CONFIDENTIAL 1 BA/JUL 2021/FIN430

FACULTY OF BUSINESS AND MANAGEMENT

FINAL ASSESSMENT

COURSE : INTRODUCTION TO CORPORATE FINANCE

COURSE CODE : FIN430
EXAMINATION : JULY 2021
TIME : 3 HOURS
PLATFORM : UFUTURE/GOOGLE CLASSROOM/GOOGLE FORM

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of four (2) parts: PART A (14 Questions)
PART B (2 Questions)

2. Answer ALL questions. Start each answer on a new page.

3. Answer ALL questions in English.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 6 printed pages

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

 CONFIDENTIAL 2 BA/JUL 2021/FIN430

PART A : MULTIPLE CHOICE

1. The statements below all refer to short-term financing EXCEPT:

a) A short-term obligation for a period of more than one year.
b) Used to support the firm’s current assets.
c) Used to meet the firm’s temporary and seasonal demands.
d) Interest rates are often lower compared to long-term financing.
(1 mark)

2. Short term financing are normally obtained from:

i) Internal generated funds
ii) External financing
iii) Revolving credit
iv) Line of credit

a) I only
b) I and II
c) I, III and IV
d) All of the above.

(1 mark)

3. The following statements below describes a revolving credit facility EXCEPT:

a) A line of credit facility where the borrower is able to borrow up to a certain limit.
b) A credit facility where the borrower is allowed to use the funds for one time only.
c) A commitment fee is charged on unused portion of the credit facility.
d) Interest is calculated each month on the outstanding balance and added to the
previous balance.

(1 mark)

4. Marina Enterprise has been granted a revolving credit facility amounting RM100,000 for
one year. The facility comes with a 14 percent interest rate and 0.5 percent commitment
fee. What is the effective interest rate if Marina uses only RM80,000 of the facility?
a) 0.05%
b) 12%
c) 14%
d) 14.13%

(2 mark)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

 CONFIDENTIAL 3 BA/JUL 2021/FIN430

5. A discounted interest rate is:

a) Deducted in the beginning of the loan period.
b) Deducted at the end of the loan period.
c) Deducted at the middle of the loan period.
d) A discount to reduce interest rate charged on the loan.

(1 mark)

6. A borrower borrows RM5,000 at 12 percent interest rate on discounted basis for a six
months period. What is the effective interest rate of the loan?
a) 6%
b) 12%
c) 12.77%
d) 24%

( 2mark)

7. A borrower borrows RM10,000 at 12 percent interest rate on discounted basis for a six
months period and is required to to have a compensating balance of 10 percent. What is
the effective interest rate of the loan?
a) 6%
b) 12%
c) 14.29%
d) 24%

(2mark)

8. Which of the following are the characteristics of common stocks?

i) Represents an ownership of the firms.
ii) The stated par value of the common stocks, usually RM100.
iii) Common stockholders can claim on earnings and assets and dividend paid prior to
bondholders.
iv) Common stockholders attached voting privileges which give right to the shareholders
to elect directors, who in turn choose managers who are responsible for the direction
of the business.

a) i and ii
b) ii and iii
c) iii and iv
d) i and iv

(1 mark)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

 CONFIDENTIAL 4 BA/JUL 2021/FIN430

9. Which of the following statements about preferred stock is TRUE?

a) Preferred shareholders generally get enhanced voting rights.
b) Dividends must generally be paid to preferred shareholders before dividends may be
paid to common shareholders.
c) Preferred stocks are a hybrid between equity and debt, because like common stock
the owners of preferred shares can vote and like debt, they are paid interest.
d) Some preferred shares have a pre-emptive right attached to it.

(1 marks)

10. Which of the followings is not a positive aspect about bonds?

a) The cost of issuing bonds is relatively less expensive compared to common stocks.
b) Bondholders do not have voting rights.
c) The issuer’s obligation to bondholders is limited to fixed interest payment throughout
the contract of the bond even though the issuer’s profit is high.
d) The payment of interest is not mandatory in times of low earnings.

(1 marks)

11. ___________ is the minimum rate of returns expected by an investor to be received in

compensation to the amount of risk assumed.
a) desired rate of returns.
b) actual rate of returns.
c) exact rate of returns.
d) approximate yield.

(1 marks)

12. GoGo Mart is considering issuing bonds with a 10 percent coupon rate. Currently the
market price is RM920, and the maturity period is 15 years. Given the marginal tax rate of
the firm is 40 percent, calculate the after-tax cost of issuing the bond.
a) 6.60%
b) 10.97%
c) 5.87%
d) 10.50%

(2 marks)

13. ABC Corp. planned to issue preferred shares with a dividend rate of 7.5 percent of par
value. The market price is 5 percent below par value and the cost of issuing is estimated
at 4.5 percent of market price. What is the cost of financing?
a) 7.47%
b) 8.29%
c) 8.27%
d) 7.83%

(2 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

 CONFIDENTIAL 5 BA/JUL 2021/FIN430

14. Menara Holdings issues additional common stock with last year dividend RM1.20.
The dividend is expected to grow at 7.5 percent forever. The selling price of the new
issuance of common stock is RM15 per unit and the floatation is 5 percent of issuance
price. Determine the cost of financing for the common stock.
a) 16.55%
b) 20%
c) 18.05%
d)10.80%

(2 marks)

PART B : LONG STRUCTURED

QUESTION 1

One Global Corporation requires RM15 million to finance its project that results in after-tax
cash inflows of RM3.75 million each year for 6 years. The company would like to maintain its
present debt-to-equity ratio of 0.60. One Global corporation’s systematic risk is 1.2. Treasury
bills rate is 5 percent and market risk premium is estimated at 8 percent. Additionally, the firm’s
pre-tax cost of debt is 13 percent, the flotation cost of equity and debt are 5 percent and 8
percent respectively. The corporate tax rate is 40 percent. Calculate:

i) The firm’s weighted average cost of capital.

(4 marks)

ii) The NPV of the project if the flotation costs are to be ignored.

(3 marks)

iii) The firm’s weighted average flotation cost.

(2 marks)

iv) The amount of flotation cost for the proposed financing.

(2 marks)

v) The NPV of the project if flotation costs are to be considered. Justify if the firm should
accept or reject the project.

(4 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

 CONFIDENTIAL 6 BA/JUL 2021/FIN430

QUESTION 2

Changgeh Berhad is considering investing in either one of the two mutually exclusive projects.
Its initial investment for project C and D is RM75,000 and RM67,000 respectively.

Project C Project D
Year
(RM) (RM)
1 20,000 40,000

2 20,000 30,000

3 20,000 30,000

4 20,000 -

5 20,000 -

If the firm’s average cost of capital is 10 percent, compute:

i) the payback period for each project.

(3 marks)

ii) the net present value for each project.

(4 marks)

iii) the internal rate of return for each project.

(4 marks)

iv) the profitability index for both projects.

(3 marks)

v) Which project should Changgeh Berhad invest in? Justify your answer.

(1 marks)

END OF QUESTION PAPER

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL