,Contents
Question 1 – Risk and Return (Chapter 8) ...................................................................................................................................................................................................................... 3
1. Difference Between Systematic and Unsystematic Risk ....................................................................................................................................................................... 3
2. Define Risk and Return ..................................................................................................................................................................................................................................................... 3
3. Role and Function of Risk Analysis............................................................................................................................................................................................................................4
4. Risk–Return Trade-Off ........................................................................................................................................................................................................................................................4
5. Role of Correlation and Diversification .................................................................................................................................................................................................................4
6. Capital Asset Pricing Model (CAPM) ....................................................................................................................................................................................................................... 5
7. Key Formula Summary ....................................................................................................................................................................................................................................................... 5
8. Exam Focus – Question 1 (20 Marks) .................................................................................................................................................................................................................... 5
Question 2 – WACC, NPV, PI, and Payback Method ........................................................................................................................................................................................ 6
1. Weighted Average Cost of Capital (WACC) ..................................................................................................................................................................................................... 6
2. Net Present Value (NPV) ................................................................................................................................................................................................................................................. 7
3. Profitability Index (PI) ....................................................................................................................................................................................................................................................... 7
4. Payback Period (PBP) ............................................................................................................................................................................................................................................................. 8
5. Relationship Between WACC, NPV, PI, and Payback ............................................................................................................................................................................. 8
6. Limitations of Payback Method .................................................................................................................................................................................................................................... 8
7. Combined Example (WACC + NPV + PI + PBP)..........................................................................................................................................................................................9
8. Exam Focus – Question 2 (24 Marks) ...................................................................................................................................................................................................................9
Question 3 – Project IRR, Cash Flow Components, and Project Selection ......................................................................................................................................9
1. Internal Rate of Return (IRR)...................................................................................................................................................................................................................................10
2. Comparing IRR and NPV................................................................................................................................................................................................................................................10
3. Cash Flow Components ........................................................................................................................................................................................................................................................10
Components of Cash Flow ......................................................................................................................................................................................................................................................... 11
4. Calculating Project IRR (Trial and Error Example) ..................................................................................................................................................................................... 11
5. Project Acceptance and Ranking................................................................................................................................................................................................................................ 11
6. Conflicts Between NPV and IRR ............................................................................................................................................................................................................................12
7. Cash Flow Estimation and Risk.......................................................................................................................................................................................................................................12
8. Risk Analysis in Capital Budgeting ...............................................................................................................................................................................................................................12
9. Example Summary Table .................................................................................................................................................................................................................................................... 13
10. Exam Focus – Question 3 (25 Marks) ................................................................................................................................................................................................................ 13
Question 4 – Leverage and Capital Structure (Chapter 13) ........................................................................................................................................................................... 13
1. Types of Leverage .................................................................................................................................................................................................................................................................. 13
2. Operating Leverage (DOL) ........................................................................................................................................................................................................................................... 14
3. Financial Leverage (DFL) .................................................................................................................................................................................................................................................... 14
4. Total Leverage (DTL) .......................................................................................................................................................................................................................................................... 15
1
, 5. Financial Leverage and Return on Equity (ROE) ...................................................................................................................................................................................... 15
6. Capital Structure Concepts ............................................................................................................................................................................................................................................. 15
7. Evaluating Leverage Outcomes ................................................................................................................................................................................................................................. 16
8. Example Summary Table .................................................................................................................................................................................................................................................... 16
9. Exam Focus – Question 4 (16 Marks) .................................................................................................................................................................................................................... 16
Question 5 – Financial Ratios and Working Capital Management (Chapters 3 & 15) .............................................................................................................. 16
1. Financial Statement Analysis.............................................................................................................................................................................................................................................. 17
2. Key Financial Ratios................................................................................................................................................................................................................................................................ 17
3. DuPont System ........................................................................................................................................................................................................................................................................... 18
4. Working Capital Management ...................................................................................................................................................................................................................................... 19
5. Components of Working Capital ............................................................................................................................................................................................................................... 19
6. Balancing Liquidity and Profitability............................................................................................................................................................................................................................ 19
7. Working Capital Financing Strategies .................................................................................................................................................................................................................. 20
8. South African Context....................................................................................................................................................................................................................................................... 20
9. Exam Focus – Question 5 (20–25 Marks) ..................................................................................................................................................................................................... 20
Practice Questions........................................................................................................................................................................................................................................................................................ 20
Question 1 – Risk and Return (Chapter 8) ............................................................................................................................................................................................................ 20
Question 2 – WACC, NPV, PI & Payback (Chapters 7 & 10) ............................................................................................................................................................ 25
Question 3 – Capital Budgeting, Cash Flow & Project Selection ......................................................................................................................................................... 28
Question 4 – Leverage and Capital Structure .................................................................................................................................................................................................... 31
Question 5 – Financial Ratio Analysis & Working Capital Management ..................................................................................................................................... 33
FMA101 High-Grade Summary Sheet .................................................................................................................................................................................................................................. 37
1. Risk and Return (Chapter 8) ......................................................................................................................................................................................................................................... 37
2. WACC, NPV, PI & Payback (Chapters 7 & 10) ......................................................................................................................................................................................... 37
3. Capital Budgeting, Cash Flow & Project Selection (Chapters 10 & 11) ..........................................................................................................................................38
4. Leverage and Capital Structure (Chapter 13).............................................................................................................................................................................................. 39
5. Financial Ratios & Working Capital Management (Chapters 3 & 15) ....................................................................................................................................... 39
Final Exam Power List (Memorise These!) ................................................................................................................................................................................................................ 41
Summary Mindset for Exam Day.................................................................................................................................................................................................................................... 41
2
, Question 1 – Risk and Return (Chapter 8)
(20 marks)
Overview
This question assesses your understanding of risk, return, and their relationship — core concepts in financial
decision-making.
