AGW518 - FINANCIAL MANAGEMENT - SIDANG 1992-93.

(1)

t

TJITIIVERSITI SAINS TALAYSIA

SPECIAL EXA}III{ATION

1992/93 ACADE}|IC SESSI0|'| ^.

TI{ASTER OF BUSINESS ADIIIINISTRATIoN AGY

5I8

FINANCIAL HANAGEHENT

TIIIE 3 3

^HOURS

TOTAL UARKS

:

lO0

F_;;;___

Answer

any five questions including

_Question

No. I which is compulsory. All

questions

carry

equal narks.

1. M

& N Sdn Bhd has requested

a loan fron

^your

bank.

The

loan is to

^be

used

to finance current assests,

and

will

be

repaid within three

^years.

The

c.onrltmy

has supplied the

bank

with its financial statenents

as

fol

lows.

M&NSDNB[IT)

Ee_linee_S-heet_eg_qt .Deceqber

31,

1986

Cash

Trade debtors Stocks

Total

Current Assets

Larid

Building

and equipnent, net

(depreciation -

^$57,O00)

Total

Fixed Assets

Trade

creditors Short-tern

loans

Total

Current

Liabil ities

$ 750 24|OAO 68,25A 93,O00

39,000 93,O0O

t32,0oo

225,OAA

33,0O0 70,5OO

l03,5o0

(2)

trong-tern loans Shares

Unappropriated prof i

ts

Arflp 518

34,425 47,25O 39,825

1?i:Y2

?rading and

Profit

and l,oss

Account for year

ended Decenber

31,

1986

$ 240,000

144,00O Sales

Cost Gross

Less:

of

goods sold

profit

Profit before

ta;r Incone Tzur

Net

profit

Fixed

operating

^expenses

Variable

operating expenses Depreciat ion

Interest

Total

Expenses

96,000

31,500 24,0O0 15,OOO

9,15O 79,650

16,35O B,175

8,l?5

Industry

1986

Ayerecc

1.8O times

0.70 tines

3? days

2.5 tines

sUA

-\ffi

3.8 tires

38fr

IM

(a) _Basedon

the financial statenents,

conplete

the following table:

1.

2, 3.

CArrent

ratio

Quick

ratio

Average

collection period

(use 360 days) Stock

turnover

^(use

36O days)

Total debt to total

asset

kng-term debt to total capital

izat ion

Interest

coverage

ratio

Gross

profit

nargin

Profit

margin

before

tan

1-9s5

1.84 0.78 36 days 2-s9 t ines

50%

33.8%

4.O

tines

4m

9.6%

4.

5.

6-

1

8.

9.

. . -3/_

(3)

a

Net

profit

margin

Total asset

turnover Fixed

asset

turnover Return on

total

assets Return on shareholders' funds

What

are the factors

^you

request?

Based on

the infomation

toM&N?

Explain.

3.6%

l.

^I

1 tines

2.O2 times rc.6%

8.O%

would consider

in

available,

shoul.d

A{iw 518

3.5%

1.14

tines

1.4O

tires

4.W

9.s%

assessingM&N's

loarr

the

bank

grant the

loan

lo.

11.

t2.

13.

14.

(b)

(c)

2.

The directors of

ltlaju Bhd. have asked you

to analyse the following infornation in the

context

of *orking capital

nanagenent.

Year ended Decenber 31,

Sales

Cost

of

sales

Total materials

^purchased Stocks: lrftrter i al s

Finished goods Trade

creditors

Trade debtors

rJ1.&

$ 3O0,000 255, ^OOO 150,000 36,O0O 22,3OO 30,00o 37,5OO

-1gxs

$ 360,00o 306n00O 18O,00O

54,000 27,0O0 18,0OO 60,0Oo

each year

and

Iength of

the

to:

cash

position of

a

Hercise:

(a) Calculate the operating cycle of the

^corpany

for suggest possible reasons for

any change

in

the

operating

cycle.

(b)

Analyse

the

change

in rcrking capital

due

solely

(i) the

increase

in sales

and

the cost of

^sales

(ii) a

change

in the

turnover periods.

Connent

briefly on the cffect of the

above on the f,laju Berhad.

(4)

3.

Affi

5I8

Cherical

Conpany Berhad

The

rsnagemnt

of

^Ctrenical^CompanyBerhad

is

considering

replacing

^one

of its

nachines used

in triming

noulded

plastic.

The

old nachine

^was

prrchased five years

ago

at a cost of $75,Offi. The nachine had

^an

expected

life of fifteen

^years

at the tine it

^waspurchased, and

it

^was

estimated then that its

salvage value would be zero

at the end of

^the

fifteen yeafs.

^The^nachine

is

^being

depreciated on a straight-line basis

and

it

^presentbook

value is

$50'0O0.

The production _Bnnager

feports that a

new nachine can be ^purchased

at the following

costs:

Invoiced

price of

^new^nachine

Instal lation

cost Shipping cost

Freight

insurance

$loo,ooo 10,0o0 frrOO0 4,OO0

1131333

The new nachine has an expected

useful life of ten years. It will

reduce labour and raw

naterial

usage

sufficiently to cut operating

^costs

fron

$701000

to

$4Or00O

per :urnun. It is

estimated

that

^the^new^nachine

can be sold for

S20'0OO

at ttre

end

of ten years. The old

^m.chine's

actual current narket value is

$15,0O0

and the estinated cost of

disposing

this

machine

is

$5'0O0.

An investnent tax credit of

25

per cent

_can

be clained on

^the

total outlay if the

^new^nachine

is acquired" Working capital

^would

increase

by

$1orO0O.

Ttre coqxlny uses

discounted cash

flow tectmiques to

^evaluate

capital

replacement

decisions.

^Assune

that

^conpany's

tax rate is at

^45%

depreciation is

on

a straigfit-tine

nethcrd, accounting and

ta:r rates for depreciation of

^assets

to

^beequal and ta:r expense

is paid in the

^ye&r

it is

^incurred.

hercise:

(a) Establish the

cash

flows of the

replacenent decision-

(b) If the

coupany's

cost of capital is

^10%,

calculate the following:

l. the

^payback

periul;

2. the net

present value;

3" the profitabilitY index;

^and

4. the internal rate of return

Should

the

conpany proceed

with its plan?

^Flxplain.

.5/_

(5)

4.

AGIW 518

'cash is

no

different fron

any

other

asset

- if it is not

^being

utilised

properly it is

^going

to result in

^lower

profits.'

Discuss this statenent, in trrarticular referring to the notives for holding

cash.

The

tern 'financial intermediaries'

can be

applied to

^those

financial institutions

which

assist in overcoting the difficulties of ensuring that savings are charmelled into

econonically

desirable projects.

You

are required to

^describe:

(i) the

nature

of

^these

difficulties

(ii) four main ways in

which

financial institutions help

^to

overcome

the difficulties

(iii) wtry growth in size of

such

financial institutions can k

advantageous.

(b)

In relation to financial narketsr

_You

are required to:

(i) distineuish

^between

the

^nature^and

functions of 'prinary'

and tsecondaryt narkets.

{ii)

^connent

briefly

on

the

suggestion

that

inadeguate investment

in irxilustry is

^caused^by

diversion of funds into

speculation

in

secondary narkets.

5. (a)

a

6. (a) For what plrrposes

night

of ordinary

shares?

Shy under particular ottrer

Eeans

of raising

a

conpany consider naking

a rigttts

^issue

circumstances

night this be

^preferable

long-tern capital?

to

as

(b)

Ib

^you^consider

that a dilution in net

earnings

per

shane to

result of a rights issue rculd ever be

^acceptable

shareholders?

Connent

on the

desirabi

lity of using a

bank

overdraft

instead

of tern debt to finance

investnent

projects.

the the

7.

a

long-

(6)

(7)

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