CONFIDENTIAL AC/OCT 2003/MAF380/FMC380

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE INVESTMENT ANALYSIS

COURSE CODE MAF380/FMC380
DATE 12 OCTOBER 2003
TIME 3 HOURS (9.00 a.m -12.00 p.m)

FACULTY Accountancy
SEMESTER June 2003 - November 2003
PROGRAMME/CODE Diploma in Accountancy / AC 110

INSTRUCTIONS TO CANDIDATES

1. Answer ALL questions.

2. 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 consist of:
i) the Question Paper
ii) an Answer Booklet - provided by the faculty
iii) an Objective Answer Sheet - included
iv) a two-page Appendices (Present Value Table) - included

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

This examination paper consists of 8 printed pages
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SECTION A

This section consists of 14 multiple-choice questions. Choose the most suitable

answer and shade the corresponding alphabet representing the answer in the multiple
choice answer sheet provided.

1. Ignoring risk factors, a satisfactory investment is one for which

a. the present value of benefits equals or exceeds the present value of costs
b. the future value of benefits equals or exceeds the present value of costs
c. the present value of benefits is less than the future value of costs
d. the future value of benefits exactly equals the present value of costs

(1 mark)

2. Rashid owns 200 shares of Eazy Company. The company's board of directors
recently declared a cash dividend of RM1.50 per share on May 16 payable on June
20 to shareholders of record on May 27. How much in dividends, if any will Rashid
receive if he sells his stock on May 22

a. RM300
b. Nil
c. RM150
d. RM450
(1 mark)

3. Interest in real estate as an investment increases «s«'v:o periods o*

a. recession
b. economic growth
c. deflation
d. inflation
(1 mark)

4. If the financial markets were not efficient

a. all investors would profit

b. price would indicate the proper valuation of securities
c. price would adjust rapidly
d. some investors might consistently outperform the market
(1 mark)

5. Convertible securities that may be exchanged for common stock of a company at the
option of the holder may be either

a. callable or retired bonds

b. bonds or preferred stocks
c. preferred stocks or options
d. government bonds or preferred stocks
(1 mark)
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6. If a company has a debt-equity ratio of 0.36, this means that the company has

a. 36 cents of equity in the capital structure for every RM of debt,

b. 36 cents of debt in the capital structure for every RM of equity,
c. 36 cents to cover every RM of interest expense on its debt
d. 64 cents to cover every RM of interest expense on its debt.
(1 mark)

7. If a firm has a return on assets (ROA) of 10% and a return on equity (ROE) of 10%,
which of the following statements concerning the firm is correct?

a. The operating results of the firm must be improving

b. The firm must have no financial leverage
c. The firm must have enough cash on hand to pay some extra dividends
d. The firm is losing money
(1 mark)

8. If your required rate of return is 9%, how much would you pay for an investment
today that you sell in two years for RM200?

a. RM137
b. RM168
c. RM200
d. RM242
(1 mark)

9. As the length of time to maturity of a bond increase, generally

a. the riskiness of the bond falls

b. the price of the bond becomes more volatile
c. the coupon rate rises
d. the coupon rate falls
(1 mark)

10. In the calculation of an investment's present value, the discount rate is defined as:

a. Annual rate of return that would be currently earned on similar investment

b. Individual investor's rate of return on his or her portfolio
c. Prime rate minus the risk-free rate of return
d. Real rate of return minus the required rate of return
(1 mark)

11. A bond whose coupon is greater than the prevailing market rate on new issues is
called a

a. Par bond
b. Premium bond
c. Discount bond
d. Term bond
(1 mark)
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12. One advantage of buying options is that they

a. Offer attractive leverage

b. Allow the holder to enjoy the same ownership benefits as accrue to the
common stock's holder
c. Have an unlimited life
d. Earn predictable interest income
(1 mark)

13. A RM1000 par value, 25-year bond carries a coupon rate of 10%. If the current yield
of this bond is 8%, its market price would be

a. RM1250
b. RM1500
c. RM1000
d. RM750
(1 mark)

14. Which of the following factors are included in the rating analysis for a corporate
bond?
I. The issue's indenture provision
II. The liquidity position of the issuing company
III. The issuing company's relative debt burden

a. I and II
b. I and III
c. II and III
d. I, II and III
(1 mark)
(Total: 14 marks)

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SECTION B

Question 1

a) Explain briefly two (2) differences between investor and speculator

(4 marks)

b) Give four (4) functions of Securities Commission.

