INTI INTERNATIONAL UNIVERSITY
Bachelor of Business (Hons) ACCOUNTING
Bachelor of Business (Hons) FINANCE
Bachelor of Business (Hons) HUMAN RESOURCE MANAGEMENT
Bachelor of Business (Hons) International Business
FIN2210 / FIN2212: FINANCIAL MANAGEMENT
FINAL EXAMINATION: AUGUST 2018 SESSION
This paper consists of TWO (2) sections. Answer ALL questions in Section A and any TWO (2) questions in Section B in the answer booklet provided. Each question carries equal marks.
SECTION A: Answer ALL questions.
Question 1
You are considering two securities, AHB Holdings Berhad and Hup Seng Industries Berhad, and the relevant information is given as below:
AHB Holdings Berhad 
Hup Seng Industries Berhad 

date 
closing price 
date 
closing price 
div 
1/1/03 
0.51 
1/1/03 
1.67 

12/31/03 
1.42 
12/31/03 
2.18 

1/1/04 
1.42 
1/1/04 
2.18 

12/31/04 
0.94 
12/31/04 
1.99 

1/3/05 
0.87 
1/3/05 
2 

12/30/05 
0.37 
12/30/05 
1.85 

1/2/06 
0.37 
1/2/06 
1.85 

12/29/06 
0.28 
12/29/06 
1.65 

1/1/07 
0.28 
1/3/07 
1.7 

12/31/07 
0.12 
12/31/07 
1.38 








6/16/04 

0.1 


12/21/04 

0.1 


12/6/05 

0.1 


12/14/06 

0.1 


12/4/07 

0.05 
You plan to buy 100,000 shares from both companies. The current market price for AHB Holdings Berhad and Hup Seng Industries Berhad are $0.12 and $1.38 respectively. Assume that the correlation coefficient between the two stocks is 0.12, calculate the:
<![if !supportLists]>a) <![endif]>Average return of the portfolio
(11 marks)
<![if !supportLists]>b) <![endif]>Standard deviation of the portfolio.
(7 marks)
<![if !supportLists]>c) <![endif]>You have also gathered the following information on KLCI from your broker:
Year 
Annual Return 
2003 
14.163% 
2004 
10.605% 
2005 
8.551% 
2006 
7.146% 
2007 
21.512% 
You know that, at the time you want to form the portfolio, the riskfree rate is 3%. If the Capital Asset Pricing Model holds for the portfolio, is it good to create? Assume the beta for AHB Holdings Berhad and Hup Seng Industries Berhad are 1.033 and 0.397 respectively.
(7 marks)
Question 2
<![if !supportLists]>a) <![endif]>Jenny Corporation would like to raise $15 million to invest in capital expenditures. The company plans to issue fiveyear bonds with a face value of $1,000 and a coupon rate of 7%. The coupon payment is paid annually. The following table summarizes the yields to maturity (YTM) for fiveyear (annual payment) coupon corporate bonds of various ratings:
Rating 
AAA 
AA 
A 
BBB 
BB 
YTM 
5% 
6% 
7% 
8% 
9% 
<![if !supportLists]>i) <![endif]>Assuming the bonds will be rated AA, calculate the price of the bonds.
(5 marks)
<![if !supportLists]>ii) <![endif]>Calculate total principal amount of these bonds Jenny Corporation must issue to raise $15 million today, assuming the bonds are AA rated (Since it cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number).
(3 marks)
<![if !supportLists]>iii) <![endif]>What must the rating of the bonds be for them to sell at par? Explain.
(3 marks)
<![if !supportLists]>iv) <![endif]>Suppose that when the bonds are issued, the price of each bond is $922.21. Determine the likely rating of the bonds.
(6 marks)
<![if !supportLists]>b) <![endif]>Explain the relationship between a bond’s market price and its promised yield to maturity.
(3 marks)
<![if !supportLists]>c) <![endif]>Rich Industries has a $1,000 par value bond with an 8% coupon interest rate outstanding. The bond has 12 years remaining to its maturity date. If interest is paid quarterly, calculate the value of the bond when the required return is 10%.
(5 marks)
SECTION B: Answer ANY TWO (2) questions.
Question 3
<![if !supportLists]>a) <![endif]>On December 31, 2002, the share of Amacon Inc. closed at $20. The company subsequently paid a yearend dividend in each of the years 2003 through 2007 as follows:
2003 
$1.00 
2004 
$1.00 
2005 
$1.00 
2006 
$1.25 
2007 
$1.25 
Suppose you had purchased a share of Amacon stock on Dec 31, 2002. Calculate the price at which you must sell your share at 2007 yearend in order to realize an annual compounded total rate of return of 10 percent on your initial investment (before commission and taxes).
(15 marks)
<![if !supportLists]>b) <![endif]>Calculate the price for a stock given that the beta of the stock is 1.32, the riskfree rate is 6% per year, and the expected rate of return on the market portfolio is 14% per year. The current dividend is $4.34 per share, dividends are expected to grow at a rate of 2% during year 1, dividends are expected to grow at a rate of 8% during year 2, dividends are expected to grow at a rate of 16% during year 3, dividends are expected to grow at a rate of 15% during year 4, and dividends are expected to grow at a rate of 3% per year from that point on.
(10 marks)
Question 4
<![if !supportLists]>a) <![endif]>Today is your birthday, and you decide to start saving for your college education. You will begin college on your 18th birthday and will need $4,000 per year at the end of each of the following 4 years. You will make a deposit 1 year from today in an account paying 12 percent annually and continue to make an identical deposit each year up to and including the year you begin college. If a deposit amount of $2,542.072 will allow you to reach your goal, what birthday are you celebrating today? Show your calculation.
(5 marks)
<![if !supportLists]>b) <![endif]>Suppose Betty Brad drinks a cup of Starbuck coffee ($3.00 a cup) on the way to work every morning for 30 years. If she puts the money in the bank for the same period, calculate how much she would have, assuming her accounts earns a 5% interest compounded daily. Assume she drinks a cup of coffee every day including weekends.
(5 marks)
<![if !supportLists]>c) <![endif]>Millionaire Babies: How to Save Our Social Security System. It sounds a little wild, but that is probably the point. Former Senator Bob Kerrey, DNebraska, had proposed giving every newborn babies a $1,000 government savings account at birth, followed by five annual contributions of $500 each. If the money is then left untouched in an investment account, what will be the amount in the account by the time the baby reaches age 65? Assume the interest rate for the investment account is 9 percent per annum. Show your calculation.
(7 marks)
<![if !supportLists]>d) <![endif]>Jennifer has already saved $10,000 in a mutual fund account and expected to save additional $9,000 at the end of the next two years. She expects to take out her money of $12,000 each at the end of Year 2 and Year 3 from the mutual fund account, for her son’s college education. How much she afford to spend now on vacation if she expects to earn 7% interest rate from her investments?
(8 marks)
Question 5
<![if !supportLists]>a) <![endif]>Data relating to three investment projects are given below:

