Final Examination Semester 1 / Year 2011

Size: px

Start display at page:

Download "Final Examination Semester 1 / Year 2011"

Vernon Merritt
5 years ago
Views:

1 Southern College Kolej Selatan 南方学院 Final Examination Semester 1 / Year 2011 COURSE : COURSE CODE : FINE2003 TIME : 2 1/2 HOURS DEPARTMENT : MANAGEMENT, ACCOUNTING & FINANCE LECTURER : CHIANG FAN SIN Students ID : Batch No : Notes to candidates: 1) The question paper consists of 4 pages and 4 questions. 2) Answer all questions in your answer booklet 3) Return the question paper with your answer booklet.

2 Question 1 (25 Marks) a) Steven is 40 years old. Steven estimates that he needs $1,800,000 for his retirement when he reaches age of 55. He plans to make equal, monthly investment into an investment account which is projected at 8% annual return. i) How much he needs to invest per month in order to accumulate $1,800,000 before he reaches age of 55? ii) If he can only afford to invest $1200 per month, do you think he can achieve his retirement goal? Why? b) Jackson borrowed 80,000 at a 10% annual rate of interest to be repaid over 7 years. The loan is amortized into 7 equal, annual, end-of-year payment. i) Calculate the annual, end-of-year loan payment. ii) Prepare a loan amortization schedule showing the interest and principal breakdown of each of the 7 loan payments. (10 marks) iii) Explain why the interest portion of each payment declines with the passage of time c) What is the difference between nominal and effective rate of interest? Page 1 of 4

3 Question 2 (a) Define cash conversion cycle (CCC). (25 marks) (b) South East Spare Parts Sdn. Bhd. is concerned about managing cash efficiently. On the average, inventories have an age of 70 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 45 days after they arise. The Company has annual sales of about $500,000. Assume there is no difference in the investment per dollar of sales in inventory, receivables and payables. There are 365 days for the year. (i) Calculate the firm s operating cycle. (ii) Calculate the firm s cash conversion cycle. (iii)calculate the amount of resources needed to support the cash conversion cycle. (iv) Discuss how management might be able to reduce the cash conversion cycle. (c) Semper Pump Company, which produces bicycle pumps, has seasonal funding needs. Semper holds, at minimum, $25,000 in cash and marketable securities, $100,000 in inventory, and $60,000 in accounts receivable. At peak times, Semper s inventory increases to $750,000 and it is accounts receivable increase to $40,000. To capture production efficiencies, Semper produces pumps at a constant rate throughout the year. Thus, accounts payable remain at $50,000 throughout the year. Calculate: (i) The permanent funding requirement (ii) The seasonal funding requirement (d) Compare aggressive funding strategies versus conservative funding strategies Page 2 of 4

4 Question 3 (25 marks) (a) IJM Corporation has three projects under consideration. The cash flows for each project are shown in the following table. The firm has a 14% cost of capital. Initial Investment Project A Project B Project C $40,000 $40,000 $40,000 (CF 0 ) Year (t) Cash inflows (CF t ) 1 $13,000 $7000 $ $13,000 $10000 $ $13,000 $13,000 $13,000 4 $13,000 $16000 $ $13,000 $19000 $7000 (i). Calculate each project s payback period. Which project is preferred according to this method? (ii). Calculate each project s net present value (NPV). Which project is preferred according to this method? (iii) Comment on your findings in parts (a) and (b), and recommend the best project. Explain you recommendation. (b) What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4? (c) What is the payback period for Tangjung Mining company s new project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4? d) Briefly describe the three types of capital budgeting techniques (5 marks) Page 3 of 4

5 Question 4 (25 Marks) a) Briefly describe the sources of risk affecting financial managers and shareholders. b) Discuss the measurement of return and standard deviation for a portfolio and the concept of correlation. c) YeChui Metal has isolated four alternatives for meeting its need for increased production capacity. The following table summarizes data gathered relative to each of these alternatives. Alternative Expected Return Standard deviation Of return A B 23 9 C D i) Calculate the coefficient of variation for each alternative. ii) If the firm wishes to minimize risk, which alternative do you recommend? Why? (2 marks) d) What are the pros and cons of payback periods. e) What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4? 000 Page 4 of 4

Final Examination Semester 2 / Year 2010

Southern College Kolej Selatan 南方学院 Final Examination Semester 2 / Year 2010 COURSE : COURSE CODE : FINE3003 TIME : 2 1/2 HOURS DEPARTMENT : ACCOUNTING & FINANCE, MANAGEMENT LECTURER : KAN YOKE YUE Students