FEB 2021 Q - SinggahsanaBhd is a manufacturer of electronic devices situated at Johor Bahru. PDF

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CONFIDENTIAL 1 AC/FEB 2021/MAF© Hak Cipta Universiti Teknologi MARA CONFIDENTIALUNIVERSITI TEKNOLOGI MARAFINAL EXAMINATIONCOURSE : FINANCIAL MANAGEMENTCOURSE CODE : MAFEXAMINATION : FEBRUARY 2021TIME : 3 HOURSINSTRUCTIONS TO CANDIDATES This question paper consists offour (4) questions. Answer ALL qu...

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CONFIDENTIAL

AC/FEB 2021/MAF503

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE

:

FINANCIAL MANAGEMENT

COURSE CODE

:

MAF503

EXAMINATION

:

FEBRUARY 2021

TIME

:

3 HOURS

INSTRUCTIONS TO CANDIDATES 1.

This question paper consists offour (4) questions.

2.

Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3.

The assessment is an open book and individual work. Students are not allowed to have an open discussion once the assessment starts until the end of the assessment.

4.

Students are not allowed to communicate with other students during the assessment.

5.

Students are not allowed to plagiarise other people’s work.

6.

Students must ensure that the attached work is entirely their own.

7.

Please check to make sure that this examination pack consists of: the Question Paper a four-page Appendix 1 an Answer Booklet – provided by the Faculty

8.

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 © Hak Cipta Universiti Teknologi MARA

CONFIDENTIAL

2 QUESTION 1 SinggahsanaBhd is a manufacturer of electronic devices situated at Johor Bahru. As a Finance Manager of the company, you have received the most recent summarized financial statements for the company, which is shown below. You would like to prepare an analysis of the financial performance of the company. SinggahsanaBhd Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2020 2019 2020 RM RM RM RM Sales (all credit) 1,150,000 1,886,000 Cost of sales (680,000) (940,000) Gross Profit 470,000 946,000 Operating expense 338,000 534,000 Interest expense 13,000 (351,000) 68,000 (602,000) Net profit before tax 119,000 344,000 Tax (24%) (28,560) (82,560) Net profit after tax 90,440 261,440 SinggahsanaBhd Statements of Financial Position as at 30 June 2020 2019 2020 RM RM RM RM Non-current assets Property, plant & equipment 530,000 1,500,000 Current assets Inventories Accounts receivable Bank

130,000 85,000 300,000

Current liabilities Account payable Tax payable Overdraft

145,000 50,000 -

515,000 1,045,000

195,000

Non-current liabilities Debentures Equities Share capital Share premium Reserve Retained earnings

340,000 165,000 -

187,000 80,000 126,560

150,000

400,000 150,000 50,000 100,000

700,000 2

505,000 2,005,000

393,560

650,000

400,000 150,000 50,000 361,440

961,440

3 1,045,000

2,005,000

Note: Assume 360 days in a year. Required: a.

Compute the following ratios for SinggahsanaBhdfor the year ended 30 June 2019 and 2020: i. Current ratio ii. Quick ratio iii. Average collection period iv. Inventory turnover v. Net profit margin vi. Debt ratio (Show your answer correct two decimal places) (12 marks)

b.

Assess SinggahsanaBhd’sliquidity performance over the two-year period. (4 marks)

c.

Using the Du Pont analysis, evaluate the effects of the following relationships for SinggahsanaBhd: i.

ii. iii.

Based on the computation in (a) above and given its return on assets for 2019 and 2020 are 8.65% and 13.04%, respectively. What is the total asset turnover for both periods? Estimate its return on equity for 2020. What would happen to return on equity if the debt-to-total asset ratio decreased to 45% in 2020? (4 marks) (Total: 20 marks)

QUESTION 2 A.

Success Sdn. Bhd. is a highly potential business in producing school related products. The followings are the information reported in the company’s Statement of Financial Position during peak season as at 30 September 2020: RM Assets Motor vehicles Machinery Office equipment Intangible assets Cash and bank balances Inventories Account receivable

150,000 100,000 50,000 15,000 157,500 72,000 202,500 747,000

3

RM Equity and liabilities Share capital Retained earnings Reserves 8% Debenture Short term borrowings Accounts payable

125,000 52,500 47,500 252,000 150,000 120,000

747,000

4

During the off-peak season, it is reported that the amount of each of its current assets’ items is 30% lower. The company’s net current assets are remained constant.

Required: i. ii. iii.

B.

Prepare the revised Statement of Financial Position for Sparkling SdnBhd by showing the permanent and temporary assets and sources of financing. Evaluate the financing strategy adopted and its implication to the firm. Illustrate the graph of the financing strategy used by the firm with appropriate labels. (10 marks)

Nano Bhd is considering an expansion in their inventories. In order to supply inventories to a new store, the company requires RM400,000 of cash. Nano Bhd wants to apply for a loan for this intended purpose. Currently, Nano Bhd maintains RM20,000 in its bank account. There are three financing alternatives available to Nano Bhd: Alternative 1

Borrow a 6-month loan from DIMB Bank at 12% discount interest loan with 20% of compensating balance requirement.

Alternative 2

Borrow a 12-month bank loan from RSB Bank which offers an 11% simple interest loan. 15% compensating balance is required.

Alternative 3

Issue RM400,000 of 9-month commercial paper at an interest of 10% per annum. A flotation cost of RM7,000 will be incurred.

Required: i. ii.

Calculate the effective annual cost of financing for the above alternatives. Discuss the best financing alternative for Nano Bhd. (10 marks)

C.

Halal Foods SdnBhd (Halal Foods) sells frozen foods to restaurants and mini markets on credit basis. Halal Foods is currently reviewing its accounts receivable management. The total sales for the year 2019 amounted to RM3,000,000. At present, Halal Foods is giving a 3/15, net 40 credit terms to its customers. About 30% of its customers take up the discounts offered. Based on the accounts receivable ageing report, Halal Foods estimates that two percent of these total sales will be uncollectible. The credit department proposes that Halal Foods to consider changing its credit terms to 5/10, net 35 to speed up the collection and alleviate the cash flows. Under this new credit terms, Halal Foods expects the sales will increase by 40% and the number of customers 4

5 taking up the discounts will be doubled from the current percentage. The bad debts however are estimated to remain at the two percent level. Required: i.

Based on the new credit terms, calculate the followings: a. b.

Cost of bad debts The amount of discounts taken up by customers (2 marks)

ii.

Compute the annualized opportunity cost of giving the discounts to customers under present and new credit terms. (2 marks)

iii.

Based on your answer in (ii) above, determine the appropriate credit terms that Halal Foods should offer to its customers. (1 mark) (Total: 25 marks)

QUESTION 3 A.

BBJ Pharmaceutical SdnBhd (BBJ) is considering the replacement of an existing chemical machine. The existing machine was bought at RM530,000 with RM20,000 residual value. The machine is depreciated using straight line method over its 10 years useful life. It has been used for 5 years and could be sold for RM80,000. The new machine will cost RM800,000 including an installation cost of RM40,000, modification cost of RM25,000 and shipping cost of RM15,000. It also requires an additional cost of RM10,000 for insurance. BBJ has sent its staff to attend a specific training in order to ensure that they would be able to operate and handle the new machine properly. BBJ has spent RM15,000 for that purpose. The new machine has a useful life of 7 years and is estimated to have a salvage value of RM40,000 at the end of its useful life. The company uses straight-line method to depreciate the new machine. Due to higher efficiency, an increase in inventories of RM80,000 is projected. BBJ needs to increase its accounts payable by RM50,000 to support the operations if the new machine is acquired. The sales and expenses for the existing machine for the current year, as well as the forecasted amount in relation to the use of the new machine excluding depreciation are as follows:

Sales Production and operating expenses Cost of defect Selling and administration expenses

Current year (RM) 500,000 180,000 80,000 120,000

First five years (RM) 850,000 250,000 50,000 150,000

Remaining years (RM) 1,000,000 210,000 40,000 160,000

The corporate tax rate is 24% and the company’s minimum required rate of return is 15%. The targeted payback period is five years.

5

6 Note: Ignore inflation and taxation effect. Required: i.

ii.

B.

Calculate the followings: a) Initial outlay b) Annual differential cash flows c) Terminal cash flows d) Discounted payback period e) Modified internal rate of return (Calculate to the nearest RM) (19 marks) Discuss whether BBJ should buy the new machine or continue with the existing machine. (3 marks)

CanimElectronicsBhdwas established 10 years ago as a medium-size manufacturing company specialising in producing microwave oven. In order to expand, the firm is evaluating an investment in a new machine at a cost of RM600,000 with an estimated useful life of 4 years, nil scrap value. In the current year, the firm sells 4,000 units microwave oven at the selling price of RM200 per unit. The variable costs are 40% on sales and the cost that remain the same regardless the activity level is amounted to RM200,000 per annum. The adjustment for selling price inflation is expected to be 4% per annum and the fixed costs are subjected to an adjustment for inflation at 6% per annum. The capital investment attractstaxallowable depreciation that can be claimed on 25% reducing balance method, with balancing allowance or balancing charge claim in the final year. Despite the initial outlay, the acceptance of this project requires investment in working capital at 10% ofprojectedsales forthefollowingyear. CanimElectronicsBhd pays tax one year in arrears at the rate of 24%. The firm average general inflation is expected to be 4% over thecourse ofthemachine’s life. In an event of no inflation, the weighted average cost of capital is at 8% per annum. Required: i.

CalculatetheNPVfortheproject (round up your answer to the nearest RM). (17 marks)

ii.

Determine the expected value of sales volume of the above project assuming that the sales volume depends on the states of economy. Given that the probability occurrence are 10% possibilities for expansion, 50% chances that economy is in moderate and 40% chances for depression state. The current year sales reflect the moderate economic condition. The sales units are forecasted to

6

7 drop by 30% during the depression and boost to 150% during expansion state of economy. (6 marks) (Total: 45 marks) QUESTION 4 A.

Ammy is celebrating her 12th birthday today. Her parents would like to ensure that they will have enough money for her tertiary education when she turns 18 years old. They have several options to consider: Option 1: Invest RM10,000 today and receive 8% dividend, compounded quarterly. Option 2: Invest RM8,000 today and receive 10% dividend, compounded annually. Option 3: Invest RM2,500 per annum for 5 years starting from now, and receive 10% dividend. The accumulated amount would then continue to receive 10% dividend for another year. Required: Determine the best option that Ammy’s parents should opt to. (5 marks)

B.

‘Firms prefer to finance intangible assets with equity rather than with debt.’ Required: Do you agree with the above statement? Explain your argument. (5 marks) (Total: 10 marks)

END OF QUESTION PAPER

7

8 MAF 503 (FINANCIAL MANAGEMENT) Suggested solution Question 1 a. Ratios Current ratio Quick Ratio

2019 515,000 = 2.64x 195,000 385,000 = 1.97x 195,000 

2020 505,000  = 1.28x 393,560 165,000 = 0.42x 393,560

Average Collection Period Inventory Turnover

85,000 x 360 = 26.61 days 1,150,000

165,000 x 360 = 31.5 days 1,886,000

680,000= 5.23x 130,000

940,000= 4x [(340,000+130,000)/2]

Net Profit Margin

90,440x 100% = 7.86% 1,150,000

261,440x 100% = 13.86% 1,886,000

Debt ratio

345,000 x100%=33.01% 1,045,000

1,043,560 x100%=52.05% 2,005,000

(24 x ½ mark = 12 marks) b. Liquidity The company’s liquidity position has deteriorated in 2020 indicated by its current ratio and quick ratio. (2 x ½ mark = 1 mark) Current ratio  Its current ratio has reduced by 51.52% as compared to 2019.   It indicates that in 2019 the company has higher capability to cover its liability as compared to 2020 as in 2020 the company only has RM1.28 of asset for every RM1 of liability.   Even though the current ratio in 2020 is lower than 2019, the company’s current asset is still enough to cover ST liability.   Based on the current ratio performance, it shows that the company will not have problem to pay its current obligation.  It also signifies that the company is more efficient in managing its working capital in 2019 as compared to 2020. Or any acceptable answers (Any 3 x ½ mark = 1.5 marks) Quick ratio  The company’s quick ratio in 2020 is lower than 2019, from which in 2020 the company’s ratio is less than 1.  It is much lower than the current ratio in 2020 and it indicates thatthe firm has a serious cash flow problem.   This may be due to higher use of short-term liabilities and too much inventories. 8

9 

   

From the information given in SOFP, the company’s current liability amount has doubled in 2020. The company recorded no cash at the bank, instead, the company is using bank overdraft facility.  This can be the main reason for the lower quick ratio in 2020. This is in line with the increase in its current liability by more than 101% from 2019 to 2020. The inventory turnover shows a decrease to 4 times in 2020 than 2019, which shows the company take a longer time to liquidate its inventories. By looking at the quick ratio performance, the company is actually struggling to pay its current liabilities on time without liquidating its inventories. This makes the company in a very risky position as default payment may lead to insolvency. Or any acceptable answers (Any 3 x ½ mark = 1.5 marks)

c. 2019 i. Total assets turnover

7.86%x x = 8.65% x = (8.65%/7.86%) = 1.10x 

ii. ROE (Du Pont Analysis) iii. ROE (Du Pont Analysis)

2020 13.86%x x = 13.04% x = (13.04%/13.86%) = 0.94x 

-

(13.86 x 0.94) = 27.17% (1-0.5205)

-

(13.86 x 0.94) = 23.69% (1-0.45)  If the debt-to-total asset ratio decreased to 45% in 2020, its ratio on equity will be 23.69%  (8 x ½ mark = 4 marks) (Total: 20 marks)

Question 2 A. Permanent Assets Motor vehicles 150,000 Machinery 100,000 Office equipment 50,000 Intangible assets 15,000 PCA: Cash and Bank (RM157,500 x 30%) : Inventories (RM72,000x30%) : Acc. Receivables (RM202,500 x 30%)

RM 315,000

Permanent Sources of Financing Share capital Retained earnings Reserves 8% Debenture

125,000 52,500 47,500 252,000

47,250 21,600 60,750 444,600

Temporary Assets Bank (RM157,500 x 70%) Inventories (RM72,000 x 70%) Acc. Receivables (RM202,500 x 70%)

RM

110,250 50,400 141,750 747000 9

477,000  Temporary Sources Short term borrowings Accounts payable

150,000 120,000 747,000 (10)

10 ii. SuccessSdnBhd adopts Conservative approachwhere permanent source of financing is used to finance all permanent assets (RM444,600) and partly temporary current assets (RM32,400). Under this approach, risk of illiquidity is low because it takes longer time to pay the long-term financing but the profit is lower because of higher interest rate on long-term financing which resulted in higher interest expenses.  (Or any other acceptable answers) (5) iii.

Temporary current assets Total permanent assets

(5) (Note: No marks will be given for (ii) if the students wrongly determine the financing policy. OF  can be given to the graph) (20 x ½ mark = 10 marks) B.i. Alternative 1: 400,000 = B – [0.12Bx6/12] – [0.2B -RM20,000] 400,000 = 0.74B + RM20,000 B = RM380,000 = RM513,514 @ 513,513.51 0.74 EAC : 12%XRM513,514X 6/12 x 12/6 = 15.41%  RM400,000 Alternative 2:

(7)

400,000 = B – [0.15B -RM20,000] 400,000 = 0.85B + RM20,000 B = RM380,000 = RM447,059 @ 447,058.82 0.85 EAC : 11%XRM447,059 = 12.29%  RM400,000

(5)

Alternative 3: Interest: 10% x RM400,000x 9/12 = RM30,000 10

11 EAC :

RM37,000 _______ RM400,000-RM30,000-RM7,000

x 12/9 = 13.59% 

(5)

ii. The best financing alternatives for Nano Bhd would be Alternative 2  because the effective annual cost is the lowest as compared to Alternative 1 andAlternative 3 . (3) (20 x ½ mark = 10 marks) C. i.

a. Cost of bad debts RM 3 mil x 140% x 2% = RM84,000 b. Amount of discount taken up by customers 60% x 5% x [RM4.2 mil – RM84,000] = RM123,480 (4 x ½ mark = 2 marks)

ii.

Annualized opportunity cost of giving the discounts

= =

Present credit terms 0.03 X 360 (1-0.03) (40– 15) 44.54% 

New credit terms = 0.05 X 360 1-0.05 (35– 10) = 75.79%  (4  x ½ mark = 2 marks)

iii. Halal Foods should maintain the existing credit terms 3/15, net 40 because the cost of giving discounts to customers under new credit terms is higher/expensiveto Halal Foods. (2  x ½ mark = 1 mark) (Total: 25 marks) Question 3 A i) Initial outlay RM Purchase price 800,000 10,000 (+) insurance cost Depreciable cost 810,000 (+) Increase in working capital Inventories 80,000 30,000 Account payables (50,000) Total Outflow 840,000 (80,000) (-) Sales proceed – old machine (46,800) Tax savings (W1) 713,200 Initial outlay W1 Depreciation = (530,000 – 20,000)/10 = 51,000 Acc.Depr. =51,000 x 5 = 255,000 NBV = 530,000 – 255,000 = 275,000 Loss on disposal = 80,000 – 275,000 = 195,000 Tax savings = 195,000 x 24% = 46,800 (10)

11

12 (b) Differential cash flows

Sales Cost of defect Less: Production and operating expenses Selling and administration expenses Depreciation (W2) Cash flow before tax Tax – 24% Cash flow after tax (+) Depreciation Differential cash flows

Year 1–5 RM 350,000 30,000 380,000

Year 6 – 7 RM 500,000 40,000 540,000

(70,000) (30,000) (59,000) 221,000 (53,040) 167,960 59,000 226,960

(30,000) (40,000) (110,000) 360,000 (86,400) 273,600 110,000 383,600

W2 New deprecation = (810,000 - 40,000)/7 = RM110,000 Increase in depreciation = 110,000 -51,000 = 59,000 (14) (c) Terminal cash flow Salvage value 40,000 Working capital 30,000 70,000 (2) (d)

Discounted payback period Initial outlay = RM713,000 Year Cashflow PVF – 15% 1–4 226,960 2.8550 5 22...