CONFIDENTIAL BM/MAR 2016/FIN242/260/262 UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE : FUNDAMENTALS OF FINANCE COURSE CODE : FIN242/260/262 EXAMINATION : MARCH 2016 TIME : 3HOURS INSTRUCTIONS TO CANDIDATES 1 This question paper consists of two (2) parts: PART A (2 Questions) PART B (5 Questions) 2 ‘Answer ALL questions in PART A and any three (3) questions in PART B in the Answer Booklet. Start each answer on anew 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 ji) an Answer Booklet — provided by the Faculty ii) a four— page Appendix 6. ‘Answer ALL questions in English. DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 8 printed pages (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 2 BM/MAR 2016/F1N242/260/262 PARTA QUESTION 1 Below are the financial statements of Blackie Enterprise for the financial year 2015. Blackie Enterprise Balance Sheet as at December 31, 2015 (RM’000) Cash 500 Accounts payable 500 ‘Accounts receivable 1,200 Notes payable 800 Inventory 700 Accruals 100 Marketable Securities 300 Long term debt 2,500 Plant and equipment 3,800 Debentures 1,000 Land and buildings 2,880 Common stock 2,000 Less: Accumulated depreciation 480 Retained earnings 1,800 TOTAL ASSETS 0 == TOTAL CLAIMS 8,700 Blackie Enterprise Income Statement For The Year Ended December 31, 2015 Sales 8,000,000 Less: Cost of goods sold 6,200,000 Gross Profit 1,800,000 Less: Operating expenses 1,000,000 Earnings before interest and taxes Less: Interest expense ____ 280,000 Earnings before taxes 520,000 Less: Taxes (40%) 208,000 Net Income 312,000 Industry Average ‘Current ratio 1,80 X Avg Collection period 45 days Quick ratio 1.25X Fixed asset turnover 1.60 X Debt ratio 50.00% Net profit margin 3.00 % Times Interest Earned 3.00 X Return on Asset 8.50% (© HakCiptaUniversitiTeknologi MARA CONFIDENTIALCONFIDENTIAL 3 BM/MAR 2016/FIN242/260/262 a) Given the above industry averages, calculate the indicated ratios for the year 2015. (12 marks) b) Based on your answer in (a), evaluate the overall performance of the company according to liquidity, activity, profitability and leverage ratios, (8 marks) QUESTION 2 a) You work as an assistant to the financial manager of Black Gold Holdings. The firm's current revenue stood at RM4,520,000 and the firm is planning to increase its revenue next year by 60 percent. Currently, the firm has fully utilize its capacity. The following is the balance sheet statement for this year. Black Gold Holdings Balance Sheet as at 31st December 2015 ('000) ASSETS RM CLAIMS RM Cash 100 | Accruals 36 Prepaid Expenses 480 | Trade Creditors 54 | Account Receivable 320 | Tax Accruals 161 Marketable Securities 340 | Accrued Wages 128 [inventory 680 __| Notes Payable 732 [ Plant and Equipments 7,600 _| Bond 819 _— Common Shares 910 li Retained Earnings 380 TOTAL [3,220 TOTAL 3,220 Additional information: * The net earings for the year was RM226,000. * Dividend currently paid was RM180,800. Based on the statement and the information given, you are required to: i) Construct a pro-forma balance sheet as at 2016, (13 marks) ii) Compute the additional fund needed by the firm. (2 marks) b) The five (5) Cs of credit is a method used by lenders to determine the credit worthiness. of potential borrowers. List the five characteristics (5 Cs) of credit. (6 marks) (© HakCiptaUniversitiTeknologi MARA CONFIDENTIALCONFIDENTIAL, 4 BM/MAR 2016/FIN242/260/262 PARTB QUESTION 1 a) IdeaTab Berhad is planning for an expansion project for their existing plant in Tanjung Batu. It is estimated that the project takes 10 months to complete and generate additional income for the firm. The firm needs RM750,000 additional financing for the said purpose and is considering these alternatives: Option 1: A 10-month short term loan from OCBD Bank with an annual interest of 7 percent on a discounted basis and the bank requires a compensating balance of 5 percent. Option 2 A 10-month credit facilities of RM1 million with MBBB Bank with an annual interest rate of 10 percent and a commitment fee of 0.75 percent on any unused amount. Option 3: Issued commercial papers with a face value of RM50,000 each with a promised return of 7.5 percent annually and matures on the 10th month. The cost of issuing these papers is estimated at RM1,500 each. Based on these available alternatives: i) Compute the effective interest rate on option 1. (3 marks) ii) Compute the effective interest rate on option 2. (3 marks) ili) Compute the effective interest rate on option 3. (3 marks) iv) Decide on which source of financing that this firm should choose. Justify your answer. (1 mark) b) Compute the following: i) You borrowed RM10,000 with bank A. The annual repayment amount is RM1,600 and the tenure of the said loan is 8 years. Determine the rate of interest charged by the bank. (Do interpolation) (4 marks) ii) You are planning to purchase a treadmill that cost RM5,400 in another 2 years’ time. You start to save an amount of money today and every month thereafter to achieve your plan. If the bank pays 12 percent interest per annum, compute the monthly savings amount. (3 marks) (© HakCiptaUniversitiTeknologi MARA CONFIDENTIALCONFIDENTIAL 5 BM/MAR 2016/FIN242/260/262 ili) Faris deposited RM15,000 in his fixed deposit account with HLP Bank three years ago. This account pays 5 percent interest per annum. Assuming that there are no other deposits made to the account, compute the amount of interest earned from this saving today. (3 marks) QUESTION 2 a) Yaqub Enterprise is involved in the production of dates the oldest cultivated fruits. This enterprise normally uses 8,500 boxes of dates annually with the selling price of RM25 Per box. The carrying cost for the dates is 6 percent from the selling price while, ordering cost is estimated at RM120 per order. Besides, Yaqub Enterprise has also decided to maintain safety stock of 1,500 boxes of dates and it will take 12 days for the dates to be delivered. (Assume 1 year = 360 days). Compute the: i) EOQ level. (Orders must be placed in 100 units). (4 marks) )) number of order in a year. (2 marks) average inventory, (2 marks) iv) total inventory costs for the year. (4 marks) v) reorder point. (3 marks) b) EDF Berhad is determining the firm’s minimum operating cash. At norm, credit purchase is done on the 5" day of each month and is paid 20 days later. The firm usually sells on credit term 2/10 net 60.The firm takes 20 days to produce and another 20 days to sell the finished products. If the firm's annual outlays are RM1.2 million, compute the firm's minimum operating cash (6 marks) QUESTION 3 a) Dina & Co. has decided to expand its business and it needs RMS million additional fund for the said purpose. There are several alternatives of financing available. Alt 1: Issue long-term debt that is currently selling for 103 percent of its par value. The issue matures in 15 years and pays annual coupon rate of 8 percent. The tax rate is 35 percent, (© HakCiptaUniversitTeknologi MARA CONFIDENTIALCONFIDENTIAL 6 BM/MAR 2016/F1N242/260/262 Alt 2; The firm can issue RM100 par preferred stock with a 14 percent dividend. The stock is selling in the market for RM96 and floatation cost is 5 percent of the market price. Alt 3: The firm is expected to pay a dividend of RM2.00 per share. The dividend is expected to grow at a rate of 7 percent constantly. The current market price for the share is RM55 Based on this information, i) compute the after tax cost of debt, preferred stock and common stock (12 marks) li) decide which alternative is the best alternative for Dina & Co. Justify your answer. (2 marks) b) Explain the following: i) Treasury bill (3 marks) ii) Commercial paper. (3 marks) QUESTION 4 Holistic Berhad is trying to estimate its cash standing for the third quarter of 2016. The company’s sales and forecasted sales are as follows: MONTH ‘SALES (RM) MONTH “SALES (RM)_| April 70,000 August 100,000 May 75,000 ‘September 95,000 June 80,000 October 420,000, July 90,000 November 110,000 a) The collections of sales are as follows: i) 50 percent is collected in the month of sales ii) 30 percent is collected one month after sales ill) 15 percent is collected two months after sales iv) 5 percent is uncollected ‘© HakCiptaUnivorsitiTeknologl MARA CONFIDENTIALCONFIDENTIAL 7 BMIMAR 2016/F1N242/260/262 b) Purchases of raw materials are 70 percent of sales and are made two months prior to sales, Payments are as follows i) 50 percent cash ii) 25 percent is paid one month after purchase iil) 25 percent is paid two months after purchase ©) Annual tax of RM10,000 is divided into 4 payments and is to be paid at the end of each quarter. d) Operating expenses will be 10 percent of monthly sales. e) Other fixed monthly expenses: i) Insurance RM2,000 ii) Depreciation RM30,000 iil) Rental RM6,000 iv) Salary RM20,000 f) A quarterly dividend of RM9,000 will be received at the end of each quarter. g) The firm bought a new machine for RM120,000 in January and payment for the machine is to be made into 12 equal monthly payments starting from February onwards. hh) Ending cash balance in June is RM185,000 and the minimum cash balance of RM30,000 must be maintained at all times. i) The cost of short term borrowing is 9 percent per annum and the interest is to be paid monthly Prepare the cash budget for the indicated months. (20 marks) (© HakCiptaUniversitiTeknologi MARA CONFIDENTIALCONFIDENTIAL, 8 BM/MAR 2016/F1N242/260/262 QUESTION 5 a) FiaFifa Holding is planning to venture into new project and is currently gauging the Viability and profitability of two (2) mutually exclusive projects. The cost of capital is 8 percent and the cash flows for each project are as appended below. {Year Project XX 7 Project ZZ 0 -950,000 -950,000 1 250,000 280,000 2 250,000 130,000 3 250,000 330,000 4 250,000 210,000 _| 5 250,000 300,000 I Based on the given information: i) Determine the payback period for both projects. (6 marks) ii) Compute the net present value for both projects. (6 marks) iii) Compute the internal rate of return for project XX. (6 marks) iv) Decide on which project should be accepted. State your reasons. (2 marks) b) List any two (2) disadvantages of using Payback period in capital budgeting, (2 marks) END OF QUESTION PAPER © HakCiptaUniversit Teknologi MARA CONFIDENTIALBM/MAR 2016/FIN242/260/262 APPENDIX 4 CONFIDENTIAL vm | | we | me | m [rome jG + 1) = U's gIAd Pepunodwod 00'L WH 404 10}9e4 ySOz9,U] ONjeA OINyNY *) eIqeL CONFIDENTIAL (© Hak Cipta Universiti Teknolog! 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