CONFIDENTIAL 1 AC/FEB 2022/MAF253

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE : FUNDAMENTALS OF FINANCIAL MANAGEMENT

COURSE CODE : MAF253
EXAMINATION : FEBRUARY 2022
TIME : 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of two (2) parts: PART A (10 Questions)
PART B (4 Questions)

2. Answer ALL questions in both parts. Start each answer on a new page.

3. Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) a four-page Appendix
iii) an Answer Booklet – provided by the Faculty

4. Answer ALL questions in English

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 8 printed pages
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PART A

This part consists of TEN (10) multiple choice questions. Choose the most suitable
answer for each question and write the corresponding alphabet representing the
answer in the answer booklet.

1. Maximization of shareholders’ wealth is a concept in which

A. profits are maximized on a quarterly basis.

B. increased earning is of primary importance.
C. optimally increasing the long term value of the firm is emphasized.
D. virtually all earnings are paid as dividends to common stockholders.
(1 mark)

2. All of the following are the key areas that a financial manager should focus in
managing their financial decisions EXCEPT

A. raising of long-term finance.

B. meeting the sales target.
C. management of working capital.
D. making an investment decisions.
(1 mark)

3. The flow of fund from investors to financial managers is facilitated by

A. financial markets.
B. government regulation.
C. suppliers.
D. creditors.
(1 mark)

4. All the following activities are related to financial management EXCEPT

A. planning and controlling of financial resources.

B. borrowing of funds.
C. balancing risks and profitability.
D. integrating human resource management strategies and systems.

(1 mark)
5. Which of the following statement is INACCURATE?

A. Profit maximization ignores real world complexities when making financial

decisions.
B. Shareholders’ wealth maximization considers risk or uncertainty when making
financial decisions.
C. Short-term securities are sold in capital market
D. Financial institutions serve as intermediaries that channel the savings of
individuals, businesses and governments into loans and investments.
(1 mark)

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6. __________________ provide funds by giving loans to individual and firms, or

purchasing securities issued by other firms.

A. Financial managers
B. Institutional investors
C. Money markets
D. Suppliers
(1 mark)

7. Which of the following decision involves determining the optimal mixture of the debt
and equity for any investment?

A. Investment decision
B. Financing decision
C. Asset management decision
D. Working capital investment decision
(1 mark)

8. Wealth maximization as the goal of the firm implies enhancing the wealth of

A. the firm’s board of directors.

B. the firm’s stockholders.
C. the regulators.
D. the firm’s employees.
(1 mark)

9. The concept of being risk averse means that

A. investors are willing to accept a decrease in return for an increase in risk.

B. investors would prefer investments with high standard deviations and greater
opportunity for gain.
C. the greater the risk, the higher the expected return must be.
D. for a given situation, investors would prefer relative certainty to uncertainty.
(1 mark)

10. Which of the following statement is TRUE?

A. Default risk is the risk of not being able to convert the asset into cash at short
notice without losing value.
B. Managers are generally assumed to be risk seekers
C. Risk cannot be eliminated through diversification in events such as changes
in tax legislation and fluctuations interest rates.
D. Market risk is classified under unsystematic risk.
(1 mark)
(Total: 10 marks)

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PART B

QUESTION 1

Kuwasa Bhd manufactures quality coffee beans for export and domestic consumption. The
company had applied for a bank loan and, currently, is being evaluated as a prospective
borrower. The following financial statement had been presented to the bank.

Kuwasa Bhd
Statement of Profit or Loss for the year ended 31 December 2021
RM
Sales (60% on credit basis) 3,500,000
Cost of sales (1,500,000)
Gross profit 2,000,000
Interest expense (150,000)
Operating expenses (850,000)
Depreciation (280,000)
Tax expense (172,800)
Net profit after tax 547,200

Kuwasa Bhd
Statement of Financial Position as at 31 December 2021
RM RM
Non-current Assets
Property, plant and equipment 2,000,000
Less: Accumulated depreciation (450,000) 1,550,000

Current Assets
Inventories 310,000
Accounts receivables 223,000
Cash and bank 100,000 633,000
Total Assets 2,183,000

Ordinary share capital (RM1.25 each) 750,000

Retained earnings 310,000
6% Preference shares 400,000
Non-current liabilities 571,000
Current liabilities 152,000
Total Equity and Liabilities 2,183,000

Additional Note:

1. The following are the industry averages for 2021:

Current ratio 5.6 times

Acid-test ratio 4.1 times
Inventory turnover 6.0 times
Average collection period 29 days
Debt ratio 30%
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Time interest earned 6.3 times

Operating profit margin 23%
Net profit margin 14%

Required:

a. Calculate the above ratios for Kuwasa Bhd for the year 2021. Assume that there are
360 days in a year.
(10 marks)

b. Comment on the company’s liquidity and leverage position, in comparison with the
industry average. Should the bank approve the loan?
(5 marks)
(Total: 15 marks)

QUESTION 2

A. Jaya Sdn Bhd is operating in a seasonal industry. The firm’s policy is to maintain
20% of its inventories and 25% of its cash as a minimum current assets level. The
lists of assets and sources of financing are provided below:

RM RM
Plant and machinery 250,000 Common equity 260,000
Investment 30,000 8% Bond 70,000
Cash 28,000 Accounts payable 42,000
Inventories 46,000 Short-term loan 22,000
Accounts receivable 40,000
Assets 394,000 Equity and Liabilities 394,000

Required:

a. Calculate the temporary sources and temporary assets of Jaya Sdn Bhd.
(3 marks)

b. Assess the risk and return trade-off of the financing strategy adopted by Jaya
Sdn Bhd.
(2 marks)

B. Gees Sdn Bhd’s inventory turnover is 9 times in a year. The average collection
period is 36 days and the deferral payable period is 38 days. The firm has an annual
outlay of RM936,000 in one-cycle of investment and pays 11% per year for its
financing. The firm is considering a plan to stretch its accounts payable by another
18 days. Assume that there are 360 days in a year.

Required:

a. Calculate the firm’s cash conversion cycle.

(2 marks)

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b. Calculate the amount of financing required by Gees Sdn Bhd to support its
cash conversion cycle.
(2 marks)

c. Calculate the annual savings if accounts payable is stretched.

(3 marks)

C. Cahaya Bhd has been offered a new credit terms of 5/10 net 45 by its existing
supplier. Due to cash flow problem, the firm is only able to pay on day 50 and is
agreeable with the supplier. Cahaya Bhd needs RM800,000 to pay within the
discount period to its supplier. In order to raise the needed fund, the firm is
considering the following alternatives.

i. A line of credit amounting RM900,000 from Ka-Ching Bank at an interest rate

of 9% and a commitment fee of 2.5% on the unused balance.
ii. A loan from Bank Kaya-Raya at 9% discounted interest rate. A 20%
compensating balance will be required.

Required:

a. Calculate the effective annual cost of foregoing the cash discount.

(2 marks)

b. Calculate the effective annualised cost of each alternative.

(6 marks)

c. Advise Cahaya Bhd on the best option for the company.

(3 marks)
(Total: 23 marks)

QUESTION 3

A Jenita is planning to buy a property in 6 years time. At present, the property costs
RM650,000. However, the value is expected to increase each year at the rate of
12%. Jenita plans to make an annual savings at the end of each year for the next 6
years, so that, she can pay the stipulated deposit of 30%. It is assumed that she can
earn 14% interest per year on the savings.

Required:

Calculate the annual savings that Jenita should make at the end of each year for the
next 6 years, so that, she has sufficient fund to pay for the deposit.
(6 marks)

B Lala Sdn Bhd, a chocolate manufacturer has been experiencing a growth in its
business. In order to meet the increasing demand in their product, the management
has decided to purchase a new mixing machine costing RM250,000. The company
has obtained a loan amounting to 90% of its needed fund from Mewah Bank. The
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loan will be for 5 years and bears an interest of 16% on unpaid amount. Instalments
will be made on a yearly basis.

Required:

a. Calculate the annual instalment payment of the loan.

(3 marks)

b. Prepare the amortization schedule of the loan for the first three years.
(7 marks)

C. Sofiya is considering two possible investments. The investments’ possible returns

and related probabilities are provided below.

Investment’s Returns (RM)

Probability
Aey Bea
0.40 2,500 2,200
0.35 3,300 3,000
0.25 1,600 1,800

Required:

a. Determine the expected return of each investment.

(2 marks)

b. Calculate the coefficient of variation for each investment.

(4 marks)
(Total: 22 marks)

QUESTION 4

A. Herbalic Sdn Bhd is currently using a semi-mechanical packaging machine to pack

their herbs. The machine was purchased 4 years ago at a cost of RM300,000. This
machine is being depreciated at 10% per annnum on a straight line basis towards a
RM10,000 salvage value. It has 6 years remaining life. The existing machine can be
sold for RM150,000.

The firm is offered a new machine which costs RM400,000. It has an estimated
useful life of 6 years and it will cost another RM25,000 to deliver and install the
machine. The estimated salvage value is RM20,000 and the machine will be
depreciated on a straight line basis.

Since the new machine is fully automated, the firm is able to increase its production
by RM65,000 per year for the first 5 years, and RM100,000 per year in the 6th year.

The new machine would require that inventory be increased by RM35,000, accounts
payable be increased by RM25,000 and operating costs be reduced by RM15,000,
yearly. The firm is subjected to 24% corporate tax rate. The required rate of return is
10% while the desired payback period is 3 years.

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Required:

a. Calculate:

i. initial outlay.
ii. annual differential cash flow.
iii. terminal cash flow.
iv. net present value.
v. internal rate of return.
vi. payback period.
(12 marks)

b. Advise the management whether to acquire the new machine. Give reasons
for your answer.
(5 marks)

B. A project that cost an initial of RM35,000 is being considered by Mentari Sdn Bhd.
The projected sales is RM36,000 per annum for the first 2 years. The anticipated
variable costs will be RM3,000, annually. As the financial advisor, you are
responsible to advise the top management about the effect of changes of projects
variables on the NPV. The cost of capital is 12%.

Required:

a. Calculate the sensitivity margin of:

i. the initial investment.

ii. the variable costs of the projects.
iii. the sales of the project.
(6 marks)

b. Explain the sensitivity margin of the above variables.

(3 marks)

c. Sensitivity analysis is based on historical data and management assumptions.

In addition, it assumes other factors do not change, therefore each variable is
considered individually. Discuss the above weaknesses.
(4 marks)
(Total: 30 marks)

END OF QUESTION PAPER

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