FINA201: Financial Management 201 Exam Pack (UKZN BCom Accounting)

This study guide provides comprehensive, exam‑oriented notes for FINA201 Financial Management 201 as offered in the BCom in Accounting at the University of KwaZulu‑Natal (UKZN). It targets key topics, formulas, and question styles that commonly appear in mid‑year and final assessments. The material aligns with what UKZN students often search for online under phrases like “FINA201 UKZN exam notes”, “UKZN Financial Management 201 past papers”, and “BCom Accounting financial management study notes”. Use it alongside your prescribed textbook, UKZN lecture slides, and tutorial questions for maximum benefit.

1. Foundations of Financial Management (UKZN FINA201 Core Theory)

Financial Management 201 builds on introductory accounting and economics to focus on how financial decisions are made in a business. For UKZN BCom Accounting students, this module is a bridge between basic principles and more advanced corporate finance in third year. Understanding the theoretical foundations is crucial, because Section A of the FINA201 exam typically includes conceptual and short‑theory questions alongside calculation‑based items.

1.1 The Role and Objectives of Financial Management

Financial management deals with how a business:

• Raises funds (financing decisions),
• Allocates funds to assets (investment decisions),
• Manages day‑to‑day cash flows (working capital decisions),
• Returns surplus funds to owners (dividend decisions).

In the UKZN BCom Accounting context, exam questions often test the main objective of financial management:

• Primary objective:
  Maximization of shareholder wealth, usually reflected in the market value of the company’s shares.

This is different from simple profit maximization:

• Profit is short‑term, accounting‑based, and can be manipulated (e.g., through depreciation policy).
• Shareholder wealth reflects:
  • Timing of cash flows,
  • Risk associated with those cash flows,
  • Value of money over time (time value of money),
  • Market perceptions and information.

Common exam comparison (theory question):

Aspect	Profit Maximization	Wealth Maximization
Time value of money	Ignored	Explicitly considered (discounted cash flows)
Risk	Often ignored	Incorporated via required rate of return
Measure basis	Accounting profit	Market value of equity (share price × shares)
Short vs long term	Short‑term focus	Long‑term sustainable value creation
Conceptual acceptance	Less relevant in modern finance	Dominant paradigm in corporate finance

Students often lose marks by stating only “the goal is to make profit” without linking to shareholder wealth and risk‑adjusted returns. Always mention risk, timing, cash flows, and share price in open‑ended questions.

1.2 The Agency Problem and Corporate Governance

Modern corporations, including those listed on the Johannesburg Stock Exchange (JSE), face an agency problem:

• Principals: Shareholders who own the company.
• Agents: Managers who control daily decisions.

The problem arises because managers’ interests may conflict with those of shareholders. For example:

• Managers may prefer empire building (expanding size) over profitable projects.
• They may avoid risky positive‑NPV investments to protect their jobs.
• They may overconsume perks (company cars, travel, corporate entertainment).

Agency costs include:

• Monitoring costs (e.g., audits, performance evaluations),
• Bonding costs (e.g., incentive schemes, contracts),
• Residual loss (remaining inefficiency after controls).

Corporate governance in South Africa is guided by the King IV Report, which emphasizes:

• Ethical leadership,
• Transparency,
• Accountability,
• Fairness to all stakeholders.

Exam answers for FINA201 at UKZN should mention King IV when discussing governance and agency problems, especially in essay‑style questions.

1.3 The Financial Manager’s Decisions

Financial management decisions fall into three main categories, all testable in short questions:

1. Investment (Capital Budgeting) Decisions

   • Which long‑term projects to undertake,
   • How much to invest in plant, machinery, technology, and product lines.
   • Tools: NPV, IRR, Payback, Profitability Index.

2. Financing Decisions

   • How to fund the assets:
     • Equity (ordinary shares, retained earnings),
     • Debt (bank loans, bonds),
     • Hybrid instruments (preference shares, convertible debt).
   • Concerned with capital structure — the mix of debt and equity.

3. Dividend (Distribution) Decisions

   • How much of earnings to pay as dividends vs retain,
   • Consistency of dividend policy (stable vs residual),
   • Impact on share price and growth.

Additionally, working capital management overlaps with all three because it affects liquidity, profitability, and risk.

1.4 The Financial Environment in South Africa

UKZN FINA201 students are expected to be aware of the South African financial environment, especially:

• The role of the South African Reserve Bank (SARB) in setting the repo rate.
• The use of the prime lending rate by commercial banks.
• The importance of the JSE as a source of equity capital.
• Taxation aspects (e.g., corporate tax currently in the region of 27% in many examples used in tutorials; always follow the rate given in the exam question).

In essay questions about cost of capital and capital structure, reference to South African interest rates, inflation, and the JSE can earn extra marks for application.

2. Time Value of Money and Valuation (Core Quantitative Skills for FINA201)

A large portion of FINA201 assessment at UKZN revolves around time value of money (TVM) calculations. These feed directly into bond valuation, share valuation, and capital budgeting questions. Mastery of TVM concepts is non‑negotiable for exam success.

2.1 Core Time Value of Money Concepts

The time value of money states that a rand today is worth more than a rand in the future because:

• It can earn interest,
• Inflation erodes purchasing power,
• There is uncertainty and risk over time.

Key variables (standard notation):

• PV = Present Value
• FV = Future Value
• r = interest rate per period (decimal)
• n = number of periods
• PMT = constant payment each period (annuity)
• i = sometimes used for r in formulas

2.1.1 Single Amount: Future and Present Values

Future Value (FV) of a single cash flow:

[
FV = PV \times (1 + r)^n
]

Present Value (PV) of a single future cash flow:

[
PV = \frac{FV}{(1 + r)^n}
]

Example (style of UKZN tutorial question):

A UKZN BCom Accounting student invests R10 000 in a money market fund at an annual interest rate of 8% for 3 years.

• (FV = 10,000 (1+0.08)^3 = 10,000(1.259712) = R12,597.12)

If the student needs R12 597.12 in three years and the interest rate is 8%, the required investment today is the PV:

• (PV = \frac{12,597.12}{(1.08)^3} = R10,000)

In exams, always show the formula first, then substitution, then answer, with units (R).

2.1.2 Annuities: Equal Cash Flows

An annuity is a series of equal cash flows occurring at regular intervals.

Ordinary annuity: Cash flows occur at the end of each period.
Annuity due: Cash flows occur at the beginning of each period.

Present Value of an Ordinary Annuity (PVOA):

[
PV = PMT \times \frac{1 – (1 + r)^{-n}}{r}
]

Future Value of an Ordinary Annuity (FVOA):

[
FV = PMT \times \frac{(1 + r)^n – 1}{r}
]

Present Value of an Annuity Due (PVAD):

[
PV_{AD} = PV_{OA} \times (1 + r)
]

Future Value of an Annuity Due (FVAD):

[
FV_{AD} = FV_{OA} \times (1 + r)
]

Typical exam example:

A company plans to invest R20 000 at the end of each year for 5 years at 10% per annum. Find the future value.

[
FV = 20,000 \times \frac{(1+0.10)^5 – 1}{0.10} = 20,000 \times \frac{1.61051 – 1}{0.10} = 20,000 \times 6.1051 = R122,102
]

Always round final answers to two decimal places unless otherwise specified, but interim rounding can be reduced to four or five decimal places.

2.2 Compounding Conventions

In the South African context, banks and financial institutions may quote interest rates with different compounding frequencies.

• Annual compounding: Once per year.
• Semi‑annual: Twice per year.
• Quarterly: Four times per year.
• Monthly: Twelve times per year.

Nominal vs Effective Annual Rate:

• Nominal annual rate (j): The quoted rate, e.g., 12% per annum, compounded monthly.
• Effective Annual Rate (EAR):

[
EAR = \left(1 + \frac{j}{m}\right)^m – 1
]

where:

• (j) = nominal annual rate,
• (m) = number of compounding periods per year.

