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# FINANCIAL MANAGEMENT GAME QUIZ 1 1.

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Alamaya Berhad is experiencing a period of rapid growth. Earnings and dividends are expected to grow at rate of 15 percent during next 2 year, at 13 percent in the third year and

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During her four years at college, Hayley received the following amounts of money at the end of each year from her grandmother. She deposited her money in a saving account paying 6 percent rate of interest. How much money will Hayley have on graduation day?

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What is the payback period for Tangshan Mining Companys new project if its initial after tax cost is \$5,000,000 and it is expected to provide after-tax operating cash inflows of \$1,800,000 in year 1, \$1,900,000 in year 2, \$700,000 in year 3 and \$1,800,000 in year 4? Answer: 3.33 years Consider the following projects, X and Y, where the firm can only choose one. Project X costs \$600 and has cash flows of \$400 in each of the next 2 years. Project Y also costs \$600, and generates cash flows of \$500 and \$275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent? Using net present value. Answer: RM94.20 (X), RM81.81 (Y) You have been asked to analyze two proposals, Compaq and HP. Project Compaqs cost is RM90,000 and project HPs cost is RM100,000. Cash flows for project Compaq are projected to be RM20,000 in Year 1, RM25,000 in Year 2, RM20,000 in Year 3, RM25,000 in Year 4 and RM30,000 in Year 5. Cash flows for projects HP are equal at RM25,000 from Year 1 to Year 5. The required rates of return for these projects are 10 percent. Calculate internal rate of return (IRR) for Project HP. Answer: 7.935% Intan as a financial assistance for Johnson Berhad is calculating two mutually exclusive projects. Net cash flows for the projects are given below: Year 0 1 2 3 4 Project WFL (RM) -100,000 50,000 40,000 30,000 10,000 Project NAX (RM) -100,000 30,000 30,000 40,000 60,000

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Assuming that Johnson Berhads cost of capital is 15 percent, calculate profitability index for both projects. Answer: 0.99 (WFL), 1.09 (NAX)

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A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of \$80,000 and cash inflows at the end of each of the next five years of \$25,000. Project Z has a initial investment of \$120,000 and cash inflows at the end of each of the next four years of \$40,000. Calculate IRR for both projects. Answer: 16.97% (X), 12.87% (Y)

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22. Tangshan Mining Company is considering investing in a new mining project. The

firms cost of capital is 12 percent and the project is expected to have an initial after tax cost of \$5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of \$2,500,000 in year 1, \$2,300,000 in year 2, \$2,200,000 in year 3 and (\$1,300,000) in year 4? Calculate the projects Profitability Index (PI). Answer: 0.9611 23. Akai has a portfolio of three assets. Find the expected rate of return for the portfolio assuming he invests 50 percent of its money in asset A with 10 percent rate of return, 30 percent in asset B with a rate of return of 20 percent, and the rest in asset C with 30 percent rate of return. Answer: 17%
24. An investment banker has recommended a \$100,000 portfolio containing assets B,

D, and F. \$20,000 will be invested in asset B, with a beta of 1.5; \$50,000 will be invested in asset D, with a beta of 2.0; and \$30,000 will be invested in asset F, with a beta of 0.5. Calculate beta portfolio. Answer: 1.45 25. Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5. Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of return. Answer: 9% 26. Given in the table below is the information for Stock M, N and O. Stock M N O Return 18% 15% 16% Standard Deviation 2.80 2.56 2.60

Which stock should you choose based on the information of return and standard deviation? Why? Answer: 0.1556 (M), 0.1707 (N), 0.1625 (O) 27. Saleha has deposited RM33,000 today in an account which will earn 10 percent annually. She plans to leave the funds in this account for seven years earning interest. If the goal of this deposit is to cover a future obligation of RM65,000, what recommendation would you make to Saleha? Answer: RM64,317

28. Rock Company has a current dividend of RM1.00 per share. Following is the expected annual growth rates for dividends: Year 1-2 3-4 5 onward Dividend Growth Rate 5% 8% 6%

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The required rate of return for the share is 10 percent. Calculate the value of share. Answer: RM25.66 29. Haikal deposited RM1,000 in a savings account that pays 8 percent interest compounded quarterly. He plans to use the money to finish his study in Collage Height West. Eighteen months later, Haikal decides to go to Sipadan to become a scuba diving instructor rather than continue his study. So, he closes out his saving account. How much money will Haikal receive when he closes his account? Answer: RM1,126.16 30. You plan to accumulate \$450,000 over 12 years by making equal annual deposits in an account that pays an annual interest rate of 9% at the end of each year. What amount must you deposit each year to reach your goal? Answer: RM30.454,79
31. You plan to borrow \$389,000 now and repay it in 25 equal annual instalments

(payments will be made at the end of each year). If the annual interest rate is 14%, how much will your annual payments be? Answer: RM56,599.11
32. Oakdale Furniture Berhad has a beta coefficient of 0.7 and a required rate of return of

15 percent. The market risk premium is currently 5 percent. If the expected of inflation premium increase by 2 percentage and Oakdale to acquire assets which will increase its beta by 50 percent, calculate Oakdales new required rate of return. Answer: 11.5% (before), 16.855% (after) 33. Sime Berhad finances its investments using both securities, bonds and common shares. The bonds with a maturity of 15 years, coupon of 8 percent and RM1,000 par value were issued three years ago. The company had just paid a dividend of RM0.40 and expected to grow at 20 percent for 4 years. Shareholders require 14 percent rate of return while bondholders require 10 percent rate of return. Calculate the expected price of the securities. Answer: RM847.89 (bond), RM1.53 (share) 34.You are considering two investments as following: (i) (ii) Preferred stock that has a par value of RM100. The preferred stock is currently selling at RM78 and pays an annual dividend of RM9.50 with required rate of return is 12 percent. Common stock that recently paid a RM3.40 dividend. The common stock is expected to grow 5 percent indefinitely. The stock is currently selling for RM25.80 with required rate of return is 18 percent.

Calculate the value of each security based its required rate of return. Answer: RM79.17, RM26.15 35.Kurnia Berhad is considering a major expansion of its product line and has estimated the following free cash flows associated with such an expansion. The initial outlay associated with the expansion would be RM1,950,000 and project would generate free cash flows of RM450,000 per year for six years. The appropriate required rate of return is 9 percent. Based on the information above, calculate internal rate of return.

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36. Yakin Sdn. Bhd. is considering two machines which are Machine A and Machine B. All information are as follows: Machine A: The cost of the machine is RM5,375,000 and expected to produce cash inflow of RM1,825,000 in Year 1, RM1,775,000 in Year 2, RM1,630,000 in Year 3, RM1,585,000 in Year 4 and RM1,650,000 in Year 5. The cost of the machine is RM2,775,000 and cash flows are projected to be RM925,000 in Year 1, RM1,000,000 in Year 2 until Year 4 and RM1,225,000 in Year 5.

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If required rate of return is 10 percent, calculate profitability index for each machine. Answer: 1.20, 1.39 37.Consider a two-factor APT model where the first factor is changes in the 30-year Tbond rate and the second factor is the percent growth in GNP. Based on historical estimation, the risk premium for T-bond is 2 percent and GNP is 5 percent. For a particular asset, the beta for T-bond is -1.2 and the GNP is 0.80. If required rate of return is 3 percent, calculate risk free rate for the asset. Answer: 1.4% 38.You have been asked to analyze two proposals, Compaq and HP. Project Compaqs cost is RM90,000 and project HPs cost is RM100,000. Cash flows for project Compaq are projected to be RM20,000 in Year 1, RM25,000 in Year 2, RM20,000 in Year 3, RM25,000 in Year 4 and RM30,000 in Year 5. Cash flows for projects HP are equal at RM25,000 from Year 1 to Year 5. The required rates of return for these projects are 10 percent. Based on the above information, calculate the Net present value (NPV) for both projects. Answer: -RM430, -RM5230 39. An investor is considering three shares given below: Stock A B C Market portfolio T-Bills Expected return 6% 13.3% 9.2% 10% 7% Beta (0.10) 2.10 0.75 1.0

Based on the information above, assume the portfolio is equally weighted. Calculate the required rate of return using CAPM for the portfolio. Answer: 9.75% 40. South Berhad is expected to pay the following dividends over the next three years. Year 1 2 3 Dividend per share (RM) 2.00 3.00 3.50

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Afterwards the company pledges to maintain a constant 4 percent growth rate in dividends forever and the required rate of return is 12 percent. What is the value of South Berhads share? Answer: 39.06