BWFM5013 CORPORATE FINANCE

MATRIC NO:____________________

ANSWER ALL QUESTIONS (100 MARKS)

QUESTION ONE (20 MARKS)

a) Recently, a customer of a bank that you are working with consult you for a RM10,000
personal loan application. The loan has a five-year duration, with 9 percent compounded
annually. Suggest to the customer on an equal payment that he needs to pay over the 5
years. (You are required to prepare an amortization loan schedule).
(6 marks)

b) Briefly explain what Beta is and why it is important.

(3 marks)

1
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

c) Why are some risks are diversiable and some nondiversiable? Give an example of each.

(6 marks)

d) Explain briefly the difference between Security Market Line (SML) and characteristics
line.

(5 marks)

2
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

QUESTION TWO (20 MARKS)

a) Briefly explain the difference between discount bond and premium bond.
(4 marks)

b) Company XYZ recently decided on going public by offering an initial public offering. The
company is expected to grow 40 percent for the first three years and then slow down to a
constant growth of 15 percent. The most recent dividend (D0) was RM0.75. The
companys beta is approximately 1.5. The risk free rate is 8 percent and the market risk
premium is 6 percent.
i) Calculate the current value of company XYZs shares.
(4 marks)

3
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

ii) If the companys share is currently sold in the market for the price of RM80, will
you purchase the share? Why?
(2 marks)

c) Mutiara Steel has 104,000 shares of common stock outstanding at a market price of RM20
a share. Last month, the company also paid an annual dividend in the amount of RM1.60
per share. The dividend growth rate is 4% annually.

Mutiara Steel also has 6,000 bonds outstanding with a face value of RM1,000 per bond.
The bonds carry a 7% coupon, pay interest annually, and mature in 5 years. The bonds are
selling at 102% of face value. The company's tax rate is 34%. What is the companys
weighted average cost of capital (WACC)?

i) Calculate the value for each component of capital.

(4 marks)

4
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

ii) Compute the weight of each component of capital.

(2 marks)

iii) What is the weighted average cost of capital (WACC) of the company?

(4 marks)

5
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

QUESTION THREE (20 MARKS)

a) You are appointed as a financial manager at Binapura Sdn Bhd. The company allocates
up to RM800,000 for two independent projects. The projects that you are considering have
required rate of return of 12% with the following cash flows.

Project A Project B
Year Cash Flow Year Cash Flow

0 -RM87,000 0 -RM85,000
1 RM31,000 1 RM15,000
2 RM37,000 2 RM20,000
3 RM44,000 3 RM90,000

i) Determine the payback period for each project.

(2 marks)

ii) Based on the payback period, which project(s) should be accepted if the payback
aaaaa acutoff period is 2.5 years? Justify your decision.
(2 marks)

6
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

b) Plenitude Enterprises is considering a new project. The project will require RM325,000 for
new fixed assets, RM160,000 for additional inventory and RM35,000 for additional
accounts receivable. Short-term debt is expected to increase by RM100,000 and long-term
debt is expected to increase by RM300,000. The project has a 5-year life. The fixed assets
will be depreciated straight-line to a zero book value over the life of the project. At the end
of the project, the fixed assets can be sold for 25% of their original cost. The net working
capital returns to its original level at the end of the project. The project is expected to
generate annual sales of RM554,000 and costs of RM430,000. The tax rate is 35% and the
required rate of return is 15%.

i) What is the initial cost of this project?

(3 marks)

ii) Determine the annual cash flow of this project in years 1- 4.

(7 marks)

7
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

iii) What is the terminal value at year 5?

(4 marks)

iv) Should this project be accepted or rejected? Justify your decision.

(2 marks)

8
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

QUESTION FOUR (20 MARKS)

a) A substantial percentage of the companies listed on Bursa Malaysia do not pay dividends.
Yet, investors are willing to purchase their shares. Briefly provide arguments for their
decision.
(8 marks)

b) Glory Coffee Berhad has 135,000 shares of stock outstanding with a par value of RM1 per
share and a market value of RM5 a share. The company has retained earnings of RM76,500
and capital in excess of par of RM340,000. Last week, the company announced a 1-for-5
stock split.

i) How many shares of stock will be outstanding after the stock split?
(2 marks)

9
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

ii) What is the primary reason managers tend to use stock split?
(3 marks)

c) En Aizat is a chief financial officer (CFO) at Mutiara Tyres Berhad. Recently, he takes
a proposal to the firms board of directors to distribute noncash dividend to the firms
shareholders in the form of new shares of common stock. Specifically, he proposed
that the company pays an additional 25 shares of common stock for 1,000 shares hold
by investors.

i) It Mutiara had total income for the year of RM10,000,000 and 20,000,000 shares
of common stock outstanding before the stock dividend, what is the firms earnings
per share (EPS) before the stock dividend.

(1.5 marks)

10
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

ii) After paying the stock dividend, what is the firms EPS?

(2 marks)

iii) If you owned 1,000 shares of stock before the stock dividend, how much did the firm
earn on your 1,000 share investment? After the stock dividend is paid, how much did
the firm earn on your larger share holdings? What effect would you expect from the
payment of the stock dividend on your total investment in the firm?

(3.5 marks)

11
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

QUESTION FIVE (20 MARKS)

a) List and briefly explain any FOUR (4) of 5Cs that determine creditworthiness of a
borrower.
(4 marks)

b) Clarify how revenue and costs of a company influence its decision to grant credit?
(4 marks)

12
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

c) Each year, the company sell 950 units of a product at a price of RM899 each. The variable
cost per unit is RM875 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

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

(5.5 marks)

ii) Calculate the economic order quantity (EOQ)?

(2.5 marks)

iii) Briefly explain any TWO (2) inventory management techniques?

(4 marks)

END OF QUESTIONS

13
 BWFM5013 CORPORATE FINANCE
MATRIC NO:____________________

xiv