MAF503 – JUNE 2016

QUESTION 1
Suggested solution
a) Secari Sdn Bhd’s financial ratios for 2015:
Current ratio 842,500 / 590,000 = 1.43 times √

Quick ratio (842,500 – 400,000-10,000)/590,000= 0.73 times √

Inventory turnover 1,960,000 / 400,000 = 4.9 times √

Average collection period 279,000 / 3,700,000 x 360 = 27 days √

Fixed assets turnover 3,700,000 / 2,100,000 = 1.76 times √

Total asset turnover 3,700,000 / 2,942,500 = 1.26 times √

Debt ratio 1,490,000 / 2,942,500 x 100 = 50.6% √

Times interest earned 1,040,000 / 100,000 = 10.4 times √

Gross profit margin 1,740,,000 / 3,700,000 x 100 = 47% √

Operating profit margin 1,040,000 / 3,700,000 x 100 = 28.1% √

Return on equity 705,000 / 1,452,500 x 100 = 48.53 % √

(11√ x 1 = 11 marks)

b) No, the loan should not be approved. √ This is because of the followings:-
1. Liquidity position is not as good as industry average. √ The company seems to have
overstocking problem√ as can be seen from the ratios. Even though the current ratio is on
par with industry standard but the quick ratio is far below the industry average√ because of
lower inventory turnover as compared to industry. √

2. The leverage position is also poor as compared to industry average. √ The Debt ratio is
higher √ and times interest earned is slightly lower by 10.6% and 0.6 times respectively
than industry average. √
(8√ x 1/2 = 4 marks)

c) Weaknesses are in the areas of liquidity and leverage position.

Liquidity

1
 MAF503 – JUNE 2016

The company must introduce an effective inventory control system ( e.g, introducing JIT
system) √ and may also need to cut down on slow-moving/obsolete items√ by selling these
at a reduced price. √
Leverage
The company should issue shares√ or use retained profits to finance its capital expenditure√
and also may have to review its dividend policy as this will affect the company’s source of
financing. √
(6√ x 1/2 = 3 marks)
(Total: 18 marks)

QUESTION 2

A. Chelsea United Sdn Bhd

a) Earnings after tax

Hedging (Matching)

Assets RM Financing
PFA 50,000,000
LTF 52,000,000
PCA (10% x RM20 million) 2,000,000
(8% int)
52,000,000 52,000,000

RM
TCA (90% x RM20 million) 18,000,000
STF (4% int) 18,000,000
70,000,000 70,000,000

RM
EBIT 15,550,000
Less: Interest
LTF (8% x 52,000,000) (4,160,000)
STF (4%  x 18,000,000) (720,000)
EBT 10,670,000
Less: Taxes (25%) (2,667,500)
√OF
EAT 8,002,500
(8x ½ mark = 4 marks)

b) Graph - Hedging principle working capital financing policy

RM

2
 MAF503 – JUNE 2016

TCA (area) = RM 18,000,000

Marketable securities

Short term financing

 RM = 18,000,000


PCA (area) = RM 2,000,000 Note: For TCA,PCA,PFA,  is given to the area
For LTF, STF  is given to curve not figure

PFA (area)= RM 50,000,000  Long term financing RM = 52,000,000

Period
(6  x ½ mark = 3 marks)
B. Synergy Platinum Sdn Bhd

a) i) Change in cost of bad debts

Old policy:
5% x 5,000,000 = 250,000 
New policy:
3% x 4,500000 = 135,000 
Decrease in cost of bad debts 115,000 

ii) Change in cost of financing accounts receivables

Old policy:
Investment in AR = 5,000,000 x 60/360 = 833,333 
Cost of financing = 15% x 833,333 = 125,000 

New policy:
Investment in AR = 4,500,000 x 30/360 = 375,000 
Cost of financing = 13% x 375,000 = 48,750 

Decrease in cost of financing AR = 125,000 – 48,750 = 76,250 OF

iii) Change in the contribution margin

Contribution margin:
Old policy: 40% x 5,000,000 = 2,000,000 
New policy: 40% x 4,500,000 = 1,800,000 
Decrease in contribution (200,000)

(10 x ½ mark = 5 marks)

b) Effect of new credit policy

Cost savings:

3
 MAF503 – JUNE 2016

Decrease in contribution (200,000) OF

Decrease in bad debts 115,000 OF
Decrease in cost of financing 76,250 OF
Loss from new policy (8,750)

The new policy should not be implemented  since the costs exceed the benefits of
Synergy Platinum by RM8,750. OF

(2 x 1 mark = 2 marks)

