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# ANSWER SCHEME FOR FINAL EXAM BWFF2043, FIRST SEMESTER 2014/2015

(A141)

## a) The different between Ordinary Annuity and Annuity Due

Ordinary Annuity : the payment comes at the end of the covered term. E.g- typical
home mortgage
Annuity Due : The payment comes at the beginning of the term. E.g- rent

## b) i) RM 100 (PVIFA 5%, 12) + RM 1000 (PVIF5%, 12)

RM100 (8.8633) + 1000 (0.5568)
RM 886.32 + RM 556.80
= RM1,443.12

## ii) RM 100 (PVIFA, 10%,12) + RM1,000 (PVIF, 10%, 12)

RM100 (6.8137) + 1000 (0.3186)
RM 681.37 + RM 318.60
= RM1,00.13

## iii) RM 100 (PVIFA, 15%,12) + RM1,000 (PVIF, 10%, 12)

RM100 (5.4206) + 1000 (0.1869)
RM 542.06 + RM 186.90
= RM728.96

c) There is an inverse relationship between value of bond and bonds yield. As the yield
increases, the value of the bond decreases. When the yield equal coupon rate, the bonds
value is equal to par value RM1,000.

QUESTION 2 (6 marks)

## D2= 1.44 (1+0.2) = 1.728

D3= 1.728 (1+0.2) = 2.0736

P4 = D5/ (Kcs-g)

## P0 = 1.44/(1.12) + 1.728/(1.12)2 + 2.0736/(1.12)3

+ 2.4883/(1.12)4 + 32.3487/(1.12)4

= \$ 26.2786

## QUESTION 3 (30 marks)

a) Cost of capital is the rate of return that a firm must earn on its investments in order to
satisfy the the required rates of return of all the firms sources of financing. All types of
capital, including debt, preferred stock, common stock and retained earnings should be
incorporated into the cost of capital computation, with the relative importance of a
particular sources being based upon the percentage of financing to be provided from that
source. (5 marks)

b) TWO reasons for calculating a firms weighted average cost of capital (WACC)

i) The cost of capital is used as the minimum acceptable rate of return for capital investments.
The value of the firm should be maximized by accepting all projects where the net
present value is positive when discounted at the firms cost of capital. (2.5 marks)

ii) The weighted average cost of capital is also used in evaluating a firms historical
performance. That is, to create shareholder value a firm must not only earn a profit in the
traditional accounting sense, but it must earn a return on its invested capital that is
acceptable to the investors who provided the firms financing. This acceptable return is
the firms weighted average cost capital. (2.5 marks)

c) Effect of tax rate on its cost capital is observed in computing the cost of debt. Since
interest is a tax deductible expense, the use of debt indirectly decreases the firms taxes.
Therefore, since we have computed the internal rate of returnmon an after- tax basis, we
also compute the cost of debt on an after-tax-basis. ( 2.5 marks)

d) No. This is the current yield only, not the promised yield to maturity. In addition, it is
based on the book value of the liability, and it ignores taxes. ( 5 marks)

e)
i) Calculate the after-tax cost of debt assuming Meachma/s bonds are its only debt
YTM with net proceeds = RM1,075 (1090 15) is 8%

10001075
90+
12
YTM = 1075+1000 = 8%
2

## iii) Cost of retained earning

RM 4.00 (1.05)/ (RM 30- RM 3) + 5% = 20.56%

## iv) Weighted average cost of capital

At RM30 million; debt = RM12 million and common equity = RM 18 million. Available
retained earnings are RM12 million, so new common stock will equal to RM6 million.

## Weighted for retained earning = ( RM 12 million / RM 18 million) x 60% = 40%

Weighted for retained earning = ( RM 6 million / RM 18 million) x 60% = 20%

QUESTION 4

Project X:

Cumulative

Project Y:

Cumulative

## 2 1,000 0.7972 797.19 -3309.95

3 2,000 0.7118 1423.56 -1886.39

## Discounted Payback Period = 4.0 + 615.35/1134.85 = 4.542 years.

B. PP (1) ignores any cash flows that occur after the payback period and (2) does not consider the time
value of money within the payback period.

C.

## I. NPV = RM405,000 (PVIFA 8%, 6) - RM1,750,000

= RM405,000 (4.6229) - \$1,750,000

= RM 1,872,274.5 - RM1,750,000

= RM 122,274.50

RM 1872,274.5
RM 1,750,000
(II) PI =

= 1.0699

## (III) \$1,750000 = \$405,000 [PVIFA ]

IRR%,6 yrs

4.3210 = PVIFA
IRR%,6 yrs

PVIFA
6
10% 4.3553
IRR 4.321
12% 4.1114
IRR= 10% + 2%(4.3553-4.321/4.3553-4.1114) = = 10% + 2% (0.1406) = 10.28%

1V. Yes because NPV is positive, PI is more than one and IRR is more that required rate of return
QUESTION 5
i) The initial outlay (in Year 0).
(5 marks)

machine

= RM5,600

## Increase in Maintenance Cost (5,300)

1
Deacrease in Operating Cost 9,200

EBT 47,900

## Tax at 28% (13,412)

EAT 34,488

+) Depreciation 500

(4 marks)

## Tax payment = 0.28xRM7500

= RM 2,100

B) Calculate the projects net present value (NPV). Is the project acceptable under the NPV technique?
Explain.
(4 marks)

## NPV = [ RM34988 (PVIFA 12%, 5) + 170400 (PVIF 12%,5) ] RM211,900

= [ RM34,988 (3.6048) + 170400 (0.5674) ] RM211,900
= RM10,909.70 (0.5)

AA Berhad should accept the project (1) because the NPV is positive. (1)

QUESTION 6
i) Firms monthly fixed operating cost (2 marks)
EBIT = Q (P-V)- F
550,000
40,000 = ( 110 (110-70)) F

## RM 40,000 = (5,000 units *RM40 F

Fixed cost = RM160,000

## ii) Monthly operating break-even point in units (2 marks)

F
QB = PV

RM 160,000
QB = RM 110RM 70 = 4,000 units

## b) Indifference level of EBIT between the two plans (6 marks)

Plan A Plan B
(EBIT- I) (1-T)- P = (EBIT-I) (1-T)- P
S S

## (EBIT- 20,000) (0.74)- 0 = (EBIT- 0) (0.74) 8,000

5,000 +1,000 5,000 +2,000

## 0.74EBIT-14,800 = 0.74EBIT 8,000

6,000 7,000
5,180EBIT -103,600,000 = 4,400 EBIT- 48,000,000
740EBIT = 55,600,000
EBIT = RM75,135.14

## QUESTION 7 (10 marks)

a) The repurchase price = RM70 + RM 4 ( RM 600,000/150,000)
= RM 74

## b) Number of shares to be repurchased

RM600,000/ RM74 = 8,108.11 shares

= RM24

## After stock repurchase

EPS = RM3,600,000/ (150,000- 8,108)
= RM25.371

d) The capital gains to be received by the stockholders would not be equal to the intended
dividend, thus resulting in a dollar benefit or loss to the stockholders. (1.5 marks)

e) You would prefer the repurchase plan, unless you have a need for current income
(1.5 marks)