GROUP ASSIGNMENT

SEM II 2022/2023
FNC3213: FINANCIAL MANAGEMENT

Learning Outcome:
CLO1: Explain the concepts and principles of financial management in the business context.
CLO2: Apply the capital budgeting techniques, time value of money concepts and risk return
relationships in making financial decisions.
CLO3: Work collaboratively in group assignment based on the topics discussed

Introduction:
Investors normally use the risk and return concepts to invest their savings, buy real estate,
finance major purchases, purchase insurance, invest in securities and implement the retirement
plan. Although the risk and return are difficult to measure precisely, the trade-offs between risk
and return may help investors to make their decisions. Therefore, this assignment allows the
students to understand the relationship between the risk and return and how to measure that
relationship to evaluate data, hence translate the data into investment decision.

Managers of a company must make investments that are worth more than they cost in present
value terms. Cost of capital is the rate of return that financial managers use to determine which
investment opportunities create value. The cost of capital represents the firm’s cost of financing
and is a minimum rate of return that a project must earn to increase the firm’s value. This
assignment will let the students to explain the various sources of capital and to demonstrate how
to calculate the costs to provide the data necessary in order to determine the company’s cost of
capital.

Capital budgeting is a process of evaluating and selecting investments that are worth more than
they cost and create wealth for investors. Companies use capital budgeting methods to analyse all
types of investments such as building new factories, buying equipment, launching new products
and conducting research and development. As a manager of a company, you need to understand
capital budgeting techniques to help determine the cash flows associated with proposed capital
expenditures. Thus, this assignment will let the students to correctly analyse the cash flow of
proposed projects and decide whether to accept or reject them.

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 GROUP ASSIGNMENT
Instructions:

1. Students are required to form a group of FIVE (5) members to complete the assignment.

2. Each and everyone in the group is required to fill in the RUBRIC PEER ASSESSMENT
FORM (refer to Oceania) as it will contribute 10% out of the overall marks of the group
assignment.

3. RUBRIC PEER ASSESSMENT form must be submitted individually to your lecturer

through Oceania OR some other methods (please refer to your lecturer).

4. Each group is responsible to submit the softcopy of the group assignment (via Oceania).

GUIDELINES FOR PREPARING REPORT

1. The report must be typed using A4 paper size, Tahoma 11 point font, 1.0 spacing.
2. Each page must have the page number typed on the right-hand corner beneath the
page.
3. Use only English language.
4. The cover page of the report should have the title, lecture group, group member’s
name and matric numbers (ascending order). Your lecturer’s name is optional.

Example:

UMT LOGO

GROUP ASSIGNMENT
FNC3101 FINANCIAL MANAGEMENT

GROUP: 12

GROUP MEMBERS :
1. S12000 SITI FATIMAH BT ZAINAL
2. S12340 IBRAHIM BIN MOHAMAD
3. S12440 ZUHAIR BIN EMBONG
4. S12441 AISYAH BT ISMAIL

LECTURER :

7. Deadline for submission :

Date - 18 June 2023 (Sunday)
Time - before 4.00 pm
Venue - Oceania (online)

Reminder:
Content of the report should satisfy all the above instructions. Deduction of marks will be
implemented on groups that fail to follow any of the above instructions.

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 GROUP ASSIGNMENT
QUESTION 1: Risk and Return

In most important business decisions, there are two key financial consideration: risk and
return. As an investor, an individual needs to expand his/her consideration towards the
performance of individual assets as compared to just concentrate on the return behaviour of
a few large portfolios. Firstly, the person should know the risk of individual assets and how to
measure it. Secondly, the person must quantify the relationship between an asset’s risk and
its required return.

An investor named Sumayyah is considering investing in three (3) different stocks or creating
three distinct two-stock portfolio. Sumayyah consider herself to be a rather conservative
investor. She is able to obtain forecasted returns for the three securities for the year 2023
through 2029. The data of the individual stocks are given in the following table.

Year STOCK X STOCK Y STOCK Z

2023 11% 12% 10%
2024 12% 12% 13%
2025 14% 9% 9%
2026 13% 13% 10%
2027 15% 11% 8%
2028 13% 16% 8%
2029 11% 16% 9%

In any possible two-stock portfolios, the weight of each stock in the portfolio will be 50%. The
three possible portfolio combinations are XY, XZ and YZ.

As an investment advisor, your task is to recommend the appropriate investment strategies

that most suited to your client’s investment portfolio, in this case, Sumayyah.

You are required to:

1. Determine the expected return and risk of:
a. individual stocks.
b. three possible portfolio combinations.

2. Give your recommendation to Sumayyah whether she should invest in:

a. single stock X or the portfolio consisting of stock X and Y.
b. single stock Y or the portfolio consisting of stock Y and Z.

Your recommendation must be from the risk-return viewpoint.

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 GROUP ASSIGNMENT
QUESTION 2: Cost of Capital

For a firm to maximise the shareholder wealth, managers must make investment that are worth
more than they cost in present value term. The rate of return that financial managers use to
determine which investment opportunities create value is also known as cost of capital. In
other words, it represents the firm’s cost of financing and is the minimum rate of return that a
project must earn to increase the firm’s value.

As a financial manager of a firm, you have been asked to measure the cost of each specific
type of capital as well as the weighted average cost of capital (WACC). The weighted average
cost is to be measured by using the following weights:
• 40% - long-term debt,
• 10% - preferred stock,
• 50% - common stock equity (retained earnings, new common stock, or both).

The firm's tax rate is 20%.

Your firm can sell for RM1010 a 15-year, RM1,000-par-value bond paying annual interest at a
6.00% coupon rate. A flotation cost of 3.5% of the par value is required. A 9.00% (annual
dividend) of issue price preferred stock having an issue price of RM110 can be sold for RM98.
An additional fee of RM3 per share must be paid to the underwriters. Your firm's common stock
is currently selling for RM8 per share. The stock has paid a dividend that has gradually
increased for many years, rising from RM0.25 ten years ago to the RM0.67 dividend payment,
D0, that your firm just recently made. If your firm wants to issue new common stock, it will sell
them RM1.00 below the current market price of the stock to attract investors and will pay
RM1.50 per share in flotation costs.

You are required to calculate:

1. the after-tax cost of debt.
2. the cost of preferred stock.
3. the cost of common stock (both retained earnings and new common stock).
4. the WACC for your firm.

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 GROUP ASSIGNMENT
QUESTION 3: Capital Budgeting

After considering and analysing all information regarding a firm’s cost of capital, now it is time
for evaluating and selecting investments that are worth more than they cost and create wealth
for investors. A firm needs procedure to analyse and select the best investment alternatives.
There are a few methods that are available which may help a firm to decide which is the best
investment to choose.

Your firm is attempting to select the best of three mutually exclusive projects. The initial
investment and subsequent cash inflows associated with these projects are shown in the
following table:

Cash flows Project A Project B Project C

Initial investment (CF0) -RM30,000 -RM60,000 -RM70,000
Cash inflows (cft, t = 1-5) RM10,000 RM21,500 RM22,500

You are required to do the followings:

1. Calculate the payback period for each project.
2. Calculate the net present value (NPV) of each project, assuming that your firm has a
cost of capital equal to 11%.
3. Calculate the internal rate of return (IRR) for each project.
4. Draw the NPV profiles for all three projects on the same set of axes and discuss any
conflict in ranking that may exist between NPV and IRR.
5. Summarize the preferences dictated by each measure and indicate which project would
your firm choose. Explain your reason.

All the best!