CONFIDENTIAL BB ACIMAR 2005/MAF380/FMC380 a UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE : INVESTMENT ANALYSIS COURSE CODE : MAF380/FMC380 DATE : 20 MARCH 2005 } TIME : 3 HOURS (9.00 AM. - 42.00 P.M.) SEMESTER : NOVEMBER 2004 — APRIL 2005, it ‘Answer ALL questions. 2. Start each answer on @ new page. 3. Do not bring any material into the examination room unless permission is given by the invigitator. 4. Please check to make sure that this examination pack consists of: i) the Question Paper ji) an Answer Booklet - provided by the Faculty ii) an Objective Answer Sheet — provided by the Facully iv) a two-page Appendix 1 (Present Value Table) DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO xxaminalion paper consists of 8 printed pages (© Hak Cipta Universit Teknologi MARA CONFIDENTIAL COPYRIGHT © UiTMCONFIDENTIAL, 2 ACIMAR 2005/MAF380/FMC380 SECTION A This section consists of 15 multiple-choice questions. Choose the most suitable answer and shade the corresponding alphabet representing the answer in the multiple choice answer sheet provided. 1. The definition of liquidity suggests an asset can be 1. 2. 3. posD converted into cash easily. easily sold. converted into cash easily with litle chance of loss. 4 and 2. Zand 3. 2 only. 3 only. 2. Gains will result from a short sale if ene peso interest rate rises so seourity prices fall. Interest rate rises so security prices rise. Inflation causes stock prices to rise. Inflation causes stock prices to fall and 3. tand 4. Zand 3. 2and 4. 3. The following persons are required to hold dealer's representative license issued under the Securities Industry Act (SIA) 1983 except pose A Stockbroker. A Dealer's Representative. A Fund Manager. A Remisier. 4. These bonds, also called high yield bonds are highly speculative and receive low, ‘sub-investment grade ratings. a. Eurobonds, b. — Mortgage bonds. c. _Junk bonds, d. Subordinated bonds. © Hak Cipta Universit Teknolog! MARA CONFIDENTIAL, COPYRIGHT © UiTMCONFIDENTIAL, 3 ACIMAR 2005/MAF380/FMC3B0 5. These are funds that normally invest in a combination of common stock and fixed income securities. Combined funds. Balanced funds. Income funds. Flexible funds. eee 6. Compared to straight bonds, convertible bonds generally carry lower coupon rates. carry lower yields. are safer and less volatile. are not callable. apse 7. Under which of the following conditions will it be prudent to exercise a warrant? a. If the prevailing stock price exceeds its book value. b. Ifthe stock price declines after the warrant is issued. ©. Ifthe prevailing market price of the stock is greater than the exercise price of ‘the warrant. d. Ifthe price of the underlying common stock is less than the exercise price of the warrant. 8. _ All of the following are assumptions made by technical analysts except a, changes in trend are caused by the shifts in demand and supply relationships. b. stock prices follow a random walk. ©. security prices tend to move in trends which persist for a reasonable length of time. 4. supply and demand are governed by various factors, rational and irrational. 9. The belief that the intrinsic value of a stock is influenced by the performance of the ‘company that issued the stock is called a. Technical analysis. b. Industry analysis. c. Fundamental analysis, 4. Economic analysis. 10. How would you explain P/E ratio differences among companies? a. __ by investors’ expectations about the future growth of the market, b. _ by investors’ estimates of the recent growth of earings. c. by investors’ expectations about the future growth of earnings. d. __byinvestors’ estimates about the recent growth of dividends. © Hak Cipta Universiti Teknologi MARA CONFIDENTIAL COPYRIGHT © UiTMCONFIDENTIAL 4 1. ACIMAR 2005/MAF380/FMC380 When analysts say that “the market” was up by 3%, they generally mean a. that the level of a stock price index was up by 3%. b. that retail prices of goods went up by 3%. ¢. that productivity was up by 3%. d. that costs were up by 3%. 