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1. Please read the instructions given in the question paper CAREFULLY.
3. All questions must be answered in English (any other language is not allowed).


people come in various types: High risk / low risk. Conflicts arise when people (agents) who are entrusted to protect the interests of another person (the principal) to use power or power for their own interests instead.Question 1 a) Provide a detailed discussion on when does the agency problem occur in an organization. The customers do not know of a company. but no organization can fully recover because the cost to do so sooner or later exceed the value making. Organizations try to solve them with the launch measures such as screening process difficult. It is a pervasive problem and is present in almost every organization. . Two main sources agency problem are moral hazard and adverse selection. club. incentives for good behavior and punishment for bad behavior. Moral hazard. regulatory bodies. the person taking the action the company did not see: Drive with caution / no. b) Discuss the two main sources of agency problems with examples. Agency problem occurs when one partner in a transaction (the principal / shareholders) delegates authority to another (the agent / managers) and the welfare of the principal is affected by the choices of the agent. church. Training / not. which is monitored / careless. and so on. work hard / no. Also known as the main problem of the agency. or the government. healthy / unhealthy. whether business. As example Insurance companies generally have a variety of problems: Adverse selection.

d) Suggest possible solutions to both types of agency conflicts in organizations. disciplines to be efficient to meet debt obligations. dividend also reduce FCF if managers require additional capital and lastly its prevent unsound investment. prevent managers from investing in negative NPV project and outside financing is subject to monitoring by capital markets.Customers do something companies do not. the principal cannot perfectly and costlessly monitor the action of the agent it incurring monitoring cost and principal cannot perfectly and costlessly acquire information require to monitor agent that will impose information asymmetry. . It a bonding mechanism which forces managers to pay out future cash flows by debt creation without retention of the proceeds of the issue. external monitoring through stock market and takeover (external control device of last resort) e) Discuss Jensen’s Free Cash Flow (FCF) hypothesis and its implications for managers as well as the modern corporation. Payout of free cash flow to reduce agency costs by reduce amount of resources under control of managers. Free Cash Flows (FCF) are cash flows in excess of the amount needed to fund all positive net present value projects. The solution for conflict in organization: i) ii) iii) Organization mechanisms Compensation arrangements tied to performance & partial ownership Market mechanisms – market for managers. c) Discuss the two types of agency conflicts and its implications The delegation of authority from principal to agent is problematic because of interest of principal cannot and agent may not be the same.

But the prediction not apply for firms that had more profitable projects than cash flows to fund them and not suitable us for growth firms.The FCF hypothesis theory prediction positive stock price reaction to unexpected increase in payouts. The implication from Jensen’s FCF hypothesis is: i) ii) Increasing short term debt reduces agency problems Increasing overall debt reduces agency problems such as act as a iii) iv) v) disciplining tools. Managers may be reluctant to increase debt due to job security threat. Question 2 . increased tightness of constraints requiring the payout of future FCF will result in positive stock price reaction. Dividend payment reduce agency problems M&As increase agency problems.

You want to begin saving for your retirement. You anticipate you will be able to increase your annual contributions by 5% each year for the next 35 years. This is the future. The difference between the present value and future value depends on the length of compounding heavily involved in investments and interest rates. The time value of money tells us what the current value of an investment will grow by a given date. leases and savings. You plan to contribute RM 24. bonds. such as interest or dividend payments. a) What is the meaning and significance of the Time Value of Money concept? The time value of money is one of the basic theory of financial management. When an investor buys a bond or pay money into the account the benefits. The time value of money theory suggests that the dollar is in the bank today is worth more than a credible promise or expectation of receiving one dollar at a future date. but it supports the concept of interest. they exchanged money for the promise of more money on a certain date.000 in a savings account today to pay 5 percent interest compounded annually. and can be used to compare investments. The calculation of the future can tell you how much money you will have in the next three years to come if you put $ 15. You can invest the dollar today and get a return on investment. Theory of . Calculations involving the time value of money allows people to find and compare the value of future payments. payment. This may sound easy. mortgages. the total duration or number of times interest or dividend payments are made. such as loans. five numbers come into play: the interest rate. This theory states that the money you have now is more than a promise to receive the same amount of money in the future.000 to the account at the end of this year. A formula that involves the number of questions such as how many answers you need to deposit now to have $ 10. present value and future value. To do this.000 in six years if the interest rate is 7 percent.

325 8.990.79 RM180.57 77402.6058 1.1049 1.52 85336.1406 3. to calculate the value today that the money will come.067.8074 5.8385 1.00 26460. Certain types of investments do not guarantee the payment after a certain period of time.29 RM198.7182 1.26 73716.86 60646.472.14 43100.56 RM143.3799 3.845.01 RM152.419.297.118. If payment is not guaranteed for the future.time value of money allows investors to use mathematical formulas known as the risk-free rate of return.145 7.266.952.76 32162.70 RM158.1143 6. and decide whether it is worth investing.72 RM194.66 RM170.924.069.4274 5.00 RM230. and time.80 63679.25 RM183.40 81272.442.385.95 RM205.00 25200.760.588.072.5785 2.58 47518.598.53 RM164.196.0724 4.978 9.36 49894.00 29172.44 57758.55 45255.68 RM161.30 33770.55 RM173.6165 3.16 RM217.71 RM167.9672 1.53 RM146.881.190.2522 2.715 8.515.53 RM155.00 RM234.51 . how much do you expect to have in your retirement account when you retire in 35 years? 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 Period Payment 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 24000.324.93 37231.54 RM222. b) If your expected annual return is 7%.624.14 66863. you need to adjust the value based on the risks involved.65 RM177.916.40 RM213.28 52388.7405 4.68 RM187.4304 4.42 RM141.166.2139 5.10 70206.47 41048.5007 Future value RM239.10 Compound @ 7% 9.1588 2.6488 6.14 89602.90 RM226.9522 2.00 RM149.00 27783.88 39093.292.8697 3.67 RM209.840.884.19 RM202.99 55008.4098 2.126.73 RM190.6123 7.95 94083.41 35458.15 30630.759 2.

559.85 RM133.00 RM135.25 103726.080.929.9 2 .07 1 RM138.4026 1.225 1.35 RM6.36 RM130.95 114358.418.192.53 126080.35 Total Cash Flow in 35 years Question 3 1.481.1449 1.3108 1.665.16 RM128.964.62 108912.5 4 3 2 1 0 30 31 32 33 34 35 98787.60 120076.88 RM126.

how much payment would you require to opt for the second option? .00 0.0 00.00 1.54 5.000.9524 0.00 82 2.000.00 2. b) Based on you answers above.00 0.8227 TOTAL RECEIVED TODAY 1.00 OPTION 2 DISCOUNTE CASH D FLOW PERIOD PAYMENT 0 2. You can take your prize money either as 5 payments of RM 1 million per year (starting today) or RM 2 million paid today.000. which option should you take? OPTION 1 PERIOD 0 1 2 3 4 PAYMENT 1.700.000.00 1. If the interest rate is 5%.00 Based on calculation above we choose option 1 because higher value compare with option 2.00 95 2.a) You have just won a lucky draw prize worth RM 5 million.800.0 00.00 4.00 86 3.000.00 90 7.00 1.00 TOTAL RECEIVED TODAY 2.0 1 00.00 DISCOUNTE CASH D FLOW 1 0.000.0 00.00 1.0 00.900.400.000.000.907 0.0 0.8638 0.

00 22.The second option will be opt if the payment received for today more than RM4545900.7107 85. you think that you will be able to pay him back RM 24.9524 57.6 36.00 29.00 0.00 LOAN 24.6 36.00 31.5 36.6768 64. Your rich Uncle Tony Stark will lend you the money as long as you agree to pay him back within 8 years.60 0. Based on your earnings and living expenses.8227 17.80 [END OF QUESTION PAPER] .00 28.000 in one year. c) You have just finished your MBA and have received a promotion that requires you to upgrade your lifestyle and thus purchase a new car.7835 06. 3 000.00 0. If Uncle Tony Stark would otherwise earn 5% per year on his savings.8 0. 4 000. and then RM 36.00 26. 8 TOTAL RECEIVED DISCOUNTE D 000.2 36.00 25. 6 000.80 0.20 0.8 36.907 52. 5 000.00 32. You offer to pay him the rate of interest that he would otherwise get by putting his money in a savings account. 1 000.8638 96. 7 000.20 0.7462 63.2 42.3 221.80 36. how much can you borrow from him? OPTION PERIOD PAYMENT 0 1 - CASH FLOW - 24.000 for the next 7 years after that. 2 000.20 0.0 36.