Page 1 of 5
ST
The prescribed textbook is: Conradie, W., and Fourie, W. 2011. Basic Financial
Management . 1 st
edn. Juta.
Answer ALL the questions
QUESTION 1 [20]
1.1 b
1.2 c
1.3 a
1.4 e
1.5 d
1.6 a
1.7 d
1.8 c
1.9 b
1.10 d
1.11 True
1.12 False
1.13 False
1.14 False
1.15 True
1.16 True
1.17 False
1.18 False
1.19 True
1.20 True
QUESTION 2 [20]
Mark allocation: 2 marks maximum for explaining equity correctly and 9 marks for naming the correct nine sources of equity. Another 9 marks maximum for giving an appropriate everyday example for each explained source.
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Marking Memorandum: 1 st
Semester 2011 Business Numeracy 101 (BN 101)

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Equity (own or share capital)
Equity (also known as own/owner’s capital, shareholders’ funds or owner’s interest) is one of the most important sources of finance for any business enterprise. The characteristics of equity are as follows:
Often, it is the first source of capital available to start a new business.
It is that part of the total capital used in a business that is legally recognised as the total value (at a certain point in time) of contributions made by all the legal owners of the business.
It serves as the basis from which other (mostly outside) capital can be attracted.
Without own capital invested in the enterprise, it is very unlikely that other potential suppliers of capital will be interested in putting money into your business.
Own capital is permanent. The investment will last as long as the business itself, provided that the business is not sold or terminated (although exceptions to this rule are possible).
It is not easy to withdraw a part of own capital, especially if the business is not a single proprietorship, e.g. in a partnership, close corporation or private company.
There are a variety of sources for own capital, including owner’s savings, pension payouts and existing owned assets put to use in the business. It may even consist of unrelated assets (for example, a house or household furniture) that may be sold or bonded and changed into cash.
A person starting an enterprise does not need to depend solely on his/her own contribution to complete the full picture of own capital.
There are two other supplementary sources of equity :
–
If the founder borrows money from someone else in his/her personal capacity
(and not on behalf of and in the business’s name) and invests it in the business, such monies are considered to be own capital.
–
If the founder wishes to bring co-owners (partners, other shareholders) into the business, these co-owners may also be additional sources of own capital.
Another, very important, source to add to the value of own capital is the re-investment of net profit (after tax) as time goes on.
QUESTION 3 [20]
3.1 Mark allocation: Five marks maximum for the correct explanation of any five
(of the given nine) considerations. Another one mark (five marks maximum) for each time giving an appropriate everyday example to illustrate a consideration.
© IMM Graduate School of Marketing
Marking Memorandum: 1 st
Semester 2011 Business Numeracy 101 (BN 101)

Page 3 of 5
CHOOSING SOURCES AND FORMS OF FINANCE
1.
Matching life expectancy of assets and the length of time for which credit is available
2. Availability and accessibility issues
3. Costs associated with a specific source or always negotiate with suppliers of credit.
4. Independence versus dependence and control
5. Freedom of application of finance
Form of finance
1. Mortgage bonds
2. Rental/leasing/hire-purchase
3. Suppliers’ credit
Can only be used for
1. The acquisition or renovation of land and fixed buildings
2. The acquisition of certain equipment and/or machinery and/or vehicles and/or furniture and fittings
3. The acquisition of specified goods and services bought on credit from a supplier
4. A bank overdraft
5. Own capital in the form of cash
4. One of the rare cases where the entrepreneur has almost total freedom of use
5. The only other source and form of finance where the owner has almost total freedom of use
6. The effects of the financial leverage
Financial leverage is related to the cost and use of borrowed capital in the enterprise.
If the profitability of the enterprise is greater than the interest rate on borrowed capital, an increase in profitability of the own capital is caused by the use of borrowed capital.
7. Considerations of liquidity and profitability
8. Taxation considerations
9. Building long-term relationships (10)
© IMM Graduate School of Marketing
Marking Memorandum: 1 st
Semester 2011 Business Numeracy 101 (BN 101)

Page 4 of 5
3.2 Mark allocation: One mark for the correct explanation of any one of the five elements of this cycle. Another mark for any one of the five illustrated correctly. Ten marks maximum.
Raw materials delivered and received
Length of the working capital cycle
The length of the working capital cycle also plays an important role in the eventual capital requirements of a specific enterprise or business. The working capital cycle refers to the average number of days from the date of the initial investment up to the date full income is received from the investment.
Production processes start
Finished goods
Client buys
Client pays
20 days 30 days 10 days 100 days
Supplier must be paid in 30 days
We can observe the following:
= Total: 160 days
Period for which financing of raw materials and labour required = 130 days
Mohammed first places an order for the raw and supplementary materials he needs to manufacture the specialised furniture.
After a few days, he receives the goods ordered.
He now has to pay for his purchases, say by means of cash on delivery or on a credit basis. For our purposes, we assume that he must pay for the goods within 30 days.
The materials now need to be transformed into finished goods. This requires an investment of production labour (wages).
The finished goods are now sold, either for cash or on a credit basis. Let us say that the client takes 100 days to pay. (10)
QUESTION 4 [20]
Mark allocation: One mark for the correct formula given of any one financial ratio and another mark for its correct explanation.
© IMM Graduate School of Marketing
Marking Memorandum: 1 st
Semester 2011 Business Numeracy 101 (BN 101)

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See Chapter: Analyzing the Annual Financial Statements for variety of ratios to be chosen from. Twenty marks maximum.
QUESTION 5 [20]
Mark allocation: One mark for the correct explanation of any one of the elements indicated (no more than five marks per sub-structure given in the question). Twenty marks maximum.
The following questions are often asked by existing and potential entrepreneurs/ managers:
Is this a fair price to ask (or pay) for a specific business unit?
How much should my monthly sales or gross income be in order for me to survive in my new enterprise?
How can I know for sure if I am running my business at a profit or at a loss?
Is the profit I am making satisfactory?
Is it better (safer, more profitable) to use only my own capital (such as savings), or is it better to borrow additional capital?
When I use my own and borrowed capital, what should the balance be between these two sources?
When my enterprise needs a sharp increase in goods and stock during a peak season, should it be financed with a long-term loan or short-term credit?
Should I sell my products and services for cash only or should I also extend credit facilities to my clients?
What are the advantages and disadvantages of selling on credit?
How can I be sure that the stock I have purchased for resale purposes will in fact sell?
How important is cash flow management to me as a manager or business entrepreneur?
How important is effective administration to business success?
The structure and contents of the income statement : Gross sales/income minus cost of sales gives gross profit minus overheads/operational costs gives net profit.
The structure and elements of the balance sheet : Assets are divided into fixed assets, current assets and other assets, all together are total assets. Liabilities are divided into equity, long-term loans and current liabilities, all together are total liabilities.
© IMM Graduate School of Marketing
Marking Memorandum: 1 st
Semester 2011 Business Numeracy 101 (BN 101)