12. Relative to general economic activity, the stock market is, a. —_alagging indicator. b. a coincident indicator. ¢. leading indicator. d. none of the above. 13, You can justify buying a stock if a. the expected return is greater than the required return. b. the required return is greater than the expected return. c the required return is equal to the expected return. d. the expected return is greater than the inflation rate. 44, With regard to dividends, a. dividends are declared and paid annually. b. ona practical basis, there is litle difference between a stock dividend and a stock split. c. stockholders are guaranteed of receiving the most recently declared dividend for at least two or three years. d. With a stock dividend, the book value and par value are changed. 15. Retum is important to investors because a. history generally repeats itself b. _itrepresents active cash flows. ©. _ittenables them to make comparisons among alternative investments. . it gives them an idea as to the future riskiness of the asset. (Total: 15 marks) © Hak Cipta Universiti Teknologi MARA ‘CONFIDENTIAL COPYRIGHT © UiTMCONFIDENTIAL 5 ACIMAR 2005/MAF380/FMC380 SECTION B QUESTION 4 a) En. Zaihan believes that AM Berhad, a public fisted company, is financially strong, He expects to make a prof in the form of dividends and capital gain in the next few years if he buys a few lots of the company's share. His brother, En. Kamal however, disagrees. He advises Zaihan to buy the shares of TT Berhad, another public listed company. Based on rumours, Kamal feels that the market price of TT stock will increase two folds in the next two months. “Big and quick profit” he argued. Who is the real investor? Explain why, (6 marks) b) The following are two potential investors who have different investment objectives. En. Izkar is a 56 year old retired lecturer with a wife and six schoo! going’children. En, Badul is a 25 year old lecturer who recently married his childhood sweetheart. When a friend told them about investing in the capital market, they gave different responses. () Explain two possible reasons why there will be differences in their investment objectives. (4 marks) (i!) Which types of investment vehicles would be ideally appropriate for each of them? (4 marks) (Total: 14 marks) QUESTION 2 a) Differentiate between a long purchase and short selling, and briefly discuss how each relates to expectations of a bear or bull market. (6 marks) b) Assume an initial margin of 50% and a maintenance margin of 30%. Siti Nurtaliza buys 200 shares of TSPM Stock on margin at RM70 per share. The price of the stock drops to RMG0 per share. (At the time of purchase, what was the minimum amount of money that Siti ‘Nurhaliza would have had to invest? (2 marks) (i) Calculate the actual margin at RMBO. (2 marks) (© Hak Clpta Universit Teknolog! MARA CONFIDENTIAL COPYRIGHT © UiTMCONFIDENTIAL, 6 ACIMAR 2005/MAF3B0/FMC380 (ii) Ifthe price rises to RM75, calculate the margin in Siti Nurhaliza’s account. (2 marks) (iv) Determine the price below which Siti Nurhaliza will be faced with her first margin call. (2 marks) (v) Assume the price declines to RM45, calculate the amount of the margin call. (2 marks) ©) En. Hartawan sells short 100 shares of Triple A stock at RM40. () Determine the price at which En Hartawan will earn RM700. (2 marks) (i) Calculate the gain or loss if the stock price rises to RMS3 and En. Hartawan closes out the position. (2 marks) (Total: 20 marks) QUESTION 3 a) In December 2000, both KLOFFE and COMMEX Malaysia signed a Memorandum of Understanding to merge both exchanges and the new Exchange was renamed as