CONFIDENTIAL AC/DEC 2019/MAF253

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE FUNDAMENTALS OF FINANCIAL MANAGEMENT

COURSE CODE MAF253

EXAMINATION DECEMBER 2019

TIME 3 HOURS

INSTRUCTIONS TO CANDIDATES

1 This question paper consists of two (2) parts: PART A(10 Questions)
PART B (5 Questions)

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

3. Do not bring any materials 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) a four-page Appendix 1
iii) an Answer Booklet - provided by the Faculty

5. Answer ALL question in English

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

This examination paper consists of 8 printedpages
© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL
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 ultimate objective of managerial finance is to of the firm.

A. maximize current share price

B. maximize the net profit
C. maximize the cash flow
D. maximize the total asset
(1 mark)

2. The decision involves determining the optimal mixture of the debt and
equity for any investment.

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

3. Spontaneous sources of financing arise spontaneously in day-to-day operation of the

firm. These consist of the following sources EXCEPT

A. Trade credit
B. Accrued interest
C. Wages and salaries payable
D. Commercial paper
(1 mark)

4. Which of the following motive refers to managers holding cash for potential profit-
making situation?

A. Transactions motive
B. Precautionary motive
C. Speculative motive
D. Cash planning motive
(1 mark)

Following are the advantages of commercial paper EXCEPT

A. Commercial paper offers large amount of credit

B. No compensating balance is required
C. It offers credit for more than 365 days
D. It has lower interest rate compared to bank loan
(1 mark)

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CONFIDENTIAL 3 AC/DEC 2019/MAF253

6. A perpetuity is best defined as .

A. a series of cash flows for an infinite period

B. any series of cash flows
C. series of equal cash flows for an infinite number of years
D. a series of equal cash flows occurring at equal intervals for an infinite number
of periods
(1 mark)

7. Interest is earned not only on the initial investment, but also on the interest earned
earlier. This statement refers to .

A. simple interest
B. present value
C. compound interest
D. future value
(1 mark)

8. The following statements are the explanation for the expected return EXCEPT

A. Expected return is the additional return the investors anticipate receiving for
assuming risk.
B. Expected return is the return that is anticipated or expected by the investors.
C. Expected return is regarded as the target return that the firm may desire to
achieve.
D. Expected return can be defined as the weighted average of all possible returns,
weighted by the probability of the occurrence of that return.
(1 mark)

9. Which of the following cost of capital requires tax adjustment?

A. Cost of debt (kd)

B. Cost of preference shares (kp)
C. Cost of retained earnings (kc)
D. Cost of issuing ordinary shares (knc)
(1 mark)

10. The firm may apply the dividend growth model to determine the .

A. cost of internal equity

B. cost of redeemable debt
C. cost of preference share
D. cost of irredeemable debt
(1 mark)
(Total: 10 marks)

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 CONFIDENTIAL 4 AC/DEC 2019/MAF253

PARTB

QUESTION 1

A. Financial markets represent forums that facilitate the flow of funds among investors,
firms, governments units and agencies.

Required:

a. Explain briefly the terms of money market and capital market.

(2 marks)

b. Identify ONE (1) example of financial instrument for each market.

(1 mark)

B. Discuss FOUR (4) advantages and TWO (2) disadvantages of maximizing the
shareholder's wealth.
(6 marks)
(Total: 9 marks)

QUESTION 2

A. Following are the extracted information related to Seri Maju Bhd:

Statement of Financial Position (extract) as at 31 March 2019

RM RM
Non-current assets 1,800,000
Current assets
Inventories 625,000
Account receivable 525,000
Cash 300,000 1,450,000
3,250,000

Common equity 1,350,000

Non-current liabilities 1,350,000
Current liabilities
Account payable 350,000
Tax payable 200,000 550,000
3,250,000

Statement of Profit and Loss (extract) for the year ie nded 31 March 2019
RM
Sales 2,500,000
Less: Cost of sales 1,400,000
Gross Profit 1,100,000

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CONFIDENTIAL 5 AC/DEC 2019/MAF253

Additional information:

1. 25%) of the inventory and cash are considered as a buffer.

2. 90% of the sales are on credit.
3. Inventory turnover ratio is 6 times a year.

Required:

a. Discuss the working capital policy adopted by the firm by showing clearly the
total permanent assets and temporary current assets.
(5 marks)

b. Analyse risk and return trade-off by applying the above policy with justification.
(1 mark)

c. State the number of days for the firm's cash conversion cycle.
(3 marks)

d. Assume that the annual expenditure is RM900,000 for one investment cycle
with 8% interest for negotiable financing. Evaluate the implication of interest on
cash conversion cycle based on the following independent events:

i. Shortened Receivable Collection Period by 5 days

(3 marks)

ii. Shortened Payable Deferral Period to 80 days

(2 marks)

B. Aisy Bhd needs RM300,000 to pay its major supplier. The credit term of its supplier is
2/10 net 60. Currently, SH Bank offers a loan for 3 months at discounted interest rate
of 10%) with 15%o compensating balance.

