Student ID No.

: 202305D0025
IC No. / Passport No. : 010523012019
Subject Code : BBCF1013
Subject Name : PRINCIPLE OF FINANCE
Programme : BACHELOR OF BUSINESS ADMINISTRATION (ODL)
Lecturer Name : PUAN NOOR FADZILAH BINTI MOHAMAD
Date (dd/mm/yy) : 02/09/2023
Semester : 202305

Instruction to Candidates:
1. Ensure all information filled is clear and correct.
2. All answer sheet must be combined together into ONE document before submission.
3. All answer must be type in ARIAL font size 12 OR written in blue or black ball point pen.
4. Any hand written or illustrations must be insert within this answer sheet document.

For Examiner’s use only

1st examiner’s 2nd examiner’s

Questions
recommended recommended
attempted
grades grades
1
2
3
4
5
6
7
8
9
10
Total grade
QUESTION 1

(a) Net Profit Margin:

Net Profit Margin = (Net Income / Net Sales) x 100

For 2022:
Net Profit Margin (2022) = (584,500 / 1,980,000) x 100 = 29.54%

For 2021:
Net Profit Margin (2021) = (409,150 / 1,386,000) x 100 = 29.49%

(b) Operating Profit Margin:

Operating Profit Margin = (Income from Operation / Net Sales) x 100

For 2022:
Operating Profit Margin (2022) = (850,000 / 1,980,000) x 100 = 42.93%

For 2021:
Operating Profit Margin (2021) = (572,000 / 1,386,000) x 100 = 41.29%

(c) Current Ratio:

Current Ratio = Current Assets / Current Liabilities

For 2022:
Current Ratio (2022) = 475,000 / 55,000 = 8.64

For 2021:
Current Ratio (2021) = 380,000 / 50,000 = 7.60

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(d) Debt to Equity Ratio:
Debt to Equity Ratio = Long-Term Liabilities / Common Stock

For 2022:
Debt to Equity Ratio (2022) = 390,000 / 600,000 = 0.65

For 2021:
Debt to Equity Ratio (2021) = 466,000 / 480,000 = 0.97

(e) Times Interest Earned:

Times Interest Earned = Income from Operation / Interest Expenses

For 2022:
Times Interest Earned (2022) = 850,000 / 15,000 = 56.67

For 2021:
Times Interest Earned (2021) = 572,000 / 12,500 = 45.76

These are the calculated financial ratios for Flounder Berhad for both 2022 and 2021. These ratios
provide insights into the company's profitability, liquidity, leverage, and ability to cover interest
expenses.

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QUESTION 2

(a)

To calculate the balance after 3 years when you invest RM3,000 in an account at a cost of capital
of 8 percent compounded quarterly, you can use the compound interest formula:

A = P(1 + r/n)^(nt)

Where:
A = the future balance
P = the principal amount (RM3,000)
r = annual interest rate (8% or 0.08)
n = number of times interest is compounded per year (quarterly, so 4 times)
t = number of years (3 years)

Plugging in the values:

A = 3,000(1 + 0.08/4)^(4*3)

A = 3,000(1 + 0.02)^12

A = 3,000(1.02)^12

A = 3,000 * 1.268241

A = RM3,804.72

So, your balance after 3 years would be approximately RM3,804.72 when compounded quarterly
at an 8 percent annual interest rate.

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(b)

To calculate how much Fajar will have in her account at the end of five years when she places
RM2,000 in a savings account paying 5 percent interest compounded annually, you can use the
compound interest formula:

A = P(1 + r)^t

Where:
A = the future balance
P = the principal amount (RM2,000)
r = annual interest rate (5% or 0.05)
t = number of years (5 years)

Plugging in the values:

A = 2,000(1 + 0.05)^5

A = 2,000(1.05)^5

A = 2,000 * 1.276285

A = RM2,552.57

So, Fajar will have approximately RM2,552.57 in her account at the end of five years when
compounded annually at a 5 percent annual interest rate.

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(c)

To find the present value (PV) of RM15,000 that Sophia will receive 5 years from now with an
opportunity cost of 8 percent, you can use the present value formula:

PV = FV / (1 + r)^t

Where:
PV = present value (the amount Sophia should invest)
FV = future value (RM15,000)
r = discount rate (opportunity cost, 8% or 0.08)
t = number of years (5 years)

Plugging in the values:

PV = 15,000 / (1 + 0.08)^5

PV = 15,000 / (1.08)^5

PV = 15,000 / 1.469

PV = RM10,211.03

So, Sophia should invest approximately RM10,211.03 today to have RM15,000 in 5 years,
considering an 8 percent opportunity cost.

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(d)

To determine if Elora will be able to save enough to buy the land for RM120,000 by saving
RM2,000 per year in her savings account with Amanah Bank, which pays a 12 percent interest
rate compounded semi-annually, you can use the future value of an annuity formula:

FV = PMT x [(1 + r/n)^(nt) - 1] / (r/n)

Where:
FV = future value (the amount she will have after 15 years)
PMT = annual savings (RM2,000)
r = annual interest rate (12% or 0.12)
n = number of times interest is compounded per year (semi-annually, so 2 times)
t = number of years (15 years)

Plugging in the values:

FV = 2,000 x [(1 + 0.12/2)^(2*15) - 1] / (0.12/2)

Now, solve for the future value:

FV = 2,000 x [(1 + 0.06)^30 - 1] / (0.06/2)

FV = 2,000 x [(2.71828)^1.8 - 1] / 0.03

FV = 2,000 x (15.555 - 1) / 0.03

FV = 2,000 x 515.167 / 0.03

FV = 1,030,334.33 / 0.03

FV ≈ RM34,344,477.77

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Elora will have approximately RM34,344,477.77 in her savings account after 15 years with the
given savings plan and interest rate. This is far more than the RM120,000 she needs to buy the
land. So, yes, Elora will be able to buy the land with her savings.

(e)

To calculate the annual installment (payment) of Zara's loan, where she borrowed RM200,000 to
buy a house with a 5 percent interest rate and will repay the loan in 20 equal annual payments,
you can use the formula for the present value of an annuity:

PMT = P x (r x (1 + r)^n) / ((1 + r)^n - 1)

Where:
PMT = annual payment (the annual installment)
P = principal loan amount (RM200,000)
r = annual interest rate (5% or 0.05)
n = number of payments (20)

Plugging in the values:

PMT = 200,000 x (0.05 x (1 + 0.05)^20) / ((1 + 0.05)^20 - 1)

PMT = 200,000 x (0.05 x (1.276285 - 1) / (2.276285 - 1)

PMT = 200,000 x (0.06381425 / 1.276285)

PMT = 200,000 x 0.05

PMT = RM10,000

So, the annual installment of the loan is RM10,000. Zara will need to make annual payments of
RM10,000 for 20 years to repay her loan.

Page 7 of 24
QUESTION 3

(a)

Diversification is a risk management strategy that involves spreading investments across a range
of assets or asset classes to reduce the overall risk and volatility of an investment portfolio. The
primary goal of diversification is to minimize the impact of poor performance in any one investment
or asset on the overall performance of the portfolio.

Here are the key principles and explanations of diversification:

1. Risk Reduction: Diversification helps reduce the risk associated with investing by avoiding the
"putting all your eggs in one basket" scenario. By holding a variety of assets, an investor can limit
the potential loss if one or a few investments underperform or experience a downturn.

2. Asset Variety: Diversification can be achieved by investing in different types of assets, such as
stocks, bonds, real estate, commodities, and cash equivalents. Within each asset class, further
diversification can be achieved by investing in different sectors or industries.

3. Correlation: The effectiveness of diversification depends on the correlation between the assets
in the portfolio. Correlation measures how closely the prices of two assets move in relation to each
other. Ideally, diversifying with assets that have low or negative correlations can provide the
greatest risk reduction benefit.

