BAFB3013 FINANCIAL MANAGEMENT
Assignment
Assignment – 30%
Start: Week 3
Due Dates: Week 10
Learning outcomes
CLO1, CLO2, CLO3, CLO4
Instructions
1. Answer ALL Questions. All answer must be submitted in Word document file.
2. Prepare a cover page stated the course code, course name, semester, group name
and all the group members.
3. Each students need to submit the file in UNIEC Open Learning.
Question 1
Biru Bookstores is considering a major expansion of its business. The details of the proposed
expansion project are summarized below:
• The company will have to purchase RM400,000 in equipment at y=0.
• The project will have an economic life of four years.
• The cost can be depreciated on a MACRS 3-year basis, 33% in year 1, 45% in year 2,
15% in year 3 an 7% in year 4.
• At y=0, the project requires inventories increase by RM40,000 and accounts payable
increase by RM10,000. The change in Net Operating Working Capital is expected to
be fully recovered at y=4.
• Salvage value at year 4 is expected to be RM0
• The company forecasts that the project will generate RM800,000 in sales the first 2
years (y=1 and 2) and RM500,000 in sales during the last two years (y=3 and 4).
• Each year the project’s operating costs excluding depreciation is expected to be 60%
of sales revenue.
• The company tax rate is 28%.
• The project’s cost of capital is 8%.
Required:
a) Calculate the project initial outlay
b) What is the NPV of the proposed project?
c) Should Biru Bookstores proceed with the project?
Question 2
Merah Berhad current interest expense is RM2,000,000, operating income (EBIT) is
RM40,000,000 and Earnings per share (EPS) is RM4.00. The company owes RM20,000,000
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in debt, with a 10% interest rate. The corporate tax rate is 28%. Historically, the company's
price-to-earnings (P/E) ratio has been 10x. Investment bankers have recommended that the
company be recapitalized. Their proposal is to sell enough new bonds at a 10% rate to buy
back 1,400,000 shares of common stock.
Assume that the repurchase has no impact on the company's operating income, but it will
increase the company's dollar interest expenditure. The company's price earnings (P/E) ratio
will be also increase to 10.5x following the repurchase because of the heightened financial
risk.
Required:
a) What is the net income before the change?
b) How many shares are currently outstanding?
c) What is the current stock price?
d) What would be the expected year-end stock price if the company proceeded with the
recapitalization? Should Merah Berhad proceed with the recapitalization?
Question 3
The information of Chocolate Berhad is described as follows:
Sales RM600,000
Variable costs 200,000
Total contribution margin 400,000
Fixed costs 150,000
EBIT 250,000
Interest expense 50,000
Earnings before taxes 200,000
Taxes (30%) 60,000
Net income RM140,000
Required:
a) What is Chocolate Berhad's BEP(RM)?
b) Determine Chocolate Berhad's operating leverage at this level of output.
c) Calculate the degree of financial leverage at this level of output for Chocolate Berhad
d) What is the combined leverage for Chocolate Berhad?
e) If sales increase by 10%, what will be Chocolate Berhad’s EPS if the firm has 50,000
shares outstanding?
Question 4
Due to a downturn in the housing market, Turquoise Berhad expects total earnings to fall to
RM4,750,000 this year from RM5,000,000 last year. The outstanding shares of common stock
are one million. This year, the company must make investments totaling RM4,000,000. The
corporation uses equity money to fund 60% of its investments and debt to finance 40% of
them. Last year, the company paid a dividend of RM3.00 per share.
a) How much dividend per share will each shareholder receive this year if the company
adheres to a pure residual dividend policy?
b) If the company maintains a constant dividend payout ratio each year, how large the
dividend per share will each shareholder receive this year?
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c) How much will each shareholder get in dividends this year if the corporation maintains
a constant dollar dividend policy?
Question 5
In Malaysia, Hijau Berhad imports and sells unique adjustable comb to a range of customers.
The business is reevaluating its sourcing guidelines. Next year, it anticipates selling 31,200
combs. Each comb costs RM4.80 and is offered for sale in dozens. The anticipated cost of
storage and other carrying is RM0.20 per comb. The ordering cost is RM40 per order. The
delivery time is two weeks, and there are 6,000 combs in the safety stock. About 28,000 dozen
of these combs are needed each year to meet demand.
Calculate:
a) The optimal economic order quantity.
b) The annual inventory cost for the company if it orders in this quantity.
Question 6
BBQ Berhad projected sales for the first six months of 2023 are given below:
Jan. RM500,000 April RM490,000
Feb. RM740,000 May RM740,000
Mar. RM380,000 June RM610,000
• 40% of sales are collected in cash at time of sale, 50% are collected in the month
following the sale, and the remaining 10% are collected in the second month following
the sale.
• Cost of goods sold is 60% of sales. Purchases are made in the month prior to the
sales, and payments for purchases are made in the month of the sale.
• Total other cash expenses are RM40,000/month.
• The company's cash balance as of February 28, 2023, will be RM25,000. Excess cash
will be used to retire short-term borrowing (if any). BBQ Berhad has no short-term
borrowing as of February 28, 2023. Assume that the interest rate on short-term
borrowing is 1% per month.
• The company must have a minimum cash balance of RM15,000 at the beginning of
each month.
Required:
Prepare a cash budget for the months of March to May 2023.
