TEST 1 DEC 2020/MAF603

UNIVERSITI TEKNOLOGI MARA

ONLINE COMMON TEST 1

COURSE : CORPORATE FINANCE

COURSE CODE : MAF 603
TEST : DEC 2020
TIME : 2 HOURS

INSTRUCTIONS TO CANDIDATES

1. This is an online test question consist of TWO SECTIONS: A AND B.

2. Section A consist of 16 Multiple Choice Questions.
3. Section B consist of 2 Essay and Calculated Questions.
4. Click "SAVE/NEXT/FINISH/SUBMIT" button for each question and after completed.
5. Answer ALL questions.

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any of the Chief Invigilator/ Invigilators’ instructions. If found otherwise, I can be barred from taking
the assessment or can be brought to the Student Disciplinary Action Board.

( ) I do understand that I can be penalised under Rules 48, Act 174 of the Educational Institutions
(Discipline) Act 1976 as at 1 November 2012 or other enforceable Acts, and can be charged with a
maximum penalty of dismissal from the University if I am found guilty of a disciplinary offence

( ) I declare that all answers on this assessment are based on my own work and effort that depicted to
the best level of my knowledge. I do not copy other student’s answer neither collaborate nor
communicate with anyone via any kind of medium communication. MAY 2020/MAF603

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

This examination paper consists of 3 printed pages
 TEST 1 DEC 2020/MAF603

SECTION A: MULTIPLE CHOICE QUESTION

Instruction: Choose the most appropriate answer.

1. The following is the objectives of corporate finance that helps to create value and
maximize the shareholder’s wealth except:

A. Avoid Financial Distress & Bankruptcy

B. Take effort to improve the financial performance and cash flow of the firm
C. Management need to consider withdraw the investment if that investment relatively
risky venture that could affect the management position/
D. Doing an innovation and research to produce a product that could beat the
competitors’ product on price and quality.

(1 mark)

2. The maximization of shareholder’s wealth can be measured as a total shareholder return

for both dividend yield and capital gain. Thus, a financial strategy should be formulated
to ensure best decision taken on the following matters:

1. Investment decision
2. Financing decision
3. Dividend decision
4. Asset management decision

A. 1 and 2
B. 3 and 4
C. 1,2 and 3/
D. All the above decisions

(1 mark)

3. Megah Bersatu Bhd is a company listed in the stock exchange. The following information
relates to dividend payment and average share price for the past three years.

Year Dividend Per Share Share Price

1 75 sen RM14.50
2 82 sen RM14.85
3 90 sen RM14.77

Refer to above information, which of the following statements is TRUE regarding the
shareholders’ wealth?

A. There was no increase in shareholder wealth between Year 2 and Year 3.

B. Between Year 1 and Year 2 shareholder wealth decreased.
C. Between Year 2 and Year 3 shareholder wealth decreased.
D. None of the above.
 TEST 1 DEC 2020/MAF603

(1 mark)

4. One of the important aspects of financing decisions is how much debt, a firm is planning
to use and whether it can help to reduce a business weighted average cost of capital.
When a firm facing with a cash flow problem, they can consider the following action to
alleviate the problem.

1. Increase the level of gearing especially when fixed costs are a high proportion of
total costs
2. Choose to sell some of the assets that are not essential for carrying out the main
activities of the business
3. Pay out the cash to shareholders as dividend
4. Retain the cash available and use for project investment

A. 1 and 3
B. 2 and 4
C. 1,2 and 3
D. All the above

(1 mark)

5. Shareholders of a firm need to incur agency cost in order to curb the problem arises
between the agent and principal.

Which of the following is NOT true about the agency cost?

A. Indirect agency cost includes the increase in directors’ fees paid for non-executive
director.
B. Indirect agency cost is when the manager reluctant to invest in high risk project
that could impact better return and share price.
C. Agency cost exist when the owners is not the managers of a firm./
D. Manager may take a selfish investment strategy to safeguard its interest which is
an example of indirect agency cost./

(1 mark)

6. The managers are interested in maximizing their short-term interests through pay and
benefits, whereas the shareholders are interested in the long-term stability and success
of their investment

Which is the following conflict of interest describe the above statement?

A. Moral hazard
B. Time horizon.
C. Earnings retention
D. Risk aversion
(1 mark)
 TEST 1 DEC 2020/MAF603

7. Different sets of stakeholders have different objectives and often causes potential
conflicting interest. The following is circumstances causes the potential conflicts between
the stakeholders except:

A. Shareholders wants to obtain suitable return for their investment, whilst the
Managers wants higher perks and benefit.
B. Customers wants quality of goods at low price whereas the Managers want higher
profits.
C. Local people wants little disruption to their lives, but Management wants 24 hours
operation to speed the project completion.
D. Society concerns on issue of environment with less pollution, but Customers wants
quality of goods at low price
(1 mark)

8. A firm need to protect the investment and concern about the ability of the company to meet
its interest and principal repayment obligations of the following stakeholder:

A. Bond holders
B. Shareholders
C. Directors
D. Government

(1 mark)

9. Which of the following statement is NOT TRUE about the control measures to reduce the
problem of agent and principal?

A. Prepare a set of contracts between a principal and an agent which clearly explain
the principal-agent relationship.
B. Devise an appropriate incentive that tied up to company earnings and performance
so that management feel motivation to pursue the goal of the shareholders.
C. Threat of firing to management who are acting for the best interest of stockholders
D. Provide a stable dividend policy to reduce the possibility of the management
misusing the firm free cash flow.
(1 mark)

10. Safeguarding against the risk of unethical behavior may also include the adoption of a
corporate governance framework such as:

A. Restrict the power of executive directors

B. Increase the role of independent non-executive directors
C. Issue a code of conduct outlining key ethical values
D. All the above.

(1 mark)
 TEST 1 DEC 2020/MAF603

11. Which one is refer to the result of Serial Correlation Test that indicate efficient market?

A Positive correlation
B -1.0 correlation
C Near zero correlation
D 1.0 Correlation
(1 mark)

12. If you can use _____ information to earn abnormal returns consistently, then the market
cannot be _____ form efficient.

A private, weak
B public, semi-strong
C public, weak
D private, semi-strong
(1 mark)

13. Based on Efficient Market Hypothesis (EMH), which of the following statement is FALSE?

A If market is Weak Form Efficiency, you would not be able to gain abnormal return
by using Fundamental Analysis
B If market is Semi Strong Form Efficiency, you would be able to gain abnormal
return by using Technical Analysis.
C Trading strategies based on historical market data are known as technical
analysis.
D If the strong form of the EMH is true, insiders would not be able to profit from
trading on their information.
(1 mark)

.14. What is the result of the widespread usage of internet with regards to efficient market?

A It makes information cheaper and more accessible, thus making markets more
efficient
B It is subject to new regulation, thus making markets less efficient
C It increases the volatility of security prices, thus making markets less efficient
D It increases competition among brokers, thus making markets more efficient

(1 mark)

15. Based on Efficient Market Hypothesis (EMH), which of the following statement is TRUE?
 TEST 1 DEC 2020/MAF603

A In a semi-strong form efficient market, it is impossible to earn abnormal profit by

using all types of available information
B In a strong form efficient market, security price is always equal to intrinsic value.
C If the market is inefficient, a diligent study of financial statement is of no economic
value
D Based on behavioral challenge to market efficiency, representativeness
characteristic of irrational investor cannot lead to bubbles in security prices

(1 mark)

16. If the weak form of efficient markets holds, then:

A Technical analysis is useless.

B Stock prices reflect all information contained in past prices.
C Stock prices follow a random walk.
D All of the above
(1 marks)
(Total: 16 marks)

SECTION B: ESSAY AND CALCULATED QUESTION

QUESTION 1

Q17
A. Market efficiency refers to how the current prices of the underlying assets or securities
traded at the stock markets are reflected by all available and relevant information
concerning the respective securities.

Discuss whether there are opportunities to make abnormal returns for each of the
situations below (assuming market is a semi strong form efficient market):

i. A Member of Parliament realizes that a new regulation will be passed soon, which
would significantly benefit a certain company. He secretly purchases shares of the
company and pushes for the regulation to pass as soon as possible.

ii. An investor wants to invest in Faitech Bhd’s share as soon as he received the
information about the announcement that Faitech Bhd is eventually giving out an
additional RM0.30 interim dividend per share

iii. Technical traders’ study short-term trends and patterns and attempt to detect
buying and selling opportunities based upon these patterns
(5 marks)
 TEST 1 DEC 2020/MAF603

Q18.
B Briefly explain the following behavioral and empirical challenges to the efficient market
hypothesis:

i. Rationality
ii. Independent Deviation from Rationality
iii. Crashes and Bubbles
(4 marks)

(Total: 9 Marks)

QUESTION 2 2
Q19abcd

Rahman who recently won the 2020 Malaysian Open Badminton Championship is considering
investing his prize money in the following two stocks, Domino and Nestle. Since you are his best
friend, he has asked you to assist him in coming out with an appropriate investment analysis. He
has managed to collect the following information for your consideration.

State of Economy Probability of Return on Security Return on Security

Outcome Domino Nestle
Optimistic 0.20 0.10 0.25
Normal 0.70 0.20 0.20
Pessimistic 0.10 0.30 0.15

Required:

a. Calculate the expected return and standard deviation of each security.

(7 marks)

b. Calculate the covariance and correlations between the two securities.

(3 marks)

c. Determine the expected return and the standard deviation of a portfolio with half of its fund
invested in each of the securities?

(3 marks)

d. Suppose now Rahman furnishes you with the following information:

Correlation coefficient stock Domino with market return +0.75

Correlation coefficient stock Nestle with market return +0.30
Return on government securities 0.06
Market return 0.18
Standard deviation on the market returns 0.20
 TEST 1 DEC 2020/MAF603

Required:

i. Compute the covariance between the return of each stock and the market portfolio.

(3 marks)
ii. Determine the beta for each stock.
(2 marks)

iii. Ascertain the expected/required return of stock Domino assuming the Capital
Asset Pricing Model (CAPM) holds.
(2 marks)

Q20
e. Rahman try to understand the portfolio theory and he has the following question for you:

Explain the difference between the Capital Market Line (CML) and the Security Market
Line (SML).
(5 marks)
(Total: 25 marks)

END OF QUESTION