Financial Management (BFIN3213)

July 2021 Final Examination CONFIDENTIAL

THIS QUESTION PAPER COMPRISES OF ONE SECTION. (40 MARKS)

Answer ALL questions.

LipIce Berhad is a manufacturing company of cosmetic products. The company’s current

capital structure is as follows:

Types Details
Common stocks Current Price: RM2.75/ share
Outstanding Value: RM5,500,000.00
Dividend in 2020: RM0.033
Growth rate: 4%
Preferred stocks Dividend per year is RM8.00
Current Price is RM110.32
Outstanding Value: RM2,206,400.00
Long Term Financing – Monthly instalment on mortgage is RM7,231 for the next
Maybank 25 years paying off the property financing of RM1.5
million.
Vehicles Financing Total financing amount of RM200,000 at a rate of 2.83%

Proposed Capital Structure

The proposed structure to include the sukuk is hoped to reduce the company’s commitment
towards its preferred stock dividend. To reduce the weighted average cost of capital, the
management is considering replacing its preferred stock with sukuk.

The sukuk of 3,000 units will be issued with an annual coupon rate of 5.25% to be paid semi-
annually, sold at net price, RM865.00 each with a tenure of 15 years.

Capital Asset Pricing Model (CAPM)

Future projects accept or reject decision will be based on Capital Asset Pricing Model (CAPM)
approach in determining the expected rate of return of the company. The current market
return is 6.75%, and the risk-free rate is 3.35%; whereas the company’s beta is determined to
be 1.5.

Project Assessment

The company is assessing a new manufacturing contract which will generate a cash flow for 5
years. Project cost is estimated to be RM2.5 million, which 40% involved purchase of
machineries that will be depreciated based on MACRS 5-year convention. At the end of the
5th year, the machineries will be sold for RM55,000, and 20% of the project costs can be
recovered*. (Rate: 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76%)

*to be added to the project’s terminal value.

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Financial Management (BFIN3213)
July 2021 Final Examination CONFIDENTIAL

The projected sales revenues from the project are presented below:

Year Sales Revenues

(RM)
1 1,850,000
2 1,250,000
3 2,300,000
4 1,750,000
5 1,000,000

The production cost is estimated to be 30% of the sales revenues, fixed cost is RM360,000
annually and the interest expenses are as follows:

Year 1 Year 2 Year 3 Year 4 Year 5

52,344.97 51,063.52 49,741.11 48,376.44 46,968.15

Corporate tax rate is 24%.

Analyze the given information and the followings must be included in your analysis. You
are required to upload your worksheet for submission.

1. Calculate the annual cost of capital of the common stocks. (1 mark)

2. Calculate the annual cost of capital of the preferred stocks. (1 mark)

3. Calculate the annual cost of capital of the mortgage. (1 mark)

4. The total value of the current capital structure is RM_______________. (1 mark)

5. Based on Capital Asset Pricing Model (CAPM), calculate the expected required rate of
return on the company. (1 mark)

6. Assess the company’s weighted average cost of capital (wacc) based on the current capital
structure. (2 marks)

7. Assess the company’s adjusted weighted average cost of capital (adj-wacc) based on the
current capital structure. (2 marks)

8. Calculate the annual cost of capital of the sukuk. (1 mark)

9. The total value of the proposed capital structure is RM_____________. (1 mark)

10. If the company replaced the preferred stock with the sukuk, i.e., proposed capital structure,
assess the weighted average cost of capital (wacc). (2 marks)

11. If the company replaced the preferred stock with the sukuk, i.e., proposed capital structure,
assess the adjusted weighted average cost of capital (adj-wacc). (2 marks)

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Financial Management (BFIN3213)
July 2021 Final Examination CONFIDENTIAL

12. Prepare MACRS 5-year convention for the machineries and determine the after-tax gain
or loss on disposal cash flow/ tax savings. (4 marks)

13. Construct a 5-year Pro-Forma Income Statement of the new project and determine the
projected operating cash flows. (10 marks)

14. The terminal value of the operating cash flow is RM___________. (1 mark)

15. Based on Capital Budgeting Techniques and Adjusted WACC of the proposed capital
structure, assess the viability of the new project. (Upload the file.) (5 marks)

16. The Discounted Payback Period is _________. (1 mark)

17. The NPV of the project is RM_______________. (1 mark)

18. The Profitability Index (PI) of the project is __________. (1 mark)

19. The IRR of the project is ________%. (1 mark)

20. The MIRR of the project is ________%. (1 mark)

(Total: 40 Marks)

*** END OF QUESTION PAPER ***