BBF201/03 Introduction to Financial Management

September 2023
Assignment 2

Academic Session 2023

September 2023 Semester
Assignment 2
BBF201/03 Introduction to Financial Management

Instructions:

1. Assignment 2 contains FOUR (4) questions and you are required to answer ALL
questions.

2. Assignment 2 carries 25% of your final total marks.

3. The assignment must not exceed 2,000 words (excluding references and
appendices).

4. The assignment should be typed using Times New Roman, font size 12 and 1.5
spacing.

5. The deadline for the submission of Assignment 2 is 28th October 2023

(Saturday) at 11:59pm.

Copyright © 2023 WOU

BBF201/03 Introduction to Financial Management
September 2023
Assignment 2

QUESTION 1 (25 MARKS)

a) Angela took a RM100,000 bank loan from Bank AA. The bank charged Angela
an interest rate of 7% p.a. and requires him to pay at the end of each year for
10 years.

(i) Calculate the yearly repayment amount and complete the following
loan amortization schedule.
Beginning Repayment Interest Principal Ending
Year Value amount paid paid Value
1
2
3
4
5
6
7
8
9
10

(10 marks)

(ii) By the end of year 5, Angela not only services the yearly repayment
amount but also pays an additional RM10,000 to partially pay off the
loan. Prepare another loan amortization table starting from year 6.
(6 marks)

(iii) Compute the interest saved when repays an additional of RM10,000 at

the end of year 5.
(3 marks)

b) Ramesh invested RM10,000 in Bank XX three years ago. The bank pays 10%
simple interest per annum. He decided to withdraw all the money accumulated
in Bank XX and invest in Bank ZZ that gives 6% interest p.a. compounded
quarterly. He plans to keep the money for 4 years in Bank ZZ. Calculate the
accumulated amount at the end of the fourth year.
(6 marks)
 QUESTION 2 (25 MARKS)

a) Anita is going to graduate from Wawasan Open University three years from
now. She is confident of earning a monthly salary of RM2,500 for her first job.

i) If she plans to save RM10,000 as the down payment for buying a new
car after 2 years, how much must Anita save monthly in a savings
account with an interest rate of 2% p.a. compounding monthly.
(5 marks)

ii) Assuming Anita has managed to save RM10,000 after 2 years, compute
the monthly installment for a 7-year hire purchase charging 4% p.a. to
acquire a new car worth RM70,000.
(5 marks)

b) John Hsu has invested in an annuity policy fund which requires him to place
an annual deposit of RM10,000 for the next 20 years. During this period, an
interest rate of 10% p.a. will be earned for the first 5 years, followed by an
interest rate of 8% p.a. for the next 5 years and 6% p.a. for the remaining
years. Compute the accumulated amount at the end of 20 years.
(15 marks)

QUESTION 3 (25 MARKS)

An equity analyst is considering investing in two listed companies in Bursa Malaysia, Eco
Berhad (Eco) and Sky Berhad (Sky). The expected returns on each of these two
investments vary depending on economic conditions. The following table shows the
expected returns and the likelihood of the economic conditions.

Economic conditions Probability Eco returns (%) Sky returns (%)

Recession 30% 5 (5)

Normal 55% 12 18
Boom 15% 16 28

a) Based on the above, compute the followings:

i) The expected return for Eco and Sky;

(2 marks)
ii) The standard deviation for Eco and Sky;
(3 marks)
iii) The correlation between Eco and Sky.
(3 marks)
 b) Calculate portfolio risk and return based on following combination:

i) 70% invested in Eco, 30% in Sky;

(4 marks)
ii) 50% invested in Eco, 50% in Sky;
(4 marks)
iii) 30% invested in Eco, 70% in Sky.
(4 marks)

c) Based on your response above, explain what has happened to the rate of
return and risk when moving from individual shares to a portfolio.
(5 marks)

QUESTION 4 (25 MARKS)

Max Real Estate Investment Trust (“Max REIT”) currently owns only two assets,
namely the Mid V Megamall and The G Mall. Both assets are situated in the same
location in Kuala Lumpur. Even though both shopping malls are high value assets
that are currently generating high returns, the Trustee sees the need to acquire new
assets to diversify risks and to grow Max REIT to become a top shopping mall REIT
in the Malaysian capital market.

The General Manager has identified a promising acquisition target. It is a newly

completed shopping mall in Kelana Jaya that has just started commercial operations.
The occupancy rate is currently very low because the existing owner lacks the
experience managing a shopping mall. Hence, the existing owner is willing to sell at
RM60 million which is below the current market value.

For the period of one year from acquisition date, the shopping mall operation is
expected to be loss-making and will incur a negative net cash flow of RM16 million.
In the following year, the shopping mall operation is expected to generate positive
net cash flow of RM20 million and will grow by 20% per annum for the next three
years. After that, growth will be 3% per annum for the next 10 years. All net cash
flows are assumed to be incurred at the end of each year. Assuming Max REIT does
not pay any corporate taxation and the nominal cost of capital is 10%.

a) Using only Net Present Value as your basis of decision, advise the General
Manager on the proposal to acquire the newly completed shopping mall in
Kelana Jaya.
(21 marks)

b) Explain TWO (2) disadvantages of Net Present Value as the basis of capital
budgeting decision.
(4 marks)

END OF ASSIGNMENT 2