MAC3702 Application of Financial Management Techniques Exam Questions (UNISA BCom Management Accounting Study Guide)

This study guide provides comprehensive exam-focused notes for MAC3702 – Application of Financial Management Techniques for UNISA BCom Management Accounting students. It is written with South African university exam styles in mind, with strong emphasis on UNISA MAC3702 exam questions, formats, calculations and common problem areas. It also connects briefly to similar financial management techniques modules at other South African universities (e.g. CUT, UJ, NWU), so you can recognise overlapping content and question styles.

1. Overview of MAC3702 and Typical Exam Structure

1.1 Position of MAC3702 in the UNISA BCom Management Accounting Curriculum

MAC3702 (Application of Financial Management Techniques) is typically a third-year module in the BCom in Management Accounting stream at UNISA. It builds on earlier modules such as:

• MAC2601 – Principles of Management Accounting
• MAC2602 – Management Accounting Techniques
• FAC2601 / FAC2602 – Financial Accounting
• QMI1500 – Quantitative Methods or similar statistics modules

Where MAC2602 focuses on techniques (e.g. cost-volume-profit analysis, budgeting, basic investment appraisal), MAC3702 moves into applied financial management, including:

• Investment decision-making (capital budgeting)
• Financing decisions (cost of capital, capital structure)
• Working capital management
• Business valuations
• Risk and return analysis
• Dividend decisions

At other South African universities, similar content may appear in modules such as:

• CUT: MACF371 Financial Management Techniques
• UJ: FIN3FM3 Financial Management
• NWU: FMAF321 Financial Management Applications

Question styles may differ slightly, but the core techniques and logic are essentially the same.

1.2 Typical UNISA MAC3702 Exam Format

While exact formats can change, MAC3702 exam and semester test papers usually share these characteristics:

• Mix of calculation-based and discussion/theory questions
• Often 4–6 long questions with multiple sub-questions
• Typically marks per paper: 100 marks
• Time allocation usually assumes 1.8 minutes per mark (e.g. 180 minutes for 100 marks)
• Questions carry significant marks (15–30 marks each), requiring both:
  • Detailed numeric workings, and
  • Short, focused explanations and interpretations

Common structure example:

1. Capital budgeting (NPV, IRR, payback, risk analysis) – ±20–30 marks
2. Cost of capital and capital structure – ±15–20 marks
3. Working capital management – ±15–20 marks
4. Valuations and dividend policy – ±15–20 marks
5. Risk & return / portfolio theory / financial management theory – ±10–20 marks

Past exam papers for MAC3702 often integrate these topics in scenario-based questions, where you must:

• Perform several calculations (e.g. compute NPV, WACC, ratios)
• Interpret the results
• Make a recommendation (e.g. “Accept” / “Reject the project”)
• Justify your recommendation with financial logic and sometimes qualitative factors

1.3 Exam Command Words and What They Require

Understanding the verbs used in MAC3702 exam questions is essential:

Command word	What the examiner expects
Calculate	Show full workings, formulae and final value.
Compute	Similar to “calculate”; numerical answer with workings.
Determine	Often a multi-step calculation; show the logic.
Explain	Clear, concise description in full sentences (no bullet-only answers unless asked).
Discuss	Balanced exploration of advantages, disadvantages, assumptions; more depth than “explain”.
Evaluate	Assess pros and cons and give a reasoned conclusion or judgment.
Compare	Point out similarities and differences between concepts or methods.
Recommend	Give a clear choice backed by calculated evidence and theory.

Marks are often split, for example:

• 12 marks for calculations (NPV, IRR, etc.)
• 8 marks for discussion/recommendation

Never ignore the theory marks; they are often the difference between a borderline fail and a pass.

1.4 General Exam Strategy for MAC3702

A solid strategy for UNISA MAC3702 exam questions includes:

1. Time Management

   • Quickly add up total marks and divide available time.
   • Plan to spend not more than 1.5–2 minutes per mark.
   • Leave 5–10 minutes at the end for quick review.

2. Attempt All Questions

   • MAC3702 exam papers often have compulsory questions.
   • If optional questions exist, choose the ones where you are strongest (capital budgeting and cost of capital are usually key).

3. Show Workings Clearly

   • Label every step.
   • Use headings: Step 1: Calculate WACC, Step 2: Compute project cash flows, etc.
   • Markers give partial credit even if the final answer is wrong.

4. Use Common-Sense Checks

   • If a payback period is longer than the project life, check for a mistake.
   • If IRR is negative, ask whether that is theoretically possible for the given cash flows.
   • Confirm that sums and subtotals in your tables are correct.

5. Blend Calculation and Interpretation

   • Always interpret: “The NPV of R250 000 is positive, indicating that the project is expected to add value; therefore the investment should be accepted, assuming all assumptions hold.”

6. Link to Syllabus and Prescribed Material

   • Use correct terminology from your UNISA MAC3702 study guide and the prescribed text (often a financial management textbook like Correia et al. or similar).
   • Use formulae as given in the study material (e.g. WACC, Gordon growth model, CAPM).

2. Capital Budgeting: Core Techniques and Exam-Style Questions

Capital budgeting is one of the most heavily examined areas in MAC3702, and appears similarly in modules like CUT’s MACF371 and UJ’s FIN3FM3. Questions often revolve around:

• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Payback and discounted payback
• Accounting rate of return (ARR)
• Equivalent annual annuity (EAA)
• Project appraisal under risk (sensitivity, scenario analysis)

2.1 Net Present Value (NPV)

Definition: NPV is the sum of the present values of all cash inflows and outflows of a project, discounted at the project’s cost of capital.

Formula:

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

Where:

• ( CF_t ) = cash flow at time t (negative for outflows, positive for inflows)
• ( k ) = discount rate (usually WACC or required rate of return)
• ( n ) = project life in years

Key points examiners test:

• Correct identification of relevant cash flows (incremental, after tax, including working capital adjustments).
• Correct treatment of initial outlay, scrap value, tax and depreciation tax shields.
• Use of appropriate discount rate.
• Interpretation and recommendation.

Example Exam-Style NPV Question

You are given the following information for Project Alpha for a company being studied in MAC3702 at UNISA:

• Initial cost of machinery: R1 200 000, payable at t=0.
• Project life: 5 years.
• Annual additional revenue: R900 000.
• Annual additional operating expenses (excluding depreciation): R450 000.
• Machinery will be depreciated on a straight-line basis over 5 years to nil for tax purposes.
• Corporate tax rate: 28%.
• Required rate of return (after tax): 12%.
• Working capital of R150 000 is needed at t=0 and will be fully recovered at the end of year 5.
• Expected salvage (market) value of machinery at year 5: R100 000 (taxable).

Required (typical MAC3702):

1. Calculate the after-tax cash flows for each year.
2. Calculate the NPV of the project.
3. Advise whether the project should be accepted.

Step 1: Depreciation

• Cost: R1 200 000
• Useful life: 5 years
• Annual depreciation: R1 200 000 / 5 = R240 000

Step 2: Profit before tax (for tax calculation)

Each year (1–5):

• Revenue: R900 000
• Operating expenses: R450 000
• Depreciation: R240 000

Profit before tax (PBT): 900 000 – 450 000 – 240 000 = R210 000

Tax: 28% of 210 000 = R58 800

Profit after tax (PAT): 210 000 – 58 800 = R151 200

Step 3: Operating cash flow

Add back non-cash depreciation:

Operating cash flow (years 1–5) = PAT + Depreciation
= 151 200 + 240 000 = R391 200 per year

Step 4: Terminal cash flow in year 5

• Salvage value: R100 000
• Tax on recoupment: Because tax base is zero (fully depreciated) and proceeds are 100 000, entire 100 000 is a taxable recoupment.
  • Tax on recoupment: 28% of 100 000 = R28 000
  • After-tax salvage proceeds: 100 000 – 28 000 = R72 000
• Recovery of working capital: R150 000

Terminal cash flow at year 5 = 72 000 + 150 000 = R222 000

Total cash flow in year 5 = Operating CF + Terminal CF = 391 200 + 222 000 = R613 200

Step 5: Cash flow timeline

• Year 0: −1 200 000 (machinery) −150 000 (working capital) = −R1 350 000
• Years 1–4: R391 200 each
• Year 5: R613 200

Step 6: Discount at 12%

We need present value factors at 12% (often provided in exams; here approximate values):

• PV factor year 1 (12%): 0.893
• Year 2: 0.797
• Year 3: 0.712
• Year 4: 0.636
• Year 5: 0.567

Compute PVs:

• Year 1: 391 200 × 0.893 ≈ R349 542
• Year 2: 391 200 × 0.797 ≈ R311 408
• Year 3: 391 200 × 0.712 ≈ R278 654
• Year 4: 391 200 × 0.636 ≈ R248 983
• Year 5: 613 200 × 0.567 ≈ R347 684

Total PV of inflows:

349 542 + 311 408 + 278 654 + 248 983 + 347 684
= R1 536 271

NPV = PV of inflows − Initial outlay
= 1 536 271 − 1 350 000 = R186 271 positive

Interpretation and Recommendation:

Since NPV = R186 271 > 0, accepting Project Alpha is expected to increase shareholder wealth; therefore, the project should be accepted, assuming that all projections and the 12% discount rate are reliable.

2.2 Internal Rate of Return (IRR)

Definition: IRR is the discount rate that makes the NPV of a project equal to zero.

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

Exam points:

• Usually computed via interpolation between two discount rates.
• If NPV at 10% is positive and at 15% is negative, IRR lies between 10% and 15%.
• IRR is compared to the required rate of return (hurdle rate).

Interpolation formula:

[
IRR \approx R_1 + \frac{NPV_1}{NPV_1 – NPV_2} \times (R_2 – R_1)
]

Where:

• ( R_1 ) = lower discount rate
• ( R_2 ) = higher discount rate
• ( NPV_1 ) = NPV at ( R_1 )
• ( NPV_2 ) = NPV at ( R_2 )

Typical exam twist:

• You might be given two NPVs and asked to estimate the IRR.
• You may have to decide between projects using IRR (including conflicts with NPV).

2.3 Payback Period and Discounted Payback

Payback period: Time taken for cumulative cash inflows to equal the initial investment.

• Simple payback ignores time value of money.
• Discounted payback uses discounted cash flows.

Example (based on Project Alpha’s cash flows):

Initial outlay: 1 350 000
Annual inflow (years 1–4): 391 200
Year 5 inflow: 613 200

Simple payback:

• End year 1: cumulative 391 200
• End year 2: 782 400
• End year 3: 1 173 600
• End year 4: 1 564 800

Payback occurs between years 3 and 4.

Shortfall at end of year 3:
1 350 000 – 1 173 600 = 176 400

Payback in year 4 fraction:
176 400 / 391 200 ≈ 0.451

Payback period ≈ 3.45 years.

Discounted payback would use the PV of each inflow; the payback will be longer because early receipts are discounted.

Exam comments:

• Payback is often tested as a secondary method alongside NPV/IRR.
• You may be asked to explain its limitations, such as:
  • Ignores cash flows after payback.
  • Ignores time value (simple payback).
  • Has no direct link to wealth maximisation.

2.4 Accounting Rate of Return (ARR)

ARR is based on accounting profit, not cash flows.

Typical formula (UNISA style, confirm from your study guide):

[
ARR = \frac{\text{Average annual accounting profit}}{\text{Average investment}} \times 100%
]

Average investment often calculated as:

[
\text{Average investment} = \frac{\text{Initial cost} + \text{Final salvage value}}{2}
]

Example continuing Project Alpha:

• PBT each year: R210 000
• Tax: R58 800
• PAT: R151 200

Accounting profit for ARR usually uses after-tax profits (unless specified).

Average annual profit = 151 200 (constant each year).
Salvage value (market) at year 5: R100 000.

Average investment:

(1 200 000 + 100 000) / 2 = 1 300 000 / 2 = R650 000

ARR:

(151 200 / 650 000) × 100% ≈ 23.26%

Exam detail:
You must check whether the required rate (e.g. 18%) is before or after tax, and match the basis. ARR is rarely the primary decision tool but may be asked for comparison and conceptual understanding.

2.5 Equivalent Annual Annuity (EAA) and Mutually Exclusive Projects of Different Life

Where projects have different lives (e.g. 3 vs 5 years), exam questions often ask for:

• NPV of each project; and/or
• Equivalent annual annuity (EAA) to compare them on a per-year basis.

Steps:

1. Compute the NPV of each project over its life (assuming repeatability if needed).
2. Convert NPV into an equivalent annual amount using the annuity factor:

[
EAA = \frac{NPV}{AF_{k,n}}
]

Where:

• ( AF_{k,n} ) is the annuity factor at discount rate k over n years.

The project with the higher EAA is preferable, if projects are repeated indefinitely on the same terms.

2.6 Risk in Capital Budgeting: Sensitivity and Scenario Analysis

The MAC3702 syllabus, as well as similar modules at CUT and UJ, often test risk adjustments in project appraisal.

Sensitivity analysis:

• Change one key variable at a time (e.g. selling price, sales volume, variable cost, discount rate).
• Determine the percentage change required to reduce NPV to zero.
• The more sensitive NPV is to a variable, the more critical that variable is.

Scenario analysis:

• Combine changes in multiple variables in “best case”, “base case”, “worst case” scenarios.
• Calculate NPV under each scenario.
• Assess riskiness of project based on spread of NPVs.

Decision trees and real options might appear at a conceptual level; be prepared to explain, but heavy calculations are less common than NPV/IRR in time-constrained exams.

3. Cost of Capital, Capital Structure and Long-Term Financing

UNISA’s MAC3702, as well as modules like NWU’s FMAF321 and CUT’s MACF371, require solid knowledge of how to compute and apply cost of capital. This is central to investment appraisal, valuation and capital structure decisions.

3.1 Components of the Cost of Capital

Typical components:

1. Cost of equity (Ke)
2. Cost of preference shares (Kp)
3. Cost of debt (Kd) – before and after tax
4. Weighted Average Cost of Capital (WACC)

3.1.1 Cost of Debt

If a company issues debt at a nominal interest rate ( i ):

• Interest expense is tax-deductible.
• After-tax cost of debt:

[
K_d = i \times (1 – T)
]

Where:

• ( T ) = corporate tax rate (e.g. 28% in South Africa)
• If a firm pays 12% interest and tax is 28%, after-tax Kd = 12% × (1 – 0.28) = 12% × 0.72 = 8.64%

In exams, you may be given:

• Face value (e.g. R1 000 per debenture)
• Coupon rate
• Market price
• Redemption value and date

If debt is traded below or above par, you use IRR/YTM methods to calculate the effective pre-tax cost of debt, then adjust for tax.

3.1.2 Cost of Preference Shares

If preference shares pay a fixed dividend ( D_p ) and their current market price is ( P_p ):

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

For example, if a company has 10% preference shares with a par value of R2, but they trade at R1.80:

• Annual dividend: 10% × 2 = R0.20
• Market price: 1.80
• ( K_p = 0.20 / 1.80 ≈ 11.11% )

Preference dividends are not tax-deductible, so there is no tax adjustment.

3.1.3 Cost of Equity

Common models:

1. Dividend Growth Model (Gordon Growth):

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

Where:

• ( D_1 ) = expected dividend next year
• ( P_0 ) = current share price
• ( g ) = expected constant growth rate in dividends

2. Capital Asset Pricing Model (CAPM):

[
K_e = R_f + \beta (R_m – R_f)
]

Where:

• ( R_f ) = risk-free rate (e.g. government bond yield)
• ( R_m ) = expected market return
• ( R_m – R_f ) = market risk premium
• ( \beta ) = beta of the company’s shares

Exam tips:

• Identify whether you’re expected to use CAPM or Dividend Growth from the data given.
• If dividend growth model data is given (current dividend, growth rate, share price), use that.
• If CAPM variables are given (( R_f, R_m, \beta )), use CAPM.

3.2 Weighted Average Cost of Capital (WACC)

WACC is the average cost of all sources of financing, weighted by their market values.

[
WACC = \frac{E}{V}K_e + \frac{P}{V}K_p + \frac{D}{V}K_d(1 – T)
]

Where:

• ( E ) = market value of equity
• ( P ) = market value of preference shares
• ( D ) = market value of debt
• ( V = E + P + D ) = total market value of the firm’s financing
• ( K_e, K_p, K_d ) = costs of equity, preference shares, and debt
• ( T ) = tax rate

Example MAC3702-Style WACC Question

A company, Sunrise Ltd, listed on the JSE, has the following capital structure (market values):

• 500 000 ordinary shares trading at R8 per share.
• 100 000 10% preference shares with par value R3, trading at R2.70.
• 5 000 debentures with face value R1 000 each, trading at R950; coupon rate is 11% p.a.; interest is paid annually; debentures are redeemable in 5 years at par.
• The corporate tax rate is 28%.
• The risk-free rate ( R_f ) is 6%, expected market return ( R_m ) is 14%, and the company’s equity beta is 1.2.

Required:

1. Compute the cost of equity using CAPM.
2. Estimate the before-tax cost of debt (approximate yield).
3. Calculate the WACC.

Step 1: Cost of Equity (CAPM)

[
K_e = R_f + \beta (R_m – R_f) = 6% + 1.2 (14% – 6%)
]

Market risk premium = 14% – 6% = 8%

[
K_e = 6% + 1.2 \times 8% = 6% + 9.6% = 15.6%
]

Step 2: Cost of Preference Shares

Par value: R3, dividend rate: 10%
Dividend: 0.10 × 3 = R0.30
Market price: R2.70

[
K_p = \frac{0.30}{2.70} = 11.11%
]

Step 3: Before-tax Cost of Debt (Approximated)

You can use either IRR over 5 years or a simplified approximation.

For exam purposes, UNISA sometimes accepts the current yield if explicit IRR is not required:

Current yield = ( \frac{\text{Coupon}}{\text{Market price}} )

Coupon: 11% of 1 000 = R110
Market price: R950

[
K_{d,approx} \approx \frac{110}{950} = 11.58%
]

Because the redeemable value is at par and the term is only 5 years, the exact YTM will be slightly above the coupon (since price < par), so 11.6% is a reasonable approximation.

After-tax cost of debt:

[
K_d (1 – T) = 11.58% \times (1 – 0.28) = 11.58% \times 0.72 ≈ 8.34%
]

Step 4: Market Values

• Equity (E): 500 000 × 8 = R4 000 000
• Preference shares (P): 100 000 × 2.70 = R270 000
• Debt (D): 5 000 × 950 = R4 750 000

Total V = 4 000 000 + 270 000 + 4 750 000 = R9 020 000

Weights:

• ( \frac{E}{V} = 4 000 000 / 9 020 000 ≈ 0.4437 )
• ( \frac{P}{V} = 270 000 / 9 020 000 ≈ 0.0299 )
• ( \frac{D}{V} = 4 750 000 / 9 020 000 ≈ 0.5264 )

Step 5: WACC

[
WACC = 0.4437 \times 15.6% + 0.0299 \times 11.11% + 0.5264 \times 8.34%
]

Compute each component:

• Equity: 0.4437 × 15.6% ≈ 6.92%
• Preference: 0.0299 × 11.11% ≈ 0.33%
• Debt: 0.5264 × 8.34% ≈ 4.39%

Sum:

WACC ≈ 6.92% + 0.33% + 4.39% = 11.64%

This WACC would be used as the discount rate for future NPV calculations of investments with similar risk.

3.3 Capital Structure Theories and Exam Discussion Questions

MAC3702 examinations often include theory questions on capital structure, requiring short essays or bullet point discussions.

Common theories:

1. Traditional view
2. Modigliani and Miller (MM) propositions (with and without tax)
3. Trade-off theory
4. Pecking order theory
5. Signalling theory

Key discussion angles:

• Impact of leverage on WACC and firm value.
• Role of tax shield of debt.
• Financial distress costs and agency costs.
• Real-world implications for South African companies (e.g. JSE-listed firms).

Example discussion question:

“Discuss the impact of increasing financial leverage on the weighted average cost of capital (WACC) and the market value of a firm according to the traditional view and Modigliani & Miller (without taxes).”

Required points:

• Traditional view:

  • Initially, as debt increases (cheap source of finance), WACC decreases.
  • At low to moderate debt levels, cost of equity doesn’t rise much.
  • Beyond an optimal capital structure, higher debt increases financial risk.
  • Cost of equity rises significantly, pushing WACC up.
  • There exists an optimal capital structure that minimises WACC and maximises firm value.

• MM without tax:

  • Assumes perfect capital market, no taxes, no bankruptcy costs.
  • Firm value is independent of capital structure.
  • WACC remains constant regardless of debt-equity mix.
  • Increasing leverage increases the cost of equity exactly enough to offset the cheaper cost of debt.

• Linking to practice (brief):

  • Real-world evidence shows tax, bankruptcy risk and agency costs matter.
  • Supports modified theories like trade-off and pecking order.

3.4 Marginal Cost of Capital and Investment Decision Rules

In some MAC3702 questions, especially integrated case studies, you may be asked to:

• Rank investment projects by IRR or profitability index (PI).
• Compare projects’ returns to the marginal cost of capital schedule.
• Determine which projects to accept.

Steps:

1. Estimate WACC or incremental cost of capital for different financing ranges.
2. Compare each project’s expected return (IRR, PI) to the relevant WACC.
3. Accept projects as long as IRR ≥ marginal cost of capital and capital is available.

This often forms part of a capital rationing question, sometimes combined with linear programming or ranking of projects by profitability index.

4. Working Capital Management and Short-Term Financial Decisions

Working capital management is a crucial part of MAC3702 and is particularly relevant in South African contexts where businesses face liquidity constraints. At institutions like CUT and UJ, similar content is tested under financial management modules.

4.1 Key Concepts and Ratios

Working capital:

• Gross working capital = current assets.
• Net working capital = current assets – current liabilities.

Effective working capital management aims to:

• Ensure sufficient liquidity to meet short-term obligations.
• Minimise the cost of holding current assets.
• Optimise the trade-off between profitability and liquidity.

Important ratios tested in exam questions:

1. Current ratio = Current assets / Current liabilities
2. Quick (acid-test) ratio = (Current assets – Inventory) / Current liabilities
3. Inventory turnover = Cost of sales / Average inventory
4. Debtors (receivables) collection period = (Trade debtors / Credit sales) × 365
5. Creditors (payables) payment period = (Trade creditors / Credit purchases) × 365
6. Cash conversion cycle = Inventory days + Debtors days – Creditors days

4.2 Working Capital Policy: Aggressive vs Conservative

Examiners like to ask conceptual questions on:

• Aggressive policy:

  • Lower levels of inventory and receivables.
  • Higher reliance on short-term financing.
  • High risk, potentially higher return.

• Conservative policy:

  • Higher levels of current assets for safety.
  • Preference for long-term financing for permanent current assets.
  • Lower risk, lower return.

Moderate policy aims for a balance.

Exam-style question example:

“Explain the difference between an aggressive and conservative working capital policy and discuss the impact of each on the firm’s profitability and risk.”

Required answer points:

• Definitions of each policy.
• Impact on liquidity (higher with conservative).
• Impact on profitability (potentially higher under aggressive).
• Examples in a South African SME context (e.g. retailer in Johannesburg or Bloemfontein).

4.3 Inventory Management and EOQ

The Economic Order Quantity (EOQ) model appears frequently in UNISA MAC modules, including MAC3702.

Basic EOQ formula:

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

Where:

• ( D ) = annual demand (units)
• ( S ) = cost per order (Rands)
• ( H ) = holding cost per unit per year (Rands)

Example:

A company requires 36 000 units of raw material per year. Cost per order is R900. Holding cost per unit per year is R6.

[
EOQ = \sqrt{\frac{2 \times 36 000 \times 900}{6}} = \sqrt{\frac{64 800 000}{6}} = \sqrt{10 800 000} ≈ 3 286\text{ units}
]

If examiners want more depth, they may ask:

• Total annual ordering cost = (D / EOQ) × S
• Total annual holding cost = (EOQ / 2) × H
• Impact of quantity discounts.

4.4 Debtors (Receivables) Management and Credit Policy Analysis

MAC3702 exams often contain a question where a company (e.g. a UNISA case study firm) considers:

• Relaxing credit terms (e.g. 30 days to 60 days).
• Offering discounts for early payment (e.g. 2% discount if paid within 10 days).
• Tightening credit policy.

The exam usually requires you to:

1. Calculate the change in sales (units and revenue).
2. Compute the change in bad debts.
3. Estimate the change in average debtors (and hence investment in debtors).
4. Apply the required rate of return on additional investment in debtors.
5. Compare the additional contribution margin to additional costs and required return.

Simplified Example

A company with annual credit sales of R5 000 000 is considering relaxing credit terms, expecting the following:

• Sales increase to R5 600 000.
• Average collection period increases from 30 to 45 days.
• Bad debts increase from 1% to 2% of sales.
• Variable cost ratio is 65% of sales.
• Required return on investment in debtors: 15%.
• Assume 365-day year.

Step 1: Contribution from additional sales

Current sales: 5 000 000
New sales: 5 600 000
Increase: 600 000

Contribution margin ratio = 1 – variable cost ratio = 1 – 0.65 = 0.35

Additional contribution = 600 000 × 0.35 = R210 000

Step 2: Additional bad debts

Old bad debts: 1% × 5 000 000 = 50 000
New bad debts: 2% × 5 600 000 = 112 000

Increase in bad debts = 112 000 – 50 000 = R62 000

Step 3: Change in average debtors

Average debtors = (Annual credit sales / 365) × collection period days

• Old average debtors:
  = (5 000 000 / 365) × 30 ≈ 410 959
• New average debtors:
  = (5 600 000 / 365) × 45 ≈ 689 041

Increase in investment in debtors = 689 041 – 410 959 = R278 082

Required return on this extra investment:

15% × 278 082 ≈ R41 712

Step 4: Net benefit

Additional contribution: 210 000
Less additional bad debts: 62 000
Less required return on extra debtors: 41 712

Net benefit = 210 000 – 62 000 – 41 712 ≈ R106 288

If positive and material, relaxing credit terms may be justified.

Examiners will also ask for a recommendation, requiring a sentence or two summarising your calculations and adding qualitative considerations (e.g. impact on liquidity, risk of default in a weak economy).

4.5 Cash Management Models

Two classic models:

1. Baumol cash management model – similar structure to EOQ.
2. Miller–Orr model – sets upper and lower cash balance limits.

Baumol model formula:

[
C^* = \sqrt{\frac{2bT}{i}}
]

Where:

• ( C^* ) = optimum cash transfer size
• ( b ) = transaction cost of converting securities to cash
• ( T ) = total cash needed for the period
• ( i ) = interest rate on marketable securities (opportunity cost)

These models appear in theoretical or light calculation questions for 6–10 marks, often alongside a request to explain the advantages and limitations of such models for South African firms.

5. Business Valuations, Risk & Return and Exam Technique Integration

The final cluster of topics that MAC3702 students at UNISA must master relates to valuation and risk & return, along with integrating the various techniques into a single, multi-part exam question. Similar integrated case questions feature in CUT’s MACF371 and NWU’s FMAF321.

5.1 Risk and Return: Portfolio Theory and CAPM

MAC3702 may test:

• Computation of expected return of a single asset or portfolio.
• Standard deviation as a measure of risk (basic).
• Beta as a measure of systematic risk.
• Use of CAPM to estimate required return on equity.

Expected return:

[
E(R) = \sum_{i=1}^{n} p_i R_i
]

Where:

• ( p_i ) = probability of state i
• ( R_i ) = return in state i

Portfolio expected return (two-asset portfolio):

[
E(R_p) = w_A E(R_A) + w_B E(R_B)
]

Where:

• ( w_A, w_B ) = portfolio weights in securities A and B.

Exams may ask:

• Compute E(R) for each investment.
• Compute E(Rp) for portfolio with given weights.
• Use CAPM to determine if an asset is overvalued or undervalued by comparing its expected return to required return.

5.2 Business Valuations: Methods

Three key valuation methods often tested:

1. Dividend Discount Model (DDM)
2. Free Cash Flow (FCF) / Discounted Cash Flow (DCF)
3. Price/Earnings (P/E) multiples

5.2.1 Dividend Discount Model (DDM)

If dividends are expected to grow at a constant rate ( g ):

[
P_0 = \frac{D_1}{K_e – g}
]

Where:

• ( P_0 ) = current value of share
• ( D_1 ) = dividend next year
• ( K_e ) = cost of equity
• ( g ) = constant growth rate

Example:

A JSE-listed company, KZN Industries Ltd, is expected to pay a dividend of R1.50 per share next year. Dividends are expected to grow at 5% per year indefinitely. The required return on equity is 14%.

[
P_0 = \frac{1.50}{0.14 – 0.05} = \frac{1.50}{0.09} = R16.67
]

Exam twist:

• You may have to solve for g or K_e given price and dividend.
• Or comment on whether the share is under- or over-valued compared to its current market price.

5.2.2 Free Cash Flow Valuation

For valuing entire companies (not just equity), exam questions may use Free Cash Flow to the Firm (FCFF):

[
V_{firm} = \sum_{t=1}^{n} \frac{FCFF_t}{(1+WACC)^t} + \frac{TV}{(1+WACC)^n}
]

Where:

• ( TV ) = terminal value, often using a constant growth formula:

[
TV = \frac{FCFF_{n+1}}{WACC – g}
]

Exam tasks:

• Calculate FCFF from income statement data:
  ( FCFF = EBIT(1 – T) + Depreciation – CAPEX – \Delta NWC )
• Discount at WACC.
• Subtract market value of debt to find equity value.

Though this may seem complex, examiners usually simplify figures and focus on your understanding of:

• Cash flow vs accounting profit.
• Timing and discounting.
• Relation to WACC and cost of equity.

5.2.3 P/E Multiples

Relative valuation using P/E ratios is commonly tested in a more conceptual way:

[
\text{Value per share} = \text{Industry P/E} \times \text{Earnings per share (EPS)}
]

Examiners may give:

• Industry average P/E.
• Company’s EPS.
• Current market price.

You may need to:

• Estimate a target price.
• Discuss whether the company appears undervalued or overvalued.

5.3 Dividend Policy Theories

MAC3702 exam questions often include a short theory question on dividend policy:

• Dividend irrelevance (MM): Under perfect market conditions, dividend policy does not affect firm value.
• Bird-in-the-hand theory: Investors prefer certain dividends over uncertain capital gains, so higher payout may reduce required return.
• Tax preference theory: Investors may prefer capital gains to dividends due to tax advantages.
• Signalling theory: Dividend changes convey information about management expectations.
• Clientele effect: Different investor groups prefer different payout patterns.

An exam question may ask:

“Discuss three factors that might influence a company’s dividend policy decision in the South African context.”

Suggested points:

1. Legal and contractual constraints:

   • Companies Act restrictions on distributions.
   • Loan covenants limiting dividends.

2. Liquidity position:

   • Even profitable companies may lack cash.
   • Working capital and future investment needs.

3. Access to capital markets:

   • Large firms with cheap access to finance may pay higher dividends.
   • Smaller or riskier firms may retain profits.

4. Tax considerations:

   • Dividend withholding tax in South Africa.
   • Differential treatment of dividends vs capital gains.

5. Investor preferences and expectations:

   • Stability of dividends.
   • Historical track record.

5.4 Integrated Case Study Question: Pulling It All Together

In MAC3702, the final question may combine:

• Investment appraisal (NPV/IRR).
• WACC estimation.
• Working capital analysis.
• Valuation.
• Strategic recommendation.

Example Outline

You may get a 30–40 mark question for a fictional company, say Mabule Manufacturing (Pty) Ltd, considering:

• Replacing old machinery with new.
• Changing credit policy.
• Adjusting capital structure.

You would be required to:

1. Calculate NPV of the new investment using an estimated WACC (cost of capital question).
2. Assess changes in working capital requirements (inventory and debtors).
3. Evaluate impact on company value and shareholders’ wealth.
4. Comment on financing options (debt vs equity).
5. Provide a final recommendation supported by your calculations and theoretical understanding.

5.5 Exam Technique for Long, Multi-Part Questions

Given typical time pressure in UNISA MAC3702 exams, it is critical to have a strategy for long questions:

1. Read the Entire Scenario Once

   • Underline key numbers.
   • Highlight which parts relate to which sub-questions.

2. Attempt Sub-questions in Logical Order

   • Many exams structure sub-questions so that one part (e.g. WACC) is needed for later parts (e.g. NPV).
   • Clearly label each sub-question (e.g. 1.1, 1.2, 1.3).

3. If Stuck, Move On and Come Back

   • Do not spend 25 minutes on one 10-mark sub-question.
   • Secure easier marks elsewhere (theory, simpler calculations).

4. Show All Workings

   • Even partial steps score marks.
   • If you cannot complete an IRR, at least calculate NPVs at given discount rates and state that IRR lies between them.

5. Use Subtotals and Introduce Tables

   • Clean, tabular presentation saves time and avoids error.
   • For example, a cash flow table with columns for Year, Revenue, Expenses, Depreciation, Tax, Net Cash Flow.

6. Explicitly State Recommendations

   • “Based on the positive NPV of R250 000, the project should be accepted.”
   • “Relaxing the credit policy yields a net benefit of approximately R106 000; therefore, the proposal appears financially justified, subject to careful monitoring of bad debts.”

5.6 Linking MAC3702 to Other SA University Modules

While this guide focuses on UNISA MAC3702 – Application of Financial Management Techniques, similar concepts and exam styles appear in:

• CUT: MACF371 Financial Management Techniques

  • Emphasis on capital budgeting, cost of capital, working capital, and financial analysis for Central University of Technology BTech and diploma students.

• UJ: FIN3FM3 Financial Management

  • Strong overlap in topics such as NPV, IRR, WACC and valuations; exam questions often case-based with integrated calculations and interpretation.

• NWU: FMAF321 Financial Management Applications

  • Focus on applying financial management in real-world contexts, using the same core techniques tested in MAC3702.

Recognising this overlap can be helpful when searching online for past papers, study notes and exam tips. Keywords frequently used by students in South Africa include:

• “MAC3702 exam questions and answers UNISA”
• “UNISA BCom Management Accounting MAC3702 study notes”
• “CUT MACF371 past papers”
• “NWU FMAF321 financial management exam revision”

Understanding the common core of financial management techniques across South African universities enhances your ability to apply concepts flexibly, regardless of the specific module code.

This comprehensive guide aligns with the UNISA BCom Management Accounting curriculum, focusing specifically on MAC3702: Application of Financial Management Techniques exam questions. It provides a structured, exam-oriented perspective on capital budgeting, cost of capital, working capital management, valuations, risk & return, and integrated case analysis — all essential for success in MAC3702 and comparable financial management modules at South African universities.