CONFIDENTIAL 1 AC/DEC 2019/MAF253

UNIVERSITI TEKNOLOGI MARA

COMMON TEST

COURSE : FUNDAMENTALS OF FINANCIAL MANAGEMENT

COURSE CODE : MAF253
EXAMINATION : OCTOBER 2019
TIME : 1 HOUR 30 MINUTES

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of two (2) parts: PART A (10 Questions)
PART B (2 Questions)

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

3. Do not bring any material into the examination room unless permission is given by the
invigilator.

4. Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) an Answer Booklet – provided by the Faculty

5. Answer ALL questions in English.

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

This examination paper consists of 5 printed pages
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 CONFIDENTIAL 2 AC/DEC 2019/MAF253

PART A

This part consists of TEN (10) multiple choice questions. Choose the most suitable
answer for each question and write the corresponding alphabet representing the
answer in the answer booklet provided.

1. The decision to determine the financing mix is a _______.

A. financing decision
B. investment decision
C. asset management decision
D. working capital management decision
(1 mark)

2. A drawback of maximizing profit is that it _______.

A. considers uncertainty and risk

B. is a short term process
C. aims to maximize a firm’s profit
D. stresses on the efficient use of capital resources
(1 mark)

3. A financial manager _______.

A. channels the savings of suppliers of funds

B. provides funds to the firm
C. manage credit for the firm
D. only interacts within the financing department
(1 mark)

4. The financial instrument in the money market are as follows, EXCEPT

A. Commercial paper
B. Banker’s acceptance
C. Certificates of deposits
D. Preference stock
(1 mark)

5. The main reason for a firm to finance permanent assets with permanent term debt is
due to _______.

A. the inability of the firm to repay debt of long term

B. sales of the firm has remain constant over the year
C. match the maturities of assets and liabilities for reducing risk
D. the long term debt has more stable interest rates than short term debt
(1 mark)

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6. _______ requires cooperation and good relationships between firm and its suppliers.

A. ABC inventory system

B. Just-in-Time manufacturing system
C. Material Requirement planning system
D. Economic Order Quantity
(1 mark)

7. When cash balances are held for potential profit-making situations it is the _______
motive for holding cash.

A. speculative
B. transaction
C. hedging
D. precautionary
(1 mark)

8. _______ is not one selection criteria for marketable securities.

A. Inflation risk
B. Speculative risk
C. Marketability risk
D. Default risk
(1 mark)

9. A _______ is a short-term financing instrument that is issued only by firms with high
credit standing.

A. revolving credit agreement

B. transaction loan
C. commercial paper
D. line of credit
(1 mark)

10. Which of the following statement is FALSE about long-term borrowing?

A. Long-term borrowing is less risky than short-term borrowing.

B. Long-term borrowing is more expensive than short-term borrowing.
C. The firm that uses long-term borrowing has higher liquidity than the firm that
uses short-term borrowing.
D. The firm that uses long-term borrowing has higher illiquidity risk than the firm
that uses short-term borrowing.
(1 mark)
(Total: 10 marks)

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 CONFIDENTIAL 4 AC/DEC 2019/MAF253

PART B

QUESTION 1

Finance is the process of which money is transferred among businesses, individuals and
governments via the financing and investing activities of these parties.

A. Identify, with brief explanation, the THREE (3) types of finance.

(3 marks)

B. Explain briefly the investment decision function of financial management and provide
TWO (2) examples.
(2 marks)

C. Financial environment is made up of four important parties. Describe any THREE (3)
parties.
(3 marks)

D. The goal of the firm is to maximise the wealth of the owners for whom it is being
operated. Highlights TWO (2) advantages of shareholder’s wealth maximization.
(2 marks)
(Total: 10 marks)

QUESTION 2

A. The following information is extracted from the Statement of Financial Position of Excel
Sdn Bhd:
RM
Assets
Non-current assets 2,500,000
Current assets 1,200,000
3,700,000

Additional information:
i. Three quarter of current assets are considered temporary assets.
ii. Earnings before interest and tax is RM750,000.
iii. Asset financing plan:
• Long term financing, with an interest rate of 5%, is used to finance all non-
current and half of permanent current assets.
• Short term financing, with an interest rate of 2%, is used to finance the
remainder of the assets.

Required:

a. Describe the working capital policy adopted by the firm. Support your answer
with a diagram.
(5 marks)

b. Comment on the risk and return trade-off associated with the policy used.
(2 marks)

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 CONFIDENTIAL 5 AC/DEC 2019/MAF253

c. Compute the net profit after tax under the above financing plan, given the
corporate tax rate is 25%.
(3 marks)
(Total: 10 marks)

B. FitBody Sdn Bhd is having an inventory turnover ratio of 5 times a year, on average.
The company collects its receivable in 45 days and pays its suppliers in 50 days. The
average yearly operating cycle investment of the company is RM2,502,000.

Required:

a. Calculate the firm’s cash conversion cycle.

(3 marks)

b. Calculate the firm’s new cash conversion cyle if the inventory turnover ratio
increase to 6 times a year and the company is able to delay the payments to its
suppliers by 7 days.
(4 marks)

c. Compute the annual savings resulted from the change in (b), given that the
interest on borrowings is 5%.
(2 marks)
(Total: 9 marks)

C. A company is considering a trade credit option of 10/30 net 60. In order to pay within
the discount period, the company requires RM80,000.

There are three possible sources being offered to the company:

1. A loan from Bank Kerjasama for 9 months at a simple interest of 4% with a

required compensating balance of 20%. The company has been maintaining a
current balance of RM16,000 in the bank and it is sufficient to cover the
compensating balance of the new loan.
2. A loan from Bank Waja for 9 months at 6% discount interest with 15%
compensating balance.
3. A line of credit of RM100,000 for 9 months from Bank Adil at an interest of 4%
and 2% of commitment fee on the unused amount.

Required:

a. Calculate:
i. the cost of forgoing the cash discount
ii. the effective annual cost of each possible source of fund
(10 marks)

b. Advise whether the company should take the cash discount.

(1 mark)
(Total: 11 marks)

END OF QUESTION PAPER

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