1

Question 2.1
Part A: 19 Marks
Mpho Nenguda, aged 32 (i.e., to be aged 33 at his next birth date), works for University of
Venda as a lecturer in the Department of Biochemistry, within the School of Mathematics and
Natural Sciences. According to applicable South African Labour Regulations, he has to retire
at the age of 65, and he is already planning for his retirement. Mpho belongs to his employer’s
pension fund which is underwritten by a local insurance giant, Sanlim Ltd. He has been a
member of this fund from the age of 27 when he joined the University of Venda. Although
Mpho belongs to his employer’s pension fund, he believes that the lumpsum he will receive
when he retires may not sustain his standard of living, more so the active life he would like to
live when he retires. Thus he is considering augmenting his pension fund by joining a
retirement annuity fund (hereafter ‘RAF’) as he feels that by so doing, he will be able to
optimally maintain his standard of living post retirement. His problem is that he is not sure yet
as to how much he would like to earn when he retires but he estimates that he may join RAF
and contribute R750 per month payable in arrears effective from his next birth date. When he
retires, he would like to cash one quarter (1/4) of the lumpsum in order to settle family debts,
and then reinvest the remainder with reputable fund management company from which he
expects to receive R9 500 per month as a means to augment his pension receipt during
retirement.

Additional information:

• 1 November is Mpho’s birth date.

• RAF contributions will commence at the end of November 2018.
• Mpho expects to live an active life, i.e., maintain standard of living as of during working
period, for 15 years during retirement.
• The estimated effective interest yields from RAF and similar investment schemes are as
follows:
1 November 2018 to 31 October 2033: 7.5%.
1 November 2033 to 31 October 2050: 8.4%.
1 November 2050 to 31 October 2065: 7.9%.
• Ignore possible Income tax Implications in all calculations.
• Round off all values to 2 decimals.

REQUIRED MARKS
a) Calculate the lump-sum that Mpho will receive on retirement and
determine if he will be able to receive the planned monthly amount of
R9 500 from the re-invested RAF amount. (Your analysis should take
into account his plan of cashing a quarter of the lumpsum that he
receives of retirement) 17
b) Discuss 2 means by which Mpho can optimise his expectation of
receiving R9 500 per month during retirement, i.e., in case the monthly
contribution may not be enough to assist him realise his wishes. (No 2
calculations required)

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 TOTAL MARKS 19

Part B: 18 marks
Assume you are a senior investment analyst at Stantik Ltd, a reputable JSE-listed fund
management and investment company. You are currently working on a case of one of your
corporate clients, who would like to invest in bonds of Santem Ltd, a local insurance giant and
in ordinary shares of Aspire Ltd, a local leader in medical and related chemicals. The following
information has been gathered in respect of the two potential investments:

Terms Santem Ltd – Bonds Aspire Ltd – shares

Total nominal value R650 000 000
Total market value of shares R2 160 000 000
(1 800 000 × R1 200 per
share current price)
Market value of bonds R750 000 000
Fixed coupon rate (before 6.5%
tax)
Payable semi-annually in
Interest payments arrears
Actual dividend declared and R216 000 000
paid (D0)
Expected constant dividend 6%
growth rate
Issue date **1 October 2003 1 May 1985
Maturity date 30 September 2023
**assume today’s date is 30 September 2018.

Additional information:

• Corporate tax rate is 28%.

• The client requires a minimum pre-tax return of 11.00% p.a. on bonds and 12.50% p.a.
on equities.
• Bonds are redeemable at par value.
• Ignore any other information not provided.

REQUIRED MARKS
a) Using the client’s required rates of return, determine the present value
of each investment and comment on whether the calculated present
values are greater or smaller than their respective current market 10
values.
b) Calculate the current return required by investors’ from each 6
investment, i.e., Ke and Kd for Santem Ltd and Aspire Ltd respectively,
using quoted values where necessary.
c) Comment on whether each option is a good investment following your
answers in ‘a)’ and ‘b)’ just above. 2
TOTAL MARKS 18

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Question 2.1 MEMO
Part A: 19 marks

a)

Conversion of effective rates into annual percentage rates:

2ND, CA, 12, (x, y), then EFF rate, 2ND APR for each of the effective rates we get:

7.5% becomes 7.25% (1 Nov 2018 to 31 Oct 2033)

8.4% becomes 8.09% (1 Nov 2033 to 31 Oct 2050)

7.9% becomes 7.63% (1 Nov 2050 to 31 October 2065)

✓✓

RAF value at 31 October 2033 (i.e., 15 years)

PMT: -750 ✓

I: 0.60 (7.25/12) ✓

N: 180 (15*12) ✓

FV: 241 899.01

RAF value at 31 October 2050 (i.e., 17 years)

PV: -241 899.01 ✓

PMT: -750 ✓

I: 0.67 (8.09/12) ✓

N: 204 (17*12) ✓

FV: 1 269 779.80

To be cashed/withdrawn: R317 444.95 (R1 269 779.80*1/4) ✓

Reinvestment: R1 269 779.80 – R317 444.95 = R952 334.85 ✓

PMT during the period: 1 November 2050 – 31 October 2065

PV: 952 334.85 ✓

I: 0.64 (7.63/12) ✓

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N: 180 (15*12) ✓

PMT: 8 925.95 ✓

Thus the lumpsum that Mpho will earn at retirement, i.e., R1 269 779.80 will not be sufficient.
This advice considers that Mpho has indicated that he would like to cash ¼ of the lumpsum.✓✓

b) Suggested means to optimize Mpho expectation:

