CONFIDENTIAL 1 AC/JUL 2024/MAF253

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE : FUNDAMENTALS OF FINANCIAL MANAGEMENT

COURSE CODE : MAF253
EXAMINATION : JULY 2024
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 the Answer Booklet. Start each answer on a new page.

3. Do not bring any material into the examination hall unless permission is given by the
invigilator.

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

i) the Question Paper

ii) a four-page Appendix 1
iii) an Answer Booklet – provided by the Faculty

5. Answer ALL questions in English.

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

This examination paper consists of 9 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. Which of the following statements about goal of maximizing shareholder wealth is

INCORRECT?

A. It has long-term perspective.

B. It ignores uncertainty and risk.
C. It aims to maximize the market price of the firm’s common stock.
D. The timing of returns is taken into consideration.
(1 mark)

2. "Shareholder wealth" in a firm is represented by

A. the number of people employed in the firm.

B. the book value of the firm's assets less the book value of its liabilities.
C. the amount of salary paid to its employees.
D. the market price per share of the firm's common stock.
(1 mark)

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

A. financial markets.
B. government regulations.
C. suppliers and creditors.
D. company advertisement.
(1 mark)

4. Which of the following is NOT a major area of decision function in financial management?

A. Investment decision
B. Profitability decision
C. Asset management decision
D. Financing decision
(1 mark)

5. Which of the following is NOT the disadvantages of profit maximization concept?

A. It is a short-term concept.
B. It ignores risk.
C. It considers the timing of returns.
D. It stresses the use of capital resources.
(1 mark)

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6. Which of the following statements is FALSE about short-term borrowing?

A. Short-term borrowing is riskier than long-term borrowing.

B. Short-term borrowing is cheaper than long-term borrowing.
C. The firm that uses short-term borrowing has lower liquidity risk than the firm that
uses long-term borrowing.
D. Commercial paper is a short-term borrowing.
(1 mark)

7. The purpose of financial markets is to _____________.

A. increase the price of common stocks.

B. lower the yield on bonds.
C. allocate funds efficiently.
D. control inflation.
(1 mark)

8. An investor who holds cash in order to be able to take advantage of additional

investment opportunities is a form of _________ motive of holding cash.

A. speculative
B. transaction
C. hedging
D. precautionary
(1 mark)

9. __________ is the computerized system that breaks down the bill of materials for each
product in order to determine what and when to order, and what priorities to assign to
ordering.

A. The just in time system

B. The ABC system
C. Materials requirement planning system
D. The economic order quantity
(1 mark)

10. Which of the following factors would least affect the price of a firm’s common stocks?

A. Earnings.
B. Management styles.
C. Inflation.
D. Market sentiments.
(1 mark)
(Total: 10 marks)

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PART B

QUESTION 1

Kaboom Bhd has requested a loan from a bank to support its expansion project. To assess
the company's creditworthiness, the bank seeks to compare it with other industry peers. The
company has provided the following financial statements to the bank for evaluation.

Kaboom Bhd
Statement of Comprehensive Income for the Year Ended 31 December 2023

RM RM
Sales 2,250,000
Less: Costs of goods sold 1,650,000
Gross Profit 600,000
Less: Expenses
Selling expenses 140,000
General expenses 97,500
Administrative expenses 75,300 312,800
Earnings before interest and taxes 287,200
Less: Interest Expense 28,000
Earnings before taxes 259,200
Less: Taxes (25%) 68,000
Net income 191,200

Kaboom Bhd
Statement of Financial Position as at 31 December 2023

RM RM
Net non-current assets 890,000
Current assets:
Cash 270,000
Accounts receivables 416,000
Inventories 450,000 1,136,000
Total assets 2,026,000

Current liabilities:
Accounts payable 348,000
Notes payable 330,000
Other current liabilities 128,800 806,800
Non-current liabilities 336,000
Common equity 883,200
Total equity and liabilities 2,026,000

Additional information:

1. Market price per share on 31 December 2023 is RM3.50

2. Number of shares outstanding: 100,000 shares

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3. The industrial financial ratios for the financial year ending 31 December 2023 are as
follows:

Current ratio 1.25x

Quick ratio 0.72x
Inventory turnover ratio 2.9x
Average collection period 3 months
Total assets turnover 1.05x
Debt ratio 46%
Net profit margin 12%
Return on assets 12.6%
Return on equity 23.33%
Price-earnings ratio 1.5x

Required:

a. Compute the above ratios of Kaboom Bhd for the financial year ending 31 December
2023.
(10 marks)

b. Based on DuPont analysis, explain the reasons influencing Kaboom Bhd’s ROE.
(4 marks)
(Total: 14 marks)

QUESTION 2

a. Ceria Raya Bhd experiences seasonal sales throughout the year. It is the firm’s policy
to maintain 30% of its current assets at the permanent current assets level. Ceria Raya
Bhd has the following equity, assets, and liabilities’ balances.

Items RM
Non-current assets 280,000
Inventories 60,000
Accounts receivable 40,000
Cash 20,000
Common equity 250,000
8% Bond 90,000
Accounts payable 40,000
Short-term loan 20,000

Required:

i. Discuss the financing strategy adopted by Ceria Raya Bhd (show all calculations).
(3 marks)

ii. Describe the risk and return trade-off of the chosen financing strategy.
(2 marks)

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b. Angin Bayu Bhd has sales amounting to RM1,062,500 of which 25% are cash sales.
The cost of goods sold is 36% of sales. The average inventory is RM44,625. The
receivables are collected 6 times in a year and accounts payable will be settled in 30
days after purchase. The firm has currently incurred RM984,600 for one operating cycle
and pays 6% per year for its financing. In the future, the firm plans to stretch its accounts
payable by another 15 days. Assume 360 days in a year.

Required:

i. Calculate the current cash conversion cycle.

(4 marks)

ii. Predict the annual savings if the firm proceeds to stretch its accounts payable.
(3 marks)

c. Carlton Sdn Bhd is a manufacturing firm that has been operating for many years and is
well accepted by the market. Currently, a new supplier offers attractive credit terms of
6/30 net 90 to the firm for inventory purchases. Carlton Sdn Bhd requires RM360,000 a
year to finance the purchases of its inventories. However, the firm is now facing a cash
flow problem due to late payment by its major customer.

There are two alternatives available to obtain the required amounts:

Alternative 1: BMB Bank offers a 16% simple interest loan and requires 10%
compensating balance. Carlton Sdn Bhd is a new customer of the bank.

Alternative 2: CDL Bank offers 12% discounted interest loan and requires 15%
compensating balance. Currently Carlton Sdn Bhd maintains RM5,400 in its savings
account with CDL Bank.

Required:

i. Calculate the effective annual cost for the two (2) alternatives.
(5 marks)

ii. Justify whether the company should forgo the cash discount.
(3 marks)
(Total: 20 marks)

QUESTION 3

a. Mika Isaac has won a cash prize of RM50,000 from a tennis competition. He plans to
invest the money in a profitable investment for 5 years. After carrying out several
surveys, he identified three potential investments that offer attractive returns for a five-
year investment.

Investment A offers 14% annual compounded interest, Investment B offers 10% semi-
annual compounded interest and Investment C offers 12% interest compounded every
four months. He consults you for advice.

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Required:

As a financial consultant, advise Mika Issac on the best investment that he should
choose.
(6 marks)

b. Mr. Mukhlis is buying his first house for RM380,000, and is paying RM38,000 as a down
payment. He has arranged to finance the remaining amount with UAB Bank. The bank
offers 15 years mortgage with a 6% nominal interest and equal yearly payments at the
end of each year.

Required:

i. Determine the equal yearly payments that Mr. Mukhlis should make.
(6 marks)

ii. Prepare the loan amortization schedule for the first 2 years.
(4 marks)

c. Bara Bhd is considering two alternatives investments in public companies’ common

stocks. The firm’s finance manager has forecasted the stock’s return and related
probabilities during different state of economy as follows:

RYB Bhd’s Stocks MBB Bhd’s Stocks

States of Forecasted Probabilities Forecasted Probabilities
Economy returns Returns
Boom 25% 0.50 28% 0.30
Stable 18% 0.30 22% 0.45
Recession 10% 0.20 8% 0.25

Required:

i. Calculate the expected return and the standard deviation for both investments.
(6 marks)

ii. Based on coefficient of variation, advise Bara Bhd on the best choice of investment.
(2 marks)
(Total: 24 marks)

QUESTION 4

a. In recent years, there has been a growing demand for ethically produced garments,
driven by increased consumer awareness of social and environmental issues. ZiDEX
Garments, an international garment manufacturing company, takes the responsibility to
ensure that the company’s operations adhere to sustainable and ethical standards, not
only to meet consumer expectations but also to minimize negative impacts on the
environment.

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ZiDEX Garments currently operates a garment machine that has been in use for the
past 4 years with expected salvage value of RM50,000. The machine was initially
purchased for RM650,000 and has a remaining useful life of eight years. However,
advancements in garment manufacturing technology have led to the introduction of a
newer, more efficient machine.

The company is considering replacing the existing garment machine with a newer model
that costs RM1,255,000. The cost of the new machine has excluded custom duty,
transportation, and insurance of RM55,600, RM20,450 and RM6,500, respectively.

The new machine is expected to increase production efficiency, resulting in increase in

sales to RM2,500,000. The present machine generates RM1,890,000 sales annually,
with annual overhead costs of RM250,000 and defects cost of RM50,000. If the machine
is to be sold at present, the business will receive a sum of RM350,000. Even though the
cost of overheads will increase to RM580,000, the new machine will reduce the cost of
defects to RM20,000. It will be depreciated over eight years with a salvage value of
RM90,000 at the end of its useful life. If the company decides to buy new machine, an
additional RM15,000 of inventory is required. In previous year, ZiDEX Garments has
spent RM12,000 on training for the employees as well.

The company uses the straight- line method in depreciating its non-current assets. The
corporate tax rate is 26% and the cost of capital is 18%, while the desired payback
period is 5 years.

Required:

i. Calculate:

1. Initial outlay
2. Annual differential cash flow
3. Terminal cash flow
(10 marks)
ii. Calculate:

1. Payback period
2. Net present value
(5 marks)

iii. Advise with reasons whether the company should buy the new machine.
(2 marks)

b. DocKayuCrafters.com is a wood and furniture manufacturing company planning to

invest in a new project to expand its product line. This investment requires an initial
amount of RM300,000, covering the costs of equipment, facility expansion, and initial
inventory. The company forecasts that sales per year for the first 2 years will be
RM270,000. The variable costs associated with manufacturing the furniture include raw
material costs, labor costs and other production expenses amounting to RM75,000
annually for two periods. The company’s cost of capital is 10%.

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Required:

i. Calculate the sensitivity margin of:

1. The initial investment

2. The variable costs of the investment
3. The sales of the expansion
(8 marks)

ii. Discuss the sensitivity margin of any TWO (2) of the above variables.
(2 marks)

c. Sensitivity analysis is a method used in financial modeling and decision-making to

assess how changes in key variables impact outcomes or results. It helps in
understanding the sensitivity of results to fluctuations in key parameters, providing
insights into potential risks and uncertainties. However, sensitivity analysis has
limitations that can impact decision-making and potentially leading to oversights or
misinterpretations of results.

Required:

i. Discuss the drawbacks of the sensitivity analysis.

(3 marks)

ii. Explain the key difference between divisible and indivisible projects in investment
appraisal.
(2 marks)
(Total: 32 marks)

END OF QUESTION PAPER

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