseng’s
monthly instalment is closest to …

a. R6 146
b. R6 218
c. R66 222
d. None of the above (2 mark)
21. Financial management is the study of:

a. the decisions that create and maintain economic value or wealth.

b. the process for generating profits.
c. the guidelines for the preparation of financial reports.
d. wealth. (1 mark)

22. The fundamental objective of financial management is ______:

a. profit maximization
b. maximising the share price of the company
c. pay shareholders as much dividends as possible
d. maximising the value of the company (1 mark)

REQUIRED MARKS

(a) Indicate the correct answer to the multiple-choice questions above by

writing only the letter next to the corresponding number on your answer 35
sheet.