4. Portfolio Allocation: Diversification also involves determining the appropriate allocation of assets
within a portfolio. This allocation should be based on an individual's financial goals, risk tolerance,
and time horizon. A well-constructed diversified portfolio can balance risk and return according to
the investor's preferences.

5. Benefits: Diversification offers several advantages, including reduced portfolio volatility, potential
for more stable returns, and improved risk-adjusted performance. It can also help investors avoid
the devastating effects of a single, significant investment loss.

6. Drawbacks: While diversification can reduce risk, it may also limit the potential for outsized
gains from a single investment that performs exceptionally well. Some investors may choose to
accept higher risk in pursuit of higher returns rather than diversify excessively.

Page 8 of 24
7. Rebalancing: Diversified portfolios may require periodic rebalancing to maintain the desired
asset allocation. This involves selling assets that have appreciated significantly and buying assets
that have underperformed to bring the portfolio back to its target allocation.

In summary, diversification is a fundamental principle of investment strategy that aims to reduce

risk by spreading investments across a variety of assets. It is a valuable tool for managing risk and
achieving more stable, long-term returns In an investment portfolio.

Page 9 of 24
(b)

To calculate the realized return for Summer on her investment in the share, you can use the
following formula:

Realized Return (%) = [(Selling Price + Dividends) - Purchase Price] / Purchase Price x 100

Where:

Selling Price is the price at which the share was sold (RM27.50).
Dividends are the dividends received per share (RM2.00).
Purchase Price is the price at which the share was originally bought (RM20.00).
Plugging in the values:

Realized Return (%) = [(27.50 + 2.00) - 20.00] / 20.00 x 100

Realized Return (%) = (29.50 - 20.00) / 20.00 x 100

Realized Return (%) = 9.50 / 20.00 x 100

Realized Return (%) = 47.5%

So, Summer's realized return on her investment in the share is approximately 47.5%

Page 10 of 24
(c)
To calculate the realized return for Summer on her investment in the share, you can use the
following formula:

Realized Return (%) = [(Selling Price + Dividends) - Purchase Price] / Purchase Price x 100

Where:

Selling Price is the price at which the share was sold (RM27.50).
Dividends are the dividends received per share (RM2.00).
Purchase Price is the price at which the share was originally bought (RM20.00).
Plugging in the values:

Realized Return (%) = [(27.50 + 2.00) - 20.00] / 20.00 x 100

Realized Return (%) = (29.50 - 20.00) / 20.00 x 100

Realized Return (%) = 9.50 / 20.00 x 100

Realized Return (%) = 47.5%

So, Summer's realized return on her investment in the share is approximately 47.5%
[11:01 am, 02/09/2023] Nazirul: To assess the level of risk associated with an investment in
Coralia Berhad shares, you can calculate the average return and the volatility of those returns.

i. Calculate the Average Return:

The average return is calculated by summing the annual returns and dividing by the number of
years. In this case, you have data for three years (2020, 2021, and 2022).

Average Return = (Return in 2020 + Return in 2021 + Return in 2022) / Number of Years

Average Return = (8.5% + (-2.0%) + 10.0%) / 3

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Average Return = (16.5%) / 3

Average Return = 5.5%

So, the average annual return for Coralia Berhad shares over the last three years is approximately
5.5%.

ii. Calculate the Volatility of Risk (Standard Deviation):

To calculate the volatility of risk, you'll need to compute the standard deviation of the annual
returns. This measures how much the returns vary from the average return.

Step 1: Calculate the deviations from the average return for each year:

Deviation in 2020 = 8.5% - 5.5% = 3.0%

Deviation in 2021 = (-2.0%) - 5.5% = -7.5%
Deviation in 2022 = 10.0% - 5.5% = 4.5%

Step 2: Square the deviations:

(3.0%)^2 = 0.09%
(-7.5%)^2 = 56.25%
(4.5%)^2 = 20.25%

Step 3: Calculate the average of the squared deviations:

[0.09% + 56.25% + 20.25%] / 3 = 26.19%

Step 4: Calculate the square root of the average squared deviation to find the standard deviation
(volatility):

Standard Deviation = √26.19%

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Standard Deviation = 5.12%

So, the volatility (standard deviation) of Coralia Berhad's annual returns over the last three years is
approximately 5.12%.