Example:

A bank offers 12% per annum compounded monthly.

[
EAR = \left(1 + \frac{0.12}{12}\right)^{12} – 1 = (1.01)^{12} – 1 = 1.126825 – 1 = 0.126825 \approx 12.68%
]

In FINA201 exams, you may be asked to compare two investment options with different compounding conventions. Always convert to EAR to make a valid comparison.

2.3 Bond Valuation (Debt Securities)

Bonds are long‑term debt instruments. UKZN FINA201 commonly tests:

• Pricing of bonds,
• Yield to maturity (YTM),
• Relationship between price and interest rates.

Key bond features:

• Face (par) value (F): Usually R1 000 in exam questions.
• Coupon rate: Annual interest rate applied to face value to determine annual coupon payment.
• Coupon payment (C): (C = \text{coupon rate} \times F)
• Maturity: Number of years until final payment.
• Required rate of return / YTM (r): Market‑determined return.

Bond price formula (annual coupons):

[
P_0 = \sum_{t=1}^{n} \frac{C}{(1+r)^t} + \frac{F}{(1+r)^n}
]

This can be rewritten using annuity and single‑sum formulas:

[
P_0 = C \times \frac{1 – (1+r)^{-n}}{r} + \frac{F}{(1+r)^n}
]

Example (UKZN‑style):

A company issues a 5‑year bond with face value R1 000, coupon rate 10% payable annually. If the required rate of return is 12%, find the bond price.

• C = 0.10 × 1 000 = R100
• F = R1 000
• r = 12% = 0.12
• n = 5

[
P_0 = 100 \times \frac{1 – (1.12)^{-5}}{0.12} + \frac{1,000}{(1.12)^5}
]

Compute:

• ((1.12)^{-5} = 1 / (1.12^5) = 1 / 1.7623 = 0.5674)
• (\frac{1 – 0.5674}{0.12} = \frac{0.4326}{0.12} = 3.605)
• 100 × 3.605 = R360.50
• (1,000 / 1.7623 = R567.40)

Total:

• (P_0 = 360.50 + 567.40 = R927.90) (approx.)

Because the required rate (12%) is higher than the coupon rate (10%), the bond sells at a discount (< R1 000).

Exam hint: If the answer is clearly above or below face value in a logically consistent way, you can quickly check your work for reasonableness.

2.4 Share Valuation (Equity Securities)

UKZN FINA201 often uses dividend discount models (DDM) to value ordinary shares, with emphasis on:

• Zero‑growth, constant‑growth, and multi‑stage growth shares.

2.4.1 Zero‑Growth (Perpetuity)

If dividends are expected to remain constant forever:

[
P_0 = \frac{D}{r_e}
]

where (D) is the constant annual dividend and (r_e) is the required return on equity.

2.4.2 Constant Growth (Gordon Growth Model)

If dividends grow at a constant rate (g) forever, and (r_e > g):

[
P_0 = \frac{D_1}{r_e – g}
]

where (D_1) is the dividend next year.

Example:

A JSE‑listed company is expected to pay a dividend of R3.00 next year. Dividends are expected to grow at 5% per year indefinitely. If investors require a 13% return, find the current share price.

[
P_0 = \frac{3.00}{0.13 – 0.05} = \frac{3.00}{0.08} = R37.50
]

Often, FINA201 questions first ask you to compute (r_e) using the CAPM (covered in Section 4), then use it in the Gordon model.

2.4.3 Multi‑Stage Dividend Growth

In practice, companies may have supernormal growth followed by constant growth. The process:

1. Forecast dividends explicitly for the supernormal period.
2. Compute the terminal price at the start of the constant‑growth phase using the Gordon model.
3. Discount all dividends and the terminal price back to the present at the required rate of return.

Multi‑stage models are standard in exam long questions, but the steps always follow this sequence. Marks are awarded for correct setup even if final numbers are off.

