SOLUTION MAF503 FEB 2021 PDF

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UNIVERSITI TEKNOLOGI MARAFINAL EXAMINATIONCOURSE : FINANCIAL MANAGEMENTCOURSE CODE : MAFEXAMINATION : FEBRUARY 2021TIME : 3 HOURSINSTRUCTIONS TO CANDIDATES This question paper consists of four (4) questions. Answer ALL questions in the Answer Booklet. Start each answer on a new page. The assessment ...

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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 of four (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:

8.

i)

the Question Paper

ii)

a four-page Appendix 1

iii)

an Answer Booklet – provided by the Faculty

Answer ALL questions in English.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO © Hak Cipta Universiti Teknologi MARA

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This examination paper consists of 7 printed pages

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QUESTION 1 Singgahsana Bhd 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. Singgahsana Bhd 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) 90,440 261,440 Net profit after tax Singgahsana Bhd 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 -

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

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515,000 1,045,000

195,000

340,000 165,000 -

187,000 80,000 126,560

150,000

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

700,000 1,045,000

505,000 2,005,000

393,560

650,000

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

961,440 2,005,000 CONFIDENTIAL

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

Compute the following ratios for Singgahsana Bhd for 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 Singgahsana Bhd’s liquidity performance over the two-year period. (4 marks)

c.

Using the Du Pont analysis, evaluate the effects of the following relationships for Singgahsana Bhd: 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

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

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.

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Required: i. ii. iii.

B.

Prepare the revised Statement of Financial Position for Sparkling Sdn Bhd 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.

C.

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

Halal Foods Sdn Bhd (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 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)

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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 Sdn Bhd (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)

First five years (RM)

500,000 180,000 80,000 120,000

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

Calculate the followings: a) Initial outlay b) Annual differential cash flows c) Terminal cash flows d) Discounted payback period

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e) Modified internal rate of return (Calculate to the nearest RM) ii.

B.

(19 marks) Discuss whether BBJ should buy the new machine or continue with the existing machine. (3 marks)

Canim Electronics Bhd was 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 attracts tax allowable 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% of projected sales for the following year. Canim Electronics Bhd pays tax one year in arrears at the rate of 24%. The firm average general inflation is expected to be 4% over the course of the machine’s life. In an event of no inflation, the weighted average cost of capital is at 8% per annum. Required: i.

Calculate the NPV for the project (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 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.

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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

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