A higher standard deviation indicates greater volatility and, therefore, higher risk. In this case, the
standard deviation of 5.12% suggests that Coralia Berhad shares have experienced moderate
volatility over the past three years.

Page 13 of 24
(d)

To calculate the expected rate of return for an investment portfolio consisting of two assets,
Catleya Berhad and Miltonia Berhad, with their respective weights and expected returns, you can
use the following formula:

Expected Portfolio Return = (Weight of Asset 1 x Expected Return of Asset 1) + (Weight of Asset 2
x Expected Return of Asset 2)

In this case:

Weight of Catleya Berhad (Asset 1) = 40% or 0.40

Expected Return of Catleya Berhad (Asset 1) = 16% or 0.16
Weight of Miltonia Berhad (Asset 2) = 60% or 0.60
Expected Return of Miltonia Berhad (Asset 2) = 10% or 0.10
Now, plug these values into the formula:

Expected Portfolio Return = (0.40 x 0.16) + (0.60 x 0.10)

Expected Portfolio Return = 0.064 + 0.060

Expected Portfolio Return = 0.124 or 12.4%

So, the expected rate of return for the investment portfolio, which consists of 40% Catleya Berhad
and 60% Miltonia Berhad, is 12.4%.

Page 14 of 24
QUESTION 4
(a)
Private debt refers to debt securities or loans that are not publicly traded and are typically issued
by non-government entities, such as corporations or private companies. Here are two
characteristics of private debt:

1. Issuer Flexibility: Private debt offers issuers greater flexibility in terms of structuring the terms
and conditions of the debt as compared to public debt. Issuers can negotiate with investors to
customize the covenants, interest rates, maturity dates, and repayment terms to better suit their
specific financial needs and objectives. This flexibility can be especially valuable for companies
with unique financial situations or specific capital requirements. It allows issuers to tailor the debt
to their specific business needs, which may not be possible with standardized public debt
instruments.

2. Lack of Public Disclosure: One of the key characteristics of private debt is that it typically
involves less public disclosure and regulatory oversight compared to public debt. Publicly traded
bonds and securities are subject to more stringent reporting and disclosure requirements,
including regular financial reporting, which is made available to the public. In contrast, private debt
issuers do not have the same level of regulatory scrutiny and may not be required to disclose as
much financial information to investors or the public. This reduced disclosure can be attractive to
companies that value confidentiality or wish to keep sensitive financial data private.

It's important to note that while private debt offers advantages in terms of flexibility and
confidentiality, it may also come with certain risks, such as lower liquidity and potentially higher
credit risk due to the lack of public scrutiny. Investors in private debt should conduct thorough due
diligence and carefully consider the terms and creditworthiness of the issuer before investing.

Page 15 of 24
(b)

i. To calculate the price of each bond with a face value of RM100,000 and a market yield to
maturity (YTM) of 5 percent, you can use the present value of a bond's future cash flows formula.
The formula is as follows:

Bond Price = (C / YTM) x [1 - (1 + YTM)^(-n)] + (FV / (1 + YTM)^n)

Where:

C = Annual coupon payment

YTM = Yield to maturity (market interest rate)
n = Number of years until maturity
FV = Face value of the bond
Let's calculate for both bonds:

For Bond A (8 percent coupon rate):

C = 0.08 x RM100,000 = RM8,000 (annual coupon payment)

YTM = 5% or 0.05
n = 20 years
FV = RM100,000 (face value)
Bond A Price = (RM8,000 / 0.05) x [1 - (1 + 0.05)^(-20)] + (RM100,000 / (1 + 0.05)^20)

Bond A Price = (RM160,000) x [1 - (1.05)^(-20)] + (RM100,000 / (1.05)^20)

Now, calculate the values within the brackets:

