Describe the principal-agent relationship. Give an example of a principal-agent dilemma in the business environment in your response. Justify whether such a situation becomes cost

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Academic Session 2022 MAY 2022 Semester

ASSIGNMENT

BBF201/03 Introduction to Financial Management

INSTRUCTIONS TO CANDIDATES: 1. This assignment is the final assessment to replace the proctored examination.

2. This assignment consists of ONE (1) sections. Answer ALL questions in Part A.

3. You are allowed a maximum of one (1) attempt to submit your assignment.

4. The assignment will be made available from 11th July 2022, Monday (00:00) until 1st August 2022, Monday (23:59).

5. Completed assignment must be submitted by 1st August 2022, Monday (23:59).

Copyright © 2022 WOU

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Part A (100 marks)

Answer ALL Questions in answer book.

QUESTION 1 (25 MARKS)

a) Describe the principal-agent relationship. Give an example of a principal-agent

dilemma in the business environment in your response. Justify whether such a

situation becomes costly.

(15 marks)

b) Explain whether the following statements are true or false.

i) Derivative transactions are designed to increase risk and are used almost

exclusively by speculators who are looking to capture high returns.

ii) Hedge funds typically have large minimum investments and are marketed

to institutions and individuals with high net-worth.

iii) Hedge funds have traditionally been highly regulated.

iv) The New York Stock Exchange is an example of a stock exchange that has

a physical location.

v) A larger bid-ask spread means that the dealer will realize a lower profit.

(5 marks)

c) Jow just bought a new Toyota Cross for his business. The price of the vehicle

was RM128,000. Jimmy made a RM12,800 down payment and took out an

amortized loan for the rest. The car dealership made the loan at 2.35% interest

per year to be compounded monthly for five years. He is to pay back the principal

and interest in equal monthly installments beginning of the month. Determine the

amount of Jimmy's monthly payment.

(5 marks)

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QUESTION 2 (25 MARKS)

a) Consider the information below from a firm's balance sheet for 2020 and 2021.

2021 2020 Changes

Current Assets

Cash and Equivalents RM1,561 RM1,800 -RM 239

Short-Term Investments RM1,052 RM3,010 -RM1,958

Accounts Receivable RM3,616 RM3,129 RM 487

Inventories RM1,816 RM1,543 RM 273

Other Current Assets RM 707 RM 601 RM 106

Total Current Assets RM8,752 RM10,083 -RM1,331

Current Liabilities

Accounts Payable RM5,173 RM5,111 RM 62

Short-Term Debt RM 288 RM 277 RM 11

Other Current Liabilities RM1,401 RM1,098 RM303

Total Current Liabilities RM6,862 RM6,486 RM 376

i) Compute the Net Working Capital for 2020 and 2021.

(3 marks)

ii) Compute the change in Net Working Capital (NWC).

(3 marks)

iii) Assuming the Operating Cash Flows (OCF) are RM7,155 and the Net

Capital Spending (NCS) is RM2,372, find the Cash Flow from Assets.

(4 marks)

b) Describe some of the items often disclosed in the financial notes of Axiata Berhad

(2021).

(https://axiata.listedcompany.com/misc/Governance_and_Audited_Financial_St

atement_2021.pdf)

(15 marks)

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QUESTION 3 (25 MARