CONFIDENTIAL AC/SAMPLE/MAF253

UNIVERSITI TEKNOLOGI MARA

SAMPLE
FINAL EXAMINATION

COURSE : FUNDAMENTALS OF FINANCIAL MANAGEMENT

COURSE CODE : MAF253
EXAMINATION : SAMPLE
TIME : 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of two (2) PART A (10 Questions)

parts:
PART B (4 Questions)

2. Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3. Do not bring any material into the examination room unless permission is given by
the invigilator.

4. Please check to make sure that this examination pack consists of :

i) the Question Paper

ii) A Four-page appendix
iii) an Answer Booklet – provided by the Faculty

5. Answer ALL questions in English.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

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CONFIDENTIAL AC/SAMPLE/MAF253

This examination paper consists of 8 printed pages

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PART A

This part consists of TEN (10) multiple choice questions. Choose the most suitable
answer for each question and write the corresponding alphabet representing the
answer in the answer booklet.

1. Enhancing the wealth of the _______ is the ultimate goal of wealth maximization.

A. employees
B. financial managers
C. customers
D. shareholders
(1 mark)

2. In achieving shareholders’ wealth maximization, the firm must

A. sell its share at the highest price.

B. have growth in earnings and dividend.
C. maximise its profit.
D. accept as many projects as possible.
(1 mark)

3. The role of _______ is to supply funds to the demander of funds.

A. investor
B. financial market
C. financial manager
D. regulator
(1 mark)

4. The decision function of financial management can be broken down into

the _______ decisions.

A. capital budgeting, cash management and credit management

B. financing and investment
C. investment, financing and asset management
D. financing and dividend
(1 mark)

5. Which of the following financial instruments is not used in the capital markets?

A. Government bonds.
B. Preference stocks.
C. Commercial paper.
D. Common stocks.
(1 mark)

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6. Which of the following is NOT a component of the financial environment?

A. Financial managers
B. Employees
C. Financial institutions
D. Investors
(1 mark)

7. Which of the following is NOT an advantage of shareholders’ wealth maximization?

A. The goal consider uncertainty when making financial decision.

B. The goal stresses on the efficient use of capital resources.
C. The goal considers economic expectations.
D. The goal stresses on market price per share.
(1 mark)

8. Which statement is TRUE?

A. Capital markets are markets that deals with loans that is backed by
inventories.
B. Money markets are markets that deals with unsecured loan.
C. Primary markets are market that deals with new securities being bought and
sold for the first time.
D. Secondary markets are market that deals with loans that is backed by
accounts receivable.
(1 mark)

9. This type of risk is avoidable through proper diversification.

A. Unsystematic risk
B. Total risk
C. Systematic risk
D. Portfolio risk
(1 mark)

10. _______ is the required of return for investment in government securities.

A. Discount rate
B. Federal interest rate
C. Risk-free rate
D. Prime rate
(1 mark)

(Total: 10 marks)

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PART B

QUESTION 1

Due to the increasing demand for its product, Sejiwa Sdn Bhd, a manufacturing firm, has
decided to apply for a bank loan to finance the installation of a new production line. In order
to evaluate the company as a potential borrower, the bank would like to compare the
company with companies in the same industry. The company’s most recent financial
statements were presented to the bank to support its loan application:

Sejiwa Sdn Bhd

Statement of Comprehensive Income for the Year Ended 30 June 2020
RM RM
Sales (all credit) 3,700,000
Less: Cost of goods sold 1,960,000
Gross profits 1,740,000
Less: Operating expenses
General and administrative expenses 450,000
Depreciation expense 250,000 700,000
Operating profits 1,040,000
Less: Interest expense 100,000
Before-tax profits 940,000
Less: Taxes 235,000
After-tax profits 705,000

Sejiwa Sdn Bhd

Statement of Financial Position as at 30 June 2020
RM
Cash 98,000
Marketable securities 55,500
Accounts receivable 279,000
Inventories 400,000
Prepaid expenses 10,000
Total current assets 842,500
Net fixed assets 2,100,000
Total assets 2,942,500

Accounts payable 350,000

Notes payable 200,000
Other current liabilities 40,000
Total current liabilities 590,000

Long-term debt 900,000

Ordinary shares 600,000
Retained earnings 852,500
Total liabilities and shareholders’ equity 2,942,500

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The industry average ratios are provided below to facilitate an analysis of the firm’s loan
request:

Industry Average Ratios

Current ratio 1.40 times
Quick ratio 1.10 times
Inventory turnover 6.00 times
Average collection period 30 days
Total asset turnover 1.20 times
Debt ratio 40%
Times interest earned 11.00 times
Gross profit margin 32.00%
Operating profit margin 20.00%

Required:

a. Compute the above ratios for Sejiwa Sdn Bhd for the year 2020.
(10 marks)

b. Comment on the company’s liquidity and leverage position. Should the loan be
approved?
(5 marks)

(Total: 15 marks)

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QUESTION 2

A. The following is the Statement of Financial Position (extract) of Black Sea Bhd as at
31 December 2019.
RM
Non-current assets 600,000
Inventories 200,000
Accounts receivable 250,000
Bank 450,000
1,500,000

Ordinary shares 550,000

Preference shares 200,000
Accounts payable 450,000
Accrued expenses 300,000
1,500,000

The financial manager identified that 40% of the current assets were permanent.

Required:

a. Comment on the financing strategies adopted by Black Sea Bhd by showing

clearly the permanent current assets and temporary current assets.
(3 marks)

b. Assess the risk and return trade-off of the financing strategies adopted by
Black Sea Bhd
(2 marks)

B. Semangat Waja Bhd is facing cash flows difficulties during the year, but the financial
manager is trying to manage their cash more efficiently. The company’s annual
operating cycle investment is RM900,000. Inventories turnover is 12 times a year and
receivables are collected in 45 days. Suppliers are paid approximately 35 days after
they arise.
(Assume a 360-day year)

Required:

a. Calculate the company’s cash conversion cycle.

(2 marks)

b. Calculate the amount of financing required by Semangat Waja Bhd to support

its cash conversion cycle.
(2 marks)

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c. The financial manager of Semangat Waja Bhd has come up with a new cash
management plan to reduce its current cash conversion cycle. The company
has developed a new processing system that would reduce the production
time by 3 days. On top of that, the company had also come up with an
agreement with its supplier to delay payment by 5 days.

Calculate the annual interest savings for the company due to the new cash
management plan, given that a 12% interest is charged on resources
obtained.
(3 marks)

C. Magic Colour Bhd has been offered a new credit terms of 2/15 net 30 by its existing
supplier. Due to cash flow problem, Magic Colour can only pay on day 60 and is
agreeable with the supplier. The company needs RM285,000 to pay within the
discount period to its supplier. The following alternatives was identified to raise the
needed funds.

Alternative 1
Blue Bank is willing to provide a loan for six months at 12% interest with 10%
compensating balance.

Alternative 2
Red Bank has a new promotion and is willing provide a loan for six months at 10%
interest paid in advance with 15% compensating balance.

Required:

a. Identify the effective annual cost of foregoing the cash discount.

(2 marks)

b. Calculate the effective annualised cost of each alternative.

(6 marks)

c. Advise Magic Colour Bhd on the best option for the company.
(3 marks)

(Total: 23 marks)

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QUESTION 3

A. Shahriman has just graduated from a local university. He is planning to buy his
dream house in five years. Currently, the price of the house is RM500,000 and the
price is expected to increase by 10% in value every year. He plans to pay 20%
deposit on the house by making savings at the end of each year for the next 5 years
and expects to earn 15% interest per year.

Required:

Calculate the annual savings Shahriman should make at the end of each year for the
next 5 years as to have enough money to pay for the house deposit.
(6 marks)

B. Ikleama plans to purchase a new car for RM100,000 and pay RM10,000 as a
deposit. He agrees to pay the balance using a loan, where installment is paid at the
end of each year for the next 7 years. Interest is charged at 4% per year on unpaid
amount.

Required:

a. Calculate the yearly installment of the car loan.

(2 marks)

b. Tabulate the loan amortization schedule for the first 2 years.

(4 marks)

c. Ikleama had saved the RM10,000 deposit through an account that pays 5%.
He had diligently put in RM1,228.20 at the end of each year into the account.
Determine the duration of his investment.
(4 marks)

C. Kenanga is considering investing her money either in Belalang Bhd or Coconut Bhd.
The information for both companies is as follows:

Belalang Bhd Coconut Bhd

Probability Return Probability Return
50% 30% 40% 20%
40% 20% 40% 15%
10% -5% 20% 10%

Required:

a. Identify the expected return for both companies.

(3 marks)

b. Determine the coefficient of variation for both companies.

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(3 marks)

(Total: 22 marks)

QUESTION 4

A. Barjana Sdn Bhd is considering purchasing new machines worth RM2,730,000 with a
5-year life expectancy. It will be depreciated using the straight-line method over 5
years. The new machines will replace the old machines purchased at RM4,000,000,
which still have a four-year lifetime. The old machines’ useful life is ten years, with a
book value of RM30,000 at the end of its life.

As new machines are faster than the old machines, it requires additional work in
process inventory of RM500,000. The old machines can be sold as scrap for
RM30,000. However, if it is sold now, the company can get RM1,000,000. The
company has paid RM30,000 and RM40,000 for transportation costs and installation
costs respectively, for assembling the new machines.

The following information was extracted from the data usage of the new machines:

i. Reduced salaries by RM250,000 per year.

ii. Reduced utilities expenses by RM170,000 per annum.
iii. Reduced wastage from RM300,000 to RM100,000 per annum.
iv. Increased maintenance expenses by RM10,000 per annum.

The company has also conducted feasibility study for the new machines last month
at a cost of RM80,000. The forecasted training cost for the new machines is
RM130,000.

The company’s required rate of return is 12% and the tax rate is 25%. The desired
payback period is 5 years.

Required:

a. Calculate:

i. Initial outlay
ii. Annual differential cash flow
iii. Terminal cash flow
(10 marks)

b. Analyse:

i. Net Present Value

ii. Internal rate of return
iii. Payback period
(5 marks)

c. Advise the management whether the company should proceed with buying
the new machines. Give reasons for your answer.
(5 marks)

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B. Tandang Berhad is considering a project which will cost them an initial RM20,000.
The sales expected for the 2-year duration are RM20,000 per annum. The variable
costs are RM 2,000 per annum. The cost of capital 10%. The CEO of the company
wants to know how much the changes of project variables affected the NPV.

Required:

a. Calculate the sensitivity margin of:

i. The initial investment
ii. The variable costs of the projects
iii. The sales of the project
(8 marks)

b. Analyse the sensitivity margin of any TWO (2) above variables.

(2 marks)

(Total: 30 marks)

END OF QUESTION PAPER

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