BWFF1013 FOUNDATION OF FINANCE (SEM A222)

INDIVIDUAL ASSIGNMENT #2
TOPIC 1 – 4

Please answer ALL questions. Circle the correct answer & show your calculation
to prove your answer (write in any space available next to the specific question)

1. Which of the following is NOT among the foundational principles of finance?

A. Money has a time value.

B. Cash flow is what matters.
C. Risk does not require a reward.
D. Market prices are generally right.

2. The mixture of a firm's debt and equity financing defines the term .

A. capital structure
B. capital budgeting
C. cash management
D. working capital management

3. Which form of business structure is most associated with agency problems?

A. Corporation.
B. Sole proprietorship.
C. General partnership.
D. Limited partnership.

4. The primary advantage of being a limited partner instead of a general partner is

.

A. no potential financial loss

B. active participation in the firm's activities
C. maximum loss limited to the capital invested
D. greater control over the business affairs of the partnership

5. Which one of the following is an agency cost?

A. Increasing the quarterly dividend.

B. Incentive to the company's financial managers.
C. Investing in a new project that creates firm value.
D. Loss of investment opportunity resulting from investment turned down by
managers.

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6. Which of the following types of business organization stands as a legal entity?

A. Corporation.
B. Sole proprietorship.
C. Limited partnership.
D. General partnership.

7. Which one of the following BEST states the primary goal of financial management?

A. Maximize the current value per share.

B. Maximize current dividends per share.
C. Increase cash flow and avoid financial distress.
D. Minimize operational costs while maximizing firm efficiency.

8. Which one of the following is a primary market transaction?

A. Sale of a new share of stock to an individual investor.

B. Gift of stock from one shareholder to another shareholder.
C. Stock ownership transfer from one shareholder to another shareholder.
D. Sale of currently outstanding stock by a dealer to an individual investor.

9. Shareholder A sold shares of XYZ stock to Shareholder B. The stock is listed on the
Malaysia Stock Exchange. Which one of the following indicates where this trade
occurs?

A. Dealer market.
B. Product market.
C. Primary market.
D. Secondary market.

10. The true owners of the corporation are the .

A. common stockholders.
B. preferred stockholders.
C. board of directors of the firm.
D. holders of debt issues of the firm.

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11. Ratios that measure a firm's financial leverage are known as ratios.

A. profitability
B. asset management
C. long-term solvency
D. short-term solvency

12. What information does a firm's income statement provide to the viewing public?

A. a report of revenues and expenses for a defined period of time

B. a report of investments made and their cost for a specific period of time
C. an itemization of all of a firm's assets and liabilities for a defined period of time
D. a complete listing of all of a firm's cash receipts and cash expenditures for a
defined period of time

13. Gurun Indah Berhad plans to sell 1,000 units of handphone chargers in 2019 at an
average price of RM45 each. COGS will be 40% of the sale price. Depreciation
expense will be RM3,000, interest expense will be RM2,500 and operating expenses
will be RM4,000. The tax rate is 20%. What will Gurun Indah’s net income be for
2019?

A. RM6,800
B. RM14,000
C. RM16,400
D. RM28,400

14. ABX Berhad has shareholders' equity of RM300,300. The firm owes a total of
RM191,000 in current assets. The firm net fixed assets is RM511,000 and it has
RM90,000 for current liabilities. What is the amount of the net working capital?

A. RM561,000
B. RM101,000
C. RM721,000
D. RM122,000

15. Which statement is TRUE?

A. Debt is not a liability to a company.

B. Dividend per share is the net income on a share basis.
C. Cost of goods sold is the cost of producing a product or services.
D. Net income is a cost that change as the quantity of output produced changes.

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Use the following information to answer Questions 16 to 18

AMEX Sdn Bhd

2022 Income Statement

Net sales RM201,000

Cost of goods sold 81,500
Depreciation 20,100
Earnings before interest and taxes 99,400
Interest paid 7,400
Taxable income 92,000
Taxes 24,840
Net income 67,160

Dividends 10,000
Addition to retained earnings 57,160

AMEX Sdn Bhd

2019 Balance Sheet

Cash 30,500 Accounts payable 10,000

Accounts receivables 10,000 Long-term debt 20,000
Inventory 19,500 Common stock 45,000
Total 60,000 Retained earnings 20,000
Net fixed assets 35,000
Total assets 95,000 Total liabilities & equity 95,000

16. AMEX’s quick ratio is .

A. 4.00
B. 4.05
C. 4.27
D. 4.24

17. AMEX’s total asset turnover is .

A. 1.35
B. 1.55
C. 1.90
D. 2.11

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18. AMEX’s return on equity .

A. 0.6789
B. 1.3457
C. 1.0332
D. 1.2789

19. Which of the following statements is FALSE?

A. Liquidity refers to the assets that can quickly converted into cash.
B. Inventories are raw materials, work in progress and finished goods held by firm
C. Marketable securities are example of long term asset that can easily converted
into cash .
D. Accounts receivables refer to money owned by customers who purchased
goods or services from the firm on credit.

20. All the following are equities on a balance sheet EXCEPT .

A. cash
B. paid in capital
C. common stock
D. retained earnings

21. How much money will you have, if you deposit RM66,000 in an account earning 7%,
in the account after 20 years?

A. RM451,789.21
B. RM361,890.19
C. RM351,425.10
D. RM255,400.20

22. What is the present value of RM3,500 perpetuity per year discounted at 8%?

A. RM50,000
B. RM58,250
C. RM43,750
D. RM62,340

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23. How much money must you deposit at the end of each year for the next 20 years if you
wish to have RM200,000 in your account? Assume the bank is giving and interest rate
of 8% per year.

A. RM1,909.87
B. RM4,679.90
C. RM4,370.44
D. RM4,245.78

24. Fakhrul has deposited RM91,000 into an investment account. 15 years later his
investment has become RM251,069. What is the interest rate if it is compounded
annually?

A. 1%
B. 7%
C. 20%
D. 22%

25. Siti Nordiana plans to deposit RM10,000 at the beginning of the year, into an
investment account that offers 9% compounded annually (for each of the next 10
years). Find the future value of her investment.

A. RM167,288.90
B. RM119,712.89
C. RM131,289.76
D. RM165,592.80

26. What is the present value of RM70,500 to be received in 7 years ? Assume that the
discount rate is 7 %?

A. RM45,552.00
B. RM45,573.00
C. RM43,900.35
D. RM47,278.00

27. The present value of a single future sum of money is related to both the time
period and the interest rate.

A. not
B. perfectly
C. positively
D. negatively

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28. You have the choice of two equally risk annuities, each paying RM4,000 per year for 8
years. One is an annuity due and the other is an ordinary annuity? Which of these
annuities would have the greater value to maximize your wealth?

A. Annuity due
B. Ordinary annuity
C. Either one because they have the same present value
D. Value of the annuities cannot be determined due to no information on interest
rate. Thus, we cannot tell which one is better.

29. is the amount to which a present amount of money or a series of

payments will grow over time when compounded at a given interest rate.

A. Perpetuity
B. Future value
C. Present value
D. Future value annuity

30. Which statement is FALSE?

A. Future value annuity is an example of annuity.

B. A perpetuity is an annuity that has maturity period.
C. An annuity is a series of equal payments made for a specified number of years.
D. Ordinary annuity is an annuity in which the cash flows occur at the end of each
period.

31. The minimum rate of return necessary to attract an investor to purchase or hold a
security is referred to as the .

A. stock's beta
B. risk free rate
C. investor's risk premium
D. investor's required rate of return

32. If the Beta for stock A equals zero, then .

A. stock A has a guaranteed return

B. stock A's required return is equal to the risk-free rate of return
C. stock A's required return is equal to the required return on the market portfolio
D. stock A's required return is greater than the required return on the market
portfolio

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33. The appropriate measure for risk according to the capital asset pricing model is

A. beta
B. alpha
C. the standard deviation of a firm's cash flows
D. the standard deviation of a firm's stock returns

34. Beginning with an investment in one company's securities, as we add securities of

other companies to our portfolio, which type of risk declines?

A. Market risk.
B. Systematic risk.
C. Unsystematic risk.
D. Non-diversifiable risk.

35. You are considering investing in Ford Motor Company. Which of the following are
examples of diversifiable risk?

I. Risk resulting from interest rates decreasing.

II. Risk resulting from possibility of a stock market crash.
III. Risk resulting from an expensive recall of one of Ford’s sedan car.
IV. Risk resulting from uncertainty regarding a possible strike against Ford.

A. I only
B. I and II
C. III and IV
D. I, III and IV

36. What is the beta of the portfolio if you hold a portfolio made up of the following
stocks?
Stock Investment Value (RM) Beta
A 18,000 1.3
B 6,000 1.1
C 6,000 0.9

A. 1.10
B. 1.13
C. 1.18
D. 1.19

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37. Boston Corporation’s stock has a beta of 1.3, the risk-free rate of return is 5%, and the
market risk premium is 11%. The required rate of return on AMEX stock is
.

A. 15.9%
B. 17.6%
C. 20.2%
D. 19.3%

38. Hawkeye Berhad has a beta equal to 1.7 and a required return of 19% based on the
CAPM. If the market risk premium is 9%, the risk-free rate of return is .

A. 3.50%
B. 3.70.%
C. 2.10%
D. 2.50%

Use the following information to answer Questions 39 to 40.

You are considering a security with the following possible rates of return:

Probability Return (%)

0.5 15.5
0.3 12.9
0.2 10.1

39. Calculate the expected rate of return.

A. 13.64%
B. 14.81%
C. 16.77%
D. 17.09%

40. Calculate the standard deviation of the return.

A. 1.711%
B. 2.521%
C. 2.098%
D. 4.628%