Fakulti Pengurusan

dan Pembangunan Sumber Manusia

PEPERIKSAAN AKHIR SEMESTER I

SESI 2012/2013
(FINAL EXAMINATION SEMESTER I
2012/2013 SESSION)

KOD KURSUS
(COURSE CODE)

SHD2213/SHAD2043

NAMA KURSUS
(COURSE)

PENGURUSAN KEWANGAN
FINANCIAL MANAGEMENT

PROGRAM
(PROGRAMME)

SARJANA MUDA
(BACHELOR DEGREE)

MASA
(DURATION)

3 JAM
(3 HOURS)

TARIKH
(DATE)

JANUARI 2013
JANUARY 2013

MARKAH
(MARKS)

80 (MENYUMBANG 40 PERATUS KEPAD

MARKAH KESELURUHAN)
(CONTRIBUTING 40 PERCENT TO THE OVERALL
MARKS)

ARAHAN KEPADA CALON:

(INSTRUCTION TO CANDIDATES)
Jawab SEMUA soalan.
(Answer ALL questions).
KERTAS PEPERIKSAAN INI TERDIRI DARIPADA 6 MUKA SURAT SAHAJA
(TERMASUK MUKA SURAT INI).
THIS EXAMINATION PAPER CONSISTS OF 6 PAGES ONLY (INCLUDING THIS PAGE

1.

During the last few years, Delicious Food Industries (DFI) has been too constrained by
the high cost of capital to make many capital investments. Recently though, capital costs
have been declining, and the company has decided to look seriously at a major expansion
program proposed by marketing department. As a financial officer in DFI, your task is to
estimate the cost of capital for DFI if the company chooses to embark on the expansion
program. The total financing is RM4 500 000, which consists of 30% debt, 30%
preferred stocks and 40% of common stocks. Below are the relevant information
regarding the cost of capital for the expansion program.

The corporate tax rate is 25%.

The current price for DFI 12% coupon bond with 15 years maturity is
RM1 153.72. The DFI will issue new bonds to support the expansion program

DFI will also need to issue new preferred stocks with current market price of
RM116.95 per share, which pays dividend of 10% of its par value of RM100 per
share. The company also have to incur 5% of flotation costs for these new issues.

The last form of financing will be in terms of common stocks. DFIs common stock
is currently selling at RM50 per share. Its last dividend was RM3.12 per share, and
the dividends are expected to grow at a constant rate of 5.8% in the foreseeable
future. DFIs beta is 1.2, the yield on treasury bonds is 5.6%, and the market risk
premium is estimated to be 3.2%.

Using all relevant information given,

(a)

Calculate the cost of debt.

(4 marks)

(b)

Calculate the cost of preferred stock.

(3 marks)

(c)

Calculate the cost of common stock using the discounted cash flow (DCF)
method.
(3 marks)

(d)

Calculate the cost of common stock using the capital asset pricing model method
(CAPM) approach.

(e)

(2 marks)

Calculate the weighted average cost of capital (WACC) for the company using
your answer in (c).
(3 marks)

(f)

Calculate the weighted average cost of capital (WACC) for the company using
your answer in (d).
(3 marks)

(g)

If the average of cost of capital in the market is 12%, should the company
continue with its financing option? State your reason.
(2 marks)

2.

Agroculture Ltd., is considering a new project involving the purchase of a machine that
costs RM200 000. Additional RM50 000 will be needed for transportation and
modification of the machine. This new machine will not increase the current sales but
will reduce pre-tax manufacturing cost by RM90 000 annually. Agroculture Ltd., would
use the 3-year MACRS (modified accelerated cost recovery system) to depreciate the
machine, and the company thinks the machine would have a value of RM23 000 at the
end of its 4-year economy life. This new machine would require inventories worth of
RM30 000 with account payables would simultaneously increase by RM5 000. However
the increase in working capital will be recovered at the end of the 4 years projects life.
Agrocultures corporate tax rate is 25% and a 10% WACC is appropriate for this project.

MACRS TABLE
YEAR
1
2
3
4

(a)

3-YEAR
33%
45%
15%
7%

Calculate the cost of the machine and estimate the net cash flows of the project
from year 0 to year 4.
(8 marks)

(b)

Calculate the payback period for the project.

(2 marks)

(c)

Calculate the net present value (NPV) for the project.

(4 marks)

(d)

Calculate the internal rate of return (IRR) for the project.

(5 marks)

(e)

Based on your answers in (a), (b), (c) and (d), should the company purchase the
machine? State your reason.
(1 mark)

3.

(a)

Annual credit sales of a company is RM100 million. The companys inventories

and receivables are 30% and 20% out of annual credit sales respectively; whereas
payables are 10% out of annual credit sales. The cost of goods sold for the
company is 75% of sales. Assume that there are 360 days in a year. Based on the
information provided, calculate the companys cash conversion cycle (CCC).
(6 marks)

(b)

A company plans to change their supplier due to the closure of business of the
current supplier. There are four companies that are interested in becoming the
new supplier. The credit terms provided by Company A, B, C and D are 1/10,
net 20, 2/10, net 30, 1/10, net 30 and 2/10, net 20 respectively. Assume
that there are 360 days in a year. Based on the information provided,

(i)

calculate the nominal cost of additional credit if the cash discount is not
taken.
(6 marks)

(ii)

calculate the effective cost of additional credit if the cash discount is not
taken.
(6 marks)

(iii)

which company should be selected as the new supplier? State your

reason.
(2 marks)

4.

The following information shows the Balance Sheet and the Income Statements for
Company XYZ.

Balance Sheet (Statement of Financial Position) as at 31 December 2011

RM000

RM000

Cash

1000 Accounts payable

5000

Receivables

5000 Notes payable

2000

Inventories

9000 Accrued liabilities

3000

Total current assets

15000 Total current liabilities

10000

Long-term debt

5000

Common stock

5000

Fixed assets

15000 Retained earnings

10000

Total assets

30000 Total liabilities and equities

30000

Income Statement for the year ended 31 December 2011

RM000
Sales

100000

Operating costs

40000

Earnings before interest and tax

60000

Interest

10000

Earnings before tax

50000

Taxes (25%)

12500

Net Income

37500

Dividends (10%)
Addition to retained earnings

3750
33750

Assume that in 2012, sales are expected to increase by 20% over 2011 sales.
Furthermore, assume that the company was operating at full capacity in 2011 and it
cannot sell off any of its assets. In addition, assume that any required financing will be
borrowed as notes payable and long-term debt. Finally, assume that its assets,
spontaneous liabilities and operating costs will increase at the same percentage as sales.
(a)

Use the additional financing needed (AFN) equation to forecast the additional
funds that the company will need in 2012.
(5 marks)

(b)

Calculate the AFN using pro-forma financial statements.

(12 marks)

(c)

The company will raise the AFN in (b) from notes payable (25%) and long-term
debt (75%). Based on this information, calculate the amount of AFN required in
terms of notes payable and long-term debt.
(3 marks)