Bond A Price = (RM160,000) x [1 - 0.376889] + (RM100,000 / 2.653297705)

Bond A Price = (RM160,000) x [0.623111] + (RM37,662.975)

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Now, calculate the two components:

Bond A Price = RM99,697.76 + RM37,662.98

Bond A Price = RM137,360.74

For Bond B (4 percent coupon rate):

C = 0.04 x RM100,000 = RM4,000 (annual coupon payment)

YTM = 5% or 0.05
n = 20 years
FV = RM100,000 (face value)
Bond B Price = (RM4,000 / 0.05) x [1 - (1 + 0.05)^(-20)] + (RM100,000 / (1 + 0.05)^20)

Bond B Price = (RM80,000) x [1 - (1.05)^(-20)] + (RM100,000 / (1.05)^20)

Now, calculate the values within the brackets:

Bond B Price = (RM80,000) x [1 - 0.376889] + (RM100,000 / 2.653297705)

Bond B Price = (RM80,000) x [0.623111] + (RM37,662.975)

Now, calculate the two components:

Bond B Price = RM49,848.88 + RM37,662.98

Bond B Price = RM87,511.86

So, the price of Bond A is approximately RM137,360.74, and the price of Bond B is approximately
RM87,511.86, both assuming a face value of RM100,000 and a market yield to maturity of 5
percent.

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ii.

To determine whether both Bond A and Bond B are trading at a premium, par, or discount, you can
compare their calculated prices (obtained in the previous answer) with their face values. Here are
the calculations again for reference:

Bond A Price = RM137,360.74

Bond B Price = RM87,511.86
Both bonds have a face value of RM100,000.

Now, compare the calculated prices to the face value:

If the bond price > face value, it's trading at a premium.

If the bond price = face value, it's trading at par.
If the bond price < face value, it's trading at a discount.

i. Bond A Price ≈ RM137,360.74

Bond A Price > RM100,000
Therefore, Bond A is trading at a premium.

ii. Bond B Price ≈ RM87,511.86

- Bond B Price < RM100,000

Therefore, Bond B is trading at a discount.

Page 18 of 24
(c)

Let's calculate the price of the zero-coupon bond in three scenarios:

Scenario i. : Calculate the price of the bond with a yield to maturity (YTM) of 5 percent.

To calculate the price of the bond at its original YTM of 5 percent, we can use the formula for the
present value of a single future cash flow (the face value) discounted at the YTM:

Bond Price (Original YTM) = Face Value / (1 + YTM)^n

Where:

Face Value = RM500,000

YTM (Original) = 5% or 0.05
n = Number of years to maturity = 30
Bond Price (Original YTM) = RM500,000 / (1 + 0.05)^30

Bond Price (Original YTM) = RM500,000 / (1.05)^30

Bond Price (Original YTM) ≈ RM128,004.61

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Scenario ii. : Calculate the price of the bond with a new YTM of 8 percent.

Now, let's calculate the price of the bond with the new YTM of 8 percent:

Bond Price (New YTM) = Face Value / (1 + New YTM)^n

Where:

Face Value = RM500,000

New YTM = 8% or 0.08
n = Number of years to maturity = 30
Bond Price (New YTM) = RM500,000 / (1 + 0.08)^30

Bond Price (New YTM) = RM500,000 / (1.08)^30

Bond Price (New YTM) = RM78,873.35

Scenario iii. : Relationship of Bond Yields to Bond Price

The relationship between bond yields and bond prices is inverse: when yields rise, bond prices fall,
and vice versa. This relationship is known as the interest rate risk.

In Scenario i, with a YTM of 5 percent, the bond price was RM128,004.61.

In Scenario ii, when the YTM increased to 8 percent, the bond price decreased significantly to
RM78,873.35.
This illustrates the inverse relationship between bond yields and bond prices. When interest rates
(YTM) increase, the present value of future cash flows decreases, resulting in a lower bond price.
Conversely, when interest rates decrease, bond prices tend to rise. This relationship is crucial for
bond investors to understand as it affects the value of their bond holdings in the secondary market.

