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    FIN3201

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    INTI International University taunenTe Teno eR 3 FINAL Examination Paper (COVER PAGE) Session : May 2016 Programme Bachelor of Accountancy (Hons) Bachelor of Financial Planning (Hons) Course : FIN3201: Financial Management Date of Examination: _21 July 2016 Time + 1500-1710 __ Reading Time Duration 2.-Hours 10 minutes Special Instructions ‘This paper consists of TWO (2) sections. Answer ALL questions in SECTION A and any TWO (2) from SECTION B in the answer booklet provided. Each question carries equal marks. Materials permitted — : ‘Non-programmable Calculator Materials provided Mathematical Table Examiner(s) : Chen Yin Foo at Moderator : Moh Khairil, Siti Nurbaayah, Dr Pegah Dehghari_ asi This paper consists of 7 printed pages, including the cover page. FIN320¢ (F)/ Page | of 6 INTI INTERNATIONAL UNIVERSITY BACHELOR OF ACCOUNTANCY (HONS) BACHELOR OF FINANCIAL PLANNING (HONS) FIN3201: FINANCIAL MANAGEMENT FINAL EXAMINATION: MAY 2016 SESSION This paper consists of TWO (2) sections, Answer TWO (2) compulsory questions from SECTION Aand any TWO (2) questions from SECTION B in the answer booklet provided. SECTION A: Answer ALL questions. Question 1 1) i) Based on the graphs below, which stock has more systematic risk, and whieh stock has more unsystematic risk? FIN320p (F)/ Page 2 of 6 ‘sock (5 marks) by i) Currently the risk-free rate equals 5% and the expected retum on the market portfolio equals 11%, An investment analyst provides you with the following information: Stock Beta Expected Return A 1.33 12% B 0.7 10% c 15 14% D 0.66 9% Indicate whether each stock is overpriced, underpriced, or correctly priced. (8 marks) ii) 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 2 2 25 0.75 u 3 15 1.30 15 4 30. 0.60 9 5 20 1.20 id FIN320} (F)/ Page 3 of 6 (Calculate the portfolio expected return, (4 marks) ii) Calculate the portfolio beta. (4 marks) (i) When the returns 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) Question 2 Air Tawar Enterprises is attempting to evaluate the feasibility of investing $85,000, CF, in a machine having a 5-year life, The firm has estimated the cash inflows associated with the proposal as shown below. The firm has a 12 percent cost of capital. End of Year () Cash Inflows (CF) 1 $18,000 2 $22,500 3 $27,000 4 $31,500 5 $36,000 i) Calculate the payback period for the proposed investment. (marks) ii) Calculate the NPV for the proposed investment. (6marks) iii) Caleulate the ZRR for the proposed investment. (Gmatks) iv) Evaluate the aeceptability of the proposed investment using NPY and IRR. (marks) SECTION B: Answer ANY TWO (2) questions. Question 3 a) Two bonds offer a five percent coupon rate, paid annually, and sell at par ($1,000). One bond matures in two years and the other matures in ten years. FIN320} (F)/ Page 4 of 6 i) What are the YTMs on each bond? (6marks) ii) If the YTM changes to four percent, what happens to the price of each bond? (6marks) What happens if the YM changes to six pereent? (marks) iv) What can you conclude about your findings in (i) and (ii)? (marks) Question 4 a) One year from today, investors anticipate that Groningen Distillers In pay a dividend of $3.25 per share. After that, investors believe that the di will grow at 20% per year for three years before settling down to a long-run growth rate of 4%. The required rate of return on Groningen stock is 15%. What is the current stock price? (7 marks) b) Roban Corporation is considering going public but is unsure of a fair offering price for the company, Before hiring an investment banker to assist in making the public offering, managers at Roban have decided to make their own estimate of the firm’s common stock value. The firm’s CFO gathered the following data for performing the valuation using the free cash flow valuation model The firm’s weighted average cost of capital is 12 percent, and it has $1,400,000 of debt at market value and $500,000 of preferred stock at its assumed market value, The estimated free cash flows over the next five years, 2016 through 2020, are given below. Beyond 2020 to infinity, the firm expects its free cash flow to grow by 4 percent annually. Year Free Cash Flow 2016 $250,000 2017 $290,000 2018 $320,000 2019 $360,000 2020 $400,000 i) Estimate the value of Roban Corporation's entire company by using the fiee cash flow approach. (6 marks) ii) Use your finding in part (a), along with the data provided above, to find the total vaiue of all of Roban’s common stock. (6marks) FIN320} (F)/ Page 5 of 6 If the firm plans to issue 220,000 shares of common stock, what is its estimated value per share? (6 marks) Question 5 (@) Explain TWO () reasons why profit maximization is inconsistent with shareholder wealth, maximization? (8 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 THREE. (8) approaches. (9 marks) (©) Which type of company do you think will have a higher beta? A fast-food chain or a hip firm? (8 marks) Question 6 A business have two mutually exclusive projects in which the manager may invest and two possible manager compensation contracts that the stockholder may choose to employ. The manager may be paid a flat $300,000 or receive 10 percent of corporate profits. The stockholder receives all profits net of manager compensation. Project #1 Project #2 Probability, Gross Profit Probability Gross Profit 33.33% $0 50.0% $600,000 33.33% $3,000,000 50.0% $900,000 33.33% $9,000,000 i Estimate the payofts for project I and 2. (10 marks) ii, Which project meximizes shareholder wealth? (S marks) FIN3201 (F) / Page 6 of 6 iii Which project will the manager choose under a flat compensation atrangement? (5 marks) iv. Which compensation contract aligns the interests of the stockholder and manager so that the manager will act in the best interest of the stockholder? (Smarks)

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