FIN3201 (F) / Page 1 of 4

INTI INTERNATIONAL UNIVERSITY

BACHELOR OF ACCOUNTANCY (HONS) PROGRAMME

BACHELOR OF BUSINESS ADMINISTRATION (HONS) PROGRAMME
BACHELOR OF INTERNATIONAL BUSINESS (HONS) PROGRAMME
BACHELOR OF FINANCIAL PLANNING (HONS) PROGRAMME
FIN3201: FINANCIAL MANAGEMENT
FINAL EXAMINATION: JANUARY 2015 SESSION

This paper consists of TWO (2) sections. Answer ALL questions from SECTION A and any
TWO (2) questions from SECTION B in the answer booklet provided. All question carry equal
marks.

Question 1

ABC Co. is an all equity company whose shares have a Beta (β) value of 1.8. The company
General Manager has commented that the actual share price behavior is frequently inconsistent
with the β value. The General Manager cites a recent situation (provide below), to support his
argument.

Situation:
In a month when a dividend of $10 per share was paid, the value of share price and the stock
exchange index, were as follows:-

Share price Stock exchange index

At begin of the month $200 5,800
At the end of the month $212 6,090
Return based on opening and closing price levels 6% 5%

Assumption:-
 The risk free of return on government stock is 6%
 The market rate of return is 10%

You are required to:

a) Explain the concept of systematic risk and unsystematic risk (4 marks)

b) Explain the concept of ‘β’ and discuss how it is measured (4 marks)

c) Calculate the return which shareholders in ABC Co. would expect, and explain the extent
to which the share price behavior and shareholder return is consistent with the given β
values (8 marks)

d) Discuss the any THREE (3) inherent problems of using the Capital Asset Pricing Model
(CAPM) to determine share valuations (9 marks)

[Total: 25 marks]
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Question 2

a) What is the value of a $1,000 bond with an 8% coupon rate, maturity in 3 years time,
with yield-to-maturity (YTM) is 10%. (5 marks)

b)
i. Determine the price of a $1,000 zero coupon bond with a YTM of 16%, with 10
years maturity. (3 marks)

ii. If the price of this bond $200, determine the YTM of this bond. (4 marks)

c)
i. Discuss any 3 (THREE) risk factors in adjustments to bond’s yield-to-maturity
(YTM). (9 marks)

ii. Within the same maturity period, long-term BBB-rated corporate bonds yield
more than AAA-rated corporate bonds. Explain this situation. (4 marks)

[Total: 25 marks]

SECTION B: Answer any TWO (2) questions.

Question 3

a)
i. Discuss the objective of Panel of Takeovers and Mergers.
(5 marks)

ii. Discuss FOUR (4) general principles of Panel of Takeovers and Mergers.
(8 marks)

b)
i. Identify any THREE (3) the economic reasons for acquisitions and mergers.
(6 marks)

ii. Discuss any TWO (2) reasons why the expected economic benefits may not be
achieved
(6 marks)
[Total: 25 marks]
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Question 4

a) To better analyze the performance of the firm, ratio computed should be analyze using
both time series analysis and cross-sectional analysis.
i. Explain both the concepts time series analysis and cross-sectional analysis.
(4 marks)

ii. Provide an example for both time-series analysis and cross-sectional analysis.
(6 marks)

b) Although ratios analysis are being use widely, however finance manager must also aware
of its limitations involved in their use. Discuss any FIVE (5) limitations of ratios.
(10 marks)

c) Liquidity ratios seek to answer the question as to the extent to which the firm has
adequate cash flows or assets that are near to cash that would be sufficient to meet the
short term liabilities of the firm. Differentiate between current ratio and quick ratio (acid
test ratio) (5 marks)

[Total: 25 marks]

Question 5

a) You deposited $1,000 today and the bank offers an 8% interest rate for any deposit but
the frequency of compounding is semi-annual.
i. Calculate the future value at the end of third year. (4 marks)

ii. Explain your explain in terms of time value of money concept. (4 marks)

b)
i. Jeffrey has won a jackpot which pays him $5,000 per year for 3 years, beginning
on year from today. He wishes to know the present value of the jackpot using a
discount rate of 7%. (3 marks)

ii. Jack has invested in government sovereign bond that provides income on
investment of $250 per annum in perpetuity. Determine the present value of this
perpetual annuity if discount rate if 7%. (3 marks)

iii. Explain your answer in b(i) and b(ii) (4 marks)

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c)
Bank A Bank B

Nominal rate 8% 8%

Compounded rate Semi-annual Quarterly

i. Using the data above, calculate the effective annual rate (EAR) for both bank A
and bank B. (4 marks)

ii. Explain your answer in c(i). (3 marks)

[Total: 25 marks]

Question 6

ABC Co. having under consideration two projects, Project A and Project B. The company’s
requires rate or return is 20%. The expected useful life for both projects is 10 years. Project A
required initial capital investment of $50,000, while Project B requires RM500,000. Project A
and Project B generate equal annual net cash flows of $23,000 and $132,000 respectively. After
calculation is done, the net present values (NPVs) for Project A and Project B are $46,427 and
$53,406 respectively. If finance manager must pick one project from these two, the NPV method
would suggest Project B is more favorable due to higher NPV.

Required rate of return 20%

Number of years 10
Discount factor for annuity 4.19247

Project A Project B
Annual net cash flows $23,000 $132,000
Present value of annual cash flows $96,427 $553,406
Less: Initial capital outlay $50,000 $500,000
Net Present Value (NPV) $46,427 $53,406
Internal Rate of Return (IRR) 44.87% 23.09%

a) Explain the concepts of NPV method and IRR method. (6 marks)

b) Explain the principle consider in both NPV method and IRR method. (4 marks)

c) Provide your decision for both projects comment. You may support your decision with
calculation using profitability index (PI) method. (15 marks)

[Total: 25 marks]
-THE END-