MAF503 – JUNE 2015

SUGGESTED SOLUTION
(MAF503) – JUNE 2015

Question 1

a)
Ratio Formula Workings SAZ Industry
‘000 Shipping ave.
Current ratio CA 72,000√ 1.04x 1.08x
CL 69,000√
Quick ratio CA-Inventory 72,000 – 45,500√ 0.38x 0.7x
CL 69,000√
Inventory turnover COGS 106,000 √ 2.33x 2.5x
Inventory 45,500√
Average collection Account Receivable 25,000√ x 360 56 days 37 days
period Credit Sales 160,000√
Debt ratio Total Debt 69,000 +22,950√ 61.3% 65%
Total assets 78,000 + 72,000√
Times interest EBIT 17,000√ 2.79x 3.8x
earned Interest exp. 6,100√
Gross profit Gross Profit 54,000√ 33.75% 38%
margin Sales 160,000√
Net profit margin EAT 8,175√ 5.11% 3.5%
Sales 160,000√
Return on assets EAT 8,175√ 5.45% 4.0%
Total Assets 150,000√
Return on equity EAT 8,175√ 14.08% 9.5%
Total Equity 58,050√

(20√ x ½ mark = 10 marks)

b) Briefly comment on the financial position of SAZ Shipping Berhad with respect to its
profitability ratios:

i) Gross profit margin √

This gross profit ratio is lower as compared to the industry average. The
problem may cause by its cost of good sold items such as making emergency
purchases or making small purchases at one time which no discounts are
given by supplier. √

ii) Net profit margin√

This ratio is to indicate the efficiency in controlling the operating cost. It shows
better performance than industry average. It may be due to efficiency in
managing the operating cost or the company manages to reduce their
operating expenses. √

iii) Return on Assets√

The performance of the company is slightly higher than industry average. The
ratio measures the overall effectiveness of management in generating profit
with its available assets.√ It showed the company has better management in
utilizing its assets to generate the profit compare to the industry average. √

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iv) Return on Equity√
The company’s ratio is higher than industry average. It measures the returned
earned on the common stockholder’s investment in the firm.√ The higher is
better to the owners. Therefore, shareholders will get better return as
compared to industry average. √
(10√ x ½ mark: 5 marks)

c) Three (3) possible problems and give recommendations on how to improve the
company’s liquidity

Possible Causes of Problem Suggestions to improve the problem

1) Company is holding too 1) Selling goods in cash
much stock 2) Encourage cash discount to encourage the debtors to pay
2) Poor debtor collection early
system 3) Improve collection system
3) Poor cash management 4) Adopting effective stock control system; EOQ, JIT
4) Using ST sources to 5) Invest in marketable securities
purchase LT assets 6) Manage current liabilities well; paying existing creditors,
using long term sources for future financing.

(Any 3 possible causes with 3 suggestions; 6√ x ½ mark: 3 marks)

d) The company may get a slim chances to obtain loan from financial institution or the
application might be rejected√√. It is because:

i) The company use more than 60% of debts to finance their operations which is
above the moderate financing around 55%. It is not good for the company
since the company might not be able to obtain another debt in the future. √

ii) The company has lowers TIE than industry average. Time interest earned is to
measure the firm’s ability to meet the contractual interest payment. It means that
the company faces difficulty to meet the interest obligations√

(4√ x ½ mark = 2 marks)

(Total: 20 marks)

Question 2

A.

a) CCC= ICP ( 38 days)√ + RCP (60 days) √ √– 10 days√ = 88 days. It means the
company must have additional financing for 88 days √ as it would only receive
payment in 88 days from the date of payment to creditors. √ ( or any other relevant
answer)
(6 x ½=3 marks)
b) RM1,000,000/360√ X 88 days = RM244,444.44 √
(2 x ½ = 1 mark)

c) New CCC will be 38 + 60 – 20 = 78 days. Decrease in CCC by 10 days ( 88-78)

Decrease in financing RM1,000,000/360√ x 10 days√ = RM27,778.
Annual increase in profit / annual savings = 12% x √ 27,778= RM3,333. √
(4 x ½ = 2 marks)

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B (a)

Top Sdn Bhd

RM RM
Permanent Assets Permanent sources of financing
Non-current assets 560,000 Equity 265,000
Permanent Current assets 102,000 5 Year T.Loan 300,000
Total assets 662,000√ 565,000√

Temporary Current Assets 68,000√ Temporary sources 165,000√

730,000 730,000

Karex Sdn Bhd

RM RM
Permanent Assets Permanent sources of financing
Non-current assets 780,000 Equity 330,000
Permanent Current assets 124,000√ 5 Year T.Loan 700,000√
Total assets 904,000 1,030,000

Temporary Current Assets 186,000√ Temporary sources 60,000√

1,090,000 1,090,000

(8√ x ½ = 4 marks)

b. Top Sdn is using the aggressive approach√ as the temporary sources of financing
(RM165,000) is not only used to finance the temporary current assets but also some
of the company’s permanent assets. √ This method will result in high risk and high
return.√

Karex Sdn Bhd is using the conservative approach √ as RM 904,000 in permanent

assets while permanent financing amounts to RM 1,030,000. This means that some
of the permanent sources are used to finance part of the temporary assets. The
implication is low risk and low return to the company.√
(5√ x 1=5 marks)
C
i. Cost of not taking the discount is

= 0.03/(1-0.03)  x 360/ ( 60-10) = 22.26%

Cost of taking the bank loan

= RM20,000 x 0.11√ x 6/12 √

RM20,000√ – ( RM20,000 X 0.11 x 6/12)

= 1100/18900 x 12/6 = 11.64%√

Therefore Asdi Sdn Bhd should borrow from Solo Bank√ and take the discount
because the rate of not taking the discount ( 22.26%) is much higher√ than the
cost of taking the bank loan ( 11.64%)

(10√ x ½ = 5 marks)
(Total: 20 marks)

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Question 3

(a) Initial Outlay

Cash outflows: Purchase price of new machine 280,000 
Installation 7,500
Modification 12,000
Transportation and taxes 6,500
Depreciable cost 306,000 

Working capital requirement:

Inventory 25,500

331,500
Cash inflows: Proceed from sale old machine (65,000)
Tax payable See: W1 4250
270,750

W1 selling price 65,000

Book value 48,000
Profit 17,000

Tax payable = 17,000 x 25% = 4250

(b) Differential Cash Flows

Year 1 –3 Year 4-5
Increase in sales 75,000  90,000 
Reduction in operating 35,000  35,000
expense
Decrease cost of defects 5,000  5,000
Increase in depreciation (46,600) (46,600) 
See: W2
Net savings before tax 68,400 83,400
Tax (25%) (17,100) (20,850)
Net savings after tax 51,300 62,550
Add: depreciation 46,600 46,600
97,900 109,150

(c) Terminal Cash flows

Recapture increase in NWC 25,500 
Salvage value of new machine 25,000 
50,500

W2: Depreciation expenses:

Old machine = 48,000 = 9,600

5

New machine = 306,000 – 25,000 = 56,200

5
Increase in depreciation 46,600

(20x ½ = 10 marks)

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(b)
(i) Payback Period
Year In/outflow Amt. not yet recovered
0 (270,750) (270,750)
1 97,900 (172,850)
2 97,900 ((74,950)
3 97,900 22,950
4
5

2  + 74,950 = 2.77 years

97,900
(2 x ½ = 1 marks)

(ii) Net Present Value

Year Cash Flow PVIF 20% PV

1-3 97,900 2.1065 206,226

4 109,150 0.4823 52,643
5 109,150 + 0.4019 64,163
50,500
Total PV 323,032
(-) Initial Outlay 270,750
NPV 52,282

IRR

Try 28%
Year Cash Flow PVIF 28% PV

1-3 97,900 1.8684 182,916

4 109,150 0.3725 40,658
5 109,150 + 0.2910 46,458
50,500
Total PV 270,032
(-) Initial Outlay 270,750
NPV (718)

20% + 52,282  X 8%

(52,282 + 718)

= 27.89%

(14 x ½ = 7 marks)

(c) Yesthe existing machine should be replaced since:

Payback period is less the company’s desired payback period 
NPV is positive 
IRR more than cost of capital
(4 x ½ = 2 marks)
(Total : 20 marks)

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Question 4

a) i. Cost of debt

NP = (1000x0.95)√ – 2% (1000) √
= 950-20
= 930

Year Cash Flows PVIFA/PVIF@9%√ PV

1-10 90√ 6.4177 577.59
10 1200√ 0.4224 506.88
1084.47
NP 930
NPV 154.47

Year Cash Flows PVIFA/PVIF@12%√ PV

1-10 90 5.6502 508.51
10 1200 0.322 386.40
894.91
NP 930
NPV -35.09

Kd before tax = 9%√ + ( 154.47√/154.47-(-35.09) ) x 3%√

= 11.44%

Kd after tax = 11.44% ( 1-0.25) √

= 8.58%√

ii. Cost of Preference shares

6% x 100√/ ( 90-0.25) x 100

= 6/89.75√ x 100
= 6.68%√

iii Cosf of ordinary shares

RM1√/RM11.25√ + 5%√
= 13.88%

iv Cost of new ordinary shares

RM 1√/(11.25-0.20√) + 5%√
= 14.05
(20√x ½ =10 marks)

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b Cost of maximum capital expenditure

= 1,500,000/ 0.39√
= RM3,846,153. √

Since the cost of project is RM4,000,000, the RM1,500,000 retained earnings is no

longer sufficient to support the financing requirement above RM3,846,153 to maintain
39% equity portion, therefore the company must issue new shares to finance the project.

(2√ x 1 mark = 2 mark)

c.
Capital structure Weight Ind COC COC
Kd 0.43√ 8.58%√ 3.69%√
Kp 0.18√ 6.68%√ 1.20%√
Knc 0.39√ 14.05%√√ 5.48%
10.37%√

(10√ x ½= 5 marks)

d. It represents a capital structure that can minimize its overall cost of capital√ therefore
it will maximize the value of the firm√ and shareholders’ wealth. √
(3 √x 1 mark = 3 marks)
(Total : 20 marks)

Question 5
A. (i)
Money Market Capital Market

Dealing with short term securities that have a Dealing with long term securities that have
life of one year or less. These securities are a life span more than one year such as
very liquid that is they can easily converted common stock, preference stock, debentures
into cash without loss of value  or bonds

(3 x 1 marks = 3 marks)

(ii) Two (2) major weaknesses of profit maximization as the goal of the firm from the
finance perspective

 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 2 point x 1 marks = 2 marks)

B.
i. PV = RM10,000 (PVIFA 5, 15%) + RM20,000 (PVIFA 5, 15%)(PVIF 5,15%)

PV = 10,000 (3.3522)  + 20,000 (3.3522)(0.4972) 

PV of the cupcake business = 33,522 +33,334.28 = RM66,856.28

(3 x 1 marks = 3 marks)

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ii. FV = RM10,000 x (1 + 0.08)2x3

2

FV = RM10,000 x (FVIF 4%, 6 years)

FV = RM10,000 (1.2653)  = RM12,653

(2 x 1 marks = 2 marks)

C.
(i) Required rate of return = risk free rate + beta (risk premium)

25 = 9 + 4 (RP)
RP = 25√-9√ / 4√
= 4
(3√ x 1 mark = 3 marks)

ii)
Investment Weight of investment Expected return Weighted return
Stock Red 120,000/ 400,000 = 0.3√ 10% 3√
Stock Blue 280,000 / 400,000 = 0.7√ 15% 10.5√
Total weighted expected return 13.5

(4√ x 1/2 = 2 marks)

D.

i) Declaration date
This is the date when the Board of Directors announces its intention to pay
dividend. 

ii) In-dividend date

Last day, one trading day before ex-dividend date on which the stock is said to
be cum dividend (with or including dividend).  Buyers buy on this day entitle
to receive a dividend while sellers sell the stock lose their right to the dividend.

iii) Ex-dividend date

It is without or excluding dividend. Meaning, this is the day on which all
shares bought and sold no longer come attached with the right to be paid the
most recently declared dividend.  Existing holders will receive dividend if
they now sell the stock but buyers will not receive the dividend.

iv) Date of record

The dividend is payable to shareholders whose name appear in the register of
members as on the record date. 

v) Payment date
This is the date when the company actually mails out the cheques to the
shareholders as name appear in the register of members. 

(5 x 1 marks = 5 marks)

(Total: 20 marks)