A 
B 
C 
Initial investment 
$30,000 
$20,000 
$50,000 
Useful life 
10 years 
4 years 
20 years 
Annual cash savings 
$6,207 
$7,725 
$9,341 
Rank the project according to their attractiveness using the internal rate of return method.
(12 marks)
<![if !supportLists]>b) <![endif]>Assume that LMH Corporation plans to invest in a project during a particular year. Additional information on the project is as follows:
Year 
Aftertax cash flows 

Project H 
1 
$20,000 
2 
$25,000 
3 
$80,000 
4 
$22,000 
Using the cost of capital of 9% and a net present value (NPV) of $1,700, calculate the payback period for the project.
(13 marks)
Question 6
KWB Co. faces increasing needs for capital. Fortunately it has an AA credit rating. The corporate tax rate is 40 percent. The firm’s financial manager is trying to determine the firm’s weighted average cost of capital as at 31^{st} December 2018, in order to assess the profitability of capital budgeting projects.
The company’s common stock has a price of $98.44 and an expected dividend of $3.15 per share. The par value of the common stock is $100 and the historical growth pattern for dividends is as follows:
Year 
Dividend per share ($) 
2017 
2.87 
2016 
2.74 
2015 
2.68 
2014 
2.56 
2013 
2.44 
2012 
2.28 
2011 
2.15 
2010 
1.90 
2009 
1.75 
2008 
1.45 
2007 
1.36 
The preferred stock is selling at $90 per share and pays a dividend of $8.50 per share. The flotation cost is 2 percent of the selling price for preferred stock. The par value of the preferred stock is $72.
The table below shows the different bond issues of comparative market prices of equal risk to KWB Co.:
Data on Bond Issues 