You are expected to distinguish between types of risk, define key measures, and explain how investors balance risk
and return through diversification and analysis.
1. Difference Between Systematic and Unsystematic Risk
Type of Risk Description Example Diversifiable?
Systematic Affects the entire market or economy. Inflation, interest rates, No – cannot be diversified
Risk Caused by macroeconomic factors. recessions, political instability. away.
Unsystematic Labour strikes, management Yes – can be reduced
Specific to an individual company or industry.
Risk errors, product recalls. through diversification.
Key Concept:
Investors are only compensated for systematic risk, as unsystematic risk can be eliminated by holding a diversified
portfolio.
2. Define Risk and Return
Risk
The probability that actual returns differ from expected returns.
It represents the uncertainty of outcomes in investment performance.
Return
The gain or loss on an investment over a specific period, expressed as a percentage of the initial investment.
(𝑃1 − 𝑃0 ) + 𝐷
Return = × 100
𝑃0
Where:
• 𝑃0 = initial price
• 𝑃1 = price at end of period
• 𝐷= dividends received
Example:
Buy a share for R100, sell at R110, receive R5 dividend.
(110 − 100) + 5
Return = = 15%
100
3
Question 1 – Risk and Return (Chapter 8) ...................................................................................................................................................................................................................... 3
1. Difference Between Systematic and Unsystematic Risk ....................................................................................................................................................................... 3
2. Define Risk and Return ..................................................................................................................................................................................................................................................... 3
3. Role and Function of Risk Analysis............................................................................................................................................................................................................................4
4. Risk–Return Trade-Off ........................................................................................................................................................................................................................................................4
5. Role of Correlation and Diversification .................................................................................................................................................................................................................4
6. Capital Asset Pricing Model (CAPM) ....................................................................................................................................................................................................................... 5
7. Key Formula Summary ....................................................................................................................................................................................................................................................... 5
8. Exam Focus – Question 1 (20 Marks) .................................................................................................................................................................................................................... 5
Question 2 – WACC, NPV, PI, and Payback Method ........................................................................................................................................................................................ 6
1. Weighted Average Cost of Capital (WACC) ..................................................................................................................................................................................................... 6
2. Net Present Value (NPV) ................................................................................................................................................................................................................................................. 7
3. Profitability Index (PI) ....................................................................................................................................................................................................................................................... 7
4. Payback Period (PBP) ............................................................................................................................................................................................................................................................. 8
5. Relationship Between WACC, NPV, PI, and Payback ............................................................................................................................................................................. 8
6. Limitations of Payback Method .................................................................................................................................................................................................................................... 8
7. Combined Example (WACC + NPV + PI + PBP)..........................................................................................................................................................................................9
8. Exam Focus – Question 2 (24 Marks) ...................................................................................................................................................................................................................9
Question 3 – Project IRR, Cash Flow Components, and Project Selection ......................................................................................................................................9
1. Internal Rate of Return (IRR)...................................................................................................................................................................................................................................10
2. Comparing IRR and NPV................................................................................................................................................................................................................................................10
3. Cash Flow Components ........................................................................................................................................................................................................................................................10
Components of Cash Flow ......................................................................................................................................................................................................................................................... 11
4. Calculating Project IRR (Trial and Error Example) ..................................................................................................................................................................................... 11
5. Project Acceptance and Ranking................................................................................................................................................................................................................................ 11
6. Conflicts Between NPV and IRR ............................................................................................................................................................................................................................12
7. Cash Flow Estimation and Risk.......................................................................................................................................................................................................................................12
8. Risk Analysis in Capital Budgeting ...............................................................................................................................................................................................................................12
9. Example Summary Table .................................................................................................................................................................................................................................................... 13
10. Exam Focus – Question 3 (25 Marks) ................................................................................................................................................................................................................ 13
Question 4 – Leverage and Capital Structure (Chapter 13) ........................................................................................................................................................................... 13
1. Types of Leverage .................................................................................................................................................................................................................................................................. 13
2. Operating Leverage (DOL) ........................................................................................................................................................................................................................................... 14
3. Financial Leverage (DFL) .................................................................................................................................................................................................................................................... 14
4. Total Leverage (DTL) .......................................................................................................................................................................................................................................................... 15
1
, 5. Financial Leverage and Return on Equity (ROE) ...................................................................................................................................................................................... 15
6. Capital Structure Concepts ............................................................................................................................................................................................................................................. 15
7. Evaluating Leverage Outcomes ................................................................................................................................................................................................................................. 16
8. Example Summary Table .................................................................................................................................................................................................................................................... 16
9. Exam Focus – Question 4 (16 Marks) .................................................................................................................................................................................................................... 16
Question 5 – Financial Ratios and Working Capital Management (Chapters 3 & 15) .............................................................................................................. 16
1. Financial Statement Analysis.............................................................................................................................................................................................................................................. 17
2. Key Financial Ratios................................................................................................................................................................................................................................................................ 17
3. DuPont System ........................................................................................................................................................................................................................................................................... 18
4. Working Capital Management ...................................................................................................................................................................................................................................... 19
5. Components of Working Capital ............................................................................................................................................................................................................................... 19
6. Balancing Liquidity and Profitability............................................................................................................................................................................................................................ 19
7. Working Capital Financing Strategies .................................................................................................................................................................................................................. 20
8. South African Context....................................................................................................................................................................................................................................................... 20
9. Exam Focus – Question 5 (20–25 Marks) ..................................................................................................................................................................................................... 20
Practice Questions........................................................................................................................................................................................................................................................................................ 20
Question 1 – Risk and Return (Chapter 8) ............................................................................................................................................................................................................ 20
Question 2 – WACC, NPV, PI & Payback (Chapters 7 & 10) ............................................................................................................................................................ 25
Question 3 – Capital Budgeting, Cash Flow & Project Selection ......................................................................................................................................................... 28
Question 4 – Leverage and Capital Structure .................................................................................................................................................................................................... 31
Question 5 – Financial Ratio Analysis & Working Capital Management ..................................................................................................................................... 33
FMA101 High-Grade Summary Sheet .................................................................................................................................................................................................................................. 37
1. Risk and Return (Chapter 8) ......................................................................................................................................................................................................................................... 37
2. WACC, NPV, PI & Payback (Chapters 7 & 10) ......................................................................................................................................................................................... 37
3. Capital Budgeting, Cash Flow & Project Selection (Chapters 10 & 11) ..........................................................................................................................................38
4. Leverage and Capital Structure (Chapter 13).............................................................................................................................................................................................. 39
5. Financial Ratios & Working Capital Management (Chapters 3 & 15) ....................................................................................................................................... 39
Final Exam Power List (Memorise These!) ................................................................................................................................................................................................................ 41
Summary Mindset for Exam Day.................................................................................................................................................................................................................................... 41
2
, Question 1 – Risk and Return (Chapter 8)
(20 marks)
Overview
This question assesses your understanding of risk, return, and their relationship — core concepts in financial
decision-making.
You are expected to distinguish between types of risk, define key measures, and explain how investors balance risk
and return through diversification and analysis.
1. Difference Between Systematic and Unsystematic Risk
Type of Risk Description Example Diversifiable?
Systematic Affects the entire market or economy. Inflation, interest rates, No – cannot be diversified
Risk Caused by macroeconomic factors. recessions, political instability. away.
Unsystematic Labour strikes, management Yes – can be reduced
Specific to an individual company or industry.
Risk errors, product recalls. through diversification.
Key Concept:
Investors are only compensated for systematic risk, as unsystematic risk can be eliminated by holding a diversified
portfolio.
2. Define Risk and Return
Risk
The probability that actual returns differ from expected returns.
It represents the uncertainty of outcomes in investment performance.
Return
The gain or loss on an investment over a specific period, expressed as a percentage of the initial investment.
(𝑃1 − 𝑃0 ) + 𝐷
Return = × 100
𝑃0
Where:
• 𝑃0 = initial price
• 𝑃1 = price at end of period
• 𝐷= dividends received
Example:
Buy a share for R100, sell at R110, receive R5 dividend.
(110 − 100) + 5
Return = = 15%
100
3
