PART A: MULTIPLE CHOICE QUESTIONS (40 MARKS)

Answer ALL questions in this section using the OMR form provided.

1. Which one of the following is classified as an intangible fixed asset?

A. Building
B. Trademark
C. Account receivables
D. Production equipment

2. The percentage of the next ringgit (RM) you earn that must be paid in taxes is referred
to as the _________________ tax rate.

A. total
B. average
C. residual
D. marginal

3. Which one of the following statements related to an income statement is CORRECT?

A. Interest is a non-cash expense.

B. Depreciation decreases tax payment.
C. The addition to retained earnings is equal to net income plus dividends paid.
D. Credit sales are recorded on the income statement when the cash from the sale is
collected.

4. Bonner Collision has shareholders' equity of RM141,800. The firm owes a total of
RM126,000 of which 60 percent is payable within the next year. The firm net fixed
assets of RM161,900. What is the amount of the net working capital?

A. RM25,300
B. RM30,300
C. RM75,600
D. RM86,300

5. Kaylor Equipment Rental paid RM75 in dividends and RM511 in interest expense. The
addition to retained earnings is RM418 and net new equity is RM500. The tax rate is
35 percent. Sales are RM15,900 and depreciation is RM680. What are the earnings
before interest and taxes (EBIT)?

A. RM1,269.46
B. RM1,331.54
C. RM1,951.54
D. RM1,949.46

6. Which of the inancial statements describe the profitability of the business?

A. Balance sheet
B. Income statement
C. Statement of shareholders equity
D. Account receivables aging schedule
 PART B: STRUCTURED QUESTIONS (60 MARKS)
Answer ALL questions in this section in the space provided.

QUESTION ONE (12 MARKS)

a) If, as an investor, you had a choice of daily, monthly or quarterly compounding, which
would you choose? Why?
(3 marks)

compounding over monthly or quarterly. The greater

The investor should choose daily the

number of compounding periods, the larger the future value.

b) Sara wants to buy a new LCD TV in 2 years, when she think prices will have gone down
to a more reasonable level at RM1,800. If she can invest her money at 12 percent
compounded monthly, how much does she need to put aside today?
(3 marks)

1,800 = PV (FVIF 12/12%, 2X12)

1,800 = PV (1.2697)

PV = RM1,417.66

c) After graduation, you plan to work for Gading Enterprise for 12 years and then start your own
business. You expect to save and deposit RM750 a year for the first 6 years. The first deposit
will be made a year from today. In addition, your grandfather just gave you a RM2,500
graduation gift which you will deposit immediately. If the account earns 9 percent
compounded annually, how much will you have when you start your business 12 years from
now?
(6 marks)

Annuity
Year 1-6

FVA = 750 (FVIFA 9%,6)

= 750 (7.5233)

= RM5,642.48

Year 7-12

FV = 5,642.48 (FVIF 9%,6)

= 5,642.48 (1.6771)

= RM9,463.00

Single Sum

FV = 2,500 (FVIF 9%,12)

= 2,500 (2.8127)

= RM7,031.75

Total = 9,463.00 + 7,031.75

= RM16,494.75
QUESTION 2 (12 MARKS)

a) What is the expected return on a portfolio which is invested 25 percent in stock A, 55

percent in stock B, and the remainder in stock C?
(2 marks)

Expected Expected Return

State of Economy
Return Stock A Stock B Stock C
Boom 15% 19% 9% 6%
Normal 25% 11% 8% 13%
Recession 60% -23% 5% 25%

E(r)Boom = (0.25 x 0.19) + (0.55 x 0.09) + (0.20 x 0.06) = 0.109 0.5 mark
E(r)Normal = (0.25 x 0.11) + (0.55 x 0.08) + (0.20 x 0.13) = .0975 0.5 mark
E(r)Recession = (0.25 x - 0.23) + (0.55 x 0.05) + (0.20 x 0.25) = 0.02 0.5 mark
E(r)Portfolio = (0.15 x 0.109) + (0.25 x 0.0975) + (0.60 x 0.02) =5.27 percent 0.5
mark

b) What is the expected return, standard deviation and coefficient of variation for the
following stock?
(3
marks)

State of Economy Expected Return Rate of Return if

State Occurs
Boom 0.10 -19%
Normal 0.60 14%
Recession ? 35%

? = 1-(0.1 + 0.6) = 0.3 0.5 mark

E(R) = 0.10(-0.19) + 0.60(0.14) + 0.30(0.35) = 17.00 percent 0.5 mark
2 = 0.10(-0.19 - 0.17)2 + 0.60(0.14 - 0.17)2 + 0.30(0.35 - 0.17)2 = 0.02322 1 mark
= 0.02322 = 15.24 percent 0.5 mark
CV = 15.24/17 = 0.896 0.5 mark
 c) Suppose you observe the following situation:
(3 marks)

Stock Beta Expected Return

ABC Berhad 0.8 12%
DEF Berhad 1.1 16%

Assume these securities are correctly priced. Based on the Capital Asset Pricing Model
(CAPM), what is the return on the market?

Rf : (0.12 - Rf)/0.8 = (0.16 - Rf)/1.1; Rf = 1.33 percent---- 1.5 marks

RM: 0.12 = 0.0133 + 0.8(RM - 0.0133); RM = 14.67 percent---1.5 marks

d) Based on the following diagram answer the following questions.

i) Stock M is considered as fairly priced stock. Do you agree with the statement? Why?
(2 marks)

- Yes. Fairly priced stock is a stock whose perceived value is equal to its current
market value2 marks

ii) If you are a rational investor, which type (undervalued, overvalued of fairly valued) of
stock will you choose?
(2 marks)
- Undervalued stock because, the perceived value is more than the current market
price2 marks
QUESTION THREE (10 MARKS)

A cash budget is an important tool involving the forecasting of cash inflows and outflows over
the next short-term financial planning. It helps the financial manager to plan in advance and to
start the search for financing before the fund is actually needed. For Changloon Hardware
Enterprise, following are some important budget information for the fourth quarter of 2014.

October November December

Credit sales RM547,200 RM570,240 RM630,720
Credit purchases 211,680 252,720 288,710
Cash disbursement:
Expenses 57,240 69,420 72,430
Interest 16,410 16,410 16,410
Equipment purchases 119,520 131,040 0

In addition, Changloon Hardware has anticipates that 3 percent of its credit sales will never be
collected, 36 percent of its sales will be collected in the month of sale, and the remaining 61
percent will be collected in the following month. Moreover, its credit purchases will be paid in
the month following the purchase. Meanwhile, in the month of September, both the credit sales
and credit purchases were RM302,400 and RM224,640, respectively. As for August, the credit
sales were RM206,100 whereas credit purchases were amounting to RM150,780. It is noted that
the beginning cash balance for October was RM403,200.

You are required to calculate the cash balance at the end of November.

October cash bal. = 403,200 + (0.36 X 547,200)** + (0.61 X 302,400)** 224,640* -

57,240* 16,410* - 119,520*

= 403,200 + 196992 +184,464 224,640 57,240 16,410 119,520

= RM366,846**

November cash bal. = 366,846 + (0.36 X 570,240)** + (0.61 X 547,200)** 211,680* -

69,420* 16,410* - 131,040*

= 366,846 + 205,286.4 + 333,792 211,680 69,420 16,410 131040

= RM477,374.40**

NOTE: ** equals to 1 mark, * equals to mark

 QUESTION FOUR (10 MARKS)

a) Define the following marketable securities:

i) Commercial papers.
ii) Treasury bills (T-bills)
iii) Repurchase agreement
iv) Certificates of deposits (CDs)
(4 marks)

Commercial papers are short term loans to commercial

banks with 3-month, 6-month, 9-month and 12- month
maturities.
Treasury bills are obligations of the Central Bank with
common maturity of 30, 90 or 180 days.
Repurchase arrangement is an arrangement whereby a bank
or securities dealer sells specific securities to a firm and
agrees to purchase them in future.
Certificates of deposits are a short term promissory note issued by
commercial banks

b) Discuss the four (4) characteristics of short-term securities.

(4 marks)

Maturity Due to the changes in level of interest rate,

longer-term to maturity securities will have higher risk to
the loss of value compared with shorter term to maturity
securities
Marketability The ease of converting the securities to cash
influence the marketability of the short-term securities
Default risk The probability of defaulting the payment of
interest and principal of the securities in the promised
amount
Taxes The interest earned on money market securities are
taxable except for some government securities such as
treasury bills.

c) What are the disadvantages of holding T-bills and commercial papers?

(2 marks)

T-bills T-bills generally provide lower yields compared to alternative money

market securities
 Commercial papers There is higher default risk for commercial papers than
other short term securities.

QUESTION FIVE (8 MARKS)

a) What does the term 2/10, net 30 mean?

(2 marks)

You receive a 2% discount if you pay in 10 days, 1 mark

with the total amount due in 30 days if the discount is not taken. 1 mark

b) ABC Company has monthly sales of RM31,500 and the total variable cost of
RM18,750.The company expects that the monthly sales would be increased to RM42,000
if credit policy switch from a net 20 policy to a net 30 credit policy. The monthly interest
rate is 0.6 percent and price per unit is RM210. Based on the Net Present Value (NPV),
Should this company switch to the new credit policy?

(6 marks)

NPV = -[PQ + v(Q - Q)] + (P v)(Q - Q)/R

Total sales = p*Q

RM31,500 = RM210 * Q
Q = 150 units 1 mark
Total variable cost = V*Q
RM18,750 = V * 150
V = RM125 per unit 1 mark
Q = RM42,000 / 210
Q = 200 units 1 mark

NPV = -[(RM210 *150) + (RM125 * 50)] + [(RM210 - RM125) * 50] / .006

= -RM37,750 + RM708,333
= RM670,583 2 marks
The company should accept the new policy as NPV > zero. 1 mark
QUESTION SIX (8 MARKS)

Each year you sell 950 units of a product at a price of RM899 each. The variable cost per unit is
RM575 and the carrying cost per unit is RM16.90. You have been buying 100 units at a time.
This stock is depleted each period and reordered. Your fixed cost of ordering is RM60.

a) What is your total cost if you have been buying 100 units at a time?
(3 marks)

Total carrying cost= ( Q2 ) CC = (100/2) * 16.90 = RM845. (1 mark)

T
Total restocking cost=F ( ) = 60 * (950/100) = RM570. (1 mark)
Q
Total cost = RM845 + RM570 = RM1415. (1 mark)

b) What is the economic order quantity (EOQ)?

(2 marks)

EOQ = [(2 950 RM60)/RM16.90]1/2 = 82 units (2 marks)

c) How much can you save in total cost if you order at the EOQ level?
(3 marks)

Total carrying cost=( Q2 ) CC = (82/2) * 16.90 = RM692.90. (1 mark)

Total restocking cost=F ( QT ) = 60 * (950/82) = RM695.12. (1 mark)

Total cost = RM692.90 + RM695.12 = RM1388.02

Amount saved = RM1415 RM1388.02 = RM26.98 (1 mark)

END OF QUESTIONS