Required:

Advise the firm whether to forgo the discount.

(7 marks)

C. The management of the firm is considering investing in marketable securities instead

of having idle cash on hand with no return.

Required:

Explain the following criteria needed to select marketable securities:

a. Financial risk/default risk

b. Interest rate risk
c. Inflation risk
d. Marketability/liquidity
e. Yields/rates of return
(5 marks)
(Total: 26 marks)
©Hak Cipta Universiti Teknologi MARA CONFIDENTIAL
CONFIDENTIAL AC/DEC 2019/MAF253

QUESTION 3

A. Alamesra Sdn Bhd is planning to invest in a project that requires initial expenditure of
RM500,000. AJ Bank agrees to provide financing up to RM400,000 with interest rate
of 8% for the period of 10 years.

Required:

Predict the amount of installment payment expense of the financing by preparing the
loan amortization schedule for the first two years.
(5 marks)

B. The followings are the estimated cash stream of investment of four different investors
in the mutual fund that pay 12% interest annually:

Mixed Stream of Cash Flow at the end of year...

1 2 3 4 5
Azman 200 200 200 200 200
Bakar 600 -
600 - 600
Cheng 1,500 1,200 - - 1,500
David - - - - 1,500

Required:

Calculate the present value of these investments.

(12 marks)

Define the following terms:

a. Time value of money

b. Compound interest
(3 marks)
(Total: 20 marks)

QUESTION 4

KKIP Sdn Bhd is considering investing RM500.000 in the securities of two firms, Maju Bhd
and Segar Bhd. The return on securities of Maju Bhd and Segar Bhd during normal economic
condition is 20% and 22% respectively. However, during the recession period, the return is
reduced to 2% and 10% respectively. The probability for each state of economy is equally
likely to happen.

Required:

a. Identify the expected return for the securities of Maju Bhd and Segar Bhd.
(3 marks)

b. Identify the standard deviation for the securities of Maju Bhd and Segar Bhd.
(4 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL AC/DEC 2019/MAF253

c. Calculate the risk per unit of expected return for the securities of Maju Bhd and Segar
Bhd.
(3 marks)

d. Classify the following events as systematic risk or unsystematic risk.

i. The central bank announces the increment in interest rate by 2%.

ii. Half of the skilled employees of the firm resigned because they are not satisfied
with the salary paid to them,
iii. ABG Bhd faces a lawsuit because of environmental issues,
iv. High inflation rate reduces the purchasing power of the consumer.
(4 marks)
(Total: 14 marks)

QUESTION 5

The following are the present capital structure (consider optimal) of Indah Berkat Bhd:

Source of financing RM
6% Debentures 4,500,000
10% Preference shares 1,500,000
Ordinary shares 7,800,000
Retained earnings 1,200,000

The firm is considering investing RM2,000,000 in non-current assets next year. The
corporate's tax rate is 24%. The available retained earnings for the next investment will be
RM900,000.

Additional information:

1. Ordinary shares are now selling for RM20 each (before floatation costs of 10%) and
the expected dividend is RM1 per share. The annual growth of the expected dividend
is 6% perpetual.

2. The preference shares sell at RM10 each and floatation costs are 5% of the market
price. The outstanding number of shares is 750,000 units. The total dividend payment
is RM150,000.

3. Debenture can be issued at RM1,100. This debenture will mature in 8 years and to be
redeemed at par. Floatation cost for this debenture is 5% of the issuing price.

Required:

a. Determine the individual cost of capital for:

After-tax cost of debenture

i. Cost of preference shares
ii. Cost of retained earnings
v. Cost of issuing new ordinary shares
(13 marks)

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CONFIDENTIAL 8 AC/DEC 2019/MAF253

If the firm decides to proceed with the investment, calculate the weighted average cost
of capital (WACC) of the firm.
(5 marks)

Advise the firm on the implication of relying more on debt instrument rather than equity
instrument in financing the investment.
(3 marks)
(Total: 21 marks)

END OF QUESTION PAPER

©Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

 CONFIDENTIAL APPENDIX 1(1) AC/DEC 2019/MAF253

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© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL APPENDIX 1(3) AC/DEC 2019/MAF253

m CN CO o
oo CO X— co CO oo CO CD x — in
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© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

© . o
Table B-2: Future Value of an Annuity Factors
0>
o
z
g Tl
Period 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 16% 18% 24% 28%
"5* - o
ST 1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 m
z
3 2 2.0400 2.0500 2.0600 2.0700 2.0800 2.0900 2.1000 2.1200 2.1400 2.1500 2.1600 2.1800 2.2400 2.2800 H
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3 3.1216 3.1525 3.1836 3.2149 3.2464 3.2781 3.3100 3.3744 3.4396 3.4725 3.5056 3.5724 3.7776 3.9184 >
W
4 4.2465 4.3101 4.3746 4.4399 4.5061 4.5731 4.6410 4.7793 4.9211 4.9934 5.0665 5.2154 5.6842 6.0156
H
5 5.4163 5.5256 5.6371 5.7507 5.8666 5.9847 6.1051 6.3528 6.6101 6.7424 6.8771 7.1542 8.0484 8.6999
o
o 6 6.6330 6.8019 6.9753 7.1533 7.3359 7.5233 7.7156 8.1152 8.5355 8.7537 8.9775 9.4420 10.9801 12.1359
7 7.8983 8.1420 8.3938 8.6540 8.9228 9.2004 9.4872 10.0890 10.7305 11.0668 11.4139 12.1415 14.6153 16.5339
3
> 8 9.2142 9.5491 9.8975 10.2598 10.6366 11.0285 11.4359 12.2997
7a 13.2328 13.7268 14.2401 15.3270 19.1229 22.1634
> 9 10.5828 11.0266 11.4913 11.9780 12.4876 13.0210 13.5795 14.7757 16.0853 16.7858 17.5185 19.0859 24.7125 29.3692
10 12.0061 12.5779 13.1808 13.8164 14.4866 15.1929 15.9374 17.5487 19.3373 20.3037 21.3215 23.5213 31.6434 38.5926

>
11 13.4864 14.2068 14.9716 15.7836 16.6455 17.5603 18.5312 20.6546 23.0445 24.3493 25.7329 28.7551 40.2379 50.3985 TJ
12 15.0258 15.9171 16.8699 17.8885 18.9771 20.1407 21.3843 24.1331 27.2707 29.0017 30.8502 34.9311 50.8950 65.5100 m
13 16.6268 17.7130 18.8821 20.1406 21.4953 22.9534 24.5227 z
28.0291 32.0887 34.3519 36.7862 42.2187 64.1097 84.8529
g
14 18.2919 19.5986 21.0151 22.5505 24.2149 26.0192 27.9750 32.3926 37.5811 40.5047 43.6720 50.8180 80.4961 109.6117 x
15 20.0236 21.5786 23.2760 25.1290 27.1521 29.3609 31.7725 37.2797 43.8424 47.5804 51.6595 60.9653 100.8151 141.3029

16 21.8245 23.6575 25.6725 27.8881 30.3243 33.0034 35.9497 42.7533 50.9804 55.7175 60.9250 72.9390 126.0108 181.8677
17 23.6975 25.8404 28.2129 30.8402 33.7502 36.9737 40.5447 48.8837 59.1176 65.0751 71.6730 87.0680 157.2534 233.7907
18 25.6454 28.1324 30.9057 33.9990 37.4502 41.3013 45.5992 55.7497 68.3941 75.8364 84.1407 103.7403 195.9942 300.2521
19 27.6712 30.5390 33.7600 37.3790 41.4463 46.0185 51.1591 63.4397 78.9692 88.2118 98.6032 123.4135 244.0328 385.3227
20 29.7781 33.0660 36.7856 40.9955 45.7620 51.1601 57.2750 72.0524 91.0249 102.4436 115.3797 146.6280 303.6006 494.2131

21 31.9692 35.7193 39.9927 44.8652 50.4229 56.7645 64.0025 81.6987 104.7684 118.8101 134.8405 174.0210 377.4648 633.5927
22 34.2480 38.5052 43.3923 49.0057 55.4568 62.8733 71.4027 92.5026 120.4360 137.6316 157.4150 206.3448 469.0563 811.9987
>
23 36.6179 41.4305 46.9958 53.4361 60.8933 69.5319 79.5430 104.6029 138.2970 159.2764 183.6014 244.4868 582.6298 1040.358 O

24 39.0826 44.5020 50.8156 58.1767

B
O 66.7648 76.7898 88.4973 118.1552 158.6586 184.1678 213.9776 289.4945 723.4610 1332.659 m
O 25 41.6459 47.7271 o
54.8645 63.2490 73.1059 84.7009 98.3471 133.3339 181.8708 212.7930 249.2140 342.6035 898.0916 1706.803
z to
-n o

a 30 56.0849 66.4388 79.0582 94.4608 113.2832 136.3075 164.4940 241.3327 356.7868 434.7451 530.3117 790.9480 2640.916 5873.231
m
z 40 95.0255 120.7998 154.7620 199.6351 259.0565 337.8824 442.5926 767.0914 1342.025 1779.090 2360.757 4163.213 22728.80 69377.5
H
* *
50 152.6671 209.3480 290.3359 406.5289 573.7702 815.0836 1163.909 2400.018 4994.521 7217.716 10435.65 21813.09
> l-O
353.5837 533.1282 813.5204 1253.213 1944.792 3034.816 7471.641 cn
co