AC/JULY 2023/MAF603

MAF603
FINAL ASSESSMENT JUL 2023
SUGGESTED SOLUTION

QUESTION 1

A. ABC Bhd

a.
i. Expected return of portfolio.

Meme Bhd Gogo Bhd

P1: Weight of 6,400 shares x RM15= RM96,000 7,200 shares x RM20 = RM144,000
Investment
X Meme = 96K / 240K = 0.4 X Gogo = 144K / 240K = 0.6

P2: Weight of 3,200 shares x RM15= RM48,000 9,600 shares x RM20= RM192,000
Investment
X Meme = 48K / 240K = 0.2 X Meme = 192K / 240K = 0.8

Exp Return P1 = (0.4 x 20%)+ (0.6 x 18%)

= 18.8%

Exp Return P2 = (0.2 x 20%)+ (0.8 x 18%)

= 18.4%

(10 x ½ mark = 5 marks)

ii. Standard deviation of portfolio.

Var P1 = [(0.4)2 x (0.1)2] + [(0.6)2 x(0.12)2] + [2 x 0.4 x 0.6 x 0.0038]

= 0.008608

SD P1 = 9.28%

OR

Var P1 = [(0.4)2 x (10)2] + [(0.6)2 x(12)2] + [2 x 0.4 x 0.6 x 38]

= 86.08

SD P1 = 9.28%

1
 AC/JULY 2023/MAF603
Var P2 = [(0.2)2 x (0.1)2] + [(0.8)2 x(0.12)2] + [2 x 0.2 x 0.8 x 0.0038]
= 0.010832

SD P2 = 10.41%
.
OR

Var P2 = [(0.2)2 x (10)2] + [(0.8)2 x(12)2] + [2 x 0.2 x 0.8 x 38]

= 108.32

SD P2 = 10.41%

(8 x ½ mark = 4 marks)

2
CONFIDENTIAL 3 AC/JUL 2023/MAF603/620

iii. Beta portfolio

Beta Meme = Cov Meme, Mkt

Var Mkt
= 0.001375
0.032
= 1.53

Beta Gogo = Cov Gogo, Mkt

Var Mkt
= 0.00063
0.032
= 0.7

Beta P1 = (0.4 x 1.53) + (0.6 x 0.7)

= 1.032

Beta P2 = (0.2 x 1.53) + (0.8 x 0.7) OF

= 0.866

(8 x ½ mark = 4 marks)

b.
ER SD Beta
Portfolio1 18.8 9.28 1.032
Portfolio 2 18.4 10.41 0.866

Since ABC Bhd is a risk taker (high tolerance of risks), a better option is
Portfolio 1 as it has a higher Expected Return, which means it offers better
investment opportunities for investors. Although this portfolio has a higher beta,
this is compensated by the higher expected return and a reasonable standard
deviation of 9.28%. Along with standard deviation, beta is the most effective
way to measure risk in a large, diversified portfolio.
(4 x ½ mark = 2 marks)

B. The correlation coefficient of stocks CNEX and TALSA is negative 0.95 indicating
that the return of the two stocks moves in the opposite direction at nearly the
same proportion. The strong negative correlation implies the greatest
diversification effect indicating that CNEX and TALSA are in different segments
of stocks.

CNEX and PZIFE have a correlation coefficient of positive 1.00 indicating that
the two stocks have a perfect positive relationship. This means their returns
move in similar direction with the same proportion. This implies no diversification
effect for the portfolio.

TALSA and PZIFE have a correlation coefficient of positive 0.001 which is almost
zero implying a relationship does not exist between the two stocks where their
returns move at random.
(Any 5 x 1 = 5 marks)
(Total: 20 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 4 AC/JUL 2023/MAF603/620

QUESTION 2

a.
i. Kd = 7% x RM1,000
RM1,300 - (5% X RM1,300)

= 0.0567

Kd (after tax) = 0.0567 (1 - 0.24)

= 0.0431

ii. Kp = 8% x RM100
RM115 - RM5.50

= 0.0731

iii. g = (0.84 – 0.8)/0.8

= 0.05

Ke = RM0.84 + 0.05 (OF)

RM10
= 0.134

iv. Kne = RM0.84 + 0.05 (OF)

RM10 - (6% x RM10)

= 0.139
(20√ x ½ = 10 marks)

b. Max capex = (0.5 x RM2,000,000)

0.4

= RM2,500,000

Since the maximum CAPEX is higher than the cost of the project of RM2.3 million,
retained earnings are sufficient. Thus, the company does not have to issue new
ordinary shares.

Weightage COC WCC

Debentures 0.4 0.0431 0.0172
Preference shares 0.2 0.0731 0.0146
Common equity 0.4 0.1340 OF 0.0536
WACC 0.0854

The company should invest in the new tower project since the Expected Return (15%)
is higher than the weighted average cost of capital (8.54%).
(10 x ½ = 5 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 5 AC/JUL 2023/MAF603/620

c. Ungeared beta = 1.4 x 0.8 .