(4 marks)

c) Monet Inc.'s stock is currently selling at RM80 per share. For each of the following
situations (ignoring brokerage commissions), calculate the gain or loss that Mawar
realizes if she makes a 100-share transaction.

i) She sells short and repurchases the borrowed shares at RM90 per share,
ii) She takes a long position and sells the stock at RM95 per share.

(6 marks)

d) MESDAQ was conceived as a strategy towards the achievement of Vision 2020

What does MESDAQ stands for?

State its main objective
(2 marks)

e) Distinguish between Composite Index (Cl) and Exchange Main Board All-Share
Index (EMAS)
(4 marks)
(Total: 20 marks)

Question 2

A. a) Dividends on Seludang Bhd. shares next year are expected to be RM2 per
share. The current market price of the share is RM80 per share. Investors
expect a return of 10% and the dividends will continue to grow at the current
growth rate in the future. Find the growth rate.
(2 marks)

b) Paloh Bhd. has just paid dividend of RM2.00. The dividend is expected to
decline by 10% in the next 2 years, but to grow at a rate of 12% in the third
year and at a constant rate of 8% thereafter.

i) Find the market price of the stock 3 years from today if the required
rate of return is 15%
(3 marks)

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FMC380

ii) Determine the value of the stock today if the required rate of return is
the same as above?
(4 marks)

c) CSI Bhd has earnings per share of RM0.50 and dividend payout ratio of 40%.
An investor requires a 12% return on this kind of investment. The firm's
growth rate is 5% annually. Calculate the intrinsic value of the stock?

(2 marks)

d) Ten (10) years ago, Nabilah bought a stock for RM8.00. At the end of each of
these years, she received dividend payment of RM0.80 per share. If Nabilah
wishes to have a return of 30%, at what price must Nabilah sells the stock at
the end of the third year?
(4 marks)

B. Based on the government announcement on June 2003, one lot of share is

equivalent to 100 units of shares. Assume you bought 12 lots of Sara's share for
RM6 per share in 2001 before the ex-dividend date. The company declared dividend
of RM0.7 per share in 2001 and RM0.8 per share in 2002. You eventually sold the
shares at RM8 in 2003. Calculate your total return on your investment in Sara's
shares in terms of value and percentage.
(8 marks}
(Total: 2" marks)

Question 3

a) Give two (2) advantages of warrant issuer and investors.

(4 marks)

b) Carmen Berhad plans to raise its capital by RM25 million through right issue.
Currently, the company's common stocks are selling at RM5.00 per share. The
company's management has agreed to set the subscription price at RM2.50 per
share. Below is Carmen's Partial Balance sheet before the right issue.

Carmen Berhad
Partial Balance Sheet
(in RM Million)

Common Stock RM1 par value 50

Premium 25
Retained Earnings 35
110
i) How many new shares will be issued if all the rights were exercised?

(2 marks)

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FMC380

ii) How many rights are required to buy a new share?

(2 marks)

Hi) Calculate the ex-right price of Carmen shares.

(3 marks)

iv) What could be the value of one right, ex-right?

(2 marks)

v) If Karla has 60 lots of Carmen shares cum-right/rights - on, how many new
shares would she be able to buy using all her rights? (Assume: 1 lot is equal
to 100 shares)
(1 mark)

vi) Show the new partial Balance Sheet for Carmen after the right issue.
(Assume all right holders will exercise their rights)

(2 marks)
(Total: 16 marks)

Question 4

A. Discuss two (2) effects to the company upon the exercise of convertible bond.

(2 marks)

B. In 2002 Senario Bhd issued RM10 million, 10% callable convertible bonds that will
mature in year 2022 and interest payments are paid semi-annually. They are
callable any time with a call penalty of one year's interest being payable. The
conversion price is 2.5% of the par value (RM1000) and the company's ordinary
share is currently selling 10% above the conversion price. Other similar bonds in the
same industry are yielding 15% to maturity. The company has 2 million shares
outstanding and the corporate tax rate is 28%.

a) What is the conversion value of each convertible bond?

(2 marks)

b) If the convertible bond is being traded in the market at RM1200, calculate the
conversion premium?
(1 mark)

c) What is the number of additional shares if all the convertible bonds are fully
converted?
(2 marks)

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 CONFIDENTIAL 8 AC/OCT 2003/MAF380/
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d) And if (c) happens what would be the earnings per share before and after the
conversion? (Assuming the company's current earnings (EBIT) is RM4
million)

(5 marks)

e) How much will the holders receive if they do not convert the convertible bond
when it is called?
(1 mark)

f) If the convertible bond is to be called, what would the holders do?

(3 marks)

g) Given the above situation, what is the probability that Senario will call the
convertible bonds? Explain your answer.
(1 mark)
(Total: 17 marks)

Question 5

a) Differentiate between a debenture and a mortgage bond?

(2 marks)

b) A 10 year RM1.000 par, zero-coupon bond was sold at issue for RM508. Calculate
the rate of return from investment in this bond.
(3 marks)

c) A RM1,000, 20 year corporate bond was issued 10 years ago. The bond is paying
an annual interest of RM110.

i) Calculate the coupon yield for the bond.

(1 mark)

ii) If the bond is being sold in the market at a price, which is equal to its par
value, what should be the expected rate of return from an investment in this
bond?
(2 marks)

iii) If the market price of the bond is RM950, find the yield-to-maturity for the
bond. If your required rate of return is 12%, will you buy this bond? Why?

(4 marks)
(Total: 12 marks)

END OF QUESTION PAPER

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CONFIDENTIAL APPENDIX 1 (1) AC/OCT 003/MAF380/FMC380

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T 003/MAF380/FMC380

Table A - 2 : Present Value of an Annuity of RM1 per period for n Periods

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Period 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 16% 18% 20% 24% 28%
1 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8772 0.8696 0.8621 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 1.5656 1 .5278 1 .4568 1.3916
3 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018 2.3216 2.2832 2.2459 2.1743 2.1065 1.9613 1.8684
4 3.6299 3.5460 3.4661 3.3872 3.3121 3.2397 3.1699 3.0373 2.9137 2.8550 2.7962 2.6901 2.5887 2.4043 2.2410
5 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048 3.4331 3.3522 3.2743 3.1272 2.9906 2.7454 2.5320
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O 6 5.2421 5.0757 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
o 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 5.5348 5.3349 4.9676 4.6389 4.4873 4.3436 4.0776 3.8372 3.4212 3.0758
9 7.4363 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282 4.9464 4.7716 4.6065 4.3030 4.0310 3.5655 3.1842
10 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 5.2161 5.0188 4.8332 4.4941 4.1925 3.6819 3.2689

^^_ 11 8.7605 8.3064 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 7.5361 7.1607 6.8137 6.1944 5.6603 5.4206 5.1971 4.7932 4.4392 3.8514 3.3868
APPENDIX 1

13 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 5.8424 5.5831 5.3423 4.9095 4.5327 3.9124 3.4272
14 10.5631 9.8966 9.2950 8.7455 8.2442 7.7862 7.3667 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 8.5595 8.0607 7.6061 6.8109 6.1422 5.8474 5.5755 5.0916 4.6755 4.0013 3.4834

16 1 1 .6623 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 12.1657 1 1 .2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196 6.3729 6.0472 5.7487 5.2223 4.7746 4.0591 3.5177
18 12.6593 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497 6.4674 6.1280 5.8178 5.2732 4.8122 4.0799 3.5294
19 13.1339 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658 6.5504 6.1982 5.8775 5.3162 4.8435 4.0967 3.5386
20 13.5903 12.4622 11.4699 10.5940 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 10.8356 10.0168 9.2922 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
_i 23 14.8568 13.4886 12.3034 11.2722 10.3711 9.5802 8.8832 7.7184 6.7921 6.3988 6.0442 5.4321 4.9245 4.1371 3.5592
^ 24 15.2470 13.7966 12.5504 11.4693 10.5288 9.7066 8.9847 7.7843 6.8351 6.4338 6.0726 5.4509 4.9371 4.1428 3.5619
25 15.6221 14.0939 12.7834 1 1 .6536 10.6748 9.8226 9.0770 7.8431 6.8729 6.4641 6.0971 5.4669 4.9476 4.1474 3.5640
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