CONFIDENTIAL
FIN4801
MAY / JUNE 2022
ADVANCED FINANCIAL MANAGEMENT
STUDENT NUMBER
IDENTITY NUMBER
Marks
Question no Examiners
1 2 3
FOR USE BY EXAMINATION INVIGILATOR 1
2
3
4
……………………………………………………….
Subject
……………………………………………………….
Number of examination paper
……………………………………………………….
Date of examination
……………………………………………………….
Examination centre
Total
WARNING
1. A candidate who, without authorisation, takes into the examination venue any book, document or object which could assist him or her in the
examination, and does not hand over such material to the invigilator before the official commencement of the examination, will be guilty of
infringing the University’s examination regulations and will be liable to punishment as determined by the Council.
2. Rough work may be done on the examination paper only and must be labelled as such.
3. No notes may be made on any part of the body, such as the hands, or on any garment.
4. This page/paper is the property of the University and under no circumstances may the candidate retain it or take it out of the examination
venue.
NB: PLEASE COMPLETE THE ATTENDANCE REGISTER ON THE BACK PAGE, TEAR IT OFF AND HAND IT TO THE INVIGILATOR.
,UNIVERSITY EXAMINATIONS
May/June 2022
FIN4801
Advanced Financial Management
100 Marks
Duration: 4 Hours
This paper consists of 29 pages.
Instructions:
The examination is open book.
As the examination is an assessment, it should still be your own work and you should
remember to sign the Honesty Declaration.
Plagiarism checks may be run on your submission.
You can either fill in the template provided in MS Word, or you can print out the paper,
answer on the paper, and scan and submit your filled in paper, or you can answer on blank
paper and scan and submit your answers.
This paper consists of 29 pages, including five pages for rough work, plus appendix A
(financial tables) on pages 26 to 29. Answer all FOUR questions. Each question counts 25
marks. Show all your calculations clearly.
Please note that rough work will not be marked
, CONFIDENTIAL FIN4801
Page 2 of 29 MAY/JUNE 2022
Question 1 [25 marks]
Question 1.1 (18 Marks)
Rotary Ltd is a manufacturer of aircraft engines which is considered to be a contracting
industry at the moment. There is a need for more environmentally friendly engines in the
industry. To this end, the management of Rotary Ltd is investing in a low emission engine
programme consisting of a two-year long research and development (R&D) programme
followed by the manufacture, marketing and sale of a new engine over a period of two years.
The management of the company is confident that the R&D phase will be a success. It is
expected that machinery related to the manufacture of the engines will be bought at the end
of the second year of the project. At the end of the project, the company will sell off the
machinery related to the project at half of the original cost of the machinery. The project was
adjudicated by the South African Revenue Service (SARS) to be an R&D project, with the
deduction equal to 150% of directly related expenses. The machinery related to the
manufacture of the engines are machines that qualify for depreciation over three years
according to the following schedule: Year 1: 50%; Year 2: 30%; Year 3:20%. Over the first two
years of the project, it is expected that only R&D expenses will be incurred and that all other
cash flows as given below the R&D expenses, will be incurred after concluding the R&D phase
at the end of year 2 of the project. Assume that any tax credits in a given year can be written
off against other obligations of the company in the same year (negative tax payments should
be treated as an inflow in the same year).
Other relevant information is presented below:
Sales generated annually R3000 000
Expenses
R&D (each year for the first two years) R1000 000
Machinery cost (expense at end of year two of the project) R1000 000
Cost of sales (annual) R750 000
Fixed costs (annual) R250 000
The machine is expected to be sold for 50% of its purchase price at the end of the project and
a tax rate of 28% is applicable, while capital gains are taxed on 67% of the gain at the normal
tax rate. The company is wholly funded by equity and has a beta of 1.8 while the risk-free rate
is 10% and the market risk premium is 7%. All cash flows provided are in nominal terms. For
risky projects, the company multiplies its WACC by 1.5. Due to the project being strategic to
the future aspirations of the company, it will not stop the project at any time if it is found to be
financially acceptable in its totality.
Required:
(i) Determine two NPV’s of the proposed project using both the company’s WACC for
one and risk adjusted WACC for the other. (10)
(ii) Comment on the acceptability and profitability of the project. (2)
(iii) Discuss the influence of the tax concessions on R&D expenditure and on the NPV.
