⋆ ⋆ ⋆
FIN3701: Financial Management
OCT/NOV Examination 2026 – Covers 2023 to 2025 Past Papers
⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆
Finance, Risk Management and Banking – UNISA
▷ Exam Revision Guide
FIN3701
Module Code:
Financial Management
Module Name:
Oct/Nov 2023, Oct/Nov 2024, Oct/Nov
Papers Covered:
2025
OCT/NOV 2026 Preparation
Exam Edition:
70 marks (per paper)
Total Marks:
2.5 hours
Duration:
Comprehensive question-and-answer revision covering all examinable study units:
capital budgeting, cost of capital, capital structure, leverage, leasing, dividend policy,
and mergers.
Exam Revision Notes | FIN3701 | 2023–2025 Past Papers
,FIN3701 | Financial Management – Exam Revision Oct/Nov 2023–2025
Section A – Multiple Choice Questions (Oct/Nov 2023) 20 marks
Question 1 [1 mark]
Question: Which of the following best describes a conventional cash flow pattern?
Answer: Option 2
An initial cash outflow (investment) followed exclusively by a series of positive cash inflows.
This is “conventional” because there is only one sign change in the cash flow stream.
Key Concept
Conventional vs Non-conventional: A conventional cash flow has one sign change
(outflow then inflows). A non-conventional pattern has multiple sign changes, which
can produce multiple IRRs – making NPV the preferred evaluation method.
Question 2 [1 mark]
Question: The net present value (NPV) decision rule states that a project should be
accepted when:
Answer: NPV ≥ 0.
If NPV is positive or zero, the project generates at least the required return and adds value to
the firm. A negative NPV destroys shareholder wealth.
Question 3 [1 mark]
Question: Which capital budgeting technique ignores the time value of money?
Answer: The Payback Period (PBP).
The traditional PBP simply counts how many years it takes to recover the initial investment,
without discounting future cash flows.
Page 2 of 32
,FIN3701 | Financial Management – Exam Revision Oct/Nov 2023–2025
Watch Out
The PBP has two additional weaknesses: it ignores cash flows after the payback point
and has no objective benchmark. The Discounted Payback Period corrects the time-
value flaw but still ignores post-payback flows.
Question 4 [1 mark]
Question: The internal rate of return (IRR) is best defined as:
Answer: The discount rate that makes the NPV of a project equal to zero.
At the IRR, the present value of all future cash inflows exactly equals the initial investment.
If IRR exceeds the cost of capital, the project is acceptable.
Question 5 [1 mark]
Question: A firm’s weighted average cost of capital (WACC) is used as the:
Answer: Discount rate applied when evaluating new investment projects.
WACC reflects the blended after-tax cost of all capital sources. It is the minimum return a
firm must earn on its asset base to satisfy both debt and equity holders.
Question 6 [1 mark]
Question: The Gordon Growth Model calculates the cost of retained earnings as:
D1
Answer: ks = +g
P0
where D1 is the next dividend, P0 is the current share price, and g is the constant growth rate
in dividends.
Question 7 [1 mark]
Page 3 of 32
,FIN3701 | Financial Management – Exam Revision Oct/Nov 2023–2025
Question: The marginal cost of capital (MCC) schedule reflects:
Answer: The WACC at increasing levels of new financing.
As a firm raises more capital, it exhausts cheaper sources (retained earnings, low-cost debt)
and must use more expensive sources, causing the MCC to rise in steps.
Question 8 [1 mark]
Question: The breakpoint in the MCC schedule occurs when:
Answer: A firm exhausts one source of lower-cost capital and must move to a
higher-cost source.
Amount of lower-cost fund
Breakpoint =
Proportion in capital structure
Question 9 [1 mark]
Question: Operating leverage measures the relationship between:
Answer: Sales revenue (or units sold) and EBIT.
The Degree of Operating Leverage (DOL) shows how sensitive EBIT is to a change in sales
volume. High fixed costs create high operating leverage.
Question 10 [1 mark]
Question: Which of the following statements about financial leverage is correct?
Answer: Financial leverage amplifies the effect of changes in EBIT on EPS.
The Degree of Financial Leverage (DFL) captures the sensitivity of EPS to changes in EBIT
caused by the presence of fixed financial charges (interest payments).
Page 4 of 32
,FIN3701 | Financial Management – Exam Revision Oct/Nov 2023–2025
Questions 11–20 – Representative Topics [10 marks]
Exam Tip
The remaining 10 MCQs in the 2023 paper examined: capital structure theory (tra-
ditional vs MM views), lease-vs-buy comparison, types of mergers, dividend policy
factors, the Investment Opportunity Schedule (IOS), Annualised NPV, CAPM-based
cost of equity, tax shield on debt, and the difference between operating and financial
leases. Key answers are provided in the Section B answers below.
Question: Question 11: Under the traditional view of capital structure, what happens
to WACC as debt increases?
