CONFIDENTIAL 1 AC/JAN 2016/MAF253

UNIVERSITI TEKNOLOGI MARA

SUGGESTED SOLUTION

COURSE : FUNDAMENTAL FINANCIAL MANAGEMENT

COURSE CODE : MAF253
EXAMINATION : JANUARY 2016

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CONFIDENTIAL 2 AC/JAN 2016/MAF253

PART A

1. B 2. D 3. A 4. C 5. D
6. C 7. B 8. A 9. A 10. D
(Total: 10 marks)

PART B

QUESTION 1

a. Advantages of incorporating a company:

 Easy to raise financing through share equity issuance or debt issuance. √
 The company has a perpetual succession. √
(Any other acceptable answers)
(2√ x 1 = 2 marks)

b.
i. Equity financing: Equity is a stock or any other security that representing an
ownership interest in the company. √

ii. Debt financing: Debt is borrowings of the firm that represent a legal obligation of
the company to the lenders. √
(2√ x 1 = 2 marks)

c. Primary market is a market where new securities are bought and sold for the first
time√. In this market, the issuer is directly involved in the transaction and receives the
proceeds from the sale of securities. √
Secondary market is a market in which existing securities are traded among
investors√. The issuer of the securities is not involved in the transactions and does not
receive the proceeds from the sale of the securities. √
(4√ x 1 = 4 marks)

d. Advantages of shareholders’ wealth maximization:

 Emphasizes long-term returns. √
 Consider risk or uncertainty when making financial decisions. √
 Considers the timing of returns.
 Takes into account economic expectations since it affects movements in stock
price.
 Emphasizes market price per share.
(2√ x 1 = 2 marks)
(Total: 10 marks)

QUESTION 2

A. a. Permanent Assets = RM469,000√ + (25%√ x RM292,500√) + RM25,000√

= RM567,125
Temporary Assets = 560,575 √

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CONFIDENTIAL 3 AC/JAN 2016/MAF253

Permanent Financing = RM726,200√ + RM175,000√ = RM901,200

Temporary Financing = RM226,500√

(8√ x ½ = 4 marks)

b. The company adopted conservative approach√ because permanent financing

sources are being used to cover some of temporary assets of RM334,075. √
(2√ x 1 = 2 marks)

c. The conservative approach will lead to lower risk√, lower return√. The approach
lead a lower the risk because the use of permanent financing sources led to high
liquidity of the company√, however the return of the company will be lower
because in general the financing cost of permanent sources is higher compare to
temporary sources of financing. √
(4√ x 1 = 4 marks)

B. a. CCC = ICP + RCP – PDP

ICP = RM4.5 million√ x 360 days
(65% x RM26 million) √
= 96 days

RCP = RM3.5 million√ x 360 days

(75% x RM26 million) √
= 65 days

PDP = RM1.5 million √ x 360 days

(65% x RM26 million) √
= 32 days

CCC = 96 days + 65 days – 32 days

= 129 days
(6√ x ½ = 3 marks)

b. New PDP = RM2 million √ x 360 days

(65% x RM26 million)
= 43 days

New CCC = 96 days + 65 days – 43 days

= 118 days

Reduction in CCC = 129 days√ – 118 days√ = 11 days

Interest saving = 11 days x (RM15 million√ / 360√) x 9%√

= RM41,250.
(6√ x ½ = 3 marks)

C. Motive for holding cash:

 Transactions motive: Cash balances held are for the purpose of meeting cash
needs arising in the ordinary course of doing business. √
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CONFIDENTIAL 4 AC/JAN 2016/MAF253

 Precautionary motive: The cash balances act as a buffer for unexpected needs
that may arise. √
 Speculative motive: Cash balances are held for potential profit-making situations.
(2√ x 1 = 2 marks)
(Total: 18 marks)

QUESTION 3

a. Forgo the discount = 0.02 √ x 360 √.

1 – 0.02√ 40 – 10√
= 24.49%
(4√ x ½ = 2 marks)

b. Super Bank

AR = B – I – CB
RM450,000√ = B – (0.1√ x 60/360√)B – 0.15AB√
B = RM540,000

EAR = (0.1 x 60/360 x RM540,000) √ x 360√

RM450,000√ 60
= 12%

Power Bank

EAR = (0.12√ x 60/360√ x RM450,000√) + (0.02√ x RM50,000√) x 360√

RM450,000√ 60
= 13.33%
(14√ x ½ = 7 marks)
c. The company should borrow from Super Bank and pay within discount period√
because the cost of borrowing from Super Bank is cheaper then cost of borrowing from
Power Bank and cost of forgoing the discount. √
(2√ x ½ = 1 mark)

d. Advantages of commercial paper:

 The interest rate on commercial paper is generally lower compared to bank loans
and other sources of short-term financing. √
 The issuance of commercial paper does not require any compensating balance
requirement. √
 Commercial paper can offer large amounts of short-term funds to firms with large
credit requirements.
 Issuing commercial paper enjoys the prestige associated with its issuance
because only firms with high credit rating have access to the commercial paper
market.
(2√ x 1 = 2 marks)
(Total: 12 marks)

END OF SUGGESTED SOLUTION

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL