FINANCIAL MANAGEMENT

ASSIGNMENT 2 (50 MARKS) DUE DATE: 7TH NOVEMBER 2009

Question 1 (10 marks)

i) You plan to purchase some properties costing RM500,000. Stamp duty is 2 percent
of the purchase price and legal expenses will be RM5,500. The property will be
financed by RM80,000 of your own savings and a mortgage loan from your bank at
6% p.a. The loan will be amortised by monthly instatements over the next fifteen
years.

a) What is the amount of the monthly installment?

b) How much is the principal value of your loan after six (6) years of repayment?
c) If the interest rate after 6 years increase to 8% p. a. calculate the new monthly
repayment.

ii) You just inherited a large amount of money to deposit for one year and you have
approached the following three banks:

Bank Ace pays 8.60% p.a. compounded semi-annually

Bank Bee pays 8.00% p.a. compounded monthly
Bank Cee pays 7.90% p.a. compounded weekly

a) Calculate the effective interest rate for each of the three banks.
b) Which bank offers you the highest effective deposit rate and which bank offers
you the lowest effective deposit rate?

Question 2 (10 marks)

ii). MMC Berhad is a mining company which did not pay dividends for many years. The
company will continue with this trend for the next four (4) years after which they will
start paying dividends of RM0.60 per share. Dividends are expected to grow at 5%
per annum after that. Shareholders require a return of 16%. What is a fair value for
MMC share today?

iii). The last dividend paid to shareholders by GAB Berhad was RM1.60 per share. The
management plans to give a growth in dividend of 10 percent for the next two (3)
years and thereafter to mainin a constant dividend growth policy of 6 percent. An
investor in evaluating an investment in the company has determined that she would
require a 18 percent rate of return from this type of investment. If the current price of
GAB shares in the stock market is RM18.50, should the investor purchase the shares?
Question 3 (10 marks)

A proposal has come before the Board of Directors of Jaya Berhad for the purchase of a
machine to manufacture a new product. The cost of the machine is estimated at RM 30
million and will have zero residual value at the end of the project. Additional investment
in working capital at the start of the project is forecasted at RM 10 million. Jaya’s cost of
capital is 12% per annum. Ignore taxation.

Anticipated results for the expected five year life of the machine are supplied by the
company’s accountant as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
RM'000 RM'000 RM'000 RM'000 RM'000
Sale of product 20,000 22,000 23,000 16,000 12,000

Direct costs 10,000 12,000 13,000 10,000 8,000

Depreciation 6,000 6,000 6,000 6,000 6,000
Total costs 16,000 18,000 19,000 16,000 14,000

Profit/(Loss) 4,000 4,000 4,000 0 (2,000)

Required:.
i) Calculate the payback period of the project.
ii) Calculate the net present value (NPV) of the project.

Question 4 (20 marks)

“Today all around the world there are stock exchanges helping companies raise funds
while at the same time providing an investment avenue for those with savings. Side by
side with stock exchanges are the world ‘s stock markets. It is the stock market which
allows investors to change their investment decisions. Whereas the stock exchange
provides rules .and regulations and administrates the stock market “ Bennetts,
R.J.(2004) You are required to:

(a) Explain the role and size of the share market in Malaysia, including how it has
developed, how it can be accessed to raise financial capital, and how it is
regulated.
(b) Analyse the relationship between risk and return in equity investment, and the
chief types of investment risk
(c) Define financial and investment concepts such as beta and the capital asset pricing
model and assess the extent to which these models are useful in practice