MDEX. (i). What does MDEX stand for? (i) State its main objective. (3 marks) b) Identity two types of investment vehicles you would acquire if the interest rates are expected to: (increase in the future. Why? (i) decrease in the future. Why? (6 marks) ©} Technical analysts believe that some of the key elements of market behavior can provide valuable insights about the condition of the market. Briefly discuss three of these indicators. (6 marks) (Total: 15 marks) © Hak Cipta Universiti Teknologi MARA CONFIDENTIAL COPYRIGHT © UiTMCONFIDENTIAL, 7 ACIMAR 2005/MAF380/FMC380 QUESTION 4 With regard to investments in unit trust funds, (a) discuss briefly two potential sources of return available to unit trust investors. (4 marks) {b) explain briefly Four factors that should be considered in selecting a fund to investiin. (8 marks) (Total: 12 marks) QUESTION 5 a) —_Juwita bought an Excel Limited stock for R20 per share early this year and the stock is currently selling at RM25, The company pays a fixed dividend of RM0.50 per share every year. Calculate the rate of return on investment if Juwita decides to dispose the stock now, after receiving the dividend. (4 marks) b) The Chairman of KBR Berhad, En. Lonjong has recently announced that expected dividends for the next three years will be as follows: Year Dividend, 4 RM2.90 2 RM2.20 3 RM1.60 The firm's assets will then be liquidated and the proceeds invested in the common stock of the other firms so that KBR will be able to pay an annual dividend of RM1.50 indefinitely. tf your required return on investment in common stock is 12%, what is the maximum amount you should pay for the stock? (6 marks) c) The yield to maturity on a 10-year bond is currently 12%. The bond has a coupon rate of 8%, Calculate the capital gain /loss on the bond if the market interest rate suddenly drops to 8%. (6 marks) (© Wak Cipta Universit Teknologi MARA CONFIDENTIAL COPYRIGHT © UiTMCONFIDENTIAL, 8 ACIMAR 2005/MAF380/FMC380 d) James Bond Company has issued 50,000 units of bonds with a face value of RIM1,000 per bond. The coupon rate-on the bond is 8%, payable annually. The bond has 15 years to maturity and similar bonds currently yield 6%, Due to financial constraints, the company has signed an agreement with the bondholders to postpone the coupon payments for years 6, 7 and 8. These coupons will be repaid on maturity. Calculate the value of the bond today. (8 marks) (Total: 24 marks) END OF QUESTION PAPER © Hak Cipta Universiti Toknologi MARA CONFIDENTIAL, COPYRIGHT © UiTMACIMAR 2005/MAF380/FMC380 APPENDIX 1 (1) CONFIDENTIAL Table A-1: Present Value of RM1 Due at the End of n Periods Period 4% 5% 6% T%. 8%. 9% 10% 12% 14% 15% 16% 18% 20% 24% 28% 1 «0615 8524 043483469269 9174 _~—~«900T 8929 8772 8808 8621 6475 8033 8065 7813 2° 9248 907089008734 BS73_ 8417-8264. «7972 «7695-7561 «7432«7182 «69446504 6104. 3 880086388396. 8163-7938. 77227513. «7118 ©6750-8575 6407 «60865787 5245-4768. 4 8548 8227 7921-7629 «7350 «7084 «683063555921 571855238158 ©4823-4230 3725 5 8219 7635 747371808806 649962095674 «51944972 4761 437140193411. 2910 6 —.7908-««.7462««7050 «6863-6302 59635645 508B 55643234104 «3704 «334927512074 7 7509 «710766516227 S835. 547051824523 3096. 37598588 3139-2791 20181776 8 7307 6768 6274-5820 540350194665 40393506 9269-3050 2680 2826 «17891388. 9 7026 6446-5919 54398002, .4604 © 241 3608 S075 284326302255 1988 | 14431084 10.6756 «61395584 508346324224 §=— 9855 522026972472 2267 «191116151164 0847 11 649658475268 475142893875 35US 2875 28BE 21491954 = st619 «1346 ©0938 0862 12 624655684970 44d0 O71 35553186 ©2567 207618691685 ©1972 112207570817 13 6006-5303. 