CONFIDENTIAL MAF253/TEST/MAY2022

UNIVERSITI TEKNOLOGI MARA

COMMON TEST
SUGGESTED SOLUTION

COURSE : FUNDAMENTALS OF FINANCIAL MANAGEMENT

COURSE CODE : MAF253

DATE : MAY 2022

TIME : 1 HOUR 30 MINUTES

©Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

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QUESTION 1

a) Explain THREE (3) areas of decision function in financial management.

1. Investment Decision – is divided into 2:

a) Capital Investment decision

✔ Involves a large sum of money.
✔ Non-routine
✔ The effect of the decision on the firm is normally critical.
✔ Decision on whether to acquire a new machine or set up a new plant.

b) Working capital investment decision

✔ A more routine (daily basis) or scheduled form of decision.
✔ Decisions on the determination of the amount of inventories, cash, receivables to
hold within a certain period.

2. Financing Decision
✔ Borrowing
▪ Short-term Debt vs Long-term Debt
✔ Issuing common stock or preferred stock
✔ Using retained earnings.

3. Asset Management Decision

✔ Once assets have been acquired, these assets must be managed efficiently.
✔ Financial manager will focus more on the management of current assets while,
operating manager will focus on the management of non-current assets.
✔ Managing current assets effectively and efficiently is important to ensure company’s
return is maximize and risk of illiquidity is minimized.

(2 marks for each decision & explanation X 3 = 6 marks)

b) Discuss TWO (2) responsibilities of financial manager in managing the firm’s

funds.

1. Forecasting and planning

● Financial manager must be able to forecast the company’s future performance.
● Forecasting is made based on the company’s past and present performance and
other factors.

2. Investment and financing decisions

● Determine sales growth rates
● Determine what specific assets to purchase
● Determine the best method of financing those assets.
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3. Coordination and control

● Financial manager needs to interact with other departments within the organization.
● This is important because the decisions of other departments might affect investment
decisions.

4. Dealing with financial markets

• Has to obtain financing either through money market or capital market.
• Has to decide on investing idle funds in the financial market
• Has to foster relationships with creditors.

(any 2 responsibilities & explanation X 2 marks = 4 marks)

(Total: 10 marks)

QUESTION 2

a)
No Ratio Formula Workings UC Industry
1. Current Ratio CA 964,000 2.39 x 2.5 x
CL 404,000
2. Acid Test CA-Inventory-PE 964,000-300,000-100,000 1.40 x 1.5 x
Ratio CL 404,000
3. Inventory COGS 3,500,000 11.67 x 12 x
Turnover Inventory 300,000
4. Average Acc. Rec. x 360 444,000 x 360 31.97 days 25 days
Collection Credit Sales 5,000,000
Period
5. Times interest EBIT 652,000 2.23 x 3x
earned Interest exp. 292,000
6. Debt Ratio Total Debt 2,356,000 55.25% 50%
Total Assets 4,264,000
7. Operating EBIT x 100 652,000 13.04% 30%
profit margin Sales 5,000,000
8. Net profit EAT x 100 273,600 5.47% 10%
margin Sales 5,000,000
9. Return on EAT 273,600 6.42% 15%
Assets (ROA) Total Assets 4,264,000
10. Return on EAT 273,600 14.34% 20%
Equity (ROE) Total Equity 1,100,000+808,000
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b).
Liquidity Ratio Analysis
1. Liquidity [Current ratio and Acid Test ratio] for Unique Ceramic Sdn Bhd are slightly
lower than the industry average. The possible reasons are the company is holding too much
inventory and is not efficient in collecting debts from the customers.

Profitability Ratio Analysis

II. The profitability ratios [Operating profit margin and Net profit margin] of the company
are below the industry average. These indicate inefficient management, mismanagement of
expenses, or inefficient pricing mechanism. The company needs to reduce its COGS and
operating expenses to get a higher gross profit and net profit .

Efficiency Ratio Analysis

III. The company is less efficient as compared to the industry average as shown by slower
Inventory turnover, longer collection period, and lower ROA and ROE. This means that the
company is less efficient in selling its inventory, and managing its receivables and other
assets to generate sufficient sales. The company needs to manage its inventory turnover,
debt collection, and the utilization of its assets to get a higher gross profit and net profit.

( 5 marks)
(Total: 15 marks)
QUESTION 3

A.
a.
Assets Sources of financing
PA 650,000+ (1/3 X 760,000 PS 760,000 + ½ 870,000
330,000) (220,000)
TA 2/3 x 330,000 220,000 TS 980,000 -760,000 110,000

980,000 980,000

(4 marks)

b. The company adopts conservative approach of financing because it financed all of the
permanent assets (RM760,000) and some of the temporary assets (110,000) using
permanent sources of financing . Using the higher amount of permanent source of
financing to finance both permanent and temporary assets will result in lower risk of illiquidity
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as the liquidity position is at higher level. Lower return will be experienced because of the
higher level of interest payment

(3 marks)
c.
Earnings before interest and taxes 800,000
Less: Interest (6% x 870,000) + (4% x 110,000) (56,600)
Profit before tax 743,400
Less: Tax (25%) (185,850)
Net Profit after tax 557,550

(3 marks)

B.

a) CCC = ICP + RCP - PDP

ICP = RM2.25 million x 360 days

(55% x RM22 million)
= 67 days

RCP = RM1.75 million x 360 days

(85% x RM22 million)
= 34 days

PDP = RM750,000 x 360 days

(55% x RM22 million)
= 22 days

CCC = ICP + RCP - PDP

= 67 + 34 + 22
= 123 days
(6 √ x ½ = 3 marks)

b) Motive for holding cash:

- Transactions motive: Cash balances held are for the purpose of meeting cash
needs arising in the ordinary course of doing business.

- Precautionary motive: The cash balances act as a buffer for unexpected

needs that may arise.

- Speculative motive: Cash balances are held for potential profit-making

situations.
(2 marks)

C.
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a. Forego cash discount

0.03 360
= × = 37.11%
1 − 0.03 50 − 20

Bank credit from Bank Ikhlas

𝐴𝑅 = 𝐴𝐵 − 𝐷𝐼 − 𝐶𝐵 + 𝐵𝑎𝑙𝑎𝑛𝑐𝑒
30
1,800,000 = 𝐴𝐵 − 0.10 ( ) 𝐴𝐵 − 0.20𝐴𝐵 + 150,000
360
1,800,000 − 150,000
𝐴𝐵 = = 𝑅𝑀2,084,210
0.79167

30
0.10 ( ) × 2,084,210 360
360
𝐸𝐴𝑅 = ×
1,800,000 30
17,368.42 360
𝐸𝐴𝑅 = × = 11.58%
1,800,000 30

Line of credit from Bank Jujur

Amount = 2,000,000
Allowed

Amount Used = 1,800,000 X 8% X 30/360 = 12,000

Unused = 200,000 X 3% = 6,000

Amount

Cost = 18,000

18,000 360
𝐸𝐴𝑅 = × = 12%
1,800,000 30

(8 Marks)

b. The company should take the cash discount and borrow from Bank Ikhlas (bank credit)
because the effective annual rate is the lowest

(2 marks)

(Total: 25 marks)
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