ASSIGNMENT – BMMF5103

1

JANUARY SEMESTER 2013

BMMF5103 – MANAGERIAL FINANCE

ASSIGNMENT

INSTRUCTION:

This assignment contains 6 questions worth 120 marks. Please answer ALL questions.

QUESTION 1

a. Discuss two key limitations of the proprietorship form of business.

[5 marks]

b. Why is important for a financial manager to be able to forecast and plan, as well as to

coordinate and control the activities within the firm?

[5 marks]

c. Why is shareholder wealth maximization better than simple profit maximization as a goal

for the firm?

[5 marks]

d. When do companies incur the agency costs? Support your answer by giving an

example.

[5 marks]

[TOTAL: 20 MARKS]

QUESTION 2

a. Briefly explain the term “security market line”. Where would underpriced and overpriced

securities plot on the SML (security market line)?

[5 marks]

b. Briefly explain the “capital asset pricing model”. How does the model explain the

relationship between risk and return?

[5 marks]

c. Briefly explain how diversification reduces risk. Discuss the importance of “beta” as a

measure of risk.

[5 marks]

d. List the three forms of market efficiency and explain the basis for it.

[5 marks]

[TOTAL: 20 MARKS]

ASSIGNMENT – BMMF5103

2

QUESTION 3

a. Ms. Sally has an income of RM40,000 this year and RM60,000 next year. She can invest

in a project that costs RM30,000 this year, which generates an income of RM36,000

next year. The market interest rate is 10%. What will be his consumption next year, if

Ms. Sally invests in the project and consumes RM50,000 this year?

[4 marks]

b. After retirement, you expect to live for 25 years. You would like to have RM75,000

income each year. How much should you save in the retirement to receive this income, if

the interest is 9% per year (assume that the payments start on the day of retirement)?

[4 marks]

c. Mr. Walid expects to retire in 30 years and would like to accumulate RM1 million in the

pension fund. If the annual interest rate is 12% per year, how much should Mr. Walid put

into the pension fund each month in order to achieve his goal? Assume that Mr. Walid

will deposit the same amount each month into his pension fund and also use monthly

compounding.

[4 marks]

d. For RM10,000 you can purchase a 5-year annuity that will pay RM2358.65 per year for

five years. The payments are made at the beginning of each year. Calculate the effective

annual interest rate implied by this arrangement.

[4 marks]

e. What is the nominal rate for an investment at 10.47% effective rate compounded

monthly?

[4 marks]

[TOTAL: 20 MARKS]

ASSIGNMENT – BMMF5103

3

QUESTION 4

a. Wynners Bhd. is expected to pay a dividend of RM2 per share at the end of year 1(D1)

and the dividends are expected to grow at a constant rate of 4% forever. If the current

price of the stock is RM20 per share, calculate the expected return or the cost of equity

capital for the firm.

[4 marks]

b. Rainbow Technology Corporation has just paid a dividend of RM0.50 per share. The

dividends are expected to grow at 24% per year for the next two years and at 8% per

year thereafter. If the required rate of return in the stock is 16%, calculate the current

value of the stock.

[4 marks]

c. Universal Stars Bhd is a no growth firm and has two million shares outstanding. It is

expected to earn a constant 20 million per year on its assets. If all earnings are paid out

as dividends and the cost of capital is 10%, calculate the current price per share for the

stock.

[4 marks]

d. A three-year bond has 8.0% coupon rate and face value of RM1000. If the yield to

maturity on the bond is 10%, calculate the price of the bond assuming that the bond

makes semi-annual coupon interest payments.

[4 marks]

e. A four-year bond has an 8% coupon rate and a face value of RM1000. If the current

price of the bond is RM878.31, calculate the yield to maturity of the bond (assuming

annual interest payments).

[4 marks]

[TOTAL: 20 MARKS]

ASSIGNMENT – BMMF5103

4

QUESTION 5

a. Discuss some of the limitations of using the financial ratios.

[4 marks]

b. If the debt ratio is 0.5, what is the debt-equity ratio? If a company had a debt- equity ratio

of 1.650, what portion of its assets does equity represent?

[4 marks]

c. Use the following alphabetically listed data to prepare the income statement and balance

sheet for 2005 Merck ($ millions):

Accounts receivable $ 2,927.3

Accumulated depreciation 9,315.1

Cash and cash equivalents 9,585.3

Dividends payable 830.0

Equity (income) from affiliates (1,717.1)

Goodwill 1,085.7

Gross property, plant, and equipment 23,713.3

Income taxes payable 3,649.2

Inventories 1,658.1

Investments 1,107.9

Loans payable 2,972.0

Long-term debt 5,125.6

Marketing and administrative expense 7,155.5

Materials and production expense 5,149.6

Other (income) expense, net (110.2)

Other assets 6,686.0

Other current liabilities 5,381.2

Other intangibles 518.7

Other long-term liabilities 8,500.1

Prepaid expenses and taxes 826.3

Research and development 3,848.0

Restructuring costs 322.2

Sales 22,011.9

Short-term investments 6,052.3

Stockholders’ equity 17,916.6

Taxes on income 2,732.6

Trade accounts payable 471.1

[12 marks]

[TOTAL: 20 MARKS]

ASSIGNMENT – BMMF5103

5

QUESTION 6

a. The Mayor Company has two divisions, each of approximately the same size. The

financial staff has estimated the rates of return for different states of nature as given.

Division Rates of Return

State of

World

Subjective

Probability

Market

Return

Division 1 Division 2

Good 0.25 0.22 0.28 0.18

Average 0.60 0.11 0.10 0.10

Horrible 0.15 -0.08 -0.10 0.05

b. Calculate the market’s return, variance, standard deviation, and coefficient of variation.

[3 marks]

c. Calculate Division 1’s return, variance, standard deviation, and coefficient of variation.

[3 marks]

d. Calculate Division 2’s return, variance, standard deviation, and coefficient of variation.

[3 marks]

e. Calculate the covariance of Division 1 with the market and the covariance of Division 2

with the market.

[2 marks]

f. Calculate the beta for both divisions.

[2 marks]

g. If the risk-free rate is 6 percent, what rate of return does the market require for each

division?

[2 marks]

h. Which of the divisions should be kept? Which should be spun off? Why?

[3 marks]

i. What is the beta of the entire company?

[2 marks]

[TOTAL: 20 MARKS]