CONFIDENTIAL i ] BA/JUN 2018/FIN430 \ Z Ses UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE : INTRODUCTION TO CORPORATE FINANCE COURSE CODE : FIN430 EXAMINATION : JUNE 2018 TIME : 3HOURS INSTRUCTIONS TO CANDIDATES 1 This question paper consists of five (5) questions. 2. ‘Answer ALL questions in the Answer Booklet. Start each answer on a new page. 3, Do not bring any material into the examination room unless permission is given by the invigilato. 4 Please check to make sure that this examination pack consists of: i) the Question Paper ii) an Answer Booklet ~ provided by the Faculty 5. ‘Answer ALL questions in English. DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO. This examination paper consists of 6 printed pages © Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 2 BA/JUN 2018/FIN430 QUESTION 4 a) _ Explain three (3) main areas of decisions in corporate finance. (6 marks) b) The following information is collected from XXX Database on February 2018. Legacy Corporation Balance Sheet as at 31% December 2017 (RM '000) a CURRENT ASSETS CURRENT LIABILITIES Cash 130 Accounts payable 510 Marketable securities 500 Notes payable 270 Accounts receivable 950 Accruals 150 Inventories 400 Other current liabilities 650 FIXED ASSETS LONG TERM LIABILITIES Gross Property, plant and 4520 Long-term borrowings 2,000 ‘equipment (unsecured) Less: depreciation (1,000) Net Property, plant and 3,520 SHAREHOLDERS EQUITY ‘equipment Common stock 320 Retained Eamings 1,600 TOTAL ASSETS 5500 TOTAL LIABILITIES & 5500 EQUITIES Legacy Corporation, in year 2017, has generated sales volume of RM15 milion and the volume is expected to increase by 30 percent in next year. The net profit margin and dividend payout ratio for 2018 is expected to be similar to 2017. In 2017, the net profit margin and total dividend payout were 6 percent and RM90,000, respectively. Using the percent to sales method and assuming that the company is operating at full capacity, you are required to construct a pro-forma balance sheet for the year 2018 to estimate the amount of external (additional) funds needed. (14 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL QUESTION 2 a) Below are the finan BAVJUN 2018/FIN430 Estrail Berhad Balance Sheet as at 31 December 2017 (,000) statements for Estrail Berhad ending 31% December 2017. RM RM CURRENT ASSETS CURRENT LIABILITIES Cash 580 Accounts payable 350 Marketable securities 600 —_Notes payable 420 Accounts receivable 720 Accruals 350 Inventories. 250 Other current liabilities 380 FIXED ASSETS LONG TERM LIABILITIES Gross Property, plant 5220 Long-term borrowings 3,200 and equipment (unsecured) Less: depreciation (1,200) Net Property, plant and 4,020 SHAREHOLDERS EQUITY equipment Common stock 280 Retained Earnings 1,190 TOTAL ASSETS 6170 TOTAL LIABILITIES & 6,170 EQUITIES Estrail Berhad Income Stetement at the end of 31% December 2017 RM Sales 11,500 Cost of goods sold (COGS) (3,860) Gross profit 7,840 Operating expenses (3,400) Profit before interest and taxes (EBIT) 4,240 Interest expenses (950) Earning before Taxes (EBT) 3,290 Income tax expenses (980) Net profit / Earning after taxes (EAT) 2,310 The information on the industry average ratios are as follows: Industry Average Ratios Current ratio 1.27 times, Quick ratio 1.11 times, Inventory turnover 22 times ‘Average collection period 18 days Debt ratio 50 % or 0.50 Times interest earned 6.5 times Net profit margin 32.6 % _Retum on assets 38.8 % © Hak Cipta Universiti Teknologi MARA. CONFIDENTIALCONFIDENTIAL 4 BA/JUN 2018/FIN430 b) Calculate the relevant ratios based on the financial statements of Estrail Berhad. (12 marks) ©) Briefly evaluate the calculated ratios based on the firm's liquidity, efficiency, leverage and profitability position to the industry average. (8 