468B 4160 3677-8262 2897 220218211625 1452 1163 10985 0610 0404 1457550514423 387834052092 263320481507 .1418 1252 0985 077904920316 15 585348104173 362431522745 28041827 1401-1229 «1079-0835 0649-0997 0247 16 589945819936 ©9387-2819 2519-2176 «1631-1229 «1069-0930 .0708 0541-0320 «0198 17 51344863 B714 31662703. «231119781456 ©1078-0929 0802-0600 04510258 0150 18 498641553503. 2959-2502 21201799 1300 0948 0808 .0691 0508. | .0376 «02080118 19 47463957 33052765 2317-1945 «1635-1161 08290708 .0596 043103130168 0092 20 48643769 311825842145 1784 148610370728 06110514 0365 ©0261 01350072 21 436835892942 2415 1987 163719510926 063805310443. «030902170109 .0058 22 A220, 341827752257 1839-1502 12280826. .0560 04620382 «0262 0181 0088 +0044. 23 40ST 3256 261821091703 «187811170738. .0491 0402-0329 0222 ©0151 0071 0084. 24 8901 S101 26701971 1877-1264. «101506590431 0349 0284-0188 ©0126-0057 0027 25 87512853 28301842 1460-1160 092305880378 0304 0245 | .0160 0105 0046 0021 CONFIDENTIAL Hak Cipta Universiti Teknologl MARAACIMAR 2005/MAF380/FMC380 APPENDIX 1 (2) CONFIDENTIAL Table A-2: Present Value of an Annuity of RM per period forn Periods Period 4% 5% 6% 7% «8% 9% 10% 12% 14% ~—*15% —*16% «18% —-20% 24% =~ 28% 1 0.9615 0.9524 0.9434 0.9345 0.9259 0.9174 0.9007 0.8925 0.6772 0.8006 0.8627 0.8475 0.8333 0.8065 0.7813 2 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6467 1.6257 1.6052 1.6656 1.5278 1.4568 1.3016 3 2.7751 2.7232 26730 26243 25771 25313 24869 24018 23216 22832 2.2450 2.1743 21065 1.9613 7.8684 4 3.6299 3.5460 3.4651 9.9872 3.3121 3.2307 2.1699 3.0373 2.9187 2.8560 2.7982 26901 25887 2.4043 22410 5 4.4518 4.3205 4.2124 4.1002 3.9927 3.8807 3.7908 3.6048 3.4331 3.3522 3.2743 3.1272 29906 2.7454 2.5320 6 5.2421 8.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114 3.8887 3.7845 3.6847 3.4976 3.3255 3.0205 2.7594 7 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638 4.2883 4.1604 4.0386 3.8115 3.6046 3.2423 2.9370 8 6.7327 6.4632 6.2098 5.9713 5.7466 5.5048 5.3349 4.9676 4.6389 4.4873 4.3436 4.0776 3.8372 3.4212 3.0758 9 7.4353 7.1078 6.8017 6.6152 6.2469 5.9952 6.7590 5.9282 4.9464 4.7716 4.6065 4.3030 4.0310 3.5655 3.1842 10 8.1108 7.7217 7.9601 7.0236 6.7101 6.4177 6.1445 5.6502 5.2161 5.0188 4.8332 4.4941 4.1925 3.6819 3.2689 11 8.7605 8.3084 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.4527 5.2337 5.0286 4.6560 4.3271 3.7757 3.3351 12 9.3851 8.8633 8.3838 7.9427 7.8361 7.1607 6.8137 6.1944 5.6603 5.4206 5.1971 4.7992 4.4902 3.8514 3.3808 13 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 5.8424 5.5831 5.3423 4.9005 46327 3.9124 3.4272 14 10.5631 9.8986 9.2950 8.7455 8.2442 7.7862 7.3067 6.6282 6.0021 5.7245 5.4675 5.0081 4.6106 3.9616 3.4587 15 11.1184 10,3797 9.7122 9.1079 8.6595 8.0607 7.6061 6.8109 6.1422 5.8474 5.5755 5.0916 4.6755 4.0013 3.4834 16 11,6523 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740 6.2651 5.9542 5.6685 5.1624 4.7296 4.0333 3.5026 17 12.4657 11.2741 10.4773 9.7632 9.1216 8.5436 6.0216 7.1196 6.3729 6.0472 5.7487 5.2223 4.7746 4.0501 3.5177 18 12.6593 11.6896 10.6276 10.0591 9.3719 8.7556 8.2014 7.2497 6.4674 6.1280 5.8178 5.2732 4.8122 4.0799 3.5204 19 13.1330 12.0853 11.1681 10.3356 9.6036 8.9501 6.2649 7.3658 6.5504 6.1982 5.8775 5.3162 4.8435 4.0967 3.5386 20 13.5903 12.4622 11.4699 10.6040 9.8181 9.1285 8.5136 7.4694 6.6231 6.2593 5.9288 5.3527 4.8696 4.1103 3.5458 21 14.0292 12.8212 11.7641 10.8355 10.0168 9.2022 8.6487 7.5620 6.6870 6.3125 5.9731 5.3837 4.8913 4.1212 3.5514 22 14.4511 13.1630 12.0416 11.0612 10.2007 9.4424 8.7715 7.6446 6.7429 6.3587 6.0113 5.4099 4.9094 4.1300 3.5558 23 14.8568 13.4886 12.9034 11.2722 10.3711 9.5802 8.8832 7.7184 6.7921 6.3088 6.0442 5.4321 4.9245 4.1371 3.5592 24 18.2470 13,7986 12.5504 11.4693 10.5288 9.7066 8.9847 7.7843 6.8351 6.4938 6.0726 54509 4.9371 4.1428 3.5619 25 15.6221 14.0939 12.7834 11.6538 10.6748 9.8226 90770 7.8431 6.8729 6.3641 6.0971 5.4669 4.9476 4.1474 3.5640 CONFIDENTIAL (@ Hak Cipta Universit Teknologi MARA