MAF653 – JUN 2017

MAF653 JUNE 2017

Suggested Answer

QUESTION 1

A. i. Exon Bhd

Year CF DF@12% PV

1 3(1.1)=3.3 / 0.8929 2.95 /

2 3.3(1.1)=3.63 0.7972 2.89 /

3 3.63(1.1)=4 0.7118 2.85 /

4 4(1.1)=4.40 0.6355 2.80 /

P1 11.49

P2 = 4.4 /(1 + 0.06) / x 0.6355 / = RM 49.40

0.12 / – 0.06/
IV = 11.49 + 49.40 = RM 60.89 /
Maximum price that of this stock is RM60.89
(10 / x ½ = 5 marks)
ii. IV = D5 = 4.4 / = RM 36.67 x 0.6355 /
ke 0.12/
P2 = RM 23.30

Value of stock = RM 11.49 + RM 23.30 = RM 34.79/

(4/ x ½ = 2 marks)

B.
i.
Eko Bhd
High PE ratio suggests higher earnings growth as compared to the overall
market/. Therefore, investors are willingly to pay more to anticipate higher future
earnings growth/
Meadow Bhd
Low PE ratio suggest moderate earnings growth as compared to the overall
market/. Therefore, investors in Meadow have a modest expectation on the
company’s future growth/.

Investors view that stock of Eko as growth stock, therefore it is attractive to buy
and low PE ratio as flawed and unattractive //

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(6 / x 1 mark = 6 marks)
ii
IVEko = EPS x P/E
= 500,000,000 / x 10 /
450,000,000 /
= 1.11 x 10
=RM 11.10
IVMeadow = EPS x P/E
= 300,000,000 /x 5 /
200,000,000/
= 1.5 x 5
= RM7.5
(6/ x 1 = 6 marks)

iii. The financial advisor should buy Meadow Bhd instead of Eko Bhd
because the market stock price of Meadow Bhd is undervalued //. Eko
Bhd is considered as growth stock and the stock price will gain more by
RM2.50//.

(4/ x ½ = 2 marks)
(TOTAL: 21 Marks)

QUESTION 2

A. Bond market is important because:

1. Investors demand large amount of finance for their manufacturing
activities, infrastructure improvements and provision of services.
2. The change in the economic structure from labour intensive to
capital intensive industries demands long-term debt financing that
cannot be met by the banking sector or equity market.
3. Long-term institutional investors needs funds for portfolio
diversification and asset liability management purposes.
(any one point x 2 marks = 2 marks)

B.
Accessibility - A money market investment culminates in the return of the
principal amount at maturity. This period can be set between one day and
thirteen months, which makes them more accessible.
Risk – The money markets are in continuous flux. Because risk is lower than
investing in stock market shares, it makes use of a money market facility more
predictable.
Liquidity – Liquidity is the ease with which an investment can be converted into
cash. As such, a money market investment is the closest thing to cash on hand.
It can therefore be regarded as the most liquid form of investment. Liquidity
would depend on the terms of the investment, e.g. the maturity period and
restrictions on withdrawals.

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(3 points + explanation x 2 marks = 6 marks)

Any other relevant answers

C.
i. Conversion ratio = RM 1,000 /
40 /
= 25 shares

Conversion value = Conversion ratio x market price

= 25 shares / x RM50 /
= RM1,250

Value of straight bond = 80 / X PVIFA 10%, 20 + 1000 / X PVIF 10%, 20

= 80 (8.5136) / + 1000(0.1486) /
= 681.09 + 148.60
= RM829.69
(8 / x ½= 4 marks)

ii. The minimum value of bond is the higher of conversion value and straight
bond value/. So, the minimum value is RM1250 /
(2/ x 1 = 2 marks)

D.
i.
Pertama
BP = 60/ x PVIFA 8%, 10 + 1000 /x PVIF 8%, 10
= 60 x 6.7101 /+ 1000 x 0.4632/
= 402.61 + 463.20
= 865.81/

Perdana
BP = 120/ x PVIFA 10%, 10 + 1000/ x PVIF 10%, 10
= 120 x 6.1446/ + 1000 x 0.3855/
= 737.35 + 385.5
= 1,122.85/
(10/ x ½ = 5 marks)
ii. When the current interest rate is low, it is worth to invest in Perdana / because
the bond become more valuable and attractive/ as it offers higher interest than
others in the market/.
(3/ x 1 = 3 marks)
(Total:22 marks)

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Question 3

A. A contract size is number of contract that the investor need to buy/sell which
is equivalent to the size of the underlying instruments (eg. Commodity-crude
palm oil) needed
(2 marks)

B. Total value of contracts = RM2000x 6x 25 = RM300,000

IM = 10% x RM300 000 = RM30 000
MM = 70% x RM30,000 = RM21 000
Total Loss:/ 9 000 //
Therefore the price level,
P = RM9000 /
6 / x 25 /
= 60

So, initial margin =30 000

(RM1940// – 2000/) x 6 x 25/) =(9 000)
Balance = 21 000

OR

There will be a margin call when RM9000// has been lost/ from the margin
account. This will occur when the price decreases/ by RM60 /// per contract.
The price FCPO must therefore fall/ to RM1940// for there to be a margin call.
( 10 / x ½ = 5 marks)
C. i.
Buy futures @ 3550 /
Sell futures @ 3558 /
8
Therefore, 8 x 28 x 25 /= RM 5,600
(3 / x 1 mark = 3 marks)

iii. Total purchase price = 3558 / x 700 / = RM2,490,600

(2 / x 1 mark = 2 marks)

D. i. no.of contract = 10,000,000 / x 80% = 168.42

50 x 950 /
(2 / x 1 = 2 marks)

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ii.Sell future contract at 950 and buy future contract at 900 in December //

(2/ x 1 mark = 2 marks)

iv. Future market

Sell futures 168 x RM 50/ x 950 / = RM 7,980,000
Buy futures 168 x RM 50 x 900 / = RM 7,560,000
Gain 420,000 /
Loss values in portfolio (374,332) * ////
Net gain 45,668

*workings -
Loss of portfolio values
(900 – 935) /935 // X 10,000,000 / = (374,332) /

The RM374,332 decrease in the portfolio value is contra / by a profit on the

futures contract of RM420,000 hence a net gain of RM45,668 /.

(10 / x ½ marks = 5 marks)

E. The trader has to short his future position today and close out his trading as long
in the future /. This is because the trader wanted to lock in the higher price in
position today in order to sell it at higher price as well /. Therefore, when maturity
he would buy futures at a lower price/. Gain from futures transactions can be
realized to offset losses at the cash market/.
(4 / x 1 mark = 4 marks)
(Total: 25 marks)

QUESTION 4
A. i. RM55/ – (RM40/ + RM4/) = RM11
ii. He should let the option expire / and the amount of loss is only the premium
cost of RM4 /.
(5√ x 1 = 5 marks)

B. BEP = 1690 / – 20 / = 1670

If KLCI = 1665,
Gain = (1670 – 1665 /) x RM 100 /
= RM500
Sarah’s decision is still a profitable decision as she still gain a profit of RM500 /.

(5 / x 1 = 5 marks)

C. i) Disagree√, this model can only be used for European style of option. √

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ii) Disagree√, an increase in interest rate increases the call value of an

option√, in the case of put option, the effect is contrary.

iii) Agree√; options can be purchased at a small fraction of the share price
and option buyers will not lose more than the option premium paid.√

(6√ x 2 = 6 marks)

D. Hush Bhd 8% KLIBOR + 2%

Pacific Bhd 6% KLIBOR + 1.25%
Difference 2%√ 0.75%√
Arbitrage opportunity after commission 1.25% - 0.25√ = 1%√

There is a mismatched in the credit market,√ the difference between the fixed
interest rate market is 2% and the floating rate market is only 0.75% √, therefore
these two companies can take advantage of this price differentials√ and save
0.5% each√ over the life of the loan if they agree on a swap.
(8 / x ½ = 4 marks)
(Total: 20 marks)

Question 5

A. Probhibitions :

Riba – It means extra or additional. For example, payment of loan in excess of

what is borrowed and it is predetermined.
Maysir – All transactions in Islamic banking need to be free from the element of
gambling
Gharar –All transactions in Islamic banking need to be free form the element of
gambling
Prohibited Activities – Islamic finance should not engage in any activities relating
to unlawful or non halal goods and services like pork, non-slaughtered animal,
intoxicating or alcohol drinks
(List – 3 x 1 = 3 marks)
B.
 Education and awareness
 Product innovation and development
 Performance benchmark
 Risk management capabilities
 Information technology
 Skilled human resources 
(Any 3 with explanations x 1=3 marks)

C. i. Bai Bithaman Ajil – it refers to Deffered/Instalment payment /. It is based on a

contract of buy and sell / where the seller delivers the items sold and the buyer
pays for the price on instalment payment basis /.
(3 / x 1 = 3 marks)

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ii. The concept involves 4 steps/ processes which applying the Bai Bithaman Ajil
concept / which are:
(i) Customer requests the Islamic bank to finance an assets /.
(ii) Bank acquires the asset from a supplier on a cash basis /.
(iii) The asset now belongs to the bank, therefore, bank has the right to quote
the price /. Bank sells the asset to the customer on deffered payment basis /
(iv) Customer pays the bank’s selling price on an installment basis /.

(6 / x ½ = 3 marks)
(Total: 12 marks)

END OF SOLUTION