Issues 
S&P’s Rating 
Price $ 
Rogers Corp. 8⅜ 31/12/2025 
AAA 
975.25 
Zendesk Inc. 8¼ 31/12/2029 
AA 
916.91 
Kellogg Co. 9.62 31/12/2025 
A 
960.50 
KWB Co. uses the information in the Balance Sheet, as shown in the following table, which are based on target capital structure proportions, to calculate its weighted average cost of capital.
Assets 
Liabilities and Equity 

Cash 
$120,000 
Longterm debt 
$691,200 
Accounts Receivable 
$240,000 
Common Equity 
$1,728,000 
Inventories 
$360,000 
Preferred Stock 
$460,800 
Plant and Equipment, net 
$2,160,000 


Total Assets 
$2,880,000 
Total Liabilities and Equity 
$2,880,000 
Calculate the weighted average cost of capital for KWB Co. using a market value weight, based on the information given.
(25 marks)
THE END
FIN2210/FIN2212 (F) / Aug 2018 / Siti Nurbaayah Daud / 20082018
FORMULA
TIME VALUE OF MONEY (TVOM)
Future Value of a Single Cash Flow 
OR


Present Value of a Single Cash Flow 
OR


Future Value of an Ordinary Annuity 
OR


Present Value of an Ordinary Annuity & Loan Amortization 
OR


Future Value of an Annuity Due 
(1 + i) OR Set the calculator to the beginning of the period


Present Value of an Annuity Due 
(1 + i) OR Set the calculator to the beginning of the period

Loan Amortization Schedule 


Present Value of a Perpetuity 
PVP = 

Present Value of a Growing Perpetuity 
PVP = 

Effective Annual Rate 
EAR = OR Using financial calculator:

RISK AND RETURN
Expected Return, ER 

Standard Deviation, SD 
OR

Single Period Return, R 
R = 
Average Return, AR 
AR = 
Expected Return of a Portfolio, ERp 
ERp = ƩW x ER 
Standard Deviation of a Portfolio, SDp 
SDp =

Beta of a Portfolio, Bp 
Bp = ƩW x B 
Required Return 
R = Rf + B (Rm – Rf) 
BOND VALUATION
Coupon Payment, Annually 
CP = Coupon Rate x Par 

Coupon Payment, Semiannually 
CP = 

Value of a Redeemable Bond 


Yield to Maturity, Redeemable Bond 


Value of an Irredeemable Bond 
Vb = 

Yield to Maturity, Irredeemable Bond 
i = 
EQUITY VALUATION
Value of a Preferred Stock 


Value of a Common Stock (Constant Growth) 
OR 

Value of a Common Stock (NonConstant Growth) 
Step 1: Calculate the dividends using the respective growth rates
Step 2: Calculate the price of the stock at the time when the growth rate becomes constant e.g. P_{4} = Step 3: Calculate the price of the stock at Year 0

THE CAPITAL BUDGETING
Payback Period (Even Cash Flows) 
PP = 

Net Present Value (Even Cash Flows) 
NPV = (Initial Investment) + Sum of All PVs 

Net Present Value (Uneven Cash Flows) 


Internal Rate of Return (Even Cash Flows) 


Internal Rate of Return (Uneven Cash Flows) 

THE COST OF CAPITAL
Cost of Common Stock Or Cost of Retained Earnings, Ke 
OR 

Growth Rate, G 


Cost of Preferred Stock, Kp 


Dividend 
D = Dividend % x Par Value 

Floatation Cost 
F = Floatation % x Market Price 

Cost of Debt, Kd 
Kd = YTM


AfterTax Cost of Debt, ATKd 
ATKd = Kd (1 – T) 

Weighted Average Cost of Capital, WACC 
WACC = (We x Ke) + (Wp x Kp) + (Wd x ATKd) 
RATIOS
msobord
Current Ratio 
= 
AcidTest Ratio (Or Quick Ratio) 
= 
Gross Profit Margin 
= 
Operating Profit Margin 
= 
Net Profit Margin 
= 
Return on Assets 
= 
Return on Equity 
= 
DebttoAsset Ratio 
= 
DebttoEquity Ratio (Or Gearing Ratio) 
= 
Times Interest Earned 
= 
Average Collection Period 
= 
Inventory Turnover Ratio 
= 
Account Receivables Turnover Ratio 
= 