BBF201/03 Assignment 2

BBF201/03 Introduction to Financial Management

Assignment 2 (25%)

January 2022 Semester

Instructions

1. There are FOUR (4) questions in this assignment. Please answer ALL questions
in this assignment. Total marks awarded is 100, which will contribute to 25% of the
entire course assessment.

2. Your assignment 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.

3. Information on cover page:

 Course code and title
 Student name
 Student ID
 Name of tutor
 Class code

4. Please name and save your assignment accordingly.

5. The deadline for the submission of Assignment 2 is 4 Mar 2022 11:59:59 PM. A
softcopy should be submitted via Online Assignment Submission System.

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 BBF201/03 Assignment 2

PART A (100 MARKS)

Answer ALL questions.

QUESTION 1 (25 MARKS)

a) With a 9% discount rate, determine the value on 1/1/13 of the following cash flows:

Date Cash Received Amount of Cash

1/1/14 RM14,000
1/1/15 RM20,000
1/1/16 RM30,000
1/1/17 RM43,000
1/1/18 RM57,000
(Round your answer to the nearest RM10).
(6 marks)

b) You have been depositing money at the end of each year into an account drawing
9.5% interest. Calculate the balance in the account at the end of year four if you
deposited the following amounts.

Year End of Year Deposit

1 RM350
2 RM500
3 RM725
4 RM400
(5 marks)

c) You invest RM1,500 at a variable rate of interest. Initially the rate is 4% compounded
annually for the first year, and the rate increases one-half of one percent annually
for five years (year two's rate is 4.5%, year three's rate is 5.0%, etc.). Compute how
much will you have in the account after five years.
(3 marks)
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d) HOMBA Bank is offering you a loan at 10%; payments on the loan are to be made
monthly. AMBA Bank is offering you a loan where payments are to be made
semiannually; the rate on the loan is also 10%. CIMBA Bank is also offering a loan
at 10% where the payments are made quarterly. Justify which loan has the lowest
annual cost.
(5 marks)

e) A retirement home in Penang costs RM2,000,000 today. Housing prices in Penang

are increasing at a rate of 4% per year. Joe wants to buy the home in 8 years when
he retires. Joe has RM250,000 right now in a savings account paying 8% interest
per year. Joe wants to make eight equal annual deposits into the savings account
starting today. Calculate how much must each deposit be so Joe will have enough
money in his savings account to buy the retirement home when he retires.
(6 marks)

QUESTION 2 (25 MARKS)

a) Find how much would you be willing to pay (rounded to the nearest RM) for a 25-
year annuity due if the payments are RM5,500 per year and you want to earn a rate
of return equal to 6.5% per year.
(4 marks)

b) Estimate how much would you be willing to pay (rounded to the nearest RM) for a
20-year ordinary annuity if the payments are RM6,500 per year and you want to
earn a rate of return equal to 6.5% per year.
(4 marks)

c) Using a relevant diagram, describe how would the present value be affected by i)
an increase in the discount rate and ii) a decrease in the time period until the cash
flow is received.
(7 marks)

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d) A project requires an immediate outflow of cash of RM650,000 in return for the

following probable cash flows:

End of Year 1 End of Year 2

State of Economy Probability
(RM) (RM)

Growth 35% 300,000.00 250,000.00

Normal 65% 750,000.00 900,000.00

Assume that the state of the economy will be the same in the second year as in the first.
The required rate of return is 7 percent. There is no tax or inflation.

i. Calculate the expected Net Present Value (NPV).

(6 marks)

ii. Calculate the standard deviation of Net Present Value (NPV).

(4 marks)

QUESTION 3 (25 MARKS)

a) You are considering investing in a project with the following possible outcomes:

Probability of Investment Investment

States
Occurrence Returns A Return B
State 1: Economic boom 18% 20% -15%
State 2: Economic growth 42% 16% 5%
State 3: Economic decline 30% 3% 12%
State 4: Economic in depression 10% -25% 18%

Calculate the expected rate of return and standard deviation of returns for these
investments, respectively.
(20 marks)
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b) You are thinking of adding one of two investments to an already well-diversified

portfolio.

Security A Security B
Expected Return = 14% Expected Return = 16%

Standard Deviation of Returns = 16% Standard Deviation of Returns = 20%

Beta = 1.2 Beta = 1.2

If you are a risk-averse investor, justify which one is the better choice.
(5 marks)

QUESTION 4 (25 MARKS)

a) The prices for the Malaysia Gas Corporation for the second quarter of 2021 are
given below. The price of the stock on April 1, 2021 was RM130. Find the holding
period return for an investor who purchased the stock on April 1, 2021 and sold it
the last day of June 2021.

Month End of 2021 Price

April RM125.00
May RM138.50
June RM132.75
(3 marks)

b) You purchased 500 shares of A.M.J. Berhad common stock one year ago for RM50
per share. You received a dividend of RM2 per share today and decide to take your
profits by selling at RM54.50 per share. Estimate your amount of return in RM and
holding period return in percentage.
(3 marks)

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c) Differentiate between systematic and unsystematic risk using a relevant diagram.

(14 marks)

d) Discuss the method is used to measure a firm's market risk.

(5 marks)

END OF ASSIGNMENT 2