CONFIDENTIAL, ACIDEC 2015/MAF603 UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE : CORPORATE FINANCE COURSE CODE : MAF603 EXAMINATION : DECEMBER 2015 TIME : 3HOURS INSTRUCTIONS TO CANDIDATES 1 This question paper consists of five (5) 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 invigitator. 4 Please check to make sure that this examination pack consists of i) the Question Paper li) a two-page Appendix 1 (Present Value Table) ili) an Answer Booklet ~ provided by the Faculty 5. ‘Answer ALL questions in English. DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD T0 D0 SO This examination paper consists of 6 printed pages © Hak Cipta Universiti Teknologi MARA, CONFIDENTIALCONFIDENTIAL, 2 ACIDEC 2015/MAF603 QUESTION 1 A You are provided with the following information about two stocks and the market: ‘State of economy Probability Return from Stock A Normal 08 20% 03 -15% _ 40% Expected Return on Stock B Standard Deviation of Stock B Standard Deviation of Market Correlation between Stock A and Stock B Correlation between Stock A and the market Correlation between Stock B and the market Government securities in the market have a yield of 4% and the expected return on the market is 16%. Required: Calculate the expected return and standard deviation of Stock A. (5 marks) ji, Applying CAPM: a. Evaluate the investment performance of the stocks. (5 marks) b. Recommend which stock you would invest in if you are a typical risk- averse investor. (6 marks) “Diversification helps to eliminate risk, but it cannot remove all risk.” Do you agree? Discuss. Give one example each for systematic risk and unsystematic risk. (5 marks) (Total: 20 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL, 3 ACIDEC 2015/MAF603 QUESTION 2 A i Discuss the following empirical challenges to the efficient market hypothesis: a. Earnings surprises. b. Size. (6 marks) In each of the following cases, explain briefly which form(s) of the efficient market hypothesis is supported or violated. a. Aninvestor can consistently earn abnormal retums by studying charts of historical price movements. b. An analysis of the latest annual report of a company enables an investor to earn abnormal returns. c. A stock which is fluctuating between RM3.00 and RM3.50 suddenly drops to RM2.60 at the announcement of a suspension of dividends. (6 marks) The inflation rate in Malaysia is expected to be 2% higher than the US inflation rate in the near future. All other things being equal, state the effect of the Malaysian ringgit value to the US dollar exchange rate. (2 marks) An international investor based in Indonesia is deciding whether to invest in US dollar bonds in Singapore or Indonesia. The interest rate is higher by 1% in Singapore. Advise him on the action he should take. (2 marks) The Philippines is facing a current account deficit with its main trading partners, which are the US and Japan. State the relationship of the Philippine currency with the currencies of the US and Japan. (3 marks) A UK multinational wishes to set up a subsidiary in either Ukraine or Hungary. Advise the multinational on the decision it should take. (3 marks) (Total: 20 marks) © Hak Cipta Universit Teknologi MARA CONFIDENTIALCONFIDENTIAL, 4 ACIDEC 2015/MAF603 QUESTION 3 A. Gromac Bhd, a company manufacturing farm equipment, has annual EBIT of RM500,000 in perpetuity. The interest rate on debt is 10%. Required: i. Suppose the company’s Debt/Equity ratio is 0.25 and its overall cost of capital is 15%, calculate the following, if the firm operates in a tax-free environment a. The value of the company. b. The value of its equity. (4 marks) |i, Assuming that the company’s debt outstanding is RM800,000 and its unlevered cost of equity is 20%, calculate the following, if the firm pays corporate tax of 25%: a. The value of the company. b, The value of its equity. c. The company’s weighted average cost of capital. (6 marks) B. Discuss two (2) implications of Modigliani-Miller Proposition I, in a world with corporate taxes for a levered firm (5 marks) C. Explain three (3) assumptions used in the Modigliani-Miller Proposition, in a world without taxes. (5 marks) (Total: 20 marks) QUESTION 4 Duplex Coating Bhd is considering a new project in Morib, Selangor. The project has an expected useful life of 10 years. The project will require an initial outlay of RM320 milion. The estimated cash expenses are RMSO million for the first year of the project, RM30 million per year for years 2 and 3, and RM10 million for the remainder of the project's life. The project will generate a pre-tax cash revenue of RM150 million per year, starting from the fourth year onwards. Duplex Coating Bhd can obtain a RM320 million, 10 year, 7% loan from a commercial bank. Half of the loan principal will be repaid at the end of year 5 and the remaining at the end of year 10. The bank will charge a processing fee of 2% on the loan amount. The fee is Payable upfront, and is amortized over the term of the loan. The corporate tax rate is 25%, the risk-free rate is 4%, and the unlevered cost of equity is 14%. (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 5 ACIDEC 2015/MAF603 Required: i, Calculate the Net Present Value (NPV) of the project if its fully equity financed. (6 marks) li, Calculate the Adjusted Present Value (APV). Should the project be accepted? Show all workings. (7 marks) lil, Assume that the company is offered a 7-year, 6% loan with no processing fee from the Government for the same amount. RM100 million of the principal will be repaid at the end of year 5 and another RM220 million at the end of year 7. Advise Duplex Coating Bhd whether the project should be accepted (5 marks) iv, Compare the essential difference between sensitivity analysis and scenario analysis. (3 marks) (Total: 20 marks) QUESTION 5 Garuda Tours Sdn Bhd, a company in the holiday travel industry, is presently in discussion with Nusantara Holidays Sdn Bhd about a possible merger. The following information is relevant: "| Garuda Tours Nusantara Holidays Earnings per share (EPS) RMi70 | ___—sRMO.25 [ Price earnings ratio (P/E) 10 times 30 times No. of shares outstanding 1 42 million 12 million Neither company has debt. The management of Garuda have estimated that the combined firms should generate synergistic gains with a present value of RM36 milion. Required: i Calculate the potential value of the combined firm after the merger. (3 marks) ii If the merger takes place, where the shareholders of Nusantara will receive one share of Garuda for every two of their Nusantara shares: a. Calculate the NPV of the merger. (3 marks) b. Calculate the percentage holding of the combined firm owned by the new shareholders (former shareholders of Nusantara). (2 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL,CONFIDENTIAL, 6 ACIDEC 2015/MAF603 ll, Calculate the estimated share price of the combined firm after the merger. (2 marks) iv. Explain the gain that the original shareholders of Garuda will obtain as a result of the merger. Explain also the gain for the new shareholders of Garuda (former shareholders of Nusantara). (5 marks) v. Suggest whether the shareholders will be better off in mergers between competitors, or mergers between companies in unrelated businesses. 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