July 17 maf 503 - PYQ PDF

Preview

Summary

MAF 503 (FINANCIAL MANAGEMENT)Suggested solutionQUESTION 1a)Current ratio 1,337,600 / 916,080 = 1 times √Quick ratio (787,600 / 916,080) = 0 times √Inventory turnover 1,965,920 / 550,000 = 3 times √Average collection period 479,600 / 2,640,000 x 360 = 65 days √ Total assets turnover 2,640,000 / 2,39...

Description

MAF503 – JUNE 2017 MAF 503 (FINANCIAL MANAGEMENT) Suggested solution QUESTION 1 a) Current ratio Quick ratio Inventory turnover Average collection period Total assets turnover Debt ratio Net profit margin Return on assets Price –earnings ratio Return on equity

1,337,600 / 916,080 = (787,600 / 916,080) = 1,965,920 / 550,000 = 479,600 / 2,640,000 x 360 = 2,640,000 / 2,393,600 = 1,285,680 / 2,393,600 x 100 = 227,392 / 2,640,000 x 100 = 227,392 / 2,393,600 = RM3.85 / 0.23= 8.6% x 1.1 / (1-0.54) =

1.46 times 0.86 times 3.57 times 65 days 1.1 times 54% 8.6% 9.5% 16.7 20.6%

√ √ √ √ √ √ √ √ √ √

(10√ x 1 = 10 marks) b) Asset management ratios The company is more efficient in its asset management. √ This is shown in all the efficiency ratios, √ i.e. stock turnover ratio, average collection period and total assets turnover. √ Leverage ratios The company is using more debt financing than its industry peers. √ The financial risk of the firm is higher. √ Profitability ratios The company is making lower profits than its competitors in the industry. √ All the profitability ratios are lower. √ The company is not controlling its expenses well comparative to its sales, assets and equity investment. √ (8√ x 1/2 = 4 marks) c) Based on the Du Pont analysis, we can see that the problem of the low ROE of the firm is due to its lower profitability. √ This is because the company is using higher leverage. √ (2√ x 1 = 2 marks) d) The company should try to increase its sales without causing a disproportionate increase in costs. √ The company should try to reduce its COGS and other operating costs. √ (2√ x 1 = 2 marks) (Total: 18 marks) QUESTION 2 A (i) Statement of Financial Position FT Bhd as at 30 June 2017 Permanent Assets

RM (million)

Permanent Sources-LTF 1

RM (million)

MAF503 – JUNE 2017 PFA (75% x 12.8) PCA (25% x 12.8 x 5%)

9.6✔ Share Capital 0.16✔ ✔ Debentures

Temporary Assets TCA (25% x 12.8 x 95%)

Temporary Sources 3.04✔✔ ✔✔ Payables + STF 12.8

9.76✔ ✔

3.04✔ 12.8 (6✔ ✔ x ½ marks = 3 marks)

A (ii) Hedging Financing Policy ✔ (1✔ ✔ x 1 mark = 1 marks) RM Marketable Securities

Temporary assets✔ Short term financing✔ Permanent current assets

Long term financing✔

Permanent Fixed assets✔

Time Period A (iii)

(4✔ ✔ x ½ marks = 2 marks)

Existing CCC = 79 + 67 – 30 = 116 days ✔ ICP = 1,220,000 x 360 = 79 days✔ ✔ (65% x 8,550,000) RCP = 1,600,000 x 360 = 67 days✔ ✔ 8,550,000 New CCC (after stretch 10 days) = 79 + 67 – 40 = 106 days ✔

A (iv) Thus, reducing number of days = 116 – 106 = 10 days✔ ✔

(4✔ ✔ x ½ marks = 2 marks)

Daily Expenditure = RM3,888,000 / 360 days = RM10,800✔ ✔ Annual savings in finance cost (interest) = RM10,800 x 10 days x 8.5%✔ = RM9,180✔ (of)

(4✔ ✔ x ½ marks = 2 marks) B (i)

Line of Credit Unused fund (CF) Interest used fund Processing cost

= = =

1.2% x 1,000,000 (1.8%+6.2%) x 2,500,000 x 9/12 1.05% x 3,500,000

= 12,000✔ ✔ = 150,000✔ ✔ = 36,750✔ ✔

EAR (City Bank)

=

12,000 + 150,000 + 36,750 x 12

= 10.60%

2

MAF503 – JUNE 2017 2,500,000✔ Bank Credit Interest Compensating Bal EAR (Trust Bank)

= =

9

9% x 4,000,000 x 9/12 [(12% x 4,000,000) – 250,000]

= =

270,000✔ ✔ 230,000✔ ✔

= 270,000 x 12 (4,000,000 - 270,000 - 230,000) 9✔ ✔

= 10.29%

Pledging AR Amount of loan Interest Processing fees

= = =

80% x 4,500,000 (2%+8%) x 3,600,000 1.15% x 850,000 x 12 month

= 3,600,000✔ ✔ = 360,000✔ ✔ = 117,300✔ ✔

EAR (BAC Bank)

=

360,000 + 117,300 3,600,000

= 13.26%

(10 ✔ x ½ mark = 5 marks)

B (ii)

Ray Tech should take the bank credit✔ since the financing cost @ EAR is cheaper than the other two; line of credit and pledging AR✔. (2 ✔ x 1 mark = 2 marks)

B (iii)

under pledging, the borrower pledges accounts receivables as collateral for a loan. ✔The amount of the loan is stated as a percentage of the face value of the receivables pledged. It is made on a non-notification basis where the customer is not being notified. ✔ Factoring involves the outright sale of receivables at a discount to a factor. ✔ It is made on notification basis where the factor receives payment directly from the customer. Factor agrees to accept all credit risk. ✔ (Any 3 ✔ x 1 mark = 3 marks) (Total: 20 marks)

QUESTION 3 a) i. Initial Outlay Cost of Machine Transportation

900,000√ 50,000√ 3

Depreciation

=

(660000-0)/10

MAF503 – JUNE 2017 Installation

100,000√ 1,050,000 Increase in inventories(35-15) 20,000√ Increase in A/c Payable (60,000)√ Sale of old machine (150,000)√ Tax saving from sale of old machine (43,200)√√

for old machine

Book Value of Old machine

=

66000

=

660000- (66000x5)

=

330,000

Market Value 150,000 Book Value 330,000 816,800 Loss on disposal (180,000) Tax saving 24% 43,200 Note: Training cost and interest expenses are irrelevant expenses cost and do not effect cash flow. √√ (10 √ x 0.5 = 5 marks) ii. Differential Cash Flow Year 1 -5 Increase in Sales 154,000√ Cost Saving 70,400√ 224,400 Increase in depreciation (194,000 -66,000) 128,000√ 96,400 Tax (24%) 23,136√ Net Profit After Tax 73,264 Depreciation 128,000√ 201,264 Old Depreciation New Depreciation

= = =

66,000 (1,050,000-80,000)/5 194,000 (5 √ x 1 = 5 marks)

iii.

Terminal Cash Flow Terminal Cash Flow Working capital recovered( Inventories – AP) Salvage Value Accounts Payable

20,000√ 80,000√ (60,000) 40,000 (2 √ x 1/2 = 1 marks)

b) i.

Payback Payback Period

=

816,800√ / 201,264 √ 4

MAF503 – JUNE 2017 = ii.

4.06 years

(2 √ x 0.5 = 1 mark)

NPV Year

Cash Flow

0 1-5 5

(816,800)√ 201,264 √ 40,000 √

iii. Internal Rate of Return Try 7% Year 0 1-5 5

IRR =

=

7 % √+

Factor (10%) 1 3.7908 √ 0.6209 √

Cash Flow (816,800) 201,264√ 40,000√

PV (816,800) 762,952 24,836 (29,012)√ (6 √ x 0.5 = 3 marks)

Factor (7%)√ 1 4.1002 0.713

PV (816,800) 825,223 28,520 36,943

36,943 √ ×(10 %−7 %)√ 36,943+29,012 √

8.68% √ (8 √ x 1/2 = 4 marks)

c)

No √ Because the NPV is negative and the IRR is lower than 10% √ (2 √ x 1 = 2 marks)

d) Firms should use cash flows rather than accounting profit when making capital budgeting decisions because cash flows clearly reflect the timing of benefits and costs. √√ Hence, firms will know precisely when they will actually receive the cash√ and when they have to pay for the expenses. √ (4 √ x 1 = 4 marks) (Total: 25 marks)

Question 4 a) Net proceed (at premium 15% at par) = 1.15 x 1,000 = 1,150 Less: flotation cost (4%) = 0.04 x 1150 = (46) 5

MAF503 – JUNE 2017 1,104 Interest = 9% x 1,000 = 90 i) Yr 0 Yr 1-10 Yr 10

Kd =

cost of debt CF (1104) ✔✔ 90✔ 1000✔

7 +

9%✔ 1 6.4177 0.4224

PV (1104) 577.59 422.40 (104.01)

7%✔ 1 7.0236 0.5083

PV (1104) 632.12 508.30 36.42

36.42✔ ✔ (of) --------------- x (9-7) = 7.52% 36.42 + 104.01✔ ✔ (of)

Kd = kd(1-tax) = 7.52 (1-0.24) ✔ = 5.72%✔ (of) ii)

preference shares

kp = Dp/Np =

iii)

7% x 110✔ ✔ [(120 x 0.95) ✔ – (114 x 0.02) ✔ ] = 6.89%

Internal equity

Kr = [D1/Np] + g

iv)

= 1.254✔ + 4.5%✔ = 12.59% 15.50✔

New common stock

Knc = = [D1/Np] + g

= 1.254 ✔ + 4.5%✔ = 13.11% [15.50 x 0.94✔✔] (20✔ ✔ x ½ mark = 10 marks)

b) Number of units of common stocks to be issued in pursuant to the financing of the above project: Cost of investment = 12.0 million Common stock financing requirement = 12.0 million + 7.5 million / 30 million = 65%✔ ✔ Amount of common stock financing = 0.65 x 12 million = 7.8 million ✔ Less: retained earnings available for re-investment (5.5 million) ✔ Balance of common stock financing 2.3 million Net market price (15.50 – (6% x 15.50) = 14.57✔✔ ✔✔ Number of units common stock = RM2,300,000 / RM14.57 = 157,858 units✔ ✔ (of) 6

MAF503 – JUNE 2017 (6✔ ✔ x ½ mark = 3 marks) c) i)

Business Risk – High or low risk nature of business. ✔ A company that sells consumer products and not rely heavily on imported goods is not so badly affected by the economic condition like weaken ringgit because consumer will still buy the product due to its necessity, so it has low risk nature of business unlike business selling luxury and imported products where it will significantly affected by the weaken ringgit plus consumer has choices and option not to buy because it is not their necessities. Therefore, high risk nature of business will result in higher firm’s business risk and also higher investor’s required rate of return ✔, hence the higher the firm’s cost of capital and vice versa.

ii) Financial Risk – Size of financing and financing decision on external funding. ✔ The larger size of financing requirement, the higher cost of fund ultimately the higher firm’s borrowing if using debt funding as source of capital. Thus, it will increase the firm’s financial risk and the investors would demand for a higher rate of return✔ from the company. This will increase the firm’s cost of capital. (Any 3 ✔ x 1 mark = 3 marks) (Total: 16 marks) QUESTION 5 A. i.

Definition of shareholders’ wealth maximization.

Maximizing the total market value or market price of the existing shareholders’ common stock. ✔ The market price of the firm’s stock reflects the value of the firm as seen by its owner (shareholder) ✔ and takes consideration of complexities of the operating environment and risks (2✔ ✔ x 1 mark = 2 marks) ii.

Three (3) principles underlying in the shareholders’ wealth maximization. ● ● ● ●

Applies principles time value of money or timing of return✔ ✔ Consider risk or uncertainty when making financial decisions✔ ✔ Emphasizes on the market price per share or stock price✔ ✔ Increase in shareholders’ wealth related to increase in cash flows✔ ✔ (Any 3✔ x 1 mark = 3 marks)

B.

i.

FV of a house = RM499,990 ✔ x FVIF 3%,12 years @ 1.4258 ✔ = RM712,886 FV = PMT x FVIFA 8%, 12 years @ 18.977 ✔ 7

MAF503 – JUNE 2017 712,886 = PMT x 18.977 PMT = RM37,565.79 (3✔ ✔ x 1 mark = 3 marks)

ii.

Compound interest is earned not only on the principal or initial investment but also on the interest earned earlier ✔ whereas simple interest is earned only on the initial investment. ✔ (2✔ ✔ x 1 mark = 2 marks)

C. i.

Stock Red = 20,000/50,000 = 40%√ Stock Green = 30,000/50,000 = 60%√ Expected return for boom = 0.4 (14%) + 0.6 (12%) = 12.8%√√ Expected return for recession = 0.4 ( 9%) + 0.6 (6%) = 7.2%√√ Expected return of portfolio 0.7 (12.8%) + 0.3 ( 7.2%) = 11.12%√√ (8 √ x 1/2 = 4 marks)

ii.

Some risks are diversifiable because they are specific and unique to the company or industry. √ Therefore, through diversification, such risks can be offset. √ Risks that are attributable to market factors that affect all firms√ are not diversifiable. √ (4 √ x 1/2 = 2 marks)

D.

This argument proposes that the dividend policy has no effect on share prices. √ What really matters is the investment policy√ through which the firm can increase its earning and thereby the value of the firm. √√ Assumption: There are no taxes , or if dividends and capital gains are taxed at the same rate, investors should be indifferent to receiving their returns in dividends or capital. √ (5 √ x 1 = 5 marks) (Total: 21 marks)

END OF SOLUTION

8...