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Test 1 Maf653 Nov 2016 QnA
Test 1 Maf653 Nov 2016 QnA
INSTRUCTIONS TO CANDIDATES
3. Do not bring any material into the examination room unless permission is given by
the invigilator.
1
CONFIDENTIAL MAF653/NOV2016
QUESTION 1
A. Briefly describe what is an efficient market and the conditions that makes the market
more efficient. (5 marks)
B. Financial market can be classify in many ways. Briefly explain the classification of
financial market based on the maturity of the securities together with examples.
(5 marks)
(Total:10 marks)
QUESTION 2
A. Amirah contacted her broker and has placed a limit order to sell 50 shares of
Moneyworld Berhad at RM35. The current price of the Moneyworld Berhad’s share is
RM25. Explain the action that would be taken by the broker if,
B. Finbiz Bhd is expected to pay a dividend of RM1.20 per share for the coming year. The
company’s dividend payout ratio is 40% with P/E ratio of 15. Calculate the estimated
share price of Finbiz Bhd for the current year.
(3 marks)
C. Ashraf is considering investing in Bright Market Bhd’s stock with a two years investment
horizon. The stock is currently quoted at RM40 per share. He forecasted that the next
year’s dividend to be at RM1.50 per share while the second year’s dividend will be at
RM2.00 per share. Ashraf plan
Should he invest in the firm’s stock if the required rate of return of similar risk investment
is 10 percent?
(5 marks)
D. One of the major rating agency has just given Megah Bhd its highest investment rating
along with a strong buy recommendation. An investor, Mr. Zharif decides to invest in
this stock and is seeking your assistance. You find that Megah Bhd has just
announced a dividend of RM3.50 per share for the current year. In view of a strong
growth of the market in the years ahead, the company expects its earnings and
dividend to grow at 10% per annum for the next four (4) years. After the initial period of
super growth, the market would become more saturated; the growth rate of dividend
is expected to decline to 5% per annum indefinitely. You also learned that Niki Bhd
stock has a beta of 1.0 and the risk free rate of return is 8%. The return on market
is at 15%.
Calculate the maximum price Mr Zharif should pay for the stock.
(7 marks)
2
CONFIDENTIAL MAF653/NOV2016
(Total: 20 Marks)
QUESTION 3
A. In the money market, borrowers with high credit ratings issue highly liquid and short term
financial instruments such as bankers’ acceptance, treasury bills, certificate of deposits,
commercial paper and Eurodollars.
Required:
B. Describe the importance of bond ratings to the investors and state the two (2) rating
agencies available in Malaysia.
(5 marks)
C. En. Feisal bought a bond 5 years ago that has RM 2000 face value and 10 years of
maturity period. The annual coupon rate for the bond is 10%. The required rate of return
is expected to be at 14%.
Required:
i. Calculate the present value of the bond 5 years ago if the interest is payable on
an annual basis.
(2 marks)
ii. Determine the current yield and the yield to maturity if the market price of the
bond is RM2,200.
(3 marks)
iii. Find the present value of the bond for this year.
(2 marks)
iv. If En Feisal plans to sell the bond next year and he expected the market price for
the bond will be RM1,770 and the required rate of return will decreased to 12%,
advise En Feisal whether he should sell the bond or not.
(3 marks)
(Total: 20 marks)
END OF QUESTIONS
SUGGESTED SOLUTION
3
CONFIDENTIAL MAF653/NOV2016
QUESTION 1
A. Definition:
An efficient market is one where the market price of security reflects all available
information about the security. /
Condition:
1. The availability of information to all market participants at the same time without cost/
2. No transaction cost, taxes or other barrier to trading. /
3. Market demand and supply determine the stock price. Trading by any individual
trader does not impact market price. /
4. All participant pursue profit maximization. /
(5 ticks @ 1 marks each)
B. Money market /: Financial market for short term debt instruments / (less than one year /)
Example: commercial papers /, treasury bills /
Capital market /: Financial market for intermediate and long term instruments /.
Intermediate (1-5 years /) LT (more than 5 years /) Example: LT bonds /
A. (i) The broker will not execute the order as the share price is below the limit price of
RM35.√
(ii) The order will be execute and the broker will sell 50 shares of Moneyworld
Berhad because the share price rises above the limit price. √
(2√ x 1.5 marks = 3 marks)
(iii) A limit order is a request to buy or sell shares at a specified price (the limit) √or at a
better price√.
(2√ = 2 marks)
.
B. Dividend payout ratio = D1
E1
0.40√ = 1.20√
E1
E1 = RM3.00√
= 1.36365 + 42.9728
= RM44.34√ (6√/2 = 3 marks)
QUESTION 3
(5 √ = 5
marks)
B. The main purpose of these ratings is to measure the credit worthiness of the company
issuing the bonds and the likelihood of the issuer to default in paying the interest
income and par value of the bond upon maturity.
The two (2) rating agencies in Malaysia:
Rating Agency Malaysia Berhad (RAM)
Malaysian Rating Corporation Berhad (MARC)
C.
i. BPc = 200 PVIFA14%, 10 + 2000 PVIF14%, 10
= 200 (5.2161) + 2000 (0.2697)
= 1,043.22 + 539.40
= RM1,582.62 (4 x 0.5 = 2
marks)
YTM: TRY i at 8%
No. , En Feisal should not sell the bond next year because the bond is underpriced
6
CONFIDENTIAL MAF653/NOV2016
Tabl
e
A
- CO
1 CO NF
: NFI ID
P DE EN
r NTI TI
e AL AL
s
e
n
t
V
a
l
u
e
o
f
R
M
1
D
u
e
a
t
t
h
e
E
n
d
o
f
n
P
e
ri
o
d
s
11122
456789024568048
% % % % % % % %
........
999988887
65432109764308
123457927927361
544694192615353
7
CONFIDENTIAL MAF653/NOV2016
........
988877766
209754296541951
47037167963840
6004374251244
........
88776654
863197517540727
9396321570846
086382380576758
........
87765543
529630839751827
42258352125232
871904051838305
.......
8776654432
284184261973049
13730907976711
9530699421910
........
776554432
940639605317372
06560646520457
3203235634914
........
765543321
516284159751727
90523732953917
971750236989186
........
7665543321
372840605206373
06720163065628
78403959690698
........
76554432211
049406260862940
24130407435348
6924165305834
........
654322110
715062826429618
5383252976164 APP
694324507271547 END
IX 1
(1)
........
65543322110
482728583196396
946587076451436
67819556949682
........
654332110
259495150863175
467475867687251
680156769527
8
CONFIDENTIAL MAF653/NOV2016
........
654321100
036162828641964
085769256310
638072721523504
........
543221100
704849605429743
752709349158791
513852367325926
........
5443221100
581617384208632
517254920273494
3034254719597
........
5432211000
359395162097531
38381732630429
9167961908103
........
543©211000
Hak
137173940986421
Cipt
361
a6017572055
434631868920180
Univ
..ersit
......
i
43 2
Tek
210000
915951739865321
nolo
350502904090701
gi
MA
65392090681868
..RA......
4332110000 AC/
793739618754310
450614362093169
67575519361382
........
4332110000
571517407653210
618488321637
498454678145152
........
432110000
359496396543210
8418352340105
89257168139796
........
432110000
24728528543210
217530268684
08579286022184
........
432110000
0261731743210
510713902573
76893878129214
9
CONFIDENTIAL MAF653/NOV2016
........
321110000
9149520643210
077615348252
1017459194867
........
3221100000
793841953210
5346287046042
1302038450561
Table A-2: Present Value of an Annuity of RM1 per period for n Periods
11 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.4527 5.2337 5.0286 4.6560
12 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944 5.6603 5.4206 5.1971 4.7932
13 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 5.8424 5.5831 5.3423 4.9095
14 10.563 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 6.0021 5.7245 5.4675 5.0081
AP
15 11.1184 10.38 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109 6.1422 5.8474 5.5755 PE
5.0916
ND
IX
16 11.652 10.838 10.106 9.4466 8.8514 8.3126 7.8237 6.9740 6.2651 5.9542 5.6685 5.1624
1
17 12.166 11.274 10.477 9.7632 9.1216 8.5436 8.0216 7.1196 6.3729 6.0472 5.7487 5.2223
(2)
18 12.659 11.69 10.828 10.059 9.3719 8.7556 8.2014 7.2497 6.4674 6.1280 5.8178 5.2732
19 13.134 12.085 11.158 10.336 9.6036 8.9501 8.3649 7.3658 6.5504 6.1982 5.8775 5.3162
20 13.59 12.462 11.47 10.5940 9.8181 9.1285 8.5136 7.4694 6.6231 6.2593 5.9288 5.3527
21 14.029 12.821 11.764 10.836 10.017 9.2922 8.6487 7.5620 6.6870 6.3125 5.9731 5.3837
22 14.451 13.1630 12.042 11.061 10.201 9.4424 8.7715 7.6446 6.7429 6.3587 6.0113 5.4099
23 14.857 13.489 12.303 11.272 10.371 9.5802 8.8832 7.7184 6.7921 6.3988 6.0442 5.4321
24 15.2470 13.799 12.55 11.469 10.529 9.7066 8.9847 7.7843 6.8351 6.4338 6.0726 5.4509
25 15.622 14.094 12.783 11.654 10.675 9.8226 90770 7.8431 6.8729 6.3641 6.0971 5.4669
10