CONFIDENTIAL 1 AC/JULY 2021/MAF253

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE : FUNDAMENTALS OF FINANCIAL MANAGEMENT

COURSE CODE : MAF253
EXAMINATION : JULY 2021
TIME : 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of two (2) parts: PART A (10 Questions)
PART B (4 Questions)

2. Answer ALL questions from all two (2) parts:

i) Answer PART A in the Objective Answer Sheet.

ii) Answer PART B 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
iii) an Objective Answer Sheet – 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 9 printed pages
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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.

1. All of the followings are related to decision functions of financial management

EXCEPT:

A. Asset management decisions

B. Financing decision
C. Monitoring decision
D. Investment decision
(1 mark)

2. Which of these statement is FALSE regarding maximization of shareholders’ wealth?

A. It involves company’s long term goals.

B. It ignores risk and uncertainty.
C. It focuses on maximising market price of stock.
D. It considers in returns
(1 mark)

3. The most important goal of a company is to ______________.

A. increase the market price of the company's ordinary shares.

B. reduce costs and expenses.
C. increase profits.
D. increase sales revenues.
(1 mark)

4. Which of the following is generally under the control of the financial manager?

A. The actual level of sales.

B. The percentage of cash and credit sales.
C. The credit policies.
D. Bank's interest rate.
(1 mark)

5. The __________ is created by a financial relationship between suppliers and users

of short-term funds.

A. financial market
B. money market
C. stock market
D. capital market
(1 mark)

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6. Which of the following would be part of a financial manager's investment decision?

A. Spending money on capital expenditure.

B. Raising money using equity finance.
C. Spending money on revenue expenditure.
D. Borrowing funds.
(1 mark)

7. Which of the followings is NOT the party involved in financial environment?

A. Financial managers
B. Financial markets
C. Financial users
D. Financial institutions
(1 mark)

8. What is the main criticism in using shareholder’s wealth as the best criterion in
evaluating the performance of a financial manager?

A. It does not take into account the shareholder's exposure to financial risk.
B. It does not take into account the size of the shareholder’s investment.
C. Maximizing profits is a more suitable criterion.
D. Share market prices can be manipulated in the short term.
(1 mark)

9. Which statement is TRUE to explain systematic risk in market?

A. Investors are able to reduce the risk through well-diversification of portfolio.

B. Risks are resulted from forces outside the firm’s control.
C. The impact of risk factors are only to the individual firm.
D. The management level is able to eliminate the risk with proper decision
making.

(1 mark)
10. If a project has a higher standard deviation compared to another project,

A. it has more possible outcome.

B. it has a greater risk.
C. it has a higher expected return.
D. it may be riskier but this can only be determined by the coefficient of variation.

(1 mark)
(Total: 10 marks)

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PART B

QUESTION 1

As a junior financial manager of Kashfi Sdn Bhd, your are being given a task to analyse the
business financial statement as presented below:

Kashfi Sdn Bhd

Statement of Comprehensive Income for the Year ended 31 December
2020
RM RM
Sales 1,380,000
Less: Cost of goods sold (1,076,000)
Gross profits 304,000
Less: Operating expenses
General and administrative expenses 98,000
Selling and distribution expenses 52,000 (150,000)
Operating profits 154,000
Less: Interest expenses (60,000)
Before-tax profits 94,000
Less: Taxes (23,500)
After-tax profits 70,500

Kashfi Sdn Bhd

Statement of Financial Position as at 31 December 2020
RM RM
Non-Current Assets 1,140,000
Less: Accumulated depreciation (634,000) 506,000

Current Assets
Cash 20,000
Account receivables 680,000
Inventories 240,000 940,000
1,446,000
Financed by:
Common stockholder’s equity 440,000

Non-Current Liability 280,000

Current Liabilities:
Overdraft bank 32,000
Account Payable 506,000
Short-term loan 188,000 726,000
1,446,000

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The industry average ratios are provided below:

i. Current ratio 3.2 times

ii. Quick ratio 2.5 times
iii. Inventory turnover 15.2 times
iv. Average collection period 81 days
v. Fixed asset turnover 7.50 times
vi. Return on assets 8.1%
vii. Debt ratio 25%
viii. Times interest earned 2.88 times
ix. Gross profit margin 32.00%
x. Net profit margin 10%

Required:

a. Compute the above ratios for Kashfi Sdn Bhd for the year 2020.
(10 marks)

b. Comment on the company’s liquidity and debt management of Kashfi Sdn Bhd as
compared to the industry averages.
(5 marks)
(Total: 15 marks)

QUESTION 2

A. Eishah Bintong Bhd operates a successful groceries store in Kangar Jaya. The
following data was extracted from its financial position as at 30 June 2021.

RM
Short term financing 1,050,000
Long term financing 950,000
2,000,000
Current assets
Temporary 650,000
Permanent 650,000

Non-current assets 700,000

2,000,000

Required:

a. Discuss the financing strategy adopted by Eishah Bintong Bhd. Support your
answer with a graph.
(3 marks)

b. Analyse the risk and return trade-off for the above business financing
strategy.
(2 marks)

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B. You, as the assistant financial manager of Qhaf Sdn Bhd, are given a task of
analyzing the cash flow of the company. The following information was gathered for
the year ended 30 June 2021:

RM
Sales (40% are credit sales) 450,000
Cost of goods sold 270,000
Inventory 45,000
Account receivables 22,500
Account payables 41,250

Assume 360-day in a year.