3. Capital Budgeting and Investment Decision‑Making

Capital budgeting is the heart of Financial Management 201 and is heavily examined in UKZN’s FINA201 exams. It involves evaluating long‑term projects (e.g., opening a new manufacturing plant, investing in new technology) to decide whether they add value to the firm.

3.1 Principles of Capital Budgeting

Capital budgeting decisions are characterized by:

• Large initial outlays,
• Long‑term impact on cash flows,
• Irreversibility (difficult to reverse without loss),
• Strategic importance to the business.

The guiding principle is to accept all projects that increase shareholder wealth, i.e., projects with a positive Net Present Value (NPV) when discounted at the appropriate cost of capital.

Key cash flow concepts:

• Initial investment (CF0): Typically negative (cash outflow).
• Operating cash flows (CF1, CF2, …): Cash inflows (or outflows) from the project’s operations.
• Terminal cash flow: Salvage value, working capital recovery, and other end‑of‑project cash flows.

Important distinctions:

• Use cash flows, not accounting profits.
• Consider incremental cash flows, i.e., changes caused by undertaking the project.
• Ignore sunk costs (already incurred, non‑recoverable).
• Include opportunity costs (benefits forgone by choosing the project).
• Consider tax effects and capital allowances where required.

3.2 Net Present Value (NPV)

NPV is defined as:

[
NPV = \sum_{t=0}^{n} \frac{CF_t}{(1 + k)^t}
]

where:

• (CF_t) = net cash flow at time t,
• (k) = required rate of return or cost of capital.

Decision rule:

• If NPV > 0 → Accept project (adds value).
• If NPV < 0 → Reject project.
• If NPV = 0 → Indifferent (project earns exactly the required rate).

Example (UKZN‑style capital budgeting question):

A manufacturing company in Durban (owned by shareholders) is considering a project with the following cash flows (after tax):

• Initial investment (time 0): R‑250 000
• Year 1: R80 000
• Year 2: R100 000
• Year 3: R120 000
• Year 4: R90 000

The required rate of return (cost of capital) is 12%. Compute the NPV.

[
NPV = \frac{-250,000}{(1.12)^0} + \frac{80,000}{(1.12)^1} + \frac{100,000}{(1.12)^2} + \frac{120,000}{(1.12)^3} + \frac{90,000}{(1.12)^4}
]

Calculate:

• (80,000 / 1.12 = 71,428.57)
• (100,000 / 1.2544 = 79,731.39)
• (120,000 / 1.4049 = 85,421.79)
• (90,000 / 1.5735 = 57,180.27)

Sum of PVs of inflows:

• (71,428.57 + 79,731.39 + 85,421.79 + 57,180.27 = 293,761.02)

NPV:

• (NPV = -250,000 + 293,761.02 = R43,761.02)

Since NPV > 0, the project should be accepted.

In FINA201 marking rubrics, clear layout of each period’s cash flow and discounting step often earns method marks even if final arithmetic differs slightly.

3.3 Internal Rate of Return (IRR)

The IRR is the discount rate that makes NPV = 0. It can be interpreted as the project’s expected rate of return.

[
0 = \sum_{t=0}^{n} \frac{CF_t}{(1 + IRR)^t}
]

Decision rule:

• If IRR > required rate (k) → Accept.
• If IRR < k → Reject.

In exams, IRR is commonly found using:

• Trial and error with two discount rates and linear interpolation, or
• A financial calculator if allowed (but you must still show the interpolation step if required).

Interpolation method:

1. Compute NPV at lower rate (k_L) and higher rate (k_H) with resulting NPVs (NPV_L) and (NPV_H), where:

   • (NPV_L > 0),
   • (NPV_H < 0).

2. Use:

[
IRR = k_L + \left[\frac{NPV_L}{NPV_L – NPV_H}\right] (k_H – k_L)
]

Be careful with signs. In UKZN exams, marks are awarded for correct identification of positive and negative NPV brackets and correct application of the formula.

3.4 Payback Period and Discounted Payback

The payback period measures how long it takes to recover the initial investment from net cash inflows.

• Simple payback: Ignores time value of money.
• Discounted payback: Discounts cash flows before cumulating.

Simple payback decision rule:

• Accept if payback ≤ maximum acceptable period (set by management).

Despite its limitations (ignoring time value and cash flows after payback), payback remains a popular measure due to its simplicity and focus on liquidity.

Example:

Using the earlier project with initial outlay of R250 000 and annual inflows:

• Year 1: 80 000 (cumulative: 80 000)
• Year 2: 100 000 (cumulative: 180 000)
• Year 3: 120 000 (cumulative: 300 000)

Payback occurs between years 2 and 3:

• Remaining after year 2: 250 000 – 180 000 = 70 000
• Fraction of year 3: 70 000 / 120 000 = 0.5833
• Payback = 2 + 0.5833 ≈ 2.58 years

If the firm’s maximum payback is 3 years, the project is accepted.

3.5 Comparing Capital Budgeting Methods

In FINA201 exam essays, you may be asked to critically evaluate methods.

NPV:

• Pros:
  • Considers time value of money,
  • Uses cash flows, not profits,
  • Reflects shareholder wealth directly.
• Cons:
  • Requires an estimate of cost of capital,
  • More complex to explain to non‑financial managers.

IRR:

• Pros:
  • Gives a rate of return, which many managers understand,
  • Considers time value of money.
• Cons:
  • Can give multiple IRRs with non‑conventional cash flows,
  • May conflict with NPV for mutually exclusive projects,
  • Assumes reinvestment at IRR (unrealistic in some cases).

Payback:

• Pros:
  • Simple and easy to compute,
  • Focuses on liquidity and risk (earlier recovery).
• Cons:
  • Ignores time value (simple version),
  • Ignores cash flows after payback,
  • No direct indication of value creation.

In most theory questions, the conclusion should be that NPV is the preferred method for maximizing shareholder wealth, though firms may use payback as a supplementary risk/ liquidity measure.

4. Cost of Capital and Capital Structure (UKZN FINA201 Focus)

Cost of capital and capital structure topics link the investment and financing decisions. They are frequently tested through calculations (WACC, CAPM) and conceptual questions on leverage and risk.

4.1 Components of the Cost of Capital

The cost of capital is the required rate of return that a firm must earn on its investments to satisfy providers of capital (debt and equity).

Main components:

1. Cost of Debt (Kd)
2. Cost of Preference Shares (Kp)
3. Cost of Equity (Ke)

The Weighted Average Cost of Capital (WACC) combines these components based on their proportions in the firm’s capital structure.

4.2 Cost of Debt (Kd)

The before‑tax cost of debt is the yield required by lenders. For irredeemable debt:

[
K_d^{before} = \frac{I}{P_0}
]

where:

• (I) = annual interest payment,
• (P_0) = current market price of the debt.

For redeemable debt, Kd is calculated similarly to IRR (discount rate equating the present value of interest and principal to the current price).

In practice, exams often simplify and use:

[
K_d^{after} = K_d^{before} \times (1 – T_c)
]

where (T_c) is the corporate tax rate, because interest is tax deductible. For example, if:

• Nominal interest rate = 10%,
• Corporate tax rate = 27%,

then:

[
K_d^{after} = 0.10 \times (1 – 0.27) = 0.10 \times 0.73 = 0.073 = 7.3%
]

Always use the after‑tax cost of debt in WACC calculations.

4.3 Cost of Preference Shares (Kp)

Preference shares typically pay a fixed dividend and may be:

• Perpetual (no maturity), or
• Redeemable at a specified future date.

For perpetual preference shares, the cost is similar to a perpetuity:

[
K_p = \frac{D_p}{P_0}
]

where:

• (D_p) = annual preference dividend,
• (P_0) = current price of a preference share.

Because preference dividends are not tax deductible, there is no tax adjustment.

4.4 Cost of Equity (Ke)

The cost of equity is the return required by ordinary shareholders. Two main approaches are examined:

4.4.1 Dividend Growth Model (DGM) Approach

[
K_e = \frac{D_1}{P_0} + g
]

where:

• (D_1) = expected dividend next period,
• (P_0) = current share price,
• (g) = constant growth rate of dividends.

This is rearranged Gordon Growth. It is especially useful when a firm’s dividend history and growth can be estimated.

4.4.2 Capital Asset Pricing Model (CAPM) Approach

The CAPM links expected return to systematic (market) risk:

[
K_e = R_f + \beta (R_m – R_f)
]

where:

• (R_f) = risk‑free rate (e.g., SA government bond yield),
• (\beta) = beta coefficient (measure of share’s systematic risk),
• (R_m) = expected market return,
• (R_m – R_f) = market risk premium.

Example (UKZN tutorial‑style):

Assume:

• Risk‑free rate (R_f = 8%),
• Market return (R_m = 14%),
• Company beta (\beta = 1.2).

Then:

[
K_e = 0.08 + 1.2 (0.14 – 0.08) = 0.08 + 1.2(0.06) = 0.08 + 0.072 = 0.152 = 15.2%
]

Since UKZN exams often provide beta and market figures, always clearly substitute into the CAPM formula and interpret.

4.5 Weighted Average Cost of Capital (WACC)

The WACC is the overall required return on the firm’s assets, weighted by the proportion of each capital source:

[
WACC = w_d K_d^{after} + w_p K_p + w_e K_e
]

where:

• (w_d, w_p, w_e) are the market value weights of debt, preference shares, and equity.

Important: Use market values, not book values, unless the question explicitly instructs otherwise.

Example:

A company has the following capital structure (market values):

• Debt: R2 000 000 at after‑tax cost 7.3%
• Preference shares: R500 000 at cost 10%
• Ordinary equity: R3 500 000 at cost 14%

Total capital = 2 000 000 + 500 000 + 3 500 000 = R6 000 000

Weights:

• (w_d = 2,000,000 / 6,000,000 = 0.3333)
• (w_p = 500,000 / 6,000,000 = 0.0833)
• (w_e = 3,500,000 / 6,000,000 = 0.5833)

Compute WACC:

[
WACC = 0.3333(0.073) + 0.0833(0.10) + 0.5833(0.14)
]

• (0.3333 × 0.073 = 0.0243)
• (0.0833 × 0.10 = 0.0083)
• (0.5833 × 0.14 = 0.0817)

Sum: (0.0243 + 0.0083 + 0.0817 = 0.1143 = 11.43%)

Thus, the firm’s WACC is 11.43%, which would be used as the discount rate in NPV calculations for average‑risk projects.

4.6 Capital Structure and Leverage

Capital structure is the mix of debt and equity financing. Leverage refers to the extent to which a business uses fixed costs in its cost structure, including fixed interest charges.

Key relationships:

• Using debt (leverage) can increase return on equity when the firm’s operating return exceeds the cost of debt (positive leverage).
• However, higher debt also increases financial risk and the required return on equity.

Common exam concepts:

• Business risk: Risk arising from operations (sales volatility, cost structure).
• Financial risk: Additional risk to equity holders due to the use of debt.
• Total risk to shareholders: Combination of business and financial risk.

Students may also need to interpret EPS–EBIT analysis, which compares earnings per share at different levels of EBIT (operating profit) under alternative capital structures. The indifference point (where EPS is equal under two financing plans) can be calculated by solving for EBIT.

Although FINA201 at UKZN typically emphasizes conceptual understanding over detailed EPS calculations, students should still be able to:

• Explain how increased debt raises EPS volatility,
• Discuss trade‑off between tax shield benefits of debt and costs of financial distress.

In essay questions, a good answer will mention both Modigliani & Miller (without and with taxes) and real‑world imperfections (taxes, bankruptcy costs, agency costs, and asymmetric information) that influence optimal capital structure decisions.

5. Working Capital Management and Exam Strategy for FINA201 (UKZN BCom Accounting)

Working capital management is a core part of financial management practice and often appears in Section B or C of the FINA201 exam. In addition, success in the module depends on exam strategy: understanding question patterns, time allocation, and common pitfalls.

5.1 Working Capital Concepts

Working capital refers to the short‑term resources needed for day‑to‑day operations.

• Gross working capital: Total current assets.
• Net working capital (NWC): Current assets – current liabilities.

Key current assets:

• Cash and bank balances,
• Accounts receivable (debtors),
• Inventory (stock),
• Short‑term investments.

Key current liabilities:

• Accounts payable (creditors),
• Bank overdrafts,
• Short‑term loans,
• Outstanding expenses.

Objectives of working capital management:

• Maintain sufficient liquidity to meet short‑term obligations,
• Minimize cost of funds tied up in working capital,
• Find an optimal trade‑off between liquidity and profitability.

5.2 Cash Management

Cash is the most liquid asset but earns little to no return. Firms must decide:

• How much cash to keep on hand,
• How to invest surplus cash,
• How to speed up cash inflows and delay outflows (within ethical and contractual limits).

Common strategies:

• Speeding up collections:
  • Efficient invoicing,
  • Discounts for early payment,
  • Electronic funds transfer,
  • Strong credit control.
• Slowing down payments:
  • Use full credit period from suppliers,
  • Negotiate better terms.

In exam scenarios, you may be asked to calculate cash budgets, forecast cash surpluses/deficits, and suggest short‑term financing (e.g., overdraft) or investment options (e.g., money market instruments).

5.3 Inventory Management

Inventory represents a significant portion of working capital in many businesses. The aim is to balance:

• Ordering costs: Costs of placing and receiving orders.
• Holding costs: Storage, insurance, obsolescence, and opportunity cost of capital.

The Economic Order Quantity (EOQ) model is a classic tool, though FINA201 at UKZN may only cover it conceptually or with basic calculations.

EOQ formula:

[
EOQ = \sqrt{\frac{2DS}{H}}
]

where:

• D = annual demand,
• S = ordering cost per order,
• H = holding cost per unit per year.

Interpretation: EOQ minimizes the total of ordering and holding costs.

5.4 Accounts Receivable (Debtors) Management

Granting credit increases sales but creates:

• Risk of bad debts,
• Increased collection costs,
• Higher investment in debtors.

Key decisions:

• Credit policy (how strict or lenient),
• Credit terms (e.g., 2/10, net 30),
• Credit standards and checks,
• Collection procedures.

In exams, students may be asked to evaluate a proposed change in credit policy by comparing:

• Increase in profit from higher sales,
• Additional costs and bad debts,
• Additional investment in receivables (and its cost of capital).

The firm should adopt a policy change only if incremental profit exceeds incremental cost.

5.5 Short‑Term Financing

Sources of short‑term finance include:

• Trade credit,
• Bank overdrafts,
• Short‑term bank loans,
• Commercial paper (for large, creditworthy firms).

Key concepts:

• Spontaneous financing: e.g., trade credit that arises automatically from operations.
• Cost of trade credit: If discount is offered for early payment, the effective cost of not taking the discount can be very high.

Example:

Credit terms: 2/10, net 30
Meaning:

• 2% discount if payment is made within 10 days,
• Full amount due by day 30.

Cost of not taking discount:

[
\text{Cost} = \frac{\text{Discount%}}{1 – \text{Discount%}} \times \frac{365}{\text{Payment date} – \text{Discount period end}}
]

[
= \frac{0.02}{1 – 0.02} \times \frac{365}{30 – 10} = \frac{0.02}{0.98} \times 18.25 = 0.02041 × 18.25 = 0.3726 = 37.26%
]

A 37.26% effective annual cost is high compared to many bank lending rates, so firms usually take such discounts when possible.

5.6 FINA201 Exam Strategy (University of KwaZulu‑Natal, BCom Accounting)

Beyond mastering content, students at UKZN must approach FINA201 exams strategically. Past exam trends show a mix of:

• Theory questions (definitions, discussion, short essays),
• Calculation questions (TVM, valuation, capital budgeting, WACC),
• Application scenarios (interpretation and recommendation).

5.6.1 Common Question Types

1. Section A – Short Questions (Multiple Choice / Definitions / Brief Calculations)

   • Time value of money basics,
   • Conceptual questions on objectives of financial management,
   • Short bond or share valuation,
   • Quick cost of capital or payback questions.

2. Section B – Medium‑Length Questions

   • Detailed NPV vs IRR analysis for one or two projects,
   • WACC calculation with given capital structure,
   • Working capital scenarios (e.g., credit policy evaluation).

3. Section C – Long‑Form Integrated Questions

   • Case‑style questions combining:
     • Capital budgeting,
     • Cost of capital,
     • Risk assessment and qualitative discussion.

These patterns are consistent across several semesters of UKZN FINA201 past papers that students frequently search (e.g., “FINA201 2022 exam UKZN”, “UKZN Financial Management 201 past papers with memo”).

5.6.2 Time Management and Layout

For a typical 3‑hour exam with 100 marks:

• Aim for ~1.8 minutes per mark.
• Allocate time proportional to marks:
  • 20‑mark question → ≈ 36 minutes,
  • 30‑mark question → ≈ 54 minutes.

Best practices:

• Start with questions/topics where you are most confident to secure marks early.
• For calculation questions:
  • Use separate workings pages if necessary,
  • Clearly label each step,
  • State formulas before substituting,
  • Box or underline final answers with units.

Even if you cannot fully solve a problem, partial work with the correct approach can earn method marks.

5.6.3 Common Mistakes and How to Avoid Them

1. Ignoring the Time Value of Money

   • Using simple sums (adding cash flows) instead of discounting.
   • Solution: For any multi‑period cash flow question, immediately write the discounting formula.

2. Incorrect Sign Convention

   • Treating initial investment as positive.
   • Solution: Always set CF0 as negative for investment outflows.

3. Using Book Values Instead of Market Values for WACC

   • Solution: Read the question carefully; unless clearly specified, use market values.

4. Mixing Up Rates in CAPM and DGM

   • Using nominal risk‑free rate with real market return, or forgetting to add growth in DGM.
   • Solution: Carefully identify which numbers are percentages and whether they are returns, growth rates, or discount rates.

5. Poor Rounding and Presentation

   • Rounding too early can lead to large errors.
   • Solution: Keep 4–5 decimal places in intermediate steps; round final answers appropriately.

6. Not Answering the “Interpretation” Part

   • Many questions ask to advise management, comment on risk, or recommend a project.
   • Solution: After calculations, always write a brief conclusion:
     • “Project A should be accepted because NPV is positive (R43 761.02), indicating it adds to shareholder wealth.”

5.6.4 Integrating Lecture Notes, Tutorials, and This Guide

To align with UKZN’s Financial Management 201 expectations:

• Use this Exam Pack as a framework.
• Then overlay:
  • Your lecture slides from the UKZN module site,
  • Tutorial questions and memos (especially those flagged as “exam style”),
  • Any additional reading recommended by the lecturer.

Create a summary sheet of:

• Key formulas (NPV, IRR, WACC, DGM, CAPM, annuity formulas),
• Typical steps for each type of calculation,
• Common theory points (agency problem, capital structure theories, working capital trade‑offs).

Finally, attempt at least two past papers under exam conditions, such as:

• FINA201 Semester 1 June exam,
• FINA201 November final exam (in years where available),

using the same time allocation strategy you will apply in the actual exam.

This FINA201: Financial Management 201 Exam Pack is tailored to the University of KwaZulu‑Natal BCom in Accounting curriculum, with emphasis on exam‑style presentation, South African financial context, and integration of theory with quantitative techniques. Mastering these concepts and practicing their application under time pressure will significantly improve the likelihood of success in UKZN’s Financial Management 201 assessments.