0.8 + 0.2 (1 – 0.24)
= 1.1765

Geared beta = 1.1765 OF x 0.6 + 0.4 (1 – 0.24)

0.6
= 1.7726

Ke (CAPM) = 0.04 + [1.7726 OF (0.1 – 0.04)]

= 0.1464

Rwacc = (0.6 x 14.64%) OF + (0.4 x 5%)

= 10.78%

The company should invest in the construction business because the Expected Return
(12%) is higher than the cost of capital (10.78%) and opportunities in the upcoming
projects launched under government-private initiative projects are very good.
(10 x ½ = 5 marks)
(Total: 20 marks)
QUESTION 3

a. Without tax
i. VL = Vu

Vu = EBIT/ Keu

= RM 45 m / 0.12 = RM375 million

ii. VL = Ve + Vd

Ve = RM 375 million OF – RM100 million

= RM275 million

iii. Keg = Keu + [(Vd/Ve) (Keu - Kd)]

= 12% + [(100 m/ 275 m) (12% - 6%)]

= 14.18%

iv. Share price = Ve / no. of shares

= 275 million OF/ 32 million shares
= RM8.59 per share
(10 x ½ mark = 5 marks)

b. With tax

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 6 AC/JUL 2023/MAF603/620

Vd after redemption = 100m – (0.25 x 100m) = 75 million

i. The firm value

VL = EBIT (1 - Tc) + TCVd

Keu
= 45 million (1 - 0.24) + (0.24 x 75 million)
0.12
= RM303 million

ii. The cost of equity (Keg)

Ve = VL – Vd
= 303 million – 75 million
= RM 228 million

Keg = Keu + [(Vd/Ve) x (Keu – Kd) x (1 - Tc)]

= 12% + [(75 m /228 m) (12% - 6%) (1 - 0.24)
= 13.5%

iii. Rwacc

Rwacc = [(Vd/VL) x Kd x (1 - Tc)] + [(Ve/VL) x Keg]

= [(75m/303m) (6%)(1 - 0.24)] + [(228m/303m) (13.5%)OF]
= 11.29%

OR

Rwacc = EBIT (1 - Tc) / VL

= [45 m (0.76)] / 303 m OF
= 11.29%
(10 x ½ = 5 marks)

c. Agree. If Linas Earth Bhd issues the new shares before expiry of pioneer status,
the company pays no tax. Thus, the value of the firm will not be affected by the
different capital structures. Issuing more shares and reducing debt will reduce
risk, and therefore the cost of equity will be lower.

On the other hand, if the firm issues the shares next year, the company will no
longer be exempted from tax. Reducing debt will reduce the tax shield and thus
the value of the firm will also be reduced. Issuing more shares and reducing
debt will reduce risk, and therefore the cost of equity will be lower.

(8 x ½ mark = 4 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 7 AC/JUL 2023/MAF603/620

B. Factors to be considered in deciding the gearing level of a firm:

 Risks involved. As high gearing will lead to high financial risk, firms with
high business risk should not have high gearing.
 Restrictions set by lenders. Lenders usually use covenants to protect their
position. Thus, firms with high gearing may find that they would have to
abide by the covenants which restrict some of their actions.
 Tax shield. Highly profitable firms may want to have high gearing to enjoy
the tax shield.
 Return to shareholders. As high gearing leads to high risk, shareholders
will require a higher rate of return for their investment.
 Signaling. Issuing debt may be taken as a sign of confidence by the
investors.

(Note: Any relevant answers are accepted)

Any 3 factors; each factor + explanation = 2 marks
(3 factors x 2 marks = 6 marks)
(Total: 20 marks)

QUESTION 4

a. Synergy

VCostar = (3 x RM5) x 800,000 shares

= RM12 million

VSofast = (5 x RM2) x 500,000 shares

= RM5 million

Synergy = VAB - (VA + VB)

= RM30.5m – (RM12m + RM5m)
= RM13.5 million
(6√ x ½ = 3 marks)

b. i. Cash at 60% premium

Cash price = RM10 x 1.6 = RM16 per share
NPV = (VB before merger + Synergy) - Cost
= (5m+ 13.5m OF) – (RM16 x 0.5m shares)
= RM18.5m - RM8m
= RM10.5 m

ii. Share swap

Number of new shares issued = (500,000 shares / 4) x 2
= 250,000 shares

NPV = VB before merger + Synergy) - Cost

= [(5m + 13.5m)] – [(0.25m/(0.8m + 0.25m) x RM30.5mOF]
= RM18.5m – RM7.2619m
= RM11.2381 million
(10 x ½ = 5 marks)

c. Costar should merge with Sofast since the NPV is positive. Costar should choose
share swap as the NPV is higher.
(4 x ½ = 2 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 8 AC/JUL 2023/MAF603/620

d. Two other acquisition methods:

Acquisition of stocks. Costar can start by making a private offer to the

management of Sofast to acquire the firm’s voting stock. Costar can also make a
direct offer or tender offer to the shareholders of Sofast to buy their shares. Using
this method, no shareholders’ meeting, or vote is required. Sofast’s shareholders
can simply accept or reject the offer.

Acquisition of assets. Costar can purchase assets, especially the crown jewel
assets owned by Sofast. This requires the transfer of the title of each individual
asset owned by Sofast to Costar. However, it still requires a formal vote of Sofast’s
stockholders. Sofast can still exist after the acquisition.
(10√ x ½ = 5 marks)

B. Reasons why diversification is not a good reason to justify merger:

 Diversification can only eliminate part of the risk (unsystematic risk). The
systematic risk will remain unchanged. Shareholders can diversify more
easily and cheaply by buying stocks in other companies or using mutual
funds.
 Merger is a costly process. Acquiring firms usually would have to purchase
the target firm above the market price.
 There are risks of post-merger such as integration issues, employee’s
motivation and etc.
 The estimated synergy may not be achieved. This will adversely affect the
value of the merger.
 Management may not actually be acting in the stockholders’ best interest
when considering the merger, especially the management of the bidding firm.
This is because compensation for managers is usually related to the size of
the firm. The bigger the firm, the higher would be their compensation.

(Note: Any relevant answers are accepted)

Any 2 reasons; each reason + explanation = 2 ½ marks
(2 reasons x 2 ½ m = 5 marks)
(Total: 20 marks)

QUESTION 5

A.
a. TXM Bhd is dealing with transaction risk. Transaction risk involves a future
receipt or payment in foreign currency when engaging in import or export
businesses. The movement in the exchange rate at the placement order date
and the settlement date may cause TXM Bhd to pay higher or lower MYR for the
needed machinery in three months’ time.
(4√ x ½ = 2 marks)

b. If Ringgit depreciates by 4%, the exchange rate would be RM1 = €0.2056

(0.2142 x 0.96 = 0.2056)

Cost of machineries €350,000 /€0.2142 x RM1 RM1,633,987

Payment in 3 months €350,000 /€0.2056 x RM1 RM1,702,335
LOSS RM68,348

(6√ x ½ = 3 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 9 AC/JUL 2023/MAF603/620

B. TRY and RUB:

a. Step 1: Borrow the appropriate amount in TRY

The interest rates for 6 months deposit: (8%/12m x 6m =4%)

The interest rates for 6 months borrowing: (7%/12m x 6m =3.5%)

The company needs to borrow Turkish Lira:

TRY2,000,000/ (1+0.035) = TRY 1,932,367 today.

Step 2: Convert TRY immediately to RUB

TRY 1,932,367/0.1282 = RUB 15,073,067

Step 3: Place the converted RUB on deposit and earn interest

RUB 15,073,066 x (1+0.04) = RUB 15,675,989

Thus, the company would receive RUB 15,675,989 from this method.
(8 x ½ = 4 marks)

b. The effective forward rate that the company has manufactured:

TRY 2,000,000 /RUB 15,675,989 = 0.1276
(2 x ½ = 1 mark)

C. Viva Energy

a. £20,000/0.5368 = AUD 37,258

(4 x ½ = 2 marks)

b. Forward rate MYR/AUD = 2.9314 + 0.002 discount

= 2.9334

If the company uses a forward contract, it will have to pay:

MYR100,000/2.9334 = AUD34,090

If the company does not use a forward contract and pays using the actual
current spot rate, it would have to pay:

MYR100,000/2.9416 = AUD33,995

Thus, the use of forward contract does not benefit Viva Energy as the
payment using actual spot rate is lower than using forward rate.
(6 x ½ = 3 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 10 AC/JUL 2023/MAF603/620

D. IRR

a. Change in OPR would lead to banks changing the interest rates they give to
lenders and the interest rates charged to borrowers. For lenders, their concern
is when interest rates fall, they would receive less interest income. As for
borrowers, they are worried if interest rate rise, as they will have to pay more
interest.
(4 x ½ = 2 marks)

b. Internal methods to reduce IRR:

Matching. Matching is a technique whereby assets and liabilities are matched

with a common interest rate. It involves setting off interest income against
interest payments so that the interest risk exposure is to the net amount of
interest payments.

Smoothing. Smoothing is when a company keeps a balance between its fixed

and floating-rate borrowing. If the interest rate increases, the disadvantage of a
higher floating interest rate will be offset by low fixed interest, and vice versa.

Assets and liability risk management. This involves monitoring risks, such as
interest rate risk and credit risk, in a bank’s portfolio of assets and liabilities.
Where possible, assets and liabilities are matched in order to control risk arising
from gap exposure and basis risk.

Any 2 methods only; each method + explanation 1 ½ marks

(6 x ½ = 3 marks)
(Total: 20 marks)

[TOTAL: 100 MARKS]

END OF SOLUTION

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL