BMMF MANAGERIAL FINANCE ASSIGNMENT (60%)

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Adam Higgins
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1 BMMF MANAGERIAL FINANCE ASSIGNMENT (60%) INSTRUCTION: ANSWER ALL QUESTIONS. Question 1 a. Consider two firms, Gamma corporation and Nano corporation. Both firms are expected to have earnings before interest and taxes of RM100,000 during the coming year. In addition, Gamma is expected to incur RM40,000 in interest expenses as a result of its borrowings whereas Nano has no interest expense because it does not use debt financing. However, Nano will have to pay stockholders RM40,000 in dividend income. Both firms are in the 40 percent tax bracket. Calculate the earnings after tax for both firms. Which firm has the higher after-tax earnings? How do you account for the difference? b. At the end of 2010, Lebah Madu Bhd. announced it had produced a gross profit of RM1 million. The company has also established that over the course of this year it has incurred RM345,000 in operating expenses and RM125,000 in interest expenses. The company is subject to a 30 percent tax rate and has declared RM57,000 total preferred stock dividends. i) How much is the earnings available for common stockholders? ii) Compute the increase in retained earnings for 2010 if the company were to declare a RM4.25 common stock dividend. The company has 15,000 shares of common stock outstanding. c. Sinaran Berhad has retained earnings balance of RM850,000 at the beginning of By the end of 2010, the company's retained earnings balance was RM950,000. During 2010, the company earned RM245,000 net profits after paying its taxes. The company was then able to pay its preferred stockholders RM45,000. Compute the common stock dividend per share in 2010 assuming the company has 10,000 shares of common stock outstanding. d. Discuss the limitations of ratio analysis and the cautions which must be taken when reviewing a cross-sectional and time-series analysis. 1

2 Question 2 a. Ten years ago, Tan purchased a painting for RM300. The painting is now worth RM1,020. Tan could have deposited RM300 in a savings account paying 12 percent interest compounded annually. Which of these two options would have provided Tan with a higher return? b. Jamilah has just graduated from high school and has received an award of RM5,000. She would like to deposit the money in an interest earning account until she graduates from college (i.e., four years from now). In her search for the highest interest earning account, she has narrowed the list down to the following two accounts: 1) Bank Alpha pays 9 percent interest compounded annually, and 2) Bank Beta pays 8 percent interest compounded semi-annually. Which is the better offer, and how much will Jamilah have upon graduation from college? c. Mandy has purchased a used car for RM15,000. She paid RM2,500 as down payment and she paid the balance by a loan from her hometown bank. The loan is to be paid on a monthly basis for two years charging 12 percent interest. How much are the monthly payments? d. You are the new assistant branch manager of a large Penang-based bank and the branch manager has asked you a question. The question he asked is which rate should the bank advertise on its monthly-compounded loans, i.e. the nominal annual percentage rate or the effective annual percentage rate? Similarly, which rate should the bank advertise on quarterly-compounded savings accounts? How would you advise the bank manager? Please explain your answer. 2

3 Question 3 ASSIGNMENT - BMMF5103 Based on the table below, please answer the following questions: Bond Par Value (RM) Annual Coupon Interest Rate (%) Years to Maturity Required Return (%) L M N a. i) Calculate the current value of Bond L, M and N. ii) What will happen to the value/price as the bond approaches maturity? iii) Determine the current value of Bond M if the time to maturity is six (6) years. [10 marks] b. Charlene owns stocks in a company which has paid the annual dividends shown in the table below: Year Dividends(RM) i) Calculate the growth rate of these dividends. ii) Calculate the estimated dividend for iii) The required return is assumed to be 17 percent. Using the Gordon model, calculate the per share value of the stock. [10 marks] 3

4 Question 4 a. The College Copy Shop is in the process of purchasing a high-tech copier. In their search, they have gathered the following information about two possible copiers A and B. A B Initial Investment RM10,000 RM10,000 Annual rate of return Return Probability Return Probability Pessimistic 11% % 0.30 Most Likely 18% % 0.45 Optimistic 22% % 0.25 i) Compute expected rate of return for each copier. ii) Compute variance and standard deviation of rate of return for each copier. iii) Which copier should they purchase? [14 marks] b. Dollyna is considering investing in a project with a beta coefficient of What would you recommend her to do if this investment has an 11.5 percent rate of return, risk-free rate of 5.5 percent, and the rate of return on the market portfolio of assets is 8.5 percent? [6 marks] 4

5 Question 5 ASSIGNMENT - BMMF5103 a. A firm has an operating profit margin of 15 percent on sales of RM20,000,000. If the firm has total assets of RM22,500,000, what is the firm's ROA? What does it indicate? b. Syber Ria Bhd has earnings after interest but before taxes of RM300,000. The company's before-tax times-interest-earned (TIE) ratio is Calculate the company's interest charges. What is the importance of TIE ratio? c. Darma Niaga Bhd has the following characteristics: Common equity RM100 Total assets RM1,000 Total debt/total assets 35% Basic Earning Power (BEP) ratio 20% Tax rate 40% Interest rate on total debt 4.57% What is Darma Niaga's ROE? What does it measure? d. Two firms have the same current ratio, 0.75, and the same amount of Cost of Goods Sold. However, Firm A has a higher inventory turnover ratio than Firm B. Therefore, we can conclude that the quick ratio of Firm A will be smaller than that of Firm B. Why or why not? 5

Problem Set One. Name

Problem Set One. Name MK602 Problem Set One Name The first part of the case, presented in Chapter 3 (pages 123-125), discussed the situation that Computron Industries was in after an expansion program. Thus far, sales have