MAF503 – JUNE 2018

Suggested solution

Question 1

Ratios KOSSIN NILAX

Current ratio 11,000 √ = 1.12x 10,000 √ = 1.25x
9,800 8,000
Ave. Collection Period 1,500 √ = 10.8 days 5,000 √ = 45 days
50,000/360√ 40,000/360√
NP margin 2,280 √ = 4.56% 5,624 √ = 14.06%
50,000√ 40,000√
Debt ratio 19,800 √ = 73.3% 15,000 √ = 60 %
27,000√ 25,000√
Earnings per share 2.280√ = RM 0.76 5,624 √= RM1.40
3,000√ 4,000√
Price earning ratio RM5.6 √ = 7.36 RM 6 √ = 4.28
RM0.76 √ RM1.4√

(22√ x ½ = 11 marks)

b. Weaknesses of Kossin as compared with Nilax:

1. Net profit margin of Kossin is very low as compared to Nilax. √ This might due to high
cost of goods sold and operating expenses. Kossin must control their expenses
efficiently. √
2. Debt ratio of Kossin is higher as compared with Nilax. √This shows that the company
is in a higher risk position in a recession. A further loan in future might be difficult to
obtain. √
Or any other acceptable answers
(4√ x 1= 4 marks)

c. Investors would be more interested to invest in Nilax based on market ratios√ as

follows:-

i) Earnings per share is higher in Nilax as compared to Kossin√

ii) Price earning ratio for Nilax is still below industry average so there is a
possibility the share price will rise in future as compared to Kossin. √

(3  x 1 = 3 marks)

Total: 18 marks

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Question 2

A. Credit term 3/10 net 48

Cost of foregoing the cash discount:
3% x 360 = 29.30% per 
(100%- 3%) 48 – 10) annum 

Cost of bank loan = 14%

No, I disagree with the purchasing officer claim because the effective annual cost of
foregoing the discount (29.30%) is actually higher than the cost of bank loan (14%).
Therefore the company should pay the creditors within the discount period. 
(14 x ½ = 7 marks)

B.

i. Operating cycle = 21 days + 30 days = 51 days 

Cash conversion cycle = 51 days – 25 days = 26 days 
(6x ½ = 3 marks)
ii. Working capital financing requirement:
250 x RM60 x 26 days = RM390,000 
(4 x ½ = 2 marks)
iii. Decrease in working capital requirement
250 x RM60 x 3 days = RM45,000 
(4 x ½ = 2 marks)

C.
i. Current ratio = RM50,500,000 = 1.11 
RM45,500,000
Total Debt/Total Asset = RM130,500,000 = 52% 
RM250,500,000

(4 x ½ = 2 marks)

ii. Working capital policy applied by Helena Bhd is the conservative approach. The
company’s RM50,500,000 Current Assets is being financed by only RM45,500,000 of
Current Liabilities. This would mean that the balance of RM5 million is being financed
by Long Term funds. 
( 2 marks)
iii. The company can apply the hedging principle by increasing its current liabilities by
RM5 million and reduce its long term debt by RM5 Million.
( 2 marks)
(Total: 20 marks)

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Question 3

i) Initial OutlayX RM
Purchase price 500,000 √
Installation 15,000 √
Modification 3,000 √
Transportation 2,000 √
DEPRECIABLE VALUE 520,000
Training nil √
Compensation expense 30,000 √
Increase in inventories 20,000 √
Increase in trade creditors (5,000)
TOTAL OUTFLOW 565,000
Inflow: Sales proceed (100,000) √
Tax Saving (12,000) √√
INITIAL OUTLAY 453,000 √

Workings:

Disposal: RM Depreciation: RM
Cost 300,000 old: 300,000 – 0 30,000
10
Less: acc. depreciation 150,000

NBV 150,000 new:520,000 - 10,000 102,000

5
Less: sales proceeds 100,000 Increase in depreciation 72,000

Loss on disposal (50,000)

Tax savings (24% x 12,000

50,000)

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ii) Differential Cash Flow

Benefits Year Year 4-5

1-3
Increase in sales 250,000 √ 300,000√
√
Less costs.
Increase in overhead 112,50 135,000 √
0√
Increase in depreciation 72,000 72,000
√
EBT 65,500 93,000
Tax (24%)√ (15,720 (22,320)
)
EAT 49,780 70,680
Depreciation reversal 72,0 72,000√
00
Differential Cash Flow√ 121,78 142,680
0

iii) Terminal Cash Flow

Salvage value 10,000 √

Increase in inventories 20,000 √
Increase in trade creditors (5,000
)
25,000

iv) Net Present Value

Year Cash Flow   PV@ 14%       PV@18% √  

NPV NPV
0 (453,000) √ 1.0000 (453,000) 1.0000
of (453,000)
1-3√ 121,780 √ 2.3216 √ 282,724 2.1743
of 264,786
4-5√ 142,680 √ 1.1115 0.9529
of 158,589 135,960
5 25,000 0.5194 12985 0.4371 10,928
NPV 1,298√
(41,326)√

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v) Internal rate of return

IRR = 14% √ + 1,298 √ (18% - 14%) √

1,298 + 41,326 √

= 14% + 0.12%
= 14.12%

vi) Payback Period

Year 1 to 3 = 121,780 x 3 = RM365,340√

( 453,000 – 365340) = 0.61√ so the payback period = 3 years + 0.61 year = 3.61
years√.
142,680

(38√ x ½ = 19 marks)

b) Yes √, the company should buy the new machine because NPV is positive√ and the
payback period is within 4 years. √

(3 √ x 1 = 3 mark)

c) i. Easy to understand and communicate

ii. Use cash flows
iii. Applies time value of money
iv. Suitable for companies with limited funds.

Any two of the above.

(2 √ x 1 = 2 mark)

(Total: 24 marks)

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QUESTION 4
A. (i) kd = Interest
Net Price

= (8% x 100) = 8
RM110- 20 90

= 0.0888 @ 8.88%

kd after tax = (0.0888 x 0.76) = 0.0675 @ 6.75% 

ii) Cost of new preference shares

kp = Dp/Np = 4.65  4.65

[(120 x 0.98 ] = 117.6 = 0.03954 @ 3.954%

iii) Internal equity

Growth rate = 0.84 -0.80 = 5%

0.80

Ke = [D1/Np] + g = 0.3 x 0.84  + 5% = 12.20%

3.50

iv) Cost of new common stock

Kne = [D1/Np] + g = 0.3 x 0.84 + 5% = 13.40%

3.50 - 0.50
(10 x 1 mark = 10 marks)
b) Maximum amount of capital expenditure
= 4,940,000  /0.65 
Capital structure Weight COC (after tax) COC
Kd 0.205 6.75% 1.384%
Kp 0.145 3.954% 0.573%
Kne 0.65 13.40% 8.71%
WMACC 10.667%
= RM7,600,000 (less than contract sponsorship value of RM10 million), use Kne

(6 x ½ mark = 3 mark)

c) Factors affecting the cost of capital:

 Economic conditions
 Stock market conditions
 Firm’s operating and financing decisions
 Business risk
 Financial risk
 Size of financing

(Any 3 x 1 mark = 3 marks)

(Total: 16 marks)

QUESTION 5

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A.
i. Identify three (3) problems associated with the goal of profit maximization.
 Profit maximization is a short term concept
 Profit maximization does not consider the timing of returns
 Profit maximization ignore risk
 Profit maximization concentrates on earning per shares

(Any 3 x 1 mark = 3 marks)

ii. State three (3) advantages of 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
 Emphasizes shareholders wealth for long term return
(Any 3 x 1 mark = 3 marks)

B. i. Present value of RM150,000 perpetuity discounted at 10%.

PVP ∞ = PMT x 1/i

= RM150,000  x 1 / 0.10 
= RM1,500,000.00
(2 x 1 mark = 2 marks)
ii. FVAn = PMT x FVIFA (6%, 20 years) (1 + i)
= 2,018 x 36.786 x 1.06
= RM78,688.20
(3 x 1 mark = 3 marks)

C.

a) (i) Expected return:

Project A = 0.5 (RM1,200) √ +0.5(RM550) √ = RM875

Project B = 0.6 (RM1,500) √ +0.4 (RM450) √ = RM1080

(ii) Coefficient of variation

133 √
Project A = = 0.152
875 √

190 √
Project B = = 0.176
1080 √
1
(8√ x = 4 marks)
2

b) Mr leow would choose project B√ since the higher the CV, the higher the
risk. √
1
(2√ x = 1 marks)
2

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Select projects A and B for an investment of RM3 million. √ RM3 million × 0.4 =
RM1.2 million√ will be through debt financing√ and RM3 million × 0.6 = RM1.8
million√ will be through equity financing. √ Therefore, the total dividend payment is
RM3 million – RM1.8 million = RM1.2 million. √
(6√ x 1= 6 marks)

END OF SOLUTION