(4)
(iv) Discuss how the NPV is influenced by the company considering the project to be
risky. (2)
[TURN OVER]
FIN4801
MAY / JUNE 2022
ADVANCED FINANCIAL MANAGEMENT
STUDENT NUMBER
IDENTITY NUMBER
Marks
Question no Examiners
1 2 3
FOR USE BY EXAMINATION INVIGILATOR 1
2
3
4
……………………………………………………….
Subject
……………………………………………………….
Number of examination paper
……………………………………………………….
Date of examination
……………………………………………………….
Examination centre
Total
WARNING
1. A candidate who, without authorisation, takes into the examination venue any book, document or object which could assist him or her in the
examination, and does not hand over such material to the invigilator before the official commencement of the examination, will be guilty of
infringing the University’s examination regulations and will be liable to punishment as determined by the Council.
2. Rough work may be done on the examination paper only and must be labelled as such.
3. No notes may be made on any part of the body, such as the hands, or on any garment.
4. This page/paper is the property of the University and under no circumstances may the candidate retain it or take it out of the examination
venue.
NB: PLEASE COMPLETE THE ATTENDANCE REGISTER ON THE BACK PAGE, TEAR IT OFF AND HAND IT TO THE INVIGILATOR.
,UNIVERSITY EXAMINATIONS
May/June 2022
FIN4801
Advanced Financial Management
100 Marks
Duration: 4 Hours
This paper consists of 29 pages.
Instructions:
The examination is open book.
As the examination is an assessment, it should still be your own work and you should
remember to sign the Honesty Declaration.
Plagiarism checks may be run on your submission.
You can either fill in the template provided in MS Word, or you can print out the paper,
answer on the paper, and scan and submit your filled in paper, or you can answer on blank
paper and scan and submit your answers.
This paper consists of 29 pages, including five pages for rough work, plus appendix A
(financial tables) on pages 26 to 29. Answer all FOUR questions. Each question counts 25
marks. Show all your calculations clearly.
Please note that rough work will not be marked
, CONFIDENTIAL FIN4801
Page 2 of 29 MAY/JUNE 2022
Question 1 [25 marks]
Question 1.1 (18 Marks)
Rotary Ltd is a manufacturer of aircraft engines which is considered to be a contracting
industry at the moment. There is a need for more environmentally friendly engines in the
industry. To this end, the management of Rotary Ltd is investing in a low emission engine
programme consisting of a two-year long research and development (R&D) programme
followed by the manufacture, marketing and sale of a new engine over a period of two years.
The management of the company is confident that the R&D phase will be a success. It is
expected that machinery related to the manufacture of the engines will be bought at the end
of the second year of the project. At the end of the project, the company will sell off the
machinery related to the project at half of the original cost of the machinery. The project was
adjudicated by the South African Revenue Service (SARS) to be an R&D project, with the
deduction equal to 150% of directly related expenses. The machinery related to the
manufacture of the engines are machines that qualify for depreciation over three years
according to the following schedule: Year 1: 50%; Year 2: 30%; Year 3:20%. Over the first two
years of the project, it is expected that only R&D expenses will be incurred and that all other
cash flows as given below the R&D expenses, will be incurred after concluding the R&D phase
at the end of year 2 of the project. Assume that any tax credits in a given year can be written
off against other obligations of the company in the same year (negative tax payments should
be treated as an inflow in the same year).
Other relevant information is presented below:
Sales generated annually R3000 000
Expenses
R&D (each year for the first two years) R1000 000
Machinery cost (expense at end of year two of the project) R1000 000
Cost of sales (annual) R750 000
Fixed costs (annual) R250 000
The machine is expected to be sold for 50% of its purchase price at the end of the project and
a tax rate of 28% is applicable, while capital gains are taxed on 67% of the gain at the normal
tax rate. The company is wholly funded by equity and has a beta of 1.8 while the risk-free rate
is 10% and the market risk premium is 7%. All cash flows provided are in nominal terms. For
risky projects, the company multiplies its WACC by 1.5. Due to the project being strategic to
the future aspirations of the company, it will not stop the project at any time if it is found to be
financially acceptable in its totality.
Required:
(i) Determine two NPV’s of the proposed project using both the company’s WACC for
one and risk adjusted WACC for the other. (10)
(ii) Comment on the acceptability and profitability of the project. (2)
(iii) Discuss the influence of the tax concessions on R&D expenditure and on the NPV.
(4)
(iv) Discuss how the NPV is influenced by the company considering the project to be
risky. (2)
[TURN OVER]
