FIN3201 (F) / Page 1 of 4

INTI INTERNATIONAL UNIVERSITY

BACHELOR OF ACCOUNTANCY (HONS) PROGRAMME

BACHELOR OF FINANCIAL PLANNING (HONS) PROGRAMME
FIN3201: FINANCIAL MANAGEMENT
FINAL EXAMINATION: MAY 2014 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.

SECTION A: Answer ALL compulsory questions.

Question 1

a) Discuss FOUR (4) disadvantages of being a sole proprietor. (10 marks)

b) Discuss FOUR (4) advantages which can be found in either partnership or corporation to
solve the disadvantages of being a sole proprietor as discussed in question (a).
(10 marks)

c) Explain TWO (2) ways how investors monitor the performance of publicly traded firms.
(5 marks)
Question 2

a) An investor is considering starting a new business. The company would require

RM475,000 of assets, and it would be financed entirely with common stock. The
investor will go forward only if she thinks the firm can provide a 13.5% return on the
invested capital, which means that the firm must have an ROE of 13.5%. How much net
income must be expected before starting the business? (5 marks)

b) Harper Sdn Bhd's sales last year were RM395,000, and its year-end receivables were
RM42,500. Harper sells on terms that call for customers to pay 30 days after the
purchase, but many delay payment beyond Day 30. On average, how many days late do
customers pay? (5 marks)

c) Pace Corporation assets are RM625,000, and its total debt outstanding is RM185,000.
The new CFO wants to employ a debt ratio of 55%. How much debt must the company
add or subtract to achieve the target debt ratio? (5 marks)

d) State TWO (2) limitations of Financial Ratios. (5 marks)

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e) The following information is given regarding Bolly Berhad’s capital structure:

Capital Percentage Cost of Capital

Bonds 30 8%
Preferred Stocks 10 10%
Common Stocks 60 13%

If the corporate tax rate is 28%, compute the company’s weighted average cost of
Capital (WACC). (5 marks)

SECTION B: Answer any TWO (2) questions.

Question 3

a) A 10-year bond is currently selling for RM1,268. With a face value of RM1,000, and a
required rate of return of 8%, calculate the annual coupon payments. (5 marks)

b) Bebe Co. has outstanding 7-year bonds with a face value of RM1,000, a current yield-to-
maturity of 7% and a coupon rate of 7%. If the market interest rates were to
unexpectedly and immediately increase by 1%, what would the price change be on the
bonds? (5 marks)

c) What will be the yield to maturity on a debt that has par value of RM1,000, a coupon
interest rate of 5%, time to maturity of 10 years and is currently trading at RM900? What
will be the cost of debt if the tax rate is 30%? (5 marks)

d) Companies pay rating agencies such as Moody’s and S&P to rate their bonds, and the
cost can be substantial. However, companies are not required to have their bonds rated;
doing so is strictly voluntary. Why do you think they do it? Explain. (4 marks)

e) Explain the THREE (3) key features of common stock. (6 marks)

Question 4

a) (i) A firm is considering Projects S and L, whose cash flows are shown below. These
projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use
the IRR criterion, while the CFO favors the NPV method, and you were hired to advise the
firm on the best procedure. If the CEO's preferred method is used, how much value will the
firm lose as a result of this decision?
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r: 13%
0 1 2 3 4
CFS -$1,025 $375 $380 $385 $390
CFL -$2,150 $750 $759 $768 $777

(10 marks)

(ii) Ritz Recreation Inc. is considering a project that has the following cash flow data.
Determine the project's IRR. (5 marks)

Year: 0 1 2 3 4
Cash flows: -$650 $250 $230 $210 $190

(iii) Garbin Enterprises is considering a project that has the following cash flow. Determine
the project's discounted payback. (5 marks)

r: 10.00%
Year: 0 1 2 3
Cash flows: -$1,000 $500 $500 $500

b) List the differences between stockholder wealth maximization and profit maximization.
(5 marks)

Question 5

a) Prepare an amortization schedule for a five-year loan of RM55,000. The annual interest
rate is 10%, and the loan calls for equal annual payments. Determine how much interest is
paid in the third year. (10
marks)

b) Your father is planning to retire this year. His firm has offered him a lump sum retirement
payment of RM50,000 or a RM6,000 ordinary annuities, whichever he chooses. Your
father is currently in a reasonably good health and expects to live for at least 15 more
years. Assuming an 8% annual interest rate to evaluate the annuity, which option should
he choose? (5 marks)

c) What nominal annual interest rate is implied if Ali borrows RM12,500 and repay
RM21,364.24 in three years with monthly compounding? (5 marks)

d) An agent has just presented the following offer. If you deposit RM25,000 with the bank
today, it will pay you RM10,000 per year at the end of year 8 up until 15. If you require a
15% annual rate of return on this type of investment, how much should the investment
worth? Will you accept the offer? (5 marks)
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Question 6

a) Avestan Enterprise has a constantly growing dividend at the rate of 4% per year. If the
current dividend is RM1.25 and the required rate of return is 12%, determine the current
price of Avestan’s stock. (4 marks)

b) A stock with a constant growth rate has a 12% required rate of return expects to pay a
dividend of RM3 in one year, and is currently selling for RM100. What is the constant
growth rate? (5 marks)

c) Sunway Bhd issues common stock with market price of RM50 per share and the previous
year dividend is RM2.20. The firm forecasts a 5% annual growth. Calculate the rate of
return for the firm’s stock. (6 marks)

d) A firm has a current stock price of RM29.16, a required rate of return of 14%, and a
constant growth rate of 5%. Determine the stock’s expected dividend one-year from
today. (5 marks)

e) Explain TWO (2) main differences between preferred stock and common stock. (5 marks)

THE END