Required:

a. Calculate the firm’s cash conversion cycle.

(3 marks)

b. Calculate the firm’s new cash conversion cycle if the operating cycle is
reduced by 4 days and the firm delayed payment period by 7 days.
(2 marks)

c. Calculate the annual savings that arises from the change, given that the
annual operating cycle investment is RM5,400,000 and the interest charge on
borrowings is 12%.
(2 marks)

C. Orange Sdn Bhd is being offered a credit term of 4/15 net 90 by one of its suppliers.
Unfortunately, Orange Sdn Bhd is facing cash flow problems to pay within the
discount period. The company decided to make a borrowing of RM250,000 for 90
days. There are two options given by two different financial institutions:

Option 1

Summit Bank offers 12% discounted interest on borrowing with 20% compensating
balance. Currently, Orange Sdn Bhd has a balance of RM20,000 in its current
account.

Option 2

Berjaya Bank offers a line of credit for RM300,000 with an interest rate of 9% and will
charge 4% commitment fee on the unused amount during the period.

Required:

a. Calculate the effective cost for each of the financing alternatives above.
(9 marks)

b. Advise the firm whether to forgo the cash discount or not.

(2 marks)
(Total: 23 marks)
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QUESTION 3

A. As an incentive for his outstanding achievement, KUL Berhad decided to give a

reward to Encik Khairul and has asked him to choose one of the options shown in the
following table. Assume the opportunity cost is 12%.

Options Amount (RM)

1 RM28,500 at the end of 2 years
2 RM54,000 at the end of 9 years
3 RM160,000 at the end of 20 years

Required:

Analyse the best option to be chosen by Encik Khairul.

(6 marks)

B. Rihanna plans to buy a medium cost apartment five (5) years from today. The
apartment she wishes to purchase costs RM220,000 today and it is expected to
increase by 4% to 6% per year over the next 5 years. Rihanna plans to deposit an
equal amount each year for five (5) years into an account paying 12% return per
annum to accumulate enough money to buy the apartment.

Required:

a. Estimate the price of the apartment at the end of year 5 if the inflation rate is

i. 4% per year
ii. 6% per year
(6 marks)

b. Calculate Rihanna’s annual deposit if the price of the apartment increases by

6%.
(4 marks)

C. As a risk averse investor, NAR Sdn Bhd prefers to choose a less risky investment but
provides an adequate return. The business seeks your help in making a decision on
which investment project to choose based on the information given below:

Economic situation Probability Gold Project Silver Project

Annual Return (%) Annual Return (%)
Good 0.5 14 20
Unchanged 0.4 10 15
Poor 0.1 10 (8)

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Required:

a. Compute the expected return and standard deviation for each project.
(4 marks)

b. Identify which stock should be chosen by NAR Sdn Bhd using the coefficient
of variation.
(2 marks)
(Total: 22 marks)

QUESTION 4

A. PURE LIVING Bhd is currently using a semi-automatic packaging machine to pack

their food products. This machine was bought 4 years ago at a cost of RM250,000
and is depreciated at 10% per annum on a straight line basis for 10 years.There is no
salvage value for this machine and it can be sold now at RM160,000.

The firm is considering to replace the existing machine with a new fully automated
machine which will cost the company RM400,000. The company has to incur another
RM25,000 for installation and delivery charges. The new machine has an estimated
life of 6 years and a salvage value of RM5,000. The depreciation on the machine is
charged based on straight line basis.

Since this machine can be operated independently, the company is able to increase
its sales by RM30,000 for the first 3 years and an additional of RM10,000 for the
remaining years. On the other hand, the annual cost of maintenance and defects will
be reduced by RM15,000 and RM7,500, respectively. Overhead cost is estimated to
increase by RM500 per month. Investment in raw materials and work-in-process
inventories would increase by RM10,000. The company’s maximum acceptable
payback period is 5 years.

The corporate tax is 25% and the company’s required rate of return is 12%.

Required:

a. Calculate the:
i. Initial outlay
ii. Annual differential cash flows
iii. Terminal cashflow
(10 marks)
b. Analyse the payback period and the net present value.
(5 marks)

c. Advise the management whether the company should replace the existing
machine with a new machine.
(5 marks)

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B. Woods Creative Sdn Bhd is in the process of introducing a new product line which
will require an initial investment of RM140,000. The forecasted sales for the first 2-
year will be RM130,000 per annum. The estimated relevant variable costs are
RM30,000 for the first year and RM35,000 for the second year. The company’s cost
of capital is 12%. As a newly appointed Finance Officer, you are required to analyse
whether the changes in the project variables will affect its net present value.

Required:

a. Calculate the sensitivity margin of:

i. The initial investment
ii. The variable costs of the project
iii. The sales of the project
(8 marks)

b. Explain the sensitivity margin of any TWO (2) of the above variables.
(2 marks)
(Total: 30 marks)

END OF QUESTION PAPER

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