Mpho may consider to:
- Increase the contribution he will make to the fund from R750 to say R850. ✓
- Not cash/withdraw any portion of the lumpsum but rather use other savings such as
✓those in pension funds to settle family debts. ✓
- Cash/withdraw amount which may be determined by lower % rate than the 25% (i.e.,
¼). ✓
- Or/and any other relevant suggestion

Only 2 suggestions of a mark each allowed

Part B : 18 marks

a)

PV of Santem Ltd bonds’ future cash flows:

I: 3.96 (11% x 0.72 x 50%)✓

N: 10 (5*2) ✓

PMT: -15 210 000 (650 000 000*6.5%*72%*50%) ✓✓

FV: -650 000 000✓

PV of future cash flows: 564 421 944.80

Current market value: R750 000 0000 (quoted)

Thus the PV of bonds future cash flows are smaller than the quoted price. ✓

PV of Aspire Ltd ordinary shares’ future cash flows:

𝑫𝟏
P0 =
𝒓𝒔 − 𝒈
R126 000 000 (1+0.06)
= 12.5% − 6%
✓✓

= R3 522 461 538 ✓

Current market value: R2 160 000 000 (quoted)

Thus the PV of ordinary shares’ future cash flows are greater than the quoted price. ✓

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b) Investors’ required rate of returns:

Bonds (kd):

N: 10 (5*2) ✓

PMT: -15 210 000 (650 000 000*6.5%*72%*50%) ✓✓

PV: 750 000 000 ✓

FV: -650 000 000 ✓

I: 0.74, per annum is 1.48 but after tax. ✓

Ordinary shares (Ke):

= R133 560 000/R2 160 000 000 + 6% ✓✓

= 12%✓

c) Advise on whether both investments are good:

- It appears that only the ordinary shares are a good investment as the present value
of future cash flows are greater than their market (quoted) values. ✓✓
- It would have been more helpful if more investment such as investments’ risks were
given so the riskiness of each investment can be looked into rather than just only
returns. ✓✓
- And/or any other valid suggestion (advise).

6
Question 2.2 (SEE MEMO ON SEPARATE SHEET)
Mr. Thendo Mudau is a 45 year old Mathematics and Physical Science teacher at Lukau
high school in Tshakhuma. Thendo has been a teacher at Lukau the past 25 years, and
never worked for any employer. Throughout his teaching career Thendo has always, been
a member of the Government Employees Pension Fund (GEPF). Thendo has always made
monthly contributions to the pension fund amounting to R2 000 per month. The GEPF has
maintained an effective annual return of 8.5% on invested funds for the past 40 years to
date.
Thendo recently heard about the pension fund reforms which are being considered for
introduction by the National Treasury of South Africa. Due to lack of information and clarity
Thendo is unsure of what the proposed pension fund reforms entail, and how they will affect
the pension he has saved up over the past 25 years.
Thendo has been having sleepless nights thinking about the pension fund reforms,
furthermore he is frustrated by lack of information surrounding the proposed reforms. In an
effort to counter the effects of the pension fund reforms Thendo plans to retire immediately
to gain access to his pension fund. Since Thendo is only 45 years old he plans to apply for
a teaching post in Mpumalanga as he heard that there is a shortage of Mathematics and
Physical Science teachers in the province.
As a result of the above Thendo’s pension payout will be transferred into his bank account
on 28 February 2017. He only plans to use only a third of his pension payout and the rest
of the payout will be invested in a retirement annuity fund until his planned retirement date
of 28 February 2037. The lumpsum investment in the retirement annuity fund will draw
interest at 6.4% p.a., compounded semi-annually

Thendo plans to use one third of his pension payout to finish building his a double storey
house in Unit D Thohoyandou as well as investing in a reliable car, since he will be travelling
frequently between Mpumalanga and Thohoyandou. He plans on buying a Ford Ranger
WildTrak. He has obtained a quotation from Ford Motors in Louis Trichardt, the Ford Ranger
WildTrak will cost him R 620 000. Ford motors have given Thendo two similar financing
options on the WildTrak.

• Option one
o The cost of the WildTrak if purchased cash would be R620
000.
o Financing will be available over 5 years, at a fixed nominal compounded
interest rate of 10,5% with instalments payable at the end of each month

• Option two
o The cost of the WildTrak if purchased cash would be R620 000
o A deposit of 20% of the cost price will be payable at inception of the contract
o Financing will be over 5 years, at variable nominal compounded interest rate
of 8,5% with instalments payable at the end of each month
o A balloon payment of R55 800 will be payable at the end of the 5 years

On 1 March 2017, Thendo will be resume his teaching post in Mpumalanga as a grade 12
Physical Science teacher. Thendo will rejoin the Government Employee’s Pension Fund
and continue with his monthly pension fund contributions which will yield an effective interest
of 7.5% per annum. In order to supplement his total retirement fund, Thendo plans to invest

7
 R5 000 from his annual thirteenth cheque of into another retirement annuity fund on 28th
of February of each year during the 20 years he will be working in Mpumalanga. The interest
rate on this retirement annuity fund will be 8.24% p.a., compounded quarterly.

Upon retirement Thendo will combine his two retirement annuity funds into one fund, which
will earn interest at 9%, compounded annually. Thendo has determined that upon his
retirement, he will need to withdraw R50 000 per month at the beginning of each month for
30 years after his retirement

REQUIRED Marks
(a) Fully discuss the difference between:

i. Nominal Interest rate(s) and Effective interest rate(s)

(2)
ii. Nominal interest rate(s) and Real interest rate(s)
(b) Calculate the amount that Mr Thendo Mudau must contribute towards the
Government Employees’ Pension Fund in order to achieve is target of withdrawing (25)
R 50 000 per month for 30 after his retirement.
(c) Advice Mr Mudau in deciding which financing option he should agree on with on (10)
financing his the purchase of his Ford WildTrak.

8
Question 2.3 (SEE MEMO ON SEPARATE SHEET)
Benedict McArthur “Benni” as he is affectionately known by soccer fans recently retired from
professional football. Due to his extensive football knowledge, he has been hired as a football
analyst by SupraSport where he performs technical analysis for some of the matches which
SupraSport televises, Benni gets paid R50 000 per match he analyses for SupraSport. Benni
has little coaching experience but would like to be a world class professional coach, who would
one day coach in the English Premier League.
After extensive research on football coaching Benni discovered that for one to be an English
Premier League coach he needs to attain a EUFA Pro coaching licence. He then found that
UEFA coaching course is currently offered by the English Football Association in England.”
FA” the He has asked his agent Rob Mawara to do further research on the coaching courses
as well as the duration and course fees for all the applicable certificates he needs to attain
before getting the prestigious UEFA Pro coaching licence.
After extensive research through telephone calls, emails and web searches Rob Mawara
came up with the following schedule of courses Benni must attend before attaining his
coaching licence

Fees payable
Course Spending
Course Duration fees Accommodation Flights money
Note 1
UEFA Level 1 2 weeks 8 000 34 720 18 000 ?
UEFA Level 2 4 weeks 12 000 57 120 18 500 ?
Level 3/UEFA B
Licence 8 weeks 18 000 114 720 17 200 ?
Level 4/UEFA A
Licence 12 weeks 24 000 157 920 16 800 ?
UEFA Pro Licence 18 weeks 42 000 233 520 15 500 ?
104 000 598 000 86 000 ?

Rob also mentioned to Benni that he can only book for the next level course only after he has
successfully passed the previous course. (i.e. one can only book for UEFA level two course
after he has successfully completed UEFA level one course).as a result all the expenses in
relation to the particular course can only be booked at the same time as the course that will
attended, furthermore payments must be made one month before the month in which the
course will be attended.(i.e. a course to be attended on 1 March 2017 should be paid for on
31 January2017) Currently Benni does not want to utilise any of his current savings to fund
his coaching licence. He intends on saving a portion of his match analysis fee he receives
from SupraSport to fund his dream.
After careful planning Benni realised that he SupraSport schedule won’t allow him to start with
his coaching course immediately, as the UEFA champions league calendar has just resumed.
Benni has drawn up the following schedule with all the courses and dates he will be attending

o UEFA Level 1 – 1 October 2018

o UEFA Level 2 – 1 February 2018
o Level 3/UEFA B– 1 August 2019

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 o Level 4/UEFA A – 1 February 2019
o UEFA Pro Licence – 20 October 2020
In order to fund all the above expenses Benni will open a money market account on 28
February 2017 in order to earn interest on the invested funds. He will make an initial deposit
of R10 000 upon opening the account. He plans to make further monthly deposits at the
beginning of each month, but he is unsure as to how much he should set aside monthly to
achieve his savings target. He will commence saving on 1 March 2017 with the last deposit
taking place on 30 June 2020.
It is expected that the money market account will yield a nominal interest rate of 20% per
annum compounded quarterly this rate will remain constant until 31 December 2018. It is then
expected to increase to 22% per annum compounded quarterly until the end of the 2020.

Notes
1. Rob was not sure of how much Benni will spend per week whilst he is attending his
coaching course after confirming with Benni it was established that Benni will require
R 5000 per week each time he goes for the coaching course.

REQUIRED MARKS
Calculate the nominal yield from the money market investment;
(a) i. Between 1 March 2017 – 31 December 2018 (3)
ii. Between 1 July 2018 – 31 December 2020 (3)

How much money Benni must put aside per month in order to attain his
(b) (29)
coaching licence.

TOTAL MARKS 35

10
Question 2.4 (SEE MEMO ON SEPARATE SHEET
You are a certified financial planner at Alan Grey which is a leading financial planning firm.
One of your clients is about to retire from the South African Navy at the age of 33 years. As a
skilled electronics engineer, he has no real concern about being able to find alternative
employment. The South African Navy will commence with his pension as soon as he leaves,
but they had provided him with 2 choices: -

Option One - A lump sum of R48 500 and an annual pension of R4 995.

Option Two - A lump sum of R65 000 and an annual pension of R3 000 which at age 65 would
be increased to equal the pension that he would have received had he chosen the first option.

Your client has asked you the following question:

“Is it better to have an extra R16,500 lump sum now, or an extra index linked pension starting
at R1,900 per annum for the next 31 years until age 65? Which alternative will provide me with
a larger amount of capital at 65 with which to provide his income in retirement?”

Assume a 12% rate of return on investment.

REQUIRED MARKS
Advice your client in choosing the best option between the two options
(a) presented to him by the South African Navy (10)

TOTAL MARKS 10

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Question 2.5
Aifheli Muremi, aged 33, works for University of Venda (hereafter ‘Univen’) as a lecturer in
Accountancy. According to applicable South African Labour Regulations, he has to retire at
the age of 65, and is already planning for retirement, i.e., he has investments and retirement
funding plans already and is considering to add more. Aifheli belongs to his employer’s
pension fund which is underwritten by a local insurance giant, Mutual and Fedentia Ltd. He
has been a member of this fund from the age of 29 when he joined Univen. His first monthly
pension contribution to the fund was made effective from the end of 1st month in his
employment. Aifheli does not believe in fully withdrawing cash lumpsum from investments or
retirements funds at retirement but rather to reinvest them and then receive periodic income.
In this regard, he wishes to receive R6 000 per month during retirement.

In view of the fact that he would like to maintain his standard of living during retirement, Aifheli
has made some investments with a local bank effective from 1 March 2016, and he contributes
R3 000 per month until he retires. This investment is expected to earn effective yields as
follows:

Period Effective interest yields

1 March 2016 – 30 November 2028 5.6%
1 December 2028 – 28 February 2038 5.9%
1 March 2038 – 31 March 2065 6.4%
It is anticipated that R15 000 and R20 000 will be withdrawn from this investment account on
30 November 2028 and 28 February 2038 respectively in order to settle family debts.

Furthermore, he is considering joining a retirement annuity fund (hereafter ‘RAF’) as he feels

that by so doing, he will be able to optimally maintain his standard of living during retirement.
His problem is that he is not sure yet as to how much he should contribute to the RAF during
his working life but would like to cash one third (⅓) of lumpsum he will earn when he retires,
and expect to receive R5 000 per month during retirement

Additional information:

• 1 April is date of birth of Aifheli.

• Aifheli expects to live an active life, i.e., maintain standard of living as of during working
period, for 15 years during retirement.

12
 • Pension and RAF effective interest yields are assumed to be the same as of standard
investment above.
• Ignore portion of employer’s contribution to pension fund (as required by applicable
regulations) in your relevant calculations.
• Ignore possible Income tax Implications in all calculations.
• Round off all values to 2 decimals.

Required:

a) Determine the nominal interest yields in respect of the following effective interest rates
as identified for the given periods:

Period Effective interest yields

i. 1 March 2016 – 30 November 2018 5.6%
ii. 1 December 2028 – 28 February 5.9%
2038
iii. 1 March 2038 – 31 March 2050 6.4%
(6 marks)
b) Distinguish between the following concepts:
i. Nominal interest rate (annual percentage rate) and effective interest rate.
(2 marks)
ii. Nominal interest rate (annual percentage rate) and real interest rate. (2 marks)

c) Determine the total amount that Aifheli Muremi will earn from the only 3 identified funds
above, when he retires. (30 marks)

13
Question 2.5 MEMO
a) Conversion of effective interest rates to nominal interest rates

i. ii. iii.
Effective rate Effective rate Effective rate
5.6% 5.9% 6.4%
C/Y C/Y C/Y
12 12 12
Nominal rate Nominal rate Nominal rate
5.46% ✓✓ 5.75% ✓✓ 6.22% ✓✓

b)

The nominal interest rate (also known as an Annualised Percentage Rate or APR) is the
periodic interest rate multiplied by the number of periods per year. For example, a nominal
annual interest rate of 12% based on monthly compounding means a 1% interest rate per
month (compounded). ✓
Effective rate is the interest rate on a loan or financial product restated from the nominal
interest rate as an interest rate with annual compound interest payable in arrears. ✓
Real interest rate is nominal interest rate that accounts for inflation effects. ✓✓

c)
Pension amount to earn at retirement (i.e., at 31 March 2050):
N: 180 (15*12) ✓
I/Y: 0.52 (6.22÷12) ✓
PMT: -6 000 ✓
PV = 700 216.41 ✓
NB: use information from during retirement period

Investment value at retirement:

Period 1 March 2016 to 30 November 2028:
PMT: -3 000 ✓
I/Y: 0.46 (5.46÷12) ✓
N: 153 ✓
FV: 664 017.39 ✓
Less: -15 000 (withdrawal) ✓
649 017.39 ✓

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Period 1 December 2028 to 28 February 2038:
PV: -649 017.39 ✓
I/Y: 0.48 (5.75÷12) ✓
N: 111 ✓
PMT: -3 000 ✓
FV: 1 542 773.41 ✓
Less: -20 000 (withdrawal) ✓
1 522 773.41 ✓

Period 1 March 2038 to 31 March 2050:

PV: -1 522 773.41 ✓
I/Y: 0.52 (6.22÷12) ✓
N: 145 ✓
PMT: -3 000 ✓
FV: 3 877 239.97 ✓

Retirement annuity fund (RAF) at retirement:

N: 180 (15*12) ✓
I/Y: 0.52 (as just above) ✓
PMT: -5 000 ✓
PV: 583 513.68 (i.e., 2/3 of the whole) ✓
Thus full RAF value is R583 513.68/0.67 = R870 915.94 ✓✓

Total amount/sum to be received from all identified funds is = R5 448 372.32

(R700 216.41+R3 877 239.97+R870 915.94) ✓✓

15
Question 2.6
Rofhiwa Munyai is an avid traveller. He likes spending quality time with his family whenever
he gets the opportunity to do so. Rofhiwa is married to Vhuthuhawe, and together they have
2 sons. Since Rofhiwa is lecturer at a local university, he generally has ample time to spend
during festive season and has over the years visited a number of Zoos, resorts and game
parks locally and abroad.

Rofhiwa and family are already looking forward to the festive season of 2018 and have since
identified Rome, an Italian city, to visit for 5 days during the period 09 to 13 December 2018.
They will stay at one of the well-known hotels called Hotel Impero. The choice of Rome offers
a number interesting issues for Rofhiwa and family such as, of course leisure time, the
opportunity to visit and see building structures that can date back to centuries, as well as some
places where early bible scriptures have some reference. Rofhiwa and family are devoted
Christians.

Unlike the recent trips to a few regional African countries, Rofhiwa is well aware that he has
to budget much better for the trip to Rome. He thus started saving as early as 1 November
2017 by opening money market account and thereby depositing R10 000 same day, and
further, he deposits R8 500 at the end of every month. The key items to budget for are the
flight (including shuttle and related travelling whilst in Rome), accommodation, food and
entertainment. Rofhiwa already has cost estimations for all these items as follows:

Items Cost per person No. of days No. of persons Total cost
Flight (return
ticket for the N/A N/A N/A R98 500
entire family)
Accommodation R1 800* or 5*** N/A R21 000
R2 400**
Food and R950 5 4 R19 000
entertainment
Total cost R138 500
*Single room to be occupied by sons, and each son will have his own. **Shared room by parents.
***hotel check-in date: 09 December 2018, check-out date: 14 December 2018.

The family will board a flight on 08 December 2018, and land in Rome on 09 December 2018.
In order to secure flight sits and accommodation, i.e., considering scarcity of these items
during festive period for places like Rome, Rofhiwa has to buy flight tickets (full cost) preferably

16
by 31 May 2018, book and deposit for accommodation (i.e., 50% of total cost) by same date.
The remainder of accommodation cost will be settled on arrival in Rome. The money market
account earn effective interest rates of 5.4% up to 31 May 2018 and 5.7% from 1 June 2018.

Additional information:

• Transaction date is 1 April 2018.

• Money market account will mature investment on 30 November 2018, and all funds will
be withdrawn then.
• Ignore possible tax implications in all calculations.
• Round off all values to 2 decimals.

Required:

a) Determine if Rofhiwa Munyai savings deposits will be enough for the family’s holiday in
Rome. (17 marks
b) If savings deposits with money market will not be enough, suggest at least 4 means by
which Rofhiwa can optimise the needs for this holiday. (8 marks)

17
Question 2.6 MEMO
Determine savings value at 31 May 2018
Convert effective interest rate into nominal interest rate:
Effective rate 5.4%
C/Y 12
Nominal rate 5.27 ✓✓

PV: -10 000 ✓

I/Y: 0.44 (5.27÷12) ✓
N: 7 ✓
PMT: -8 500 ✓
FV: 70 603.28

Less: -10 500 (50% of R21 000 cost of accommodation) ✓

Less: -98 500 (flight ticket cost) ✓
Deficit: -38 396.72

Determine savings value at 30 November 2018

Convert effective interest rate into nominal interest rate:
Effective rate 5.7%
C/Y 12
Nominal rate 5.56 ✓✓

PV: 38 396.72 ✓
N: 6 ✓
I/Y: 0.46 (5.56÷12) ✓
PMT: -8 500 ✓
FV: 12 121.38
Less: -10 500 (50% remainder of accommodation cost) ✓
Less: -19 000 (food and entertainment cost) ✓
Deficit: -R17 378.62, That is, savings deposits will not be sufficient for Rome trip. ✓

a)
Suggestions to optimise the needs of the trip:

18
 i. Increase monthly fixed deposits to the money market account. ✓✓
ii. Consider reducing budget for food and entertainment. ✓✓
iii. Check with booking agents as to availability of cheaper (but decent and secure)
hotels. ✓✓
iv. Consider to book sons into shared rooms than separate ones. ✓✓
v. Check with booking agents as to availability of discount on early full purchases and
payments of flight tickets. ✓✓
vi. And/or any relevant valid suggestion (s). ✓✓
NB: maximum marks: 8, i.e., only 4 suggestions of 2 marks each allowed.

19
Question 2.7
Mrs. Phophi Tshikhudo, an unmarried woman of 2 children works for Department of Health as
Senior Professional Nurse. She became a nurse immediately following her graduation with
Bachelor of Nursing degree from Univen more than 2 decades ago. Mrs. Tshikhudo belongs
to her employer’s pension fund and she is has is already saving for retirement through
retirement annuity fund (RAF) with the insurance giant Sanlib Ltd. Mrs. Tshikhudo is already
doing some analysis on her savings and retirement accounts as she is due to retire on 31
December 2036. On retirement, Mrs. Tshikhudo will withdraw full lumpsum due from pension
and a portion (e.g., 35%) of lumpsum from RAF then reinvest the remainder from which she
would like to receive R7 000 per month subsequent to retirement. That is, Mrs. Tshikhudo
believes that significant portion (if not all) of the lumpsum pension receipt and part withdrawal
from RAF will be used to settle family debts which includes short-term loans and long-term
loans incurred in financing properties and assets.
Mrs. Tshikhudo lives a high class life hence she would need maintain relatively same life
subsequent to retirement. Thus she has decided to open an investment account with a local
bank in order to augment the monthly receipt of R7 000 from RAF subsequent to retirement,
that is, he would like to receive at least R10 000 per month in total for 15 years during
retirement. That is, the lumpsum earnings from the bank will not be withdrawn at retirement,
not even a portion of it, but rather will be reinvested with same bank to then augment the just
above-mentioned monthly receipt from RAF thereby funding a further monthly receipt of
R3 000.
An estimate of effective interest yields with the local bank are as follows:

Period Effective interest yields

1 March 2019 – 31 July 2026 5.5%
1 August 2026 – 31 December 2036 5.8%
1 January 2037 – 31 December 2051 6.2%

Additional information:

• Investment with local bank will be effective from 1 May 2019 and the only payment (s) of
R700 per month will be made in arrears until retirement.
• Ignore any possible tax implicants in all your answers.
• Round off all values to 2 decimals.

Required Marks
a) Convert effective interest yields to nominal interest rates. 6
b) Estimate the amount which Mrs. Tshikhudo will earn from investment
with local bank when she retires, and determine whether the earnings
will be sufficient for her needs subsequent to retirement. 15
c) If earnings will not be sufficient, suggest at least 3 means by which
Mrs. Tshikhudo can optimise the needs for her retirement. 6
d) Suggest 3 factors that may determine individual’s choice of either RAF
or standard investments with banks or insurance companies, as
means to save especially for retirement. 6
Total 33

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Question 2.7 MEMO
d) Conversion of effective interest rates to nominal interest rates
iv. v. vi.
Effective rate Effective rate Effective rate
5.5% 5.8% 6.2%
C/Y C/Y C/Y
12 12 12
Nominal rate Nominal rate Nominal rate
5.37% ✓✓ 5.65% ✓✓ 6.03% ✓✓

e) Amount to earn at retirement and their sufficiency:

Period: 1 May 2019 – 31 July 2026
PMT: -R700✓
i: 0.45 (5.37/12) ✓
n: 87✓
FV: R74 339.91✓

Period: 1 August 2026 – 31 December 2036

PV: -R74 339.91✓
PMT: -R700✓
i: 0.47 (5.65/12) ✓
n: 125✓
FV: R252 292.98 (amount to earn at retirement) ✓

The compute monthly receipt from this investment subsequent to retirement:

n: 180 (15x12) ✓
i: 0.50 (6.03/12) ✓
PV: -R252 292.98✓
PMT: R2 128.99✓
Since Mrs. Tshikhudo would like to receive R3 000 per month from investment account but
the amount to earn at retirement can only fund up to R2 128.99, the earnings will not be
sufficient for her needs subsequent to retirement. That is, the sum of earnings expected is
R10 000 but the current stance of RAF and investment can achieve a monthly receipt
R7 000+R2 128.99=R9 128.99. ✓✓

f) Suggestions to optimise the needs for her retirement:

vii. Increase monthly fixed deposits to the investment account. ✓✓
viii. Consider reduce percentage of lumpsum to withdraw from RAF at retirement. ✓✓

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 ix. Look for alternative investment options which can offer better interest yields. ✓✓
x. And/or any relevant valid suggestion (s). ✓✓
NB: maximum marks: 6, i.e., only 3 suggestions of 2 marks each allowed

g) Suggestions of factors that may determine individuals’ choice of either investing in RAF
or standard investments with banks or insurance companies, especially in order to save
for retirement:

i. Interest yields offered by respective funds/investments. ✓✓

ii. Application tax regulations and other regulations. ✓✓
iii. Individuals’ investments’ preferences. ✓✓
iv. And/or any relevant valid suggestion (s). ✓✓
NB: maximum marks: 6, i.e., only 3 suggestions of 2 marks each allowed

22
Question 2.8
Part 2.1 (24 marks)
Steinham Ltd is company listed in furniture and appliances sector of the JSE. The company is
among the biggest in this sector with market capitalisation accounting for at least 20%. The
following extract of the long-term unsecured bonds appears in the company’s financial
statements for the year-ended 31 March 2019:

• The capital repayment of R2.5 million per year.

• Final repayment date is 31 March 2022.
• Coupon rate is estimated at 8.5% and is payable annually in arrears.
• The bonds’ outstanding balances in recent years have been R12.5 million and R10
million on 31 March 2017 and 31 March 2018 respectively. Another capital repayment
has just been made on 31 March 2019.
• The yield to maturity on similar bonds is currently 10.5% per annum.
• Assume current date is 1 April 2019.

Additional information:

• Ignore any possible tax implicants in all your answers.

• Round off all values to 2 decimals
Required Marks
a) Construct the amortisation table for the remainder of bonds’ period 9
b) Estimate the value of bonds on 1 April 2019 9
c) Discuss the following 3 fundamental concepts from the perspective of
financial management:
i. Agency theory;
ii. Efficient market hypothesis; and
iii. Portfolio theory 6
Total 24

Part 2.2 (10 marks)

Sacom Ltd is a giant mining company which is listed on the JSE. The company produces gas,
oil and other chemicals for use in the production of fuel and ready-to-use oil, among other
products. The company has been in operation for at least the past 50 decades but it only listed
on the JSE in 1992. As a means to balance its capital structure, the company issued 100 000
debentures on 1 April 2016 and they will be redeemed on 31 March 2024 at par value. The
debentures charge a fixed annual coupon rate of 12.4% payable in arrears, and the per share
face value of debentures is R950. Similar debentures yield an annual interest of 7.5%. Ignore
all possible tax implications in your analysis.

Required Marks
a) Construct the amortisation table for the remainder of debentures’ 12
period, AND estimate their value on 1 April 2019, i.e., assume this
date is date of transaction
Total 12

23
 Part 2.3 (6 marks)
Jemicor Ltd is a global packaging company which is listed on the JSE. The company
manufactures and supplies metals, papers plastic packs for use by other companies. The
company’s major clients are based in Southern Africa and other overseas’ countries. The
company has 25 000 7% unsecured bonds which may be convertible to ordinary shares. The
face value of each bond is R800 which will be redeemed at a premium of 5% should the
conversion option not taken. The coupon payments are made semi-annually in arrears. The
bonds are redeemed on 31 March 2025.
Additional information:

• The current market interest rate for similar bonds is 6.5% per annum.
• Assume that current ordinary share price (or/and even their average price during bonds’
remaining period) is significantly below the conversion price, thus the bonds will not be
converted.
• Ignore any possible tax implicants in all your answers.

Required Marks
b) Determine the value of these debentures on 1 April 2019 6
Total 6

Question 2.8 MEMO

Part 2.1: 24 marks
a) Amortisation table

Periods/years Opening Instalment Interest Capital Closing

balance portion balance
2020 R7 500 000✓ R3 287 500✓ R787 500✓ R2 500 000✓ R5 000 000✓
2021 R5 000 000 R3 025 000 R525 000 R2 500 000 R2 500 000
2022 R2 500 000✓ R2 762 500 R262 500✓ R2 500 000 -✓

b) Value of bonds on 1 April 2019

Periods 1 2 3
Cashflow R3 287 500✓ R3 025 000✓ R2 762 500✓
PV factor 0.9009 0.8116 0.7312 ✓✓
Discounted amounts R2 961 708.75✓ R2 455 090✓ R2 019 940✓
Estimate of bonds value (sum of discounted amounts): R7 436 738.75✓

c) Discussion of selected fundamental concepts of finance:

i. Agency theory - a theory which recognises that investors have to devise means to
hold managers to account (that is, to align managers' interests with those of
themselves, which are mainly the maximization of company value) since it is

24
 recognised that the latter’s interests may not necessarily be in line with those of the
former. ✓✓
ii. Efficient market hypothesis - the assumption that all market participants have
equal access to security market information. In practice, this is seldom true, that
is why some market participants gain unfair advantage over others thereby
utilising some security information they access before it is openly known. ✓✓
iii. Portfolio theory - a finance theory which favours diversification of investments
to reduce risk. That is, investment risk can be reduced by holding combination
of assets in a portfolio of shares from different sectors of economy. ✓✓

Part 2.2 : 10 marks

Amortisation table (per debenture or in R’00 000):
Periods/years Opening Instalment Interest Capital Closing
balance portion balance
2020 R950✓ R117.78✓ R117.78 -✓ R950✓
2021 R950 R117.78 R117.78 - R950
2022 R950 R117.78 R117.78 - R950
2023 R950 R117.78 R117.78 - R950
2024 R950 R1 067.78✓ R117.78 R950✓ -✓

Determine PV of bonds on 1 April 2019:

FV: -950✓
i: 7.5✓
n: 5✓
PMT: -117.80 (950x12.4%)✓
PV: 1 138.34✓
Total value of bonds: R1 138.34x100 000 = R113 834 000

Part 2.3: 10 marks

Value of bonds on 1 April 2019:
FV: -840 (800x1.05) ✓
n: 12 (6x2) ✓
i: 3.25 (6.5/2) ✓
PMT: -56 (800x7%)✓
PV: 1 121.46✓
Total value of bonds: R1 121.46x25 000 = R28 036 577.31✓

25
Question 2.9 (MEMO TO BE GIVEN IN CLASS OR UPON SUBMISSION OF
AN ATTEMPT TO THIS QUESTION BY THE STUDENT)
Ms. Talifhani Nenzhelele who has just completed her medical degree at 24, and started
working at Helen Joseph hospital. It has always been her dream to own her own house at the
age of 30. In anticipation of buying her own house at such an early stage, Talifhani has been
saving R10 000 at the end of each year during her 6 years’ study period at the University of
the Witwatersrand in Johannesburg. This amount was invested at a 12% annual percentage
rate (APR) compounded annually. The house that Talifhani wants to buy is estimated to cost
R2 500 000 at the time when she turns 30. Talifhani understands that the money she has
saved thus far will not be sufficient and is therefore willing to contribute R15 000 per month in
arrears. When consulting with a few banks, Talifhani came to find out that the maximum APR
is 13% p.a. compounded monthly and this was after she opted to use her prior savings as a
lump sum deposit.
The house that Talifhani wants is also available on a home loan finance option. Although
Talifhani is sceptical about taking a home loan, she is still weighing her options. The bank has
offered her the following terms on the home loan:

• Loan amount is R2 500 000, no deposit required

• Loan repayment is period is 20 years,
• Loan repayments happen at the end of each month, in arrears
• Interest 11% p.a.

Required Marks
e) Distinguish between a nominal and effective rate. 3
f) Distinguish between nominal and real interest rate 2
g) Determine if investment savings will be sufficient for Talifhani to buy the
house when she turns 30. Assuming savings will not be sufficient,
suggest at least 3 possible means by which Talifhani can make up for 16
the shortfall.
h) Compute the likely instalment which Talifhani will pay if she chooses
the loan option. 5
i) Suggest at least 2 advantages that may be derived from the option of
financing the house on a home loan rather than accumulated savings 4
Total 30

26
Questions 2.10 (MEMO TO BE GIVEN IN CLASS OR UPON SUBMISSION
OF AN ATTEMPT TO THIS QUESTION BY THE STUDENT)

Part A (18 marks)

Your rich uncle Mike has been contemplating taking the whole family to Dubai on a holiday
trip in three years’ time. He has done his ‘research and came to the realisation that more
money will be required than he had initially anticipated. Based on his research, R2 500 000
will be required to cover all the expenses for the trip.
Mike decided to visit the bank and he was advised to open an investment account to save for
the required funds. Although the bank didn’t specify the monthly amounts he should save, they
did offer him the following terms.
• Present value R1 000 000
• Future value R 2 500 000
• Period 3 years
• Interest rate 9% nominal rate compounded monthly

Required Marks
1. Determine how much Mike needs to invest monthly to ensure that he has
sufficient funds at the end of the 3-year period 5
2. Identify and justify the overall fundamental objective (s) of the corporate
financial manager 5
3. Discuss the following 5 fundamental concepts from the perspective of
financial management:
iv. Agency theory;
v. Efficient market hypothesis; and
vi. Portfolio theory
vii. Capital asset pricing model 8
Total 18

Part B (18 marks)

One of your cousins Kate started working at one of the big four audit firms in the South Africa
exactly 1 year six months ago. She immediately bought a car using a loan from one of the big
4 banks. The cost of the car was R250 000 and the terms of the loan were as follows:

• Loan amount: R250 000

• Term of loan: 60 months, and instalments are payable monthly in arrears.
• Annual percentage rate (APR) is 11%, no deposit nor residual value applicable.
Kate likes spending some time away on holiday with family, currently the family she has is
herself and her husband. They are planning to go on a week-long holiday in March/April 2021
in Mauritius. The estimate of the holiday cost including flight, accommodation and
accompanying cost is R50 000. The couple started saving in this regard on 1 March 2020
thereby depositing R10 000 into savings investment account and have been further paying R4
300 at the end of every month and will continue to do so until 28 February 2021.The APR on
savings account is 6.5%.

Required Marks
a) Compute the monthly instalments that Kate has been making on her car 6
loan

27
 b) Determine how long it will take Kate to accumulate enough money required
for Mauritius trip or whether savings will be sufficient as at 28 February 2021 7
c) Answer the following question in respect of fundamentals of financial
management:
i. Distinguish between stakeholders and shareholders 5
Including 1 mark on overall presentation of question 2
Total 18

Part C (9 marks)
You are required to read through and answer the following independent multiple choice
questions by working them out to then choose the correct answer:
1. You are planning to buy a motor vehicle. The bank charges you 15% nominal interest
rate over a 4-year repayment period. You can afford monthly instalments of R950 at the
end of each month, and you have a deposit of R15 000. The maximum price you can
pay for a vehicle is closest to:
i. R15 489
ii. R17 067
iii. R30 979
iv. R49 135 (3 marks)

2. You invest R4 000 annually (at the end of each year) for five successive years in a savings
account at 15% per annum compound interest. At the end of the fifth year you withdraw
R10 000, and the balance is invested at 10% per annum compound interest for 5 years.
The approximate end value of the investment is closest to:
i. R18 318
ii. R25 146
iii. R27 330
iv. R29 340 (3 marks)

3. Muofhe plans to study at university in four years’ time. She needs about R20 157 for
tuition and books at the beginning of her first year of study. If the interest rate at the bank
on study investments is 12% per year, the amount that she should save quarterly in
arrears is closest to:
i. R1 000
ii. R3 105
iii. R4 218
iv. R5 174 (3 marks)

28
Question 2.11
Your younger sister, Blessing, will commence her studies at a tertiary institution five years
from today. She informed your parents that she wants to enrol for a Bachelor of Accounting
Sciences degree programme at the University of Venda (UNIVEN). The cost of studying for
this degree programme will be R18 000 per annum the time she commences with her studies
and the degree takes 4 years to complete. Anticipating Blessing’s ambitions together with the
unpredictable economic situation, your parents had already started saving R3 000 per year
five years ago. The local bank pays interest annually at 10% on such deposits.
Assume that there is no inflation in university class fees and that at UNIVEN the class fees
are payable at the end of each academic year. Assume that all investments are made at the
end of each year.

REQUIRED

a) How much will your parents have to invest each year for the next five 15
years to have the necessary funds for Blessing’s education?
Total marks 15

Question 2.11 MEMO

First calculate what value will be required at the beginning of your sister’s 4 years of study at
UNIVEN in 5 years’ time:
P/Yr = 1
PMT = - ✓ 18 000 ✓
N=4✓
FV = 0
I = 10% ✓
PV = ? = R57 057,58 ✓P

Determine the current value of their savings:

P/Yr = 1
Pmt = 3 000 ✓
N=5✓
i = 10% ✓
FV = 18 315,30 ✓P

The additional annual amount that needs to be saved up:

P/Yr =1

29
PV = -✓18 315,30 ✓P
FV = 57 057,58 ✓P
N=5✓
I = 10% ✓
PMT = ? = -R4 515,35 ✓P

30
Question 2.12 (MEMO TO BE GIVEN IN CLASS OR ON SUBMISSION OF
AN ATTEMPT TO THIS QUESTION BY THE STUDENT)
Mr Hopeful has just won R3 500 000 in the LOTTO and has decided to invest the money in a
savings bank account. At the beginning of the third year of his investment, he wants to
purchase a new second-hand BMW for R220 000 and buy his dream house for R2 000 000
all from his investment account. He would also like to withdraw, from his investment account,
R10 000 per month (at the end of each month) for the first 5 years (Years 1 – 5) and R15 000
at the end of every month for the next 5 years (Years 6 – 10).
The bank has quoted Mr Hopeful a nominal interest rate of 10% per year. Since Mr Hopeful is
planning to increase his withdrawal, this rate will change to 8.93% compounded monthly from
Year 6

REQUIRED

a) Assuming all will go according to plan beginning with investment of his

LOTTO winnings, determine the amount that Mr Hopeful will have in his 20
investment account at the end of year 10.
Total marks 20

31