INTI fee International University tauneare rnin ere FINAL Examination Paper (COVER PAGE) Session : JANUARY 2016 Programme : Bachelor of Accountancy Bachelor of Financial Planning Course : FIN3201: Financial Management Date of Examination: 28" April 2016 e : 09,00 ~ 11,10. am Reading Time : _ 10 minutes Duration : 2 Hours 10 minutes Special Instruetions + This paper consists of TWO (2) sections. Answer one compulsory question ftom SECTION A and any TWO (2) from SECTION B in the answer booklet. Materials permitted: Financial Calculator Materials provided 3-page Formula Sheet (Attached at the back of question paper) Examiner(s) 7 Mohd Ki bin Bahari Moderator : Siti Nurbaayah, Salar Faroog, Lee Chin Chong This paper consists of 6 printed pages, including the cover page.FIN3201 (F)/ Page 1 of S INTIINTERNATIONAL UNIVERSITY BACHELOR OF ACCOUNTANCY (HONS) BACHELOR OF FINANCIAL PLANNING (HONS) FIN3201: FINANCIAL MANAGEMENT. FINAL EXAMINATION: JANUARY 2016 SESSION ‘This paper consists of TWO (2) sections. Answer TWO (2) compulsory questions from SECTION A and any TWO (2) questions from SECTION B in the answer booklet provided. SECTION A: Answer the following compulsory questions. Question 1 (a) Explain TWO (2) reasons why profit maximization is inconsistent with shareholder wealth maximization? (6 marks) (b) The management of corporations would tend to divert from making decisions to maximize shareholders’ wealth, How can shareholders ensure that the management's interest coincides with those of the shareholders? Explain TWO (2) approaches, (8 marks) (©) What is a financial intermediary? List and describe TWO (2) principal types of finaneial intermediaties in the Malaysian financial markets. Explain and provide some examples. (11 marks)FIN3201 (F) / Page 2 of 5 Question 2 @ ) ©) Tim is 10 years old today. Tim, a studious young fellow, is already making plans to go college on his 18th birthday, and his father wants to start putting money away now for that purpose. Tim’s father estimates that Tim will need $15,000, $20,000, $26,000 and $33,000 for his first, second, third and final years respectively. He plans on making these amounts available (o Tim at the beginning of each of these years, Tim’s father would like to make eight annual deposits (the first of which would be made on ‘Tim's 11th birthday, one year from now, and the last on his 18th birthday, the day he leaves for college) in an account earning 6% annually, He wants the account to eventually be worth enough to just pay for Tim’s college expenses. Any balances remaining in the account will continue to earn 6%. Caleulate how much will Tim’s father have to deposit in this planning account each year to provide for Tim’s education? (9 marks) ‘You have been offered the right to buy a business. You have learned in your finance elass the time value of money. You think the business will net you $2,000 for 3 years, then $4,000 for 5 years, After that, you plan to close it down and do something more fun, Calculate how much would this business be worth to you if you need a 20% return to compensate you for its risk? Assume the cash flows occur at the end of the year. (© marks) (What are the FOUR (4) events that would affects the returns to a large number of firms in the economy? (2 marks) Gi) Tf you held a well-diversified portfolio, would these events be of great concern to you? G marks) ves ‘You ave considering an investment, Afier a great deal of careful research you determine that the expected return on the investment is 16%. You also estimate the beta to be 2. If the risk-free rate of interest is 4% and the return on the market is 9%, should you accept the project? (S marks)FIN3201 (F)/ Page 3 of 5 SECTION B: Answer any TWO (2) questions, inguish between systematic and u estors likely (o ignore the unsystemati ks. Under what circumstances are s ofa security? ystematic risk character (9 marks) (b) You own a portfolio consisting of the following stocks. The risk-free rate is 7% and the expected return on the market portfolio is 15.5%. Stock Percentage of Beta Expected Return Portfolio %) 1 10 1.00 12 2 25 0.75 i 3 is 1:30 15 4 30 0.60 9 3 20 1.20 4 @ Calculate the portfolio expected return. (4 marks) (ii) Calculate the portfolio beta, (4 marks) (iii) When the retums of two risky investments are perfectly negatively correlated, how does the combining them in a portfolio affect the overall riskiness of the portfolio? (4-marks) iv) Why is preferred stock referred to as hybrid security? Explain, (4 marks)@) (b) © FIN3201 (F)/ Page 4 of 5 uestion 4 An investor must choose between two bonds, Bond X pays $95 annual interest and has a market value of $900. It has 10 years to maturity. Bond Z, pays $95 annual interest and has a market value of $920. It has two years to maturity. Both bonds has par value of $1,000, (Compute the current yield on both bonds. (4 marks) Gi) Which bond should he select based on your answer to part (i)? (1 mark) (ii) ‘The yield to maturity for Bond X is 11.21%. Compute the yield to maturity on bond Z, 3 marks) (iv) What does a bond rating reflect? Why is the rating important to the firm’s management? Explain, (S marks) Over the past 5 years the dividends of Putra Berhad have grown fiom $0.50 to $2.00 per share, Calculate the value of Putra’s common stock to an investor who requires a 35% rate of retum, assuming that dividends continue growing at the same rate as they grew over the past 5 years. (8 marks) Distinguish between an independent project and a mutually exclusive project. (4 marks) Question 5 @) (b) Why is the net present value (NPV) method of evaluating projects better than the intemal rate of return method? Explain TWO (2) reasons. (S marks) You are considering a project with an initial cash outlay of $80,000 and expected eash flows ‘of $20,000 at the end of each year for six years. The discount rate is for this project is 10%, (@__ Caloulate the project’s payback (PB) and discounted payback periods. (6 marks) Gi) Calculate the project’s net present value (NPV) and internal rate of retum (IRR). Is this project acceptable under NPV and IRR evaluation? (10 marks) Gii) Calculate the project’s profitability index (PD. (4 marks)Question 6 FIN3201 (F) / Page 5 of 5 (a) The most recent balance sheet of Anggun Bhd is found below: @ Ww (b) Current assets (S millions) Cash and marketable securities 10 Accounts receivables 40 Inventory 60 Total 110 Current liabilities (S millions) Accrued wages and taxes 5 Accounts payable 35 Notes payable 30 Total 70 Calculate Anggun’s current ratio and acid-test ratio. (6 marks) Benchmark ratios for the current and acid-test ratio are 1,50 and 1.20, respectively. What can you say about the liquidity of Anggun’s operations based on these two ratios? (4 marks) Explain FIVE (5) limitations of financial ratio analysis, (15 marks) THE END FFIN3201(F tan 2016/Khair Bahavi?29:3-2016FORMULA SHEET Ratio Acid-test (Quick) ratio : asset tumover (Current assets ~ inventory)/Current liabilities Sales/Net plant & equipment ‘Accounts receivable turnover Operating profit margin Annual credit sales/Accounts receivable ‘Net operating income or EBIT/Sales Days’ sales in inventor Operating retuen on asset 365/Inventory turnover ‘Net operating income or EBIT/Total assets sepeeeereeo Debt ratio ‘otal linbilities/Total Asset “EPS = Earnings per share = Net income/Common shares outstanding Time Value of Money FV =PV(i4iy" PV =PMTA FV (M+) PV = PMT pitti BAR = [1+ inon/m]” = 1 FV=PMT [(14i)"— 1/7] MT [{1 — 11+4)"} Fi] MT [(1+i)" LICL) PV=PMT[I- 1/(1+i)"Vi (14)Risk and Return E(R)= YP, Se, Bee)? BUR,) = Sow, BCR,) a Sronporo = V Wio} + W303 + 2W,Wapi20 102 Rp = wiRy + woRo +... + WR ERa) = Ret BalE(Ro) - Red Bond Valuation seer Present Value of the Present Value of the ond \ | Bond's Coupon Interest | 4+{ Principal Amount (par value) ve Payments: of the Bond Issue. Trleresturr Inlerestea Interests Interestyna Bond Price = be 2 , ; Interestyyes Principal (i+ yrm)! "(14+ yrmyp (+ rm (+ ¥rint Oo vamos * (+ ran Approximate yield to maturity (7) of the bond Aon u al interest payment + 0.6(Price of the boi Stock Valuation Vs= Present Value of (dividend + expected price) =i + Pit Vee = Dol Hte)ieeg Value of Annual Preferred Stock Dividend Preferred Stock “ Market's Requited Yield on Preferred Stock Cost of Capital Kg= Yield (1-Tax rate) i BOnt) Key= (Di Pes) +8, WACC = (kg x Wa) + (Kes X Wes) + (Kye X Wp),Capital Budgeting NPV =CF(1+k)! + CF/(14+k)? + .. + CP/(+K)" - CFo PI= CE (Hk)! + CE/(1+k) +0... + CRY" CPo IRR = CF(I+k)! + CRM(I+ky + + CBy/(L#k)” = CFy PB = Intial Payments/Annual Cash Inflows