FIN401 2021.PDF

CONFIDENTIAL 1 BA/JUL 2021/FIN401 FACULTY OF BUSINESS AND MANAGEMENT FINAL ASSESSMENT COURSE : INTRODUCTION TO FINANCIAL MANAGEMENT C...

CONFIDENTIAL 1 BA/JUL 2021/FIN401 FACULTY OF BUSINESS AND MANAGEMENT FINAL ASSESSMENT COURSE : INTRODUCTION TO FINANCIAL MANAGEMENT COURSE CODE : FIN401 EXAMINATION : JULY 2021 TIME : 3 HOURS PLATFORM : GOOGLE FORM INSTRUCTIONS TO CANDIDATES 1. This question paper consists of two (2) parts : PART A (20 Questions) PART B (4 Questions) 2. Answer ALL questions. Start each answer on a new page. 3. Answer ALL questions in English. DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 8 printed pages © Hak Cipta Universiti Teknologi MARA CONFIDENTIAL CONFIDENTIAL 2 BM/JUL 2021/FIN401 PART A [Total marks :20 marks] ANSWER ALL QUESTIONS 1. Which of the following statement(s) best describes the collateral in the 5 C’s of credit? a) assets customer offers as a pledge for security of the credit extended b) probability that the customer will honor his/her obligation c) general financial position of the customer d) subjective judgement of the customers’ ability to pay 2. Which of the following statement(s) best describes an accounts receivable? a) amount owe to the company as a result of credit sales to customers b) amount owe to the bank as a result of loan provided to customers c) amount the borrower must pay to the lender d) amount the customer must pay to the bank 3. Based on the following, choose the best statement(s) to describe the work-in-progress inventory. a) goods on which the production has been completed but that are not yet sold. b) partially finished goods requiring additional work before they become finished goods. c) basic materials purchased from other firms to be used in the firm’s production operations. d) goods on which the production has been completed 4. All of the following statement are potentially define the finished goods. Which ONE of the statement is correct? a) goods on which the production has been completed but that are not yet sold. b) partially finished goods requiring additional work before they become finished goods. c) basic materials purchased from other firms to be used in the firm’s production operations. d) goods on which the production has been completed 5. __________ is a typical duration of a line of credit agreement. a) 2 years b) 3 years c) 4 years d) 1 year 6. Below statements are potentially explain the compensating balance. Which of the following statement(s) is correct? a) a balance in the customer’s account to compensate for the loan b) amount that the bank requires the customer to comply to c) a required checking account balance d) a minimum balance in the customer’s account © Hak Cipta Universiti Teknologi MARA CONFIDENTIAL CONFIDENTIAL 3 BM/JUL 2021/FIN401 7. Several differences between various banks that a firm must consider before entering a relationship with bank. Among the differences are listed below EXCEPT a) Different risk attitude, bank loyalty and loan size. b) Size of the bank and the firm, different risk attitude, and counsel provided. c) Loan specialization, bank royalty and other services. d) Counsel provided, Size of the bank and the firm, and other services. 8. Commercial paper is essentially: a) Another term for junk bond. b) A short-term unsecured promissory note. c) An intermediate term corporate bond. d) A certificate that may be exchanged for a share of common stock as a specified future date. 9. Which of the followings is spontaneous financing? a) inventory b) account receivable c) account payable d) commercial paper 10. The cost of bank loans varies for different borrowers at a given time, depending on their credit risks and terms in securing the loans. Key terms to understand in determining the cost of bank loans EXCEPT: a) Effective annual interest rate b) Free trade credit c) Discounted loans d) Compensating balances 11. The par value of a bond is a) RM100 b) RM1000 c) No par value d) RM 10,000 12. The expected rate of return on a bond if bought at its current market price and held to maturity. a) Yield to maturity b) Current yield c) Coupon yield d) Capital gains yield 13. The concept behind the time value of money is that a dollar today is worth more than a dollar in the future because ________. a) inflation erodes the value of money over time b) investors can earn a return on money they have today and thereby have more money in the future c) the future is more uncertain than the present d) investors are impatient © Hak Cipta Universiti Teknologi MARA CONFIDENTIAL CONFIDENTIAL 4 BM/JUL 2021/FIN401 14. _________ is the process of determining how much money that investment will produce in the future. a) discounting b) compounding c) present value d) annuitizing the cash flow 15. What does it mean by an annuity? a) a mix of cash flows in conventional and nonconventional b) a stream of perpetual cash flows c) a series of constantly growing cash flows d) a series of equal annual cash flows 16. Which of the following statement(s) is true between the comparison of an ordinary annuity and an annuity due? a) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity. b) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due. c) The present value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due. d) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due. 17. Which of the following is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing owners' wealth? a) Recapitalizing assets b) Capital budgeting c) Ratio analysis d) Securitization 18. ___________ is the amount earned on a deposit that has become the part of the principal at the end of a specified time-period. a) Discount interest b) Compound interest c) Primary interest d) Future value 19. Which of the following means the acceptance of one eliminates the others from further consideration when projects that compete with one another? a) Independent projects b) mutually exclusive projects c) replacement projects d) capital projects © Hak Cipta Universiti Teknologi MARA CONFIDENTIAL CONFIDENTIAL 5 BM/JUL 2021/FIN401 20. All of the following statements are not the potential reasons that makes NPV a better approach to capital budgeting on a purely theoretical basis except a) It measures the benefits relative to the amount invested. b) It measures the actual value created by an investment. c) Financial decision makers are inclined to higher rates of return. d) Interest rates are expressed as annual rates of return. (20 marks) © Hak Cipta Universiti Teknologi MARA CONFIDENTIAL CONFIDENTIAL 6 BM/JUL 2021/FIN401 PART B [Total marks: 40 marks] ANSWER ALL QUESTIONS QUESTION 1 Baitul Authentic Enterprise is involved in the production of dates the oldest cultivated fruits. This enterprise normally uses 8,500 boxes of dates annually with the selling price of RM25 per box. The carrying cost for the dates if 6 percent from the selling price while ordering cost is estimated at RM120 per order. Besides, Baitul Authentic Enterprise has also decided to maintain safety stock of 1,500 boxes of dates and it will take 12 days for the dates to be delivered. (Assume 1 year = 360 year). You are required to: a) Compute the optimal Economic Order Quantity (EOQ). (Hint: the quantity of Orders must be placed in 100 units). (2 marks) b) Compute the reorder point. (2 marks) c) Compute the company’s total inventory cost of the year. (3 marks) QUESTION 2 Ariana Bhd, a graphic design firm, is planning for an expansion for their business. The company needs an additional fund of RM1 million to finance the expansion and it will take 6 months to complete the project. Below are the available sources for the company: Alternative 1 Obtains a discount loan at 10 percent interest from Mayo Bank, and the bank requiring a compensating balance equal to 5 percent of the face value of the loan. Alternative 2 Issues commercial paper at an interest rate of 10 percent per annum. The issuance of the commercial paper is at a face value of RM10,000 each paper and the bank charges a placement fee of RM100 per paper. You are required to: a) Compute the effective interest rate for each alternative. (7 marks) b) Identify the best alternative for Ariana Bhd. Justify. (1 mark) © Hak Cipta Universiti Teknologi MARA CONFIDENTIAL CONFIDENTIAL 7 BM/JUL 2021/FIN401 QUESTION 3 Edifier Berhad, a manufacturer of cotton yarn, has asked its financial manager to measure the cost of each specific types of capital. The company tax rate is 25 percent. Current investigation has gathered the following data: Debt The firm can sell for RM960, a 10-year, RM1,000 par value bond paying annual interest at a 11 percent coupon rate, A flotation cost of RM30 per bond is required. Preferred stock The firm can sell 12 percent (annual dividend) preferred stock at RM100 per share par value. Analysts expect that the cost of issuing and selling the preferred stock will be RM 5 per share. Common stock The firm’s common stock is currently selling for RM80 per share. The firms expects to pay cash dividends of RM8 per share next year. The firm’s dividends have been growing at an annual rate of 5 percent, and this growth will continue in the future. The flotation costs amount to RM6 per share. Required: a) Compute the after tax cost of debt. (4 marks) b) Compute the cost of preferred stock. (2 marks) c) Compute the cost of common stock. (3 marks) d) Identify the best source(s) of financing. Justify. (1 mark) QUESTION 4 Amir Inc. is considering two projects that will allow the firm to eliminate a production bottleneck and meet the growing demand for its products. The firm’s sport department narrowed the alternatives down to two – Status Quo (SQ) and High Tech (HT). Working with the finance personnel, the firm’s CFO developed the following estimates of the cash flows for SQ and HT over the relevant 4-year time horizon. The cost of capital is 12% and these projects as equally risky. Project SQ (RM) Project HT (RM) Initial Outflow 10,000 10,000 (CF0) Year Cash Inflows 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 © Hak Cipta Universiti Teknologi MARA CONFIDENTIAL CONFIDENTIAL 8 BM/JUL 2021/FIN401 Required: a) Compute the payback period for each project. (4 marks) b) Compute the net present value for each project. (4 marks) c) Compute the internal rate of return for project HT. (3 marks) d) Determine the project should be accepted if they are independent. Justify. (2 marks) e) Determine the project should be accepted if they are mutually exclusive. Justify. (2 marks) (Total: 60 marks) END OF QUESTION PAPER © Hak Cipta Universiti Teknologi MARA CONFIDENTIAL