CONFIDENTIAL

FINAL EXAMINATION

COURSE : FINANCIAL MANAGEMENT

COURSE CODE : PFN1223

DURATION : 2 HOURS

MARKING SCHEME
PFN1223

The marking scheme paper consists of 8 printed pages

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FEB2021/A/PFN1223
Answer Section

SHORT ANSWER

1. ANS:
a. THREE (3) advantages of payback period method.
1. It is simple and easy to understand and compute. 
2. It is a cost-effective method which does not require much of the time. 
3. Payback period is a method for dealing with risk. The project with a shorter
payback period has less risk compared with the project with longest payback
period. 
4. Payback period is importance on liquidity for making decision about the
investment proposals. 

THREE (3) disadvantages of internal rate of return.

1. It requires lengthy and complicated calculations. 
2. When projects under consideration are mutually exclusive, IRR may give
conflicting results. 
3. We may get multiple IRRs for the same project especially when there are
nonconventional cash flows. 

(Any 6 x 1 point = 6 points)

(Any relevant answer is acceptable)

b. a. Calculate
i. Payback period

Machine A = 2 years + RM14,000 – RM12,000

RM 4,000
= 2.5 years

Machine B = RM14,000 
RM5,000 
= 2.8 years

(6x 0.5 point = 3 points)

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ii. Net present value (NPV)

Machine A
Year Cash Flow PVIF 12%, n PV (RM)

1 6,000 0.8929 5,357.40

2 6,000 0.7972 4,783.20
3 4,000 0.7118 2,847.20
4 1,000 0.6355 635.50
5 2,000 0.5674 1,134.80
PV 14,758.10
Less IO - 14,000
NPV 758.10

Machine B
PV = RM5,000 (PVIFA 12%,5)
= RM5,000 x 3.6048
= RM18,024

NPV = PV – IO
= RM18,024 – RM14,000
= RM4,024
(16 x 0.5 point = 8 points)

iii. Internal rate of return for Machine B only.

PVA = PMT (PVIFA i,n)

RM14,000 = RM5,000 (PVIFA i%,5)
(PVIFA i%,5) = 2.80

23% = 2.8035
i% = 2.8000
24% = 2.7454

IRR = 23%+ 2.8035 - 2.8000  x (24% - 23%)

2.8035 - 2.7454
= 23.06%

(8 x 0.5 point = 4 points)

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iv. Profitability index for each project.

14,758.10/14K
Machine A = 1  + (RM758.10 / RM14,000) 
= 1.05

Machine B = 1 + (RM4,024 / RM14,000)  18,024/14K

= 1.29
(4 x 0.5 point = 2 points)

b. Which machine that Coco Jar Berhad should buy? Justify your answer.
Coco Jar should buy Machine B, because it has higher NPV than Machine A. 

(2x 0.5 point = 1 point)

(Total = 24 points)

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2. ANS:

a. Calculate the cost of capital for:

i. Market price = 1,000 x (1 - 0.05) = RM950

Kd = [(13% x 1,000) + (1,000- (950 - 50) /12]

[(1,000+ (950- 50) / 2]
= 138.33
950
Kd = 14.56%

Kd after tax = 14.56 (1 - 0.28)

Kd after tax = 10.48%
(14 x 0.5 point = 7 points)
ii. Preference share
Kps = (15%x 100)
95- (0.10 x 95)
Kps = 17.54%
(4 x 0.5 point = 2 points)

iii. Internal equity

0.06
D1 = 2.30 (1 + 1.06)
= RM2.44 2.438
Ke = [2.44] + 0.06
28
Ke = 14.71%
(5 x 0.5 point = 2.5 points)

iv. External equity 2.438

Kne = [ 2.44  ] + 0.06
28 - (0.11 x 28) 0.38
Ke = 15.79% 15.78
(5 x 0.5 point = 2.5 points)

b. MCE = (400,000 / 0.52)

MCE = RM769,230.77
(2 x 0.5 point = 1 point)

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c. WACC if company use internal equity for equity financing

Sources of financing Cap. Structure COC WCOC
Debt 30% 10.48% 3.14% 3.144
Preferred shares
Equity
18%
52%
17.54%
14.71%
3.16%
7.65%
3.157
WACC = 13.95 %
7.649
(9 x 0.5 point = 4.5 points)

d. WACC if company use external equity for equity financing

Sources of financing Cap. Structure COC WCOC
Debt 30% 10.48% 3.14% 3.144
Preferred shares 18% 17.54% 3.16%
Equity 52% 15.79% 15.78 8.21% 3.157
WACC = 14.51 %
8.206
(9 x 0.5 point = 4.5 points)

(Total = 24 points)

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3. ANS:

a. Comprehensive income statement for the year 2020.

(RM)
Sales (1,200 x 50) + (750 x 70)  112,500
- Variable Cost (1,200 x 25)  + (750 x 30)  (52,500)
Contribution Margin 60,000
- Fixed Cost (4,500 + 5,000) (9,500)
EBIT 50,500
- Interest (1,500 + 1,200) (2,700)
EBT 47,800
- Taxes @ 18% 47,800  x 18% (8,604)
Net Income 39,196

(14 x 0.5 point = 7 points)

b. Calculate:
i. Break-even point in Ringgit (RM)

60,000 = 9,500
(112,500 – 52,500 ) / 112,500
= RM17,812.50
(4  x 0.5 point = 2 points)

ii. Degree of operating leverage (DOL) = Contribution Margin / EBIT

= 60,000 / 50,500 
= 1.19 times
(2  x 0.5 point = 1 point)

iii. Degree of financial leverage (DFL) = EBIT / EBT

= 50,500 / 47,800 
= 1.06 times
(2  x 0.5 point = 1 point)

iv. Degree of combine leverage (DCL) = DOL x DFL

= 1.19 x 1.06 
= 1.26 times
(2  x 0.5 point = 1 point)

(Total = 12 points)

(TOTAL = 60 POINTS)

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END OF MARKING SCHEME

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