CONFIDENTIAL MAF253/TEST/DEC2021

UNIVERSITI TEKNOLOGI MARA

COMMON TEST

COURSE : FUNDAMENTAL FINANCIAL MANAGEMENT

COURSE CODE : MAF253

SEMESTER : OCT 2021 - FEB 2022

TIME : 1 HOUR 30 MINUTES

INSTRUCTIONS TO CANDIDATES

1. Answer ALL questions in the Answer Booklet. Start each answer on a new page.

2. Do not bring any material into the examination room unless permission is given by
the invigilator.

3. Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) Front page for Answer script

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 5 printed pages
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CONFIDENTIAL MAF253/TEST/DEC2021

QUESTION 1

Financing decision is the second major decision made by firms, after the investment decision.
In order to account for technological and economic changes, the financial manager needs to
forecast the financial requirements.

Required:

a. Explain briefly the combination of debt and equity structure of a firm’s financing decision.
(2 marks)

b. In finance, the primary goal of investors in corporate organizations is to maximise the

value of their investment meanwhile economists view profit maximization as the goal of
all firms. Discuss the major differences between the two goals.
(8 marks)
(Total: 10 marks)

QUESTION 2

Melati is a newly appointed Finance Manager of Mesra Transportation Bhd (MTB). She is
keen to know about the financial performance of MTB and requested you as the Finance
Executive to provide a report on comparative analysis with the industry average. Below are
MTB’s financial statements for the year ended 31 December 2021 and the latest industry
average ratios:

Mesra Transportation Berhad

Statement of Financial Position as at 31 December 2021

ASSETS RM
Building 200,000
Motor vehicles 100,000
Furniture & Fittings 15,000
Cash 12,000
Marketable Securities 35,000
Inventories 30,000
Account receivables 25,000
417,000

EQUITY AND LIABILITIES

Account payable 40,000
Notes payable 37,000
Ordinary shares 170,000
Retained earnings 70,000
Long term loan 100,000
417,000

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CONFIDENTIAL MAF253/TEST/DEC2021

Mesra Transportation Berhad

Statement of Profit and Loss for the year ended at 31 December 2021
RM

Sales 150,000
Less: Cost of goods sold (80,000)
GROSS PROFIT 70,000
Less: Operating & Administrative expenses (45,000)
Earnings before interest & taxes 25,000
Less: Interest expense (7,000)
Earnings before taxes 18,000
Less: Taxation (25%) (4,500)
NET PROFIT AFTER TAX 13,500

The latest industry average ratios:

Current ratio = 2x
Quick ratio = 1.5x
Inventory turnover = 5x
Average collection period = 45 days
Operating Profit Margin = 20%
Times interest earned = 3.2x
Gross profit margin = 60%
Net profit margin = 14%
Return on Assets (ROA) = 8%
Return on Equity (ROE) = 10%

Note:
i. All sales are in credit.
ii. Use 360 days per year.

Required:

a. Calculate the above ten (10) ratios for Mesra Transportation Berhad.
(10 marks)

b. Briefly comment on the financial position of Mesra Transportation Berhad with respect
to all its profitability ratios as compared to the industry average.
(5 marks)

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CONFIDENTIAL MAF253/TEST/DEC2021

c. i. Identify three (3) possible causes for poor liquidity position.

ii. Give two (2) recommendations to improve the company’s liquidity.

(5 marks)
(Total: 20 marks)

QUESTION 3

A. Sawatan Camp Site Sdn Bhd has a inventory conversion period of 25 days, account
receivables conversion period of 55 days and a payable deferral period of 35 days.

Required:

i. Calculate the length of the firm’s cash conversion cycle.

ii. The firm has recorded an annual sales of RM1,800,000 and 40% of the total
sales were made on cash. Determine the amount of investment in the firm’s
account receivable. (Assuming 360 days in a year)
(3 marks)

iii. A short cash conversion cycle indicates that a company is managing its working
capital efficiently and hence minimizing unnecessary expenses. Discuss any
two (2) measures that a company can implement in order to shorten the length
of the cash conversion cycle.
(2 marks)

B. One of Pensiangan Hardware Sdn Bhd’s supplier offers credit terms of 3/10 net 60 for the
average purchase of RM750,000. However, Pensiangan Hardware Sdn Bhd has not been
utilizing the discounts offered. The new purchasing manager suggests the company
should take the discount and proposes to borrow from MMY Bank. Currently MMY bank
offers an 8% simple interest rate and requires 20% compensating balance.

Notes: Assume 360 days in a year.

Required:

i. Calculate Pensiangan Hardware Sdn Bhd’s effective annual cost of not taking
discounts.
(3 marks)
ii. Compute the effective annual cost of the bank loan.
(2 marks)

iii. By referring to answer in (i) and (ii) above, as the financial manager of Pensiangan
Hardware Sdn Bhd, advice the new purchasing manager which option the company
should consider to reduce cost.
(3 marks)

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CONFIDENTIAL MAF253/TEST/DEC2021

iv. Firms may issue commercial paper to the investing public or placed by dealers to
raise short-term financing. Explain three (3) benefits of commercial paper
financing.
(3 marks)

C. Sarayo Sdn Bhd operates a restaurant business in Kimanis new township. The firm
has invested RM200,000 in non-current assets and 50,000 in current assets. Three
quarter of the current assets are temporary assets. Sarayo Sdn Bhd financed all
permanent non-current assets and half of its permanent current assets with long term
financing from OMG Bank.

Required:

i. Identify the financing policy adopted by Sarayo Sdn Bhd. (Show your working
to support your answer)
(3 marks)

ii. Based on your answer in (i), discuss the risk-return trade off arising from the
company’s financing policy.
(2 marks)
(Total: 20 marks)

END OF QUESTION PAPER

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CONFIDENTIAL MAF253/TEST/DEC2021

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL