Finance Exam: Structured Questions and Solutions

Question 1: Investment Options and Savings Accounts

SECTION A: STRUCTURED QUESTIONS. 

Answer ALL Questions. 

QUESTION 1 (25 MARKS) 

(a)    Ridzuan is a finance student at a college. Recently, he has won RM 15,000 from a competition. He needs your advice on his investment options: 

You are required to calculate the accumulated sum from each option and to advice Ridzuan on the best option available. (9 marks)

(b) If Ms Chan is thinking of putting RM10,000 into the saving accounts at the end of each year for 10 years, what sum can she accumulate at an interest rate of 8% interest computed on a yearly basis? (3 marks) 

(c) A motor vehicle which costs RM20,000 was bought on credit terms, with payment of 10% as deposit to be made immediately and the balance to be paid in one lump sum 6 months later. 

(i)    Calculate the total amount of interest expense if the compound interest rate is 2% per month.(4 marks) 

(ii)    With loan amortization schedule, show the total amount be paid for the vehicle. (9 marks)

QUESTION 2 (25 MARKS) 

Consider two mutually exclusive projects – Project X and Project Y with identical initial outlays of RM90,000 and depreciable lives of 5 years. Project X is expected to produce free cash flows of RM32,787 each year. Project Y is expected to generate a single after-tax net cash flow of RM223,880 in year 5. The cost of capital is 15 percent. Required: 

(a) Calculate the net present value for each project. (6 marks) 
(b) Determine the internal rate of return for each project. (6 marks) 
(c) Compute the payback period for each project. (4 marks)
 (d) In a situation where there is capital rationing, calculate the profitability index (PI) for both projects and rank them accordingly. Based on your PI calculations above, identify the problems you foresee in selecting one of the projects. Select the best project based on Capital Budgeting Valuation Techniques above. (9 marks)

QUESTION 3 (25 MARKS) 

The following shows the expected percentage returns on three stocks over the next six years:

Required: 

(i) Find the expected return for each of the stock. (6 marks) 
(ii) Compute the variance and standard deviation for stock A, B and C. Show your working. (15 marks) 

(iii) Justify how can you minimize the risk of the above combination of stocks. (4 marks)

QUESTION 4 (25 MARKS) 

(a) Explain any three (3) differences between maximising profits and maximising shareholders’ wealth. Justify which one should be the goal of a company. (12 marks) 

(b) Explain any three (3) costs and benefits of partnerships/proprietorships as compared to corporation. Give your opinion which type of organizational structure is preferable. (8 marks) 

(c) Classify each of the following events as a source of systematic or unsystematic risk with explanations: 

(i) After the current election, Donald Trump is no more the President of United States of America and Joe Biden is appointed to take over his place. 

(ii) Harlie Davidson is convicted of insider trading and is sentenced to 10 years of prison. 

(iii) An OPEC embargo raises the world market price of oil. 

(iv) A major consumer product, Ribena loses a product liability case due to misleading Vitamin C advertisement. 

(v) The Supreme Court rules that no employer can layoff an employee without first giving 30-days notice. (5 marks)