Answer: WACC initially falls as cheap debt replaces expensive equity, reaches a minimum at
the optimal capital structure, and then rises as financial distress costs and the rising cost of
equity outweigh the tax benefit of debt.
Question: Question 12: A financial lease differs from an operating lease in that it is:
Answer: Non-cancellable, covers the majority of the asset’s economic life, and transfers sub-
stantially all risks and rewards of ownership to the lessee. The lessee typically maintains the
asset and records it on the balance sheet.
Question: Question 13: In a horizontal merger, the combining firms operate in:
Answer: The same industry, at the same stage of the production/distribution chain. The mo-
tive is usually market share, economies of scale, and elimination of a competitor.
Question: Question 14: Under Modigliani–Miller (MM) with taxes, firm value
increases as debt increases because:
Answer: The interest tax shield adds value. The present value of the tax shield equals Tc ×D,
where Tc is the corporate tax rate and D is the market value of debt.
Question: Question 15: The CAPM formula for the cost of equity is:
Answer: ke = kRF + β(kM − kRF ), where kRF is the risk-free rate, β is the asset’s systematic
risk, and (kM − kRF ) is the market risk premium.
Page 5 of 32
, FIN3701 | Financial Management – Exam Revision Oct/Nov 2023–2025
Section B – Question 1 (Oct/Nov 2023) 25 marks
(a) – Capital Budgeting: Initial Investment [8 marks]
Question: Ndala Manufacturing Ltd is evaluating the replacement of an old machine
with a new automated machine. The following data applies:
New Machine: Cost R450 000; installation R30 000; economic life 5 years; depreciation
20% straight-line; tax rate 29%; cost of capital 12%.
Old Machine: Book value R80 000; market value R100 000; original cost R200 000;
remaining life 5 years; annual depreciation R16 000.
Calculate the initial investment for this replacement decision.
Answer:
Key Concept
Initial Investment Formula (Replacement):
IN V = Costnew + Installation − P roceedsold + T ax on gainold
Tax on gain = (Selling price − Book value) × Tc
Step 1: Cost of new asset (installed)
Installed cost = R450,000 + R30,000 = R480,000
Step 2: Tax on sale of old machine
Capital gain = Market value − Book value = R100,000 − R80,000 = R20,000
Tax payable = R20,000 × 0.29 = R5,800
Step 3: Net proceeds from old machine
Net proceeds = R100,000 − R5,800 = R94,200
Page 6 of 32
FIN3701: Financial Management
OCT/NOV Examination 2026 – Covers 2023 to 2025 Past Papers
⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆
Finance, Risk Management and Banking – UNISA
▷ Exam Revision Guide
FIN3701
Module Code:
Financial Management
Module Name:
Oct/Nov 2023, Oct/Nov 2024, Oct/Nov
Papers Covered:
2025
OCT/NOV 2026 Preparation
Exam Edition:
70 marks (per paper)
Total Marks:
2.5 hours
Duration:
Comprehensive question-and-answer revision covering all examinable study units:
capital budgeting, cost of capital, capital structure, leverage, leasing, dividend policy,
and mergers.
Exam Revision Notes | FIN3701 | 2023–2025 Past Papers
,FIN3701 | Financial Management – Exam Revision Oct/Nov 2023–2025
Section A – Multiple Choice Questions (Oct/Nov 2023) 20 marks
Question 1 [1 mark]
Question: Which of the following best describes a conventional cash flow pattern?
Answer: Option 2
An initial cash outflow (investment) followed exclusively by a series of positive cash inflows.
This is “conventional” because there is only one sign change in the cash flow stream.
Key Concept
Conventional vs Non-conventional: A conventional cash flow has one sign change
(outflow then inflows). A non-conventional pattern has multiple sign changes, which
can produce multiple IRRs – making NPV the preferred evaluation method.
Question 2 [1 mark]
Question: The net present value (NPV) decision rule states that a project should be
accepted when:
Answer: NPV ≥ 0.
If NPV is positive or zero, the project generates at least the required return and adds value to
the firm. A negative NPV destroys shareholder wealth.
Question 3 [1 mark]
Question: Which capital budgeting technique ignores the time value of money?
Answer: The Payback Period (PBP).
The traditional PBP simply counts how many years it takes to recover the initial investment,
without discounting future cash flows.
Page 2 of 32
,FIN3701 | Financial Management – Exam Revision Oct/Nov 2023–2025
Watch Out
The PBP has two additional weaknesses: it ignores cash flows after the payback point
and has no objective benchmark. The Discounted Payback Period corrects the time-
value flaw but still ignores post-payback flows.
Question 4 [1 mark]
Question: The internal rate of return (IRR) is best defined as:
Answer: The discount rate that makes the NPV of a project equal to zero.
At the IRR, the present value of all future cash inflows exactly equals the initial investment.
If IRR exceeds the cost of capital, the project is acceptable.
Question 5 [1 mark]
Question: A firm’s weighted average cost of capital (WACC) is used as the:
Answer: Discount rate applied when evaluating new investment projects.
WACC reflects the blended after-tax cost of all capital sources. It is the minimum return a
firm must earn on its asset base to satisfy both debt and equity holders.
Question 6 [1 mark]
Question: The Gordon Growth Model calculates the cost of retained earnings as:
D1
Answer: ks = +g
P0
where D1 is the next dividend, P0 is the current share price, and g is the constant growth rate
in dividends.
Question 7 [1 mark]
Page 3 of 32
,FIN3701 | Financial Management – Exam Revision Oct/Nov 2023–2025
Question: The marginal cost of capital (MCC) schedule reflects:
Answer: The WACC at increasing levels of new financing.
As a firm raises more capital, it exhausts cheaper sources (retained earnings, low-cost debt)
and must use more expensive sources, causing the MCC to rise in steps.
Question 8 [1 mark]
Question: The breakpoint in the MCC schedule occurs when:
Answer: A firm exhausts one source of lower-cost capital and must move to a
higher-cost source.
Amount of lower-cost fund
Breakpoint =
Proportion in capital structure
Question 9 [1 mark]
Question: Operating leverage measures the relationship between:
Answer: Sales revenue (or units sold) and EBIT.
The Degree of Operating Leverage (DOL) shows how sensitive EBIT is to a change in sales
volume. High fixed costs create high operating leverage.
Question 10 [1 mark]
Question: Which of the following statements about financial leverage is correct?
Answer: Financial leverage amplifies the effect of changes in EBIT on EPS.
The Degree of Financial Leverage (DFL) captures the sensitivity of EPS to changes in EBIT
caused by the presence of fixed financial charges (interest payments).
Page 4 of 32
,FIN3701 | Financial Management – Exam Revision Oct/Nov 2023–2025
Questions 11–20 – Representative Topics [10 marks]
Exam Tip
The remaining 10 MCQs in the 2023 paper examined: capital structure theory (tra-
ditional vs MM views), lease-vs-buy comparison, types of mergers, dividend policy
factors, the Investment Opportunity Schedule (IOS), Annualised NPV, CAPM-based
cost of equity, tax shield on debt, and the difference between operating and financial
leases. Key answers are provided in the Section B answers below.
Question: Question 11: Under the traditional view of capital structure, what happens
to WACC as debt increases?
Answer: WACC initially falls as cheap debt replaces expensive equity, reaches a minimum at
the optimal capital structure, and then rises as financial distress costs and the rising cost of
equity outweigh the tax benefit of debt.
Question: Question 12: A financial lease differs from an operating lease in that it is:
Answer: Non-cancellable, covers the majority of the asset’s economic life, and transfers sub-
stantially all risks and rewards of ownership to the lessee. The lessee typically maintains the
asset and records it on the balance sheet.
Question: Question 13: In a horizontal merger, the combining firms operate in:
Answer: The same industry, at the same stage of the production/distribution chain. The mo-
tive is usually market share, economies of scale, and elimination of a competitor.
Question: Question 14: Under Modigliani–Miller (MM) with taxes, firm value
increases as debt increases because:
Answer: The interest tax shield adds value. The present value of the tax shield equals Tc ×D,
where Tc is the corporate tax rate and D is the market value of debt.
Question: Question 15: The CAPM formula for the cost of equity is:
Answer: ke = kRF + β(kM − kRF ), where kRF is the risk-free rate, β is the asset’s systematic
risk, and (kM − kRF ) is the market risk premium.
Page 5 of 32
, FIN3701 | Financial Management – Exam Revision Oct/Nov 2023–2025
Section B – Question 1 (Oct/Nov 2023) 25 marks
(a) – Capital Budgeting: Initial Investment [8 marks]
Question: Ndala Manufacturing Ltd is evaluating the replacement of an old machine
with a new automated machine. The following data applies:
New Machine: Cost R450 000; installation R30 000; economic life 5 years; depreciation
20% straight-line; tax rate 29%; cost of capital 12%.
Old Machine: Book value R80 000; market value R100 000; original cost R200 000;
remaining life 5 years; annual depreciation R16 000.
Calculate the initial investment for this replacement decision.
Answer:
Key Concept
Initial Investment Formula (Replacement):
IN V = Costnew + Installation − P roceedsold + T ax on gainold
Tax on gain = (Selling price − Book value) × Tc
Step 1: Cost of new asset (installed)
Installed cost = R450,000 + R30,000 = R480,000
Step 2: Tax on sale of old machine
Capital gain = Market value − Book value = R100,000 − R80,000 = R20,000
Tax payable = R20,000 × 0.29 = R5,800
Step 3: Net proceeds from old machine
Net proceeds = R100,000 − R5,800 = R94,200
Page 6 of 32
