Department of Accounting and NILAI UNI COLLEGE

Finance
SCHOOL OF BUSINESS,

FIN110
BASIC FINANCE

ASSIGNMENT 2 – INDIVIDUAL
Due Date: 9 April 2010, before 5pm
Complete and append this sheet as page 1 of
Assignment 2
NAME STUDENT NO

Lecturer’s Name: EMA IZATI ZULL DATE OF SUBMISSION

Plagiarism:
Students may discuss their Assignment with other students, however the
Assignment must be completed by each student individually. The
Assignments must be entirely each group’s own work. They should be written.
Students must give full acknowledgment of their sources, including websites, in
the footnotes, where appropriate. Students who fail to comply with these
requirements are guilty of plagiarism.

Marking:
The Assignments will be marked 10%.
Copies:
Please keep a copy for use in discussing the topic in the tutorial.

PENALTIES FOR PLAGIARISM

Plagiarism occurs when someone copies or reproduces another person’s words or
ideas and presents them as his or her own without proper acknowledgement.
This includes copying the work of other students. It is a form of cheating and will
be treated accordingly. To ensure that you are not guilty of plagiarism you must,
in all your written assignments, declare all sources from which you have obtained
material or ideas.
The penalties for plagiarism are severe and are governed by University legislation.
A student found to have plagiarised may be allocated no marks for the particular
piece of work involved, or may be allocated a fail grade in that subject.
STATEMENT OF AUTHORSHIP
I certify that the attached material is my original work. No other person’s work
has been used without due acknowledgement. Except where I have clearly stated
that I have used some of this material elsewhere, it has not been presented by me
for examination in any other course or subject at this or any other institution. I
understand that the work submitted may be reproduced and/or communicated for
the purpose of detecting plagiarism.

SIGNED: DATED:
Section A (20 Multiple Choice Questions) (50 marks)

Select the appropriate response:

1. The primary financial goal of a corporation is to maximize

A Shareholder’s wealth
B Earnings per share
C Stock price
D A&C

2. Which of the following is not one of the three major areas of finance?

A Accounting
B Investments and financial markets
C Financial management of companies
D The banking system

3. A savings-surplus unit is one:

A that needs to borrow funds from a surplus unit

B whose income exceeds its spending
C whose spending exceeds its income
D that generally is a company

4. A _______ is a financial intermediary that receives premium payments that are used to
purchase assets to cover future possible payments.

A building society
B credit union
C savings bank
D life insurance office

5. Financial markets:

A act as intermediaries by holding a collection of assets and issuing claims based on

them to savers
B issue claims on future cash flows of individual borrowers directly to lenders
C transmit funds indirectly between lenders and borrowers
D usually provide lenders with lower returns than other financial intermediaries

6. The stock market is:

A An interconnected network of brokers and exchanges licensed by the government to
assist investors in trading securities
B Located in a large building in Kuala Lumpur called the stock exchange
C An exchange that allows people to trade stock certificates in person
D Very much like a department store in that stocks from different industries are traded
7. The principle behind time value of money is based on the fact that:

A A sum of money in hand today is worth more than the same sum in the future
B A sum of money in hand today is worth less than the same sum in the future
C A sum of money in the future is worth less than the same sum in hand today
D A&C

8. If an investor is indifferent between $1.00 today and $1.33 in three years

A $1.00 must be the present value of $1.33 in three years

B $1.33 must be the future value of $1.00 today
C The relevant interest rate is positive
D All of the above

9. More frequent compounding results in _____________ future values and ___________

present values than less frequent compounding at the same nominal interest rate.

A Higher; higher
B Lower; higher
C Higher; lower
D Lower; lower

10 How much $1,000 deposited in a savings account paying 8% compounded annually will
. be worth after 5 years ?

A $5, 526
B $784
C $1, 400
D $1,469

11 The principal financial advantage of the corporate form of organization is:

.
A Ease of transferability of ownership
B Accumulation of earnings for retention for the business
C Limited liability
D Ease of raising money through selling stock

12 Bonds are also referred to as non-amortized debt, which means:

.
A Interest is paid regularly during the term, usually semiannually, whereas repayments
of principal are annual
B Interest is paid regularly during the term, usually semiannually, and repayments of
principal are semiannual
C Interest is paid regularly during the term, usually semiannually, whereas repayment of
principal does not occur until the maturity
D Interest and principal are paid regularly during the term, usually annually

13 Which of the following is most correct?

.
A When coupon rates exceed market rates, bonds will sell at a premium
 B When market rates exceed coupon rates, bonds will sell at a premium
C When coupon rates
D All above

14 With respect to valuation, stocks and bonds are dissimilar in that

.
A Bond cash flows are known precisely while stock cash flows are estimates
B Periodic bond interest payments form an annuity while dividends are unlikely to be
constant
C Bond cash flows are contractual commitments, stock cash flows are not
D All of the above

15 Songket Berhad stock is selling for $80 today. You are expecting a dividend of $3 next
. year and you plan to sell the stock for $95 one year from now. Calculate the one-year
return on Songket stock

A 3.75%
B 9.50%
C 18.75%
D 22.50%

16 If a project’s NPV is negative?

.
A The project earns less than the cost of capital
B The investment will not add value or contribute to shareholder wealth
C The present value of expected cash outflows is greater than the present value of
expected cash inflows
D All of the above

17 The cash conversion cycle measures the time

.
A Between the creation of receivables and their collection
B It takes for inventory to be turned into product and sold
C Between payment for inventory and collection of cash for its subsequent sale as
product
D For a check to clear the banking system

18 Which of the following is a source of a short-term financing?

.
A Accounts payable
B Accruals
C Commercial paper
D All of the above

19 The followings are among the 5Cs of credit EXCEPT

.
A Character
B Cooperation
C Capacity
 D Collateral
20 Bursa Malaysia (Malaysia Stock Exchange) does all this EXCEPT
.
A Be the market where securities that have already been issued are traded between
investors.
B Provide transferring ownership service to corporate securities
C Being monitored by Bank Negara Malaysia and Ministry of Finance
D Issue new securities

(20 x 2.5m = 50)

SECTION B

Question 21 (15 marks)

Use the following information to answer Question 21.

Damia Corporation is considering an expansion project that will begin next year (Time 0).
Damia’s cost of capital is 12%. The initial cost of the project will be $250,000, and it is
expected the following cashflows over its five-year life

Year $
1 40,000
2 60,000
3 90,000
4 90,000
5 90,000

a) What is the payback period for the expansion project? (3 m)

b) What is the net present value (NPV) of for the expansion project? Would you take up
the project? (5 m)

c) Explain the advantages and disadvantages of payback period. (7 m)

Question 22 (10 marks)

Use the followings Daris Berhad’s Income Statement and Balance Sheet to answer Question
22.

DARIS BERHAD
INCOME STATEMENT
$
Sales 120, 000
(-) Cost of goods sold 25, 000
95, 000
(-) Operating costs 23, 000
Earnings before interest and tax 72q, 000
4

DARIS BERHAD
BALANCE SHEET AS AT 31 DECEMBER 2008
ASSETS (‘$000) LIABILITIES & EQUITY (‘$000)
$ $
Cash and Marketable 12,000 Accounts Payable 65,000
Securities
Accounts Receivable 60,000 Accruals 15,000
Inventories 100,000 Long-term debt 80,000
Gross Fixed Assets 220,000 Preferred Stock 48,000
(-) Accumulated Depreciation -64,000 Common Stock 20,000
Net Fixed Assets 156,000 Paid in Excess 40,000
Retained Earnings 60,000
Total 328,000 Total Total

a) Calculate gross working capital (2 m)

b) Calculate net working capital (2 m)

Calculate cash conversion cycles (4 m)

c) Explain your answer briefly (2 m)

Question 23 (25 marks)

a) Explain six steps to financial retirement planning (12 m)

b) One of the areas to consider for retirement is writing a will. Explain the importance of
writing a will.
(13 m)
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