marks) QUESTION 3 a) Strex Sdn Bhd needs to acquire RM950,000 in five months for a project. The company has the following options: Source 1 Issue a commercial paper with a value of RM50,000 each paper at 12 percent per annum. The issuing cost is RM3,000 per paper. Source 2 A revolving credit agreement of RM1 million with 5 percent commitment fee on the unused fund and a 9 percent interest rate. i) Calculate the effective cost of financing for each source. (8 marks) Determine the source of financing that Strex Sdn Bhd should choose. (2 marks) b) Maximus Berhad expects a Treasury Bills rate of 4 percent, a market return and risk of 7.5 percent and 10 percent, respectively. The information on returns of three (3) different stocks are shown below: Stock Estimated Return (%) Beta XXX 3 14 YvY 6 0.9 _ zzz 75 16 i) Calculate the expected return for each stock and plot it on SML. (6 marks) ii) Identify which stock is undervalued, overvalued or fairly valued. (4 marks) (© Hak Cipta Universiti Toknologi MARA CONFIDENTIALCONFIDENTIAL 5 BA/JUN 2018/FIN430 QUESTION 4 a) b) Relinex Holdings has decided to invest in a project in Korea. Considering that RM7 million of external funds is needed, the firm is required to identify a suitable source of financing for the project. The following are three sources of financing available. Source 1 Issue bonds that pays 8 percent coupon with a maturity of 10 years. The firm plans to sell the bond at 5 percent discount. The underwriting fee is 3 percent of the selling price. The current corporate tax is 35 percent. Source 2 Issue preferred shares that pays 12 percent dividend at its par value. The flotation cost is at 14 percent of its current price of RM165. Source 3 Issue common shares at RM30 with growth rate of 6 percent. The dividend was paid at RMS.25 per share. The underwriting fee is 8.5 percent of the current price. i) Calculate the after tax cost of debt, preferred shares and common shares. (8 marks) Determine the source of financing that Relines Holdings should choose if the internal rate of return is 6.5 percent. (2 marks) Intelekz Corporation plans to start a new project in Indonesia to enlarge its market share. The total cost of the new project is RM17 million. It is estimated that the after- tax cash inflows is RM1.8 million per year perpetually. The firm has a debt to equity ratio of 50 percent. The firm's cost of eq 8.5 percent and cost of debt is 6.5 percent. The underwriting fee of equity and debt is estimated at 5.5 percent and 3 percent, respectively. The corporate tax is 30 percent. Calculate: i) NPVof the project, if floatation cost are to be ignored. (4 marks) ii) NPVof the project, if floatation costs are to be considered. (6 marks) (© Hak Cipta Universiti Teknologi MARA. CONFIDENTIALCONFIDENTIAL 6 BA/JUN 2018/FIN430 QUESTION 5 a) Halton Group is considering one of the two mutually exclusive projects; VOUGE and FAMOUS. The after tax cash flows for the projects are as follows: Year VOUGE (RM) _FAMOUS (RM) _ 0 ~160,000 -220,000 1 50,000 25,000 2 50,000 35,000 3 50,000 60,000 4 50,000 54,000 5 50,000 38,000 6 - 30,000 Assuming the cost of capital is 12 percent, you are required to: i) Calculate Payback Period, Net Present Value, Profitability Index and Internal Rate of Return for both projects. (13 marks) ii) Determine the best project that Halton Group should invest. (3 marks) b) Willy Holdings Bhd plans to install a new machine; Machine P and Machine Q. The cash flows of the two mutually exclusive machines are as follows: Year _ o i 2 ai a Machine P(RM) (600,000) 380,000 350,000 350,000 350,000 Machine Q(RM) (900,000) __450,000__450,000__ 450,000 _ 450,000 Calculate the crossover rate of the two machines. (4 marks) END OF QUESTION PAPER (© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL