Question

QUESTION 1: INTRODUCTION TO FINANCIAL MANAGEMENT [30 MARKS]

Assume that you recently graduated and have just reported to work as an investment advisor at the Bill Morrisons Wealth Management Sdn. Bhd. One of the firm’s clients is Dato’ Lee Chong Wei, a Malaysian male professional badminton player who was ranked first worldwide for 349 weeks from 21 August 2008 to 14 June 2012. After retiring, he would like to set up a badminton academy in Malaysia to develop and nurture good athletes from the grassroots. In line with his passion for drawing, he also wishes to have his own product design company. He also expects to invest substantial amounts of money through Bill Morrisons Wealth Management Sdn Bhd. Dato’ Lee Chong Wei is very bright, and he would like to understand in general terms what will happen to his money. Your boss has developed the following set of guideline you must answer to explain the Malaysian Financial System to Dato’ Lee.

a) Describe three (3) organizational forms a company might have as it evolves from a startup to a major corporation.

[9 Marks]

b) Elaborate the statement that high concentration of ownership in corporation gives rise to the agency problem.

[9 Marks]

c) Justify whether social, stakeholder or shareholders should be the primary objective of managers based on the below conditions:

(1) Do firms have any responsibilities to society at large?

(2) Is stock price maximization good or bad for society?

[12 Marks]

QUESTION 2: FINANCIAL MARKETS AND INSTITUTIONS [15 MARKS]

Leading Malaysian scientist Prof Teo Soo-Hwang has been awarded an Honorary Order of the British Empire from Queen Elizabeth II for her outstanding work in cancer research. Prof Teo, who is the Chief Executive Officer of Cancer Research Malaysia, was recognised not only for her efforts in improving the diagnosis and treatment for a variety of cancers but for developing research collaborations between Malaysia and Britain, specialising in Asian genetics and cancers prevalent within Asian communities.

Prof Teo and her team need a machine to detect cancer cells in a blood sample long before a tumour can be found with standard imaging techniques. Unfortunately, they do not have sufficient funds to produce the machine. Tan Sri Dato' Seri Syed Mokhtar Shah bin Syed Nor AlBukhary is a Malaysian businessman, entrepreneur and philanthropist has plenty of savings, which he and his wife have accumulated over the years.

Based on the scenario above, illustrate a Flows of Funds through the Financial System that provides and facilities lending and borrowing money that basically could fulfil the needs of people like Prof Teo and Tan Sri Dato’ Syed Mokhtar.

[15 Marks]

Answer 1

a) The three forms that a startup can take are :

Sole proprietorship - This means the the individual is the sole owner of the business and the business an the individual are not separate in the eyes of law.

Partnership - The individual can own the business along with others (partners) who share in all profits/losses and run the business together. In case of limited liability partnership, the partners enjoy separate legal status and are not personally responsible for the debts of the partnership.

Corporation - The corporation is a separate legal entity in the eyes of law. A corporation can enter into agreements, pay taxes and can be held legally liable.The ownership in the corporation is through the ownership of company shares.

b) Agency problem refers to the situation where management thinks to maximize it own profits rather than maximizing all the shareholders wealth.

Excessive ownership means that the individual can have a place in the company management and be responsible for making decisions of day to day operations of the company. The individual might be motivated to increase perks paid to him/her for holding the management position and then share the profits too with other shareholders. Thus, there is a clear conflict of interest leading to the agency problem.

c) 1) Yes the firms have responsibility towards the society. The firms must have social welfare as their objective. They cannot continue generating higher returns at the expense of the society. For example, if the firm operations are releasing harmful gases or causing pollution then they must take actions to take corrective measures that reduce the adverse impact of these pollutants on the society. Alternatively, they should modify their processes to prevent release of such gases. Thus, societal welfare should be one of the major considerations in company actions.

2) Stock price maximization is other major objective of the company. However, stock price maximization and social welfare must go hand in had. The share price maximization at the expense of societal welfare is not acceptable.