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KERTAS SOALAN FINANCE

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SEPTEMBER SEMESTER 2013 BMMF5103 MANAGERIAL FINANCE ASSIGNMENT Answer ALL questions. Question 1 a. If the goal of a firm is to maximize the shareholders wealth, does it mean profit is not important at all? Explain your answer. [5 marks] What are the advantages and disadvantages of the three principal forms of business organisation? [5 marks] Briefly explain the term "agency costs" as related to a corporation. How can agency problem be minimized when a company uses debt? [5 marks] In pursuing the goal of a firm, why is corporate governance important? [5 marks] [TOTAL: 20 MARKS] Question 2 a. The Capital Asset Pricing Model (CAPM) is a widely used concept in finance. The Model is expressed graphically by the Security Market Line (SML). Within the context of investment, explain how CAPM can be useful to investors. [7 marks] Explain Efficient Market Hypothesis (EMH) and the different types of market efficiency. Do stock market anomalies contradict the concept of market efficiency? Explain. [8 marks] The distributions of rates of return for Security AA and Security BB are given below: State of Economy State Boom Normal Recession Probability of Occurring 0.2 0.6 0.2 Security AA BB 30% -10% 10 5 -5 50

b.

c.

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b.

c.

Based on the above information can we conclude that any rational risk-averse investor will add Security AA to a well-diversified portfolio over Security BB. Why? Or why not? [5 marks] [TOTAL: 20 MARKS]

ASSIGNMENT BMMF5103

Question 3 a. The following information should be used to answer the following questions: Sandy River Bhd. Income Statement for the year ended 31 Dec 2012 (RM in thousands) Net sales Less: Cost of goods sold Less: Depreciation Earnings before interest and taxes Less: Interest paid Taxable Income Less: Taxes Net income Sandy River Bhd. Balance Sheets As at Dec 2011 and 2012 (RM in thousands) Cash Accounts rec. Inventory Total Net fixed assets Total assets i.) ii.) iii.) iv.) v.) 2011 70 980 1,560 2,610 3,600 6,210 2012 180 840 1,990 3,010 3,360 6,370 Accounts payable Long-term debt Common stock Retained earnings Total liabilities & equity 2011 1,350 720 3,200 940 6,210 2012 1,170 500 3,500 1,200 6,370 5,680 4,060 420 1,200 30 1,170 410 760

In 2012, how many days on average did it take Sandy River Bhd. to sell its inventory? What is the debt-equity ratio for 2012? What is the time interest earned ratio for 2012? What is the equity multiplier for 2012? What is the return on equity for 2012? [5 x 3 marks = 15 marks]

b.

Daisy Corp currently has RM1,000,000 in accounts receivable. Its days sales outstanding (DSO) is 50 days (based on a 365-day year). Assume a 365-day year. The company wants to reduce its DSO to the industry average of 32 days by putting more pressure to its customers to pay their bills on time. The company's Chief Financial Officer estimates that if this policy is adopted the company's average sales will fall by 10 percent. Assuming that the company adopts this change and succeeds in reducing its DSO to 32 days and does lose 10 percent of its sales, what will be the level of accounts receivable following the change? [5 marks] [TOTAL: 20 MARKS]

ASSIGNMENT BMMF5103

Question 4 a. Your grandmother invested one lump sum 17 years ago at 4.25% interest. Today, she gave you the proceeds of that investment which totaled RM5,539.92. How much has your grandmother originally invested? [4 marks] b. One year ago, the Beauty Skins Bhd deposited RM3,600 in an investment account for the purpose of buying new equipment four years from today. Today, it is adding another RM5,000 to this account. It plans to make a final deposit of RM7,500 to the account next year. How much will be available when it is ready to buy the equipment, assuming it earns a 7% rate of return? [4 marks] You have some property for sale and have received two offers. The first offer is for RM189,000 today in cash. The second offer is the payment of RM100,000 today and an additional RM100,000 two years from today. If the applicable discount rate is 8.75%, which offer should you accept and why? [4 marks] You borrow RM149,000 to buy a house. The mortgage rate is 7.5% and the loan period is 30 years. Payments are made monthly. Determine the monthly interest payment that you have to make to settle the loan. [4 marks] You are willing to pay RM15,625 to purchase a perpetuity which will pay you and your heirs RM1,250 each year, forever. If your required rate of return does not change, how much would you be willing to pay if this were a 20-year, annual payment, ordinary annuity instead of a perpetuity? [4 marks]

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[TOTAL: 20 MARKS] Question 5 a. The Lutfus Corp offers a 6% bond with a current market price of RM875.05. The yield to maturity is 7.34%. The face value is RM1,000. Interest is paid semiannually. How many years is it until this bond matures? [4 marks] b. A corporate bond with a face value of RM1,000 matures in 4 years and has a 8% coupon paid at the end of each year. The current price of the bond is RM932. What is the yield to maturity for this bond? [4 marks] The Chocolate Factory Inc. is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that it will be reducing its annual dividend by 5% a year for the next two years. After that, it will maintain a constant dividend of RM1 a share. Two weeks ago, the company paid a dividend of RM1.40 per share. What is the current worth of the stock if you require a 9% rate of return? [4 marks]

c.

ASSIGNMENT BMMF5103

d.

Active Planet Bhd. is preparing to pay its first dividends. It is going to pay RM1.00, RM2.50, and RM5.00 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be RM1.25 per share indefinitely. What is the current worth of this share if you require a 7% rate of return? [4 marks] Your portfolio consists of RM100,000 invested in a stock which has a beta = 0.8, RM150,000 invested in a stock which has a beta = 1.2, and RM50,000 invested in a stock which has a beta = 1.8. The risk-free rate is 7 percent. Last year this portfolio had a required rate of return of 13 percent. This year nothing has changed except for the fact that the market risk premium has increased by 2 percent (two percentage points). What is the portfolio's current required rate of return? [4 marks] [TOTAL: 20 MARKS]

e.

Question 6 a. An investor has RM5,000 invested in a stock which has an estimated beta of 1.2, and another RM15,000 invested in the stock of the company for which she works (Her total portfolio is worth RM20,000). The risk-free rate is 6 percent and the market risk premium is also 6 percent. The investor calculates that the required rate of return on her total portfolio is 15 percent. What is the beta of the company for which she works? [5 marks] A companys balance sheets show a total of RM30 million long-term debt with a coupon rate of 9 percent. The yield to maturity on this debt is 11.11 percent, and the debt has a total current market value of RM25 million. The balance sheets also show that that the company has 10 million shares of stock; the total of common stock and retained earnings is RM30 million. The current stock price is RM7.50 per share. The current return required by stockholders, rS, is 12 percent. The company has a target capital structure of 40 percent debt and 60 percent equity. The tax rate is 40%. What weighted average cost of capital should you use to evaluate potential projects? [5 marks] Mercu Jaya Bhd. is considering the purchase of land and the construction of a new plant. The land, which would be bought immediately (at t = 0), has a cost of RM100,000 and the building, which would be erected at the end of the first year (t = 1), would cost $500,000. It is estimated that the firm's after-tax cash flow will be increased by $100,000 starting at the end of the second year, and that this incremental flow would increase at a 10 percent rate annually over the next 10 years. What is the approximate payback period? [5 marks] Briefly discuss the concept of relevant cash flows when evaluating a new project. [5 marks] [TOTAL: 20 MARKS]

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