DIPLOMA
July – December
Assignment
BBF621 Business Finance
BOTSWANA OPEN UNIVERSITY
Diploma in Business Management
Business Finance
BBF621
Assignment
Marks: 100
Instructions
a) This assessment covers ALL the units of the course material.
b) The assignment consists of two sections: A and B.
c) Answer questions according to instructions given in each section.
d) This is an individual assignment. No duplication of work will be tolerated. Any plagiarism or
collusion may result in disciplinary action.
e) Your assessment will be assessed on the factual answer provided based on your reading and
analysis from various references related to this course. In addition, you should demonstrate a
sound knowledge of the topics covered and adhere to the proper referencing technique.
© BOU 2023
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DIPLOMA
July – December
Assignment
BBF621 Business Finance
SECTION A - SHORT ANSWER QUESTIONS
[40 MARKS]
Answer ALL questions from this section.
1. Identify three sources of short-term credit.
(3 marks)
2. Describe three services offered by a factoring company.
(3 marks)
3. Explain the difference between the following concepts in finance:
a) Capital market and Money Market.
(4 marks)
b) Debt finance and Equity finance.
(4 marks)
c) Systematic risk and Unsystematic risk.
(4 marks)
d) Coupon rate of a security and its yield to maturity.
(4 marks)
4. Assume the total cost of a university education will be P250 000 when your child enters
university in 18 years. You presently have P43 000 to invest. What rate of interest must you
earn on your investment to cover the cost of your child’s university education?
(5 marks)
5. BT is considering investing in government bonds. The current price of a P100 bond with 10
years to maturity is P88. The bonds have a coupon rate of 6% and repay face value of P100 at
the end of the 10 years.
Required:
Calculate the yield to maturity.
6. Explain four comparative advantages of debt as a source of finance over equity.
© BOU 2023
(5 marks)
(8 marks)
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DIPLOMA
July – December
Assignment
BBF621 Business Finance
SECTION B - ESSAY TYPE QUESTIONS
[60 MARKS]
Answer ALL questions in this section.
QUESTION 1
[25 MARKS]
AAD is a newly created company. It commenced business on 1 October 2012 to provide
specialist contract cleaning services to industrial customers. All sales are on credit.
More favourable credit terms are offered to larger customers (Class A) than to smaller customers
(Class B). All sales are invoiced at the end of the month in which the sale occurs. Class A
customers will be given credit terms requiring payment within 60 days of invoicing, while Class
B customers will be required to pay within 30 days of invoicing.
Since it is recognised, however, that not all customers comply with the credit terms they are
allowed, receipts from customers have been estimated as follows:
Customer type
Class A
Class B
Within
30 days
60%
31 to 60
days
50%
25%
61 to 90
days
30%
10%
91 to 120
days
15%
Bad debts
5%
5%
The above table shows that customers are expected either to pay within 60days of the end of the
credit period, or not at all. Bad debts will therefore be written off 60 days after the end of the
credit period.
Budgeted credit sales for each class of customer in the first 4 months of trading are as follows:
October
Customer type
P’000
Class A
100
Class B
60
Assume all months are 30days.
November
P’000
150
80
December
P’000
200
40
January
P’000
300
50
Required:
Prepare a statement showing the budgeted cash to be received by AAD from customers in each
of the three months of November, December and January, based upon the estimated receipts
from customers.
(25 marks)
© BOU 2023
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DIPLOMA
July – December
Assignment
BBF621 Business Finance
QUESTION 2
[10 MARKS]
a. Discuss the significance of trade payables in a firm’s working capital cycle.
QUESTION 3
(10 marks)
[25 MARKS]
Fisca Ltd is considering two independent projects, Project A and Project B. The initial cash outlay
associated with Project A is P50,000 and the initial cash outlay associated with Project B is
P70,000. The required rate of return on both projects is 12%. The expected annual free cash flows
from each project are as follows:
Year
0
1
2
3
4
5
6
PROJECT A
-P50,000
12,000
12,000
12,000
12,000
12,000
12,000
PROJECT B
-P70,000
13,000
13,000
13,000
13,000
13,000
13,000
Required:
a. For both projects, calculate
i.
The net present value.
(6 marks)
ii.
The internal rate of return.
(8 marks)
iii.
The profitability index.
(4 marks)
b. Assuming there is capital rationing, advise Fisca ltd which project should be accepted over
the other.
(2 marks)
c. Explain the limitations of using a profitability index in a situation where there is capital
rationing.
(5 marks)
END OF ASSESSMENT
© BOU 2023
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