CONFIDENTIAL 1 AC/JUN 2019/MAF503

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE : FINANCIAL MANAGEMENT

COURSE CODE : MAF503
EXAMINATION : JUNE 2019
TIME : 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of five (5) 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 room 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 two-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 7 printed pages
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CONFIDENTIAL 2 AC/JUN 2019/MAF503

QUESTION 1

Metrex Sdn Bhd is a manufacturing company that produces moulds design for ceramics
products. The financial statements for Metrex Sdn Bhd are as follows:

Metrex Sdn Bhd

Statement of Profit or Loss and Other Comprehensive Income for the year ended
30 June 2019
RM
Sales 170,000
Cost of sales (105,000)
Gross profit 65,000
Operating expenses (45,000)
Interest expenses (6,000)
Net profit before tax 14,000
Taxation (3,360)
Net profit after tax 10,640

Metrex Sdn Bhd

Statements of Financial Position as at 30 June 2019

RM RM
Property, Plant & Equipment 104,616

Current Assets
Inventories 61,666
Accounts receivables 34,808
Bank 6,688
Prepaid expenses 4,600
Total Current Assets 107,762
Total Assets 212,378

Equity
Ordinary share capital 58,118
Retained earnings 37,640
Total Equity 95,758

Non-current liabilities
Long term loans 56,576

Current Liabilities
Accounts payables 26,048
Notes payable 18,000
Tax payable 7,400
Overdraft 8,596
Total Current Liabilities 60,044
Total Equity & Liabilities 212,378

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Ratios Industry Average Ratio

Current ratio 1.9 times
Quick ratio 0.8 times
Average collection period 40 days
Inventory turnover 2.75 times
Debt ratio 45%
Time interest earned 5 times
Debt to equity 95%
Gross profit margin 40%
Net profit margin 5%
Return on assets 3%
Return on owners’ equity 5.45%

Note: Assume 360 days in a year. 80% of the sales are on credit.
Required:

a. Calculate the above ratios for Metrex Sdn Bhd.

(11 marks)

b. Based on answer in (a) above, discuss the leverage position and the asset
management ratios of Metrex Sdn Bhd as compared to the industry performance.
(4 marks)
c. Suggest three (3) actions that Metrex Sdn Bhd can implement to overcome any
weaknesses of its asset management ratio discussed in (b).
(3 marks)
(Total: 18 marks)

QUESTION 2

The extract of Statement of Financial Position as at 30 June 2019 for Big Money Berhad (Big
Money) is as follows:
Big Money Berhad
Statement of Financial Position (extract) as at 30 June 2019
RM
Non-current Assets (net) 120,000
Current Assets
Inventory 62,800
Accounts receivable 55,000
Cash 40,200
Total Assets 278,000
Equities
Common stocks (50,000 units at par value RM1.00 per units) 50,000
Retained earnings 25,000
Liabilities
6% Irredeemable Bonds (5 years maturity period) 45,000
Accounts payables 75,800
Bank overdrafts 48,700
Accruals 33,500
Total Equities and Liabilities 278,000

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Additional Information:

1. The permanent current assets valued at RM5,000 and RM3,000 consists of the value
for inventory and cash respectively.
2. The total sales for the year is RM800,000 inclusive of 20% cash sales.
3. The cost of goods sold is 45% of total sales.
4. The average annual operating cost is RM396,000.
5. The cost of financing short-term loan is 12% per annum.
6. The business operation is 360 days in a year.
7. The corporate tax rate is at 24%.

Required:

a. i Discuss the working capital financing strategy adopted and the implication of
risk and return to Big Money. (Support your answer with workings).
(4 marks)

ii. Based on the working capital financing adopted in (i) above, estimate the
profit after tax for Big Money.
(3 marks)

b. i Estimate the length of Big Money’s cash conversion cycle.

(4 marks)

ii. If the company is able to negotiate with suppliers to extend the credit terms
for another 4 days, advise whether it could generate annual savings for Big
Money and improve its cash conversion cycle.
(3 marks)

c. Inventory is one of the desirable collateral for short term loans.

Explain to Big Money three (3) methods of using inventory to secure short term loan.
(6 marks)
(Total: 20 marks)

QUESTION 3

Wall Paper Sdn Bhd (Wall Paper) is considering a proposal to replace its old printing
machine with a new sophisticated and latest model. The new printing machine costing
RM620,000 is expected to have a useful life of four years. In order to fix the machine, Wall
Paper needs to pay for freight and installation charges of RM40,000 and RM80,000
respectively. The training cost of RM10,000 will be borne by the supplier. At the end of the
useful life, the new printing machine would have a salvage value of RM40,000.

Meanwhile, the old printing machine which was bought six years ago at a cost of RM200,000
has become obsolete and incurred high maintenance cost. It is depreciated using a straight-
line method over 10 years of estimated useful life. The old printing machine can be sold for
RM48,750. However, the obsolete printing machine has no salvage value.

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The purchase of the new printing machine will require Wall Paper to get additional funding of
RM450,000 from HKBC Bank and it needs to pay RM27,000 of interest charges annually. It
is expected that with the use of the new printing machine the company would be able to
meet the rapidly rising demand for its products. Therefore, Wall Paper have to increase the
investment in inventories by RM60,000. The current year sales using the existing machine is
RM400,000 and sales forecast for the new machine are as follows:

Year 1-3 RM640,000

Year 4 RM720,000

The existing printing machine normally will cost the company to incur electricity charges of
RM200,000, salaries of RM60,000 and manufacturing costs of RM340,000. The projected
costs using the new printing machine are as follows:

Electricity charges RM140,000 per year

Salaries Year 1-3 RM40,000
Year 4 RM30,000
Manufacturing cost Year 1-3 RM365,000
Year 4 RM375,000

The company's tax rate is 24% and cost of capital is 10%. The company policy is to provide
annual depreciation using a straight-line method. The expected payback period is 3 years.

Required:

a. Calculate the followings:

i. Initial outlay
ii. Net annual cash flow
iii. Terminal cash flow
iv. Payback period
v. Net present value
vi. Profitability index
(19 marks)

b. Justify with two (2) reasons whether Wall Paper should replace the existing printing
machine or not.
(3 marks)

c. Depreciation of non-current assets is a non-cash item. Explain briefly the effect of

depreciation on the level of cash flow in a capital budgeting project.
(2 marks)
(Total: 24 marks)

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QUESTION 4

Milea Sdn Bhd (Milea) is going to issue new bonds and common stocks to raise funds
needed for their latest projects amounting to RM3,000,000. The company’s debt and equity
as at 30 June 2019 are as follows:

RM
8% Bond at par 2,800,000
Preference shares 2,000,000
Common stock at par 1,200,000
Retained Earnings 1,000,000
7,000,000

The market value of the 8% bond (par value RM1,000) is RM920. After the maturity period of
5 years, the bond will be redeemed at RM1,040. Floatation cost on the new bond is 4% of
the market value.

7% preference shares with a par value of RM100 can be sold at 2% discount. An additional
fee of 3% of the par value must be paid.

The common stocks (par value RM1.00) are currently selling at RM2.00. Milea proposes to
pay next year’s dividend of RM0.15 per share and the dividend is assumed to grow at a
constant rate of 5% and the floatation cost on the issuance of common stock is 10% of the
market price. All retained earnings available as at 30 June 2019 is going to be used for re-
investment purposes. The corporate tax rate is 24%.

Required:

A. i. Calculate the individual after-tax cost of:

a. new debt
b. preferred shares
c. retained earnings
d. new common stocks

ii. Calculate the number of bonds to be issued if the company plans to undertake
the above projects.
(10 marks)

B. Determine the firm’s weighted average cost of capital if the projects are undertaken.
(3 marks)

C. “A firm needs to determine its cost of capital”

Explain the above statement.

(3 marks)
(Total: 16 marks)

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QUESTION 5

A. Identify three (3) differences between profit maximization and shareholders’ wealth
maximization.
(6 marks)

B. i. Sarah plans to buy a house in four years’ time at Johor Bahru. If she wants to
buy a house at a price of RM400,000, compute the amount that she needs to
deposit every year if she can earn 7% return on investments.

Additional information:

FVIFA(4,7%) : 4.4399 PVIFA(4,7%) : 3.3872

FVIF(4,7%) : 1.3108 PVIF(4,7%) : 0.7629

ii. You plan to make yearly instalments of RM1,300 in an investment that pays
7%. After 5 years, you plan to increase your annual investment to RM1,500
for the next 5 years. Calculate the present value of your deposits.
(5 marks)

C. You want to select the less risky of two alternative assets: Asset Q and Asset T. The
possible returns and related probabilities of the assets for each economic outcome are
as follows:

Return
Economic condition Probability Asset Q Asset T
Boom 0.2 35% 40%
Normal 0.5 25% 30%
Recession 0.3 -5% -10%

The standard deviation for both Assets Q and T are 15.52% and 20% respectively.

Required:

i. For each asset, calculate the followings:

a. Expected return
b. Coefficient of variation
(4 marks)

ii. Choose the asset that would be your choice of investment.

(1 mark)

D. Explain briefly the followings:

i. The term “signaling” effect of dividends.

ii. The investors’ perception of a stable dividend policy.
(6 marks)
(Total: 22 marks)

END OF QUESTION PAPER

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