Page 20 of 24
QUESTION 5
(a)
Residual claimants, in the context of finance and corporate ownership, refer to individuals or
entities who have the ultimate ownership stake in a business or investment and are entitled to the
residual income or assets left over after all other contractual obligations, debts, and expenses
have been satisfied. They have the last claim on the company's earnings and assets.

Residual claimants bear the highest risk in a business because their returns are uncertain and
contingent on the company's financial performance. If the company experiences financial
difficulties or faces losses, residual claimants may receive lower or no returns on their investment.
However, they also have the potential to benefit the most when the company is profitable and
generates excess income or gains, as they receive the remaining funds or assets after all other
claims have been satisfied.

(b)
To calculate the value of the preferred share, you can use the formula for the present value of a
perpetuity, as preferred shares are typically considered perpetuities since they have no maturity
date and pay a fixed annual dividend. The formula is as follows:
Preferred Share Value = Annual Dividend / Required Rate of Return

Where:
Annual Dividend = RM3.30
Required Rate of Return = 6% or 0.06
Now, plug in the values:

Preferred Share Value = RM3.30 / 0.06

Preferred Share Value = RM55.00
So, the value of the preferred share is RM55.00.

Page 21 of 24
(c)
To estimate the value of the common share under different assumptions about the dividend growth,
you can use the Gordon Growth Model, also known as the Dividend Discount Model (DDM). The
Gordon Growth Model is as follows:

Common Share Value (P0) = D1 / (r - g)

Where:

P0 = Current value of the common share

D1 = Expected dividend at the end of the first year
r = Required rate of return (cost of equity)
g = Growth rate of dividends
Given that the required rate of return (r) is 10 percent, let's calculate the values for each scenario:

i. Dividends are expected to grow at an annual rate of 0 percent to infinity:

In this case, dividends are not expected to grow; they remain constant. So, g = 0.
D1 (Year 1 dividend) = D0 = RM1.80
Common Share Value (P0) = RM1.80 / (0.10 - 0.00)
Common Share Value (P0) = RM1.80 / 0.10
Common Share Value (P0) = RM18.00

ii. Dividends are expected to grow at a constant annual rate of 5 percent to infinity:
In this scenario, the dividend growth rate is 5 percent, so g = 0.05.
D1 (Year 1 dividend) = D0 x (1 + g) = RM1.80 x (1 + 0.05) = RM1.89
Common Share Value (P0) = RM1.89 / (0.10 - 0.05)
Common Share Value (P0) = RM1.89 / 0.05
Common Share Value (P0) = RM37.80

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iii. Dividends are expected to grow at an annual rate of 5 percent for each of the next 3 years,
followed by a constant annual growth rate of 4 percent in year 4 to infinity:

In this scenario, we have a multi-stage growth model.

For the first 3 years, dividends grow at 5 percent annually. So, for Year 1 (D1), D0 * (1 + g) =
RM1.80 * (1 + 0.05) = RM1.89.
Starting from Year 4 onwards, dividends grow at a constant rate of 4 percent, so g = 0.04.
Now, let's calculate the common share value:

D1 (Year 1 dividend) = RM1.89

For Year 2: D2 = D1 x (1 + g) = RM1.89 x (1 + 0.05) = RM1.98
For Year 3: D3 = D2 x (1 + g) = RM1.98 x (1 + 0.05) = RM2.08
Now, we can use the Gordon Growth Model for Year 4 and beyond:
D4 (Year 4 dividend) = D3 x (1 + g) = RM2.08 x (1 + 0.04) = RM2.16
Common Share Value (P0) = D4 / (r - g)
Common Share Value (P0) = RM2.16 / (0.10 - 0.04)
Common Share Value (P0) = RM2.16 / 0.06
Common Share Value (P0) = RM36.00

So, under each of the three assumptions about the dividend growth, the estimated value of the
common share is as follows:
i. RM18.00
ii. RM37.80
iii. RM36.00

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