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]

20. Project Analysis. McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $845 per set and have a variable cost of $405 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,000 sets of its high-priced clubs. The high- priced clubs sell at $1,175 and have variable costs of $620. The company will also increase sales of its cheap clubs by 12,000 sets. The cheap clubs sell for $435 and have variable costs of $200 per set. The fixed costs each year will be $9.75 million. The company has also spent $1 million on research and development for the new clubs. The plan and equipment required will cost $37.1 million and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1.7 million that will be returned at the end of the project. The tax rate is 25 percent, and the cost of capital if 10 percent. Calculate the payback period, the NPV, and the IRR.

21. Sensitivity Analysis. In the previous problem, you feel that the values are accurate to within +/ 10 percent. What are the best-case and worst-case NPVs? Hint: The price and variable costs for the two existing sets of clubs are known with certainty only the sales gained or lost are uncertain.

A project has the following estimated data: Price=$62 per unit; variable costs =$28 per unit; fixed costs=$27,300; required return= 12 percent; initial investment= $34,800; life= four years. Ignoring the effect of taxes, what is the accounting break-even quantity? The cash break-even quantity? The financial break-even quantity? What is the degree of operating leverage at the financial break-even level of output?

QUESTION 2: STOCK CHARACTERISTICS AND VALUATION
a) Compute the value of a share of common stock of Lexus Hotel Berhad whose most recent dividend was RM2.50 and is expected to grow at 3.50 percent per year for the next 5 years, 5 percent per year for the next 3 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10.00 percent required rate of return.

b) Glass Art Manufacturing Berhad has a beta of 1.50, the risk-free rate of interest is currently 12 percent, and the required return on the market portfolio is 18.00 percent. The company plans to pay a dividend of RM1.96 per share in the coming year and anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2016-2018 period.

Estimate the value of Glass Art Manufacturing's stock.

c) Tina's Medical Equipment Berhad paid RM1.15 common stock dividend last year. The company's policy is to allow its dividend to grow at 5.50 percent per year indefinitely. Estimate the value of the stock if the required rate of return is 8.50 percent.

The semiannual tuition payment at a major university is expected to be $40,000 for the 4 years beginning 18 years from now. What lump sum payment should the university accept now, in lieu of tuition payments beginning 18 years, 6 months from now? Assume that money is worth 9%, compounded semiannually, and that tuition is paid at the end of each half-year for 4 years. (Round your answer to the nearest cent.)

Use appropriate theories of capital structure to offer reasoned explanations of why the following phenomenon are observed in reality: i. Utility and airline companies are likely to have high levels of debt; ii. High-technology companies are likely to rely on equity financing; iii. The most profitable companies, such as Google, Microsoft, have little debt.

Hellow

please assist with a solution to this question:

Question 1                                                                                                                

Your company has decided to investment in the stock market. Management has tasked you to conduct and assessment of the two stocks listed below.

Required:

1. 1. Calculate the average rate of return for each stock during the period 2014 through 2018.                                                                                                                             
   2. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would the realised rate of return on the portfolio have been each year? What would the average return on the portfolio have been during this period?                                                                                                                                      
2. 3. Calculate the standard deviation of returns for each stock and for the portfolio
3. 4. Calculate the coefficient of variation for each stock and for the portfolio.         
   5. Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Why?                                                                                                

1) Empire Today Inc. has 10 million shares of common stock outstanding, 300,000 shares of 5% preferred stock outstanding, and 7 million of 6.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $85 per share and has a beta of 1.15, the preferred stock currently sells for $103 per share, and the bonds have 20 years to maturity and sell for 93% of par. The market risk premium is 11 percent, T-bills are yielding 2.14 %, and the firm's tax rate is 25.7%.

a) Calculate market values of Empire’s common stock, preferred stock, and debt.

b) Calculate market value weights of Empire’s common stock, preferred stock, and debt, then explain your problem solving step-by-step.

c) Calculate costs of Empire’s common stock, preferred stock, and debt

d) Calculate the firm’s Weighted Average Cost of Capital

e) The CFO is assessing a potential project which will yield an IRR of 9.3%. The project has the firm level risk. Should the CFO accept the project?

Part 2

Risk and return You are considering an investment in the stock market and have identified two potential stocks, they are Westpac Banking Corp. (ASX: WBC) and Singapore Airlines Ltd. (SGX: C6L). The historical prices for the past 10 years are shown in the table below

1. Which stocks would you prefer to own? Would everyone make the same choice? Explain your answer(s).

2. Calculate the correlation coefficient between the two stocks. Does it appear that a portfolio consisting of WBC and C6L would provide good diversification? Explain your answer(s).

3. Calculate the expected (annual) return if you owned a portfolio consisting of 50% in WBC and 50% in C6L. Would you prefer the portfolio to owning either of the stocks alone?

Explain the basic operation of the Binomial, Trinomial and Replica Method in investing

You've obtained quotes for Malaysian ringgit: $0.2300/RM and $0.2330RM. Which one of the following is correct?

The indirect bid rate of ringgit is RM4.3478/$

The indirect bid rate of ringgit is RM4.2918/$

The indirect bid rate of ringgit is $0.2330/RM

The indirect bid rate of ringgit is $0.2300/RM

Jo-Anne just bought 200 bonds at a purchase price of R1 043.70 each. The bonds will mature in 7 years’ time and have a face value of R1 000.00. The coupon rate is 11% and is paid semi-annually. Answer the questions that follow:

1.1 Calculate the prevailing interest rate.

1.2 If the prevailing interest rate is 12%, what would happen to the price of the bond?

1.3 If Lee-Anne bought the bonds at R1 043.70 and the prevailing interest rate changes to 12%, what would the capital gains yield be?

Lee-Anne bought the bonds at R1 043.70 and after four years she decides to sell the bonds while the prevailing interest rate is 9%. Answer the following questions relating to this scenario:
1.4.1 Calculate the capital gains yield.
1.4.2 Calculate the current yield.
1.4.3 Calculate the total Rand return.

Note on the questions above. Can you provide me with a more detailed calculation as to how you got to your answers for the questions and not just the answer after formula has been provided. Thank you

b) You are considering the two securities listed below.

i) Calculate the expected return for portfolio.

ii) Calculate the standard deviation of returns for portfolio.

iii) Justify why diversification work best for these stocks.

show Excel ( show all work including formulars )

You are considering an investment in the stock market and have identified two potential stocks, they are Westpac Banking Corp. (ASX: WBC) and Singapore Airlines Ltd. (SGX: C6L). The historical prices for the past 10 years are shown in the table below.

in the table below.

1. Which stocks would you prefer to own? Would everyone make the same choice? Explain your answer(s).

2. Calculate the correlation coefficient between the two stocks. Does it appear that a portfolio consisting of WBC and C6L would provide good diversification? Explain your answer(s).

3. Calculate the expected (annual) return if you owned a portfolio consisting of 50% in WBC and 50% in C6L. Would you prefer the portfolio to owning either of the stocks alone?

Fast Bikes Ltd is a small manufacturer planning to start a revolutionary line of battery operated bikes.

To start the project, the firm needs to purchase manufacturing equipment worth $ 10 million today and also incur an additional $ 2 million in research and development costs.

The equipment will be depreciated in equal amounts over the next 10 years.

In the first year, the firm expects to sell 100 bikess at $ 25,000 each and the manufacturing cost is estimated to be $ 15,000 per bike.

As demand rises and processes are streamlined, the firm expects revenues to grow by 8% each year for the first 10 years and remain constant from the 11^th year onwards into the indefinite future

Over the same period, cost of manufacturing is expected to rise by only 3% per year and stabilize from the 11^th year onwards.

To guard against contingencies, the firm needs to set aside $ 2 million at the start of the project. However, as the project develops, the contingency amount can be reduced by              $ 200,000 each year.

From the 11^th year onwards, the firm does not envisage buying or selling off any additional equipment or incurring any costs beyond the cost of manufacturing the cars.

To fund the project the firm borrows $ 5 million from the bank which charges an interest rate of 4%. The loan will need to be repaid in equal-sized annual instalments over 10 years, starting in Year 1.

The rest of the funding comes from shareholders who expect an 10% return on their investment.

The corporate tax rate is 40% and expected to remain constant.

a) Using this data, work out the free cash flow of the project from year 0 to year 10 on an Excel spreadsheet. Clearly highlight all relevant inputs, adjustments and formulae for your calculation.           

b) Calculate the NPV of the project  

Note: The project doesn’t terminate in 10 years but continues into the indefinite future