C. Porto Retailing Sdn Bhd

a) Cost of not taking the discount:

EAR = 3% x 360  = 22.27%

(100% – 3%) (60 – 10) 
(4 x ½ mark = 2 marks)

b) Bank loan:

Interest = 10% x 500,000 x 60 /360 = 8,333 

CB = 15% x 500,000 = 75,000

EAR = 8,333 x 360/60 = 12% 

(500,000 – 8,333 – 75,000) 

OR alternative answer

EAR =. 10% x 60/360 x 360/60 = 12% 

(100% - (10%x60/360) - 15%) 

Yes, Porto should follow the suggestion made by the purchasing manager to borrow from
Deutsche Bank and pay the supplier within 10 days discount period since the cost of bank
loan is cheaper than the cost of not taking the supplier’s credit. 
(8 x ½ mark = 4 marks)
(Total: 20 marks)

QUESTION 3

a. i. Suggested solution.

4
 MAF503 – JUNE 2016

Initial outlay RM
Cash outflows

Purchase price of the new machine 600,000√

Installation 40,000√
Transport 20,000√
Cost of new machine 660,000

Increase in inventories 70,000√

Total cash outflow 730,000

Cash inflow
Proceeds from disposal of old machine ( 200,000) √
Tax saving on loss of disposal ( 25% x RM60,000) (15,000) √√
Net initial outlay 515,000

Note
Additional marks for non - inclusion of Training√√ and interest costs√.

(10√ x 2 = 5 marks)

Workings
Depreciation ( new machine) = 660,000 – 0 = 132,000
5 years

Depreciation ( old machine) = 500,000-20,000 = 48,000

10 years
Increase in depreciation = RM 84,000

Tax implication: RM
Old machine = 500,000
Less : Acc Dep ( 48,000 x 5) = 240,000
NBV = 260,000
Less : proceeds on sale = 200,000
Loss on disposal = 60,000

Tax savings: 25% x 60,000 = 15,000

ii. Differential Cash Flows

5
 MAF503 – JUNE 2016

Year 1-2 Year 3-5

Savings
Increase in sales 250,000√ 250,000
Decrease in salary exp 10,000√ 15,000√
260,000 265,000

Less: Costs
Increase in maintenance 5,000√ 12,000√
Rental income forgone 30,000√ 30,000√
Increase in depreciation 84,000√ 84,000√
Net income before tax 141,000 139,000
Less : Tax ( 25%)√ 35,250 34,750
Net income after tax 105,750 104,250
Add back: Depreciation√ 84,000 84,000
After tax cash flow√ 189,750√ 188,250√

(14√ x 2 = 7 marks)

Iii Terminal cash flow

Inventories 70,000√
(1√ x 1 = 1 marks)

b.i. Payback period

Year 1 to year 2 = 189,750 x 2 = 379,500. √

We need RM515,000 to recover initial outlay, hence
515,000-379,500 = 0.7198
188,250

Therefore the payback period = 2 + 0.7198 = 2.7198years. √

b ii Net Present Value

Year Cash Flow (RM) PV @12% Present Value

1-2 189,750√ 1.6901√ 320,696
3-5 188,250√ 1.9147√ 360,442
5 70,000√ 0.5674√ 39,718
720,856
Less: initial outlay 515,000√
NPV 205,856

Year Cash Flow (RM) PV @ 28%√ Present Value

1-2 189,750 1.3916 264,056
6
 MAF503 – JUNE 2016

3-5 188,250 1.1404 214,680

5 70,000 0.2910 20,370
499,106
Less: initial outlay 515,000
NPV (15,894)

b iii IRR

12%√ + 205,856 x ( 28%-12%)√

205,856 + 15,894√

= 26.85%.√

(14√ x 1/2 =
7 marks)

c Yes, √ the company should buy the new machine because the NPV is positive. √
Furthermore, the payback period is less than 3 years √and the IRR is higher than the
cost of capital. √

(4√ x 1/2 = 2 marks)

d Sunk costs are expenses that have already been paid or incurred irrespective of the
decision made by the management. √ Sunk costs are incurred whether the company
accept or reject the project. √ Hence, they are not incremental cash flows. √

(3√ x 1 = 3 marks)

(Total: 25 marks)

QUESTION 4

a)
i) cost of debt (Kd): issue at premium 1,000 x 1.10 = 1100 
less: flotation cost (5% x 1100) (55) 
1,045
Interest: 5% x 1,000 = 50

CF 5% PV 4% PV
Yr 0 (1045) 1 (1045) 1 (1045)
Yr 1-10 50 7.7217 386.09 8.1109 405.55
Yr 10 1000 0.6139 613.90 0.6756 675.6
(45.01) 36.14

Kd = 4 + 36.14
--------------- x (5-4) = 4.44%

7
 MAF503 – JUNE 2016

45.01 + 36.14

Kd = kd(1-tax)
= 4.44 (1-0.25)  = 3.33%

ii) preference shares (kp)

kp = Dp/Np = 7% x 100
[(100 x 0.95)  – (95 x 0.03)] = 7.6%

iii) Internal equity

Kr = [D1/Np] + g = [2/10] + 5% = 25%

iv) New ordinary shares

Knc = = [D1/Np] + g = [2/10 –(5% x 10) ] + 5% = 26%

(20 x ½ mark = 10 marks)

b) Maximum capital expenditures = 2,000,000/0.65= RM3,076,923

Since the equity portion represent 65% of the capital structure,  the RM2,000,000
retained earnings will be sufficient to cover the cost of project up to the amount of
RM3,076,923.  However, if the cost of new project is RM10,000,000,  the retained
earnings available is no longer sufficient to support the financing requirement, therefore
Dortmund need to issue new shares to raise the financing for the balance required. 

(6 x ½ mark = 3 marks)

c) Weighted average cost of capital

weightage cost WACC

5% Corporate Debt 0.25 3.33 0.832
7% Preferred Stock 0.10 7.6 0.76
Equity 0.65 26 16.9
18.492%

(6 x ½ mark = 3 marks)

(Total: 16 marks)

QUESTION 5

8
 MAF503 – JUNE 2016

A.
i. The manner investors may monitor Financial Manager to ensure that his investment and
financing decision are in the best interest of the owner.

Investors buy and sell the firm’s stock, an activity that determine the equilibrium price of
the stock. If manager make poor investment and financing decision which inconsistent
with maximizing the value of the stock, the investors will sell the stock, placing
downward pressure on its price. 

When the investors hold large blocks of shares, they can try to use their voting power to
influence and often change the firm’s management or board of directors. To the extent
that the managers compensation levels are tied to the value of the stock, they are
penalized when they are not focus on satisfying the owners 

(2 x 1 mark = 2 marks)

ii. Three (3) advantages of alignment to the maximization of the shareholder’s wealth.

 Emphasizes long term returns 

 Considers risk of uncertainty when making financial decisions 
 Considers the timing of returns 
 Takes into account economic expectations since it affects movement in stock
price 
 Emphasizes market price per share 
(Any 3  x 1 mark = 3 marks)

B.
i. Total loan amount: 500,000 x 90% = 450,000 

Annual Installment:
450,000 = PMT (PVIFA 3 years, 5%)
450,000 = PMT (2.7232)
PMT = RM165,246.76 
(4 x ½ mark = 2 marks)

ii. Loan amortization schdule:

Year Beginning Installments Interest (5%) Principal Ending
balance Balance
1 450,000 165,246.76 22,500 142,746.76 307,253.24
2 307,253.24 165,246.76 15,362.66 149,884.10 157,369.14√
3 157,369.14 165,246.76 7,868.46 157,378.30

(6 x ½ mark = 3 marks)

C.
Weightage of each stock

9
 MAF503 – JUNE 2016

Stock A = RM40,000/RM120,000 = 33%√

Stock B = RM28,000/RM120,000 = 23%√
Stock C = RM52,000/RM120,000 = 44%√
Portfolio return during Strong growth
(33%)(4000) + (23%)(3800) + (44%)(4300) = RM4,086 √
Portfolio return during Moderate
(33%)(3700) + (23%)(3300) + (44%)(2600) = RM3,124√
Portfolio return during Recession
(33%)(3200) + (23%)(3000) + (44%)(2000) = RM2,626√

So the expected return of portfolio is

(0.3) ( 4,086) √+ (0.5)(3,124) √+ (0.2)(2,626) √

= RM1225.8√ + RM1,562√ + RM525.2√ = RM3,313.

(12√ x 1/2 = 6 marks)

D.
(i) Declaration date – is the day the board of directors announces its intention to pay a
dividend. √
Cum dividend – Anyone who buys stock on this day will receive the dividend, whereas
any holders selling the stock lose their right to the dividend. √
Ex -dividend – This means anyone who buys shares on this day is no longer entitled to
the dividend. √

(3√ x 1 = 3 marks)

(ii) The decision to pay a large dividend√ would mean automatically deciding to retain
little profits for the company’s growth. √ The company will therefore have to seek
external financing for its investment √which may result in higher cost of capital as
compared to usage of internal fund. √

(4√ x 1/2 = 2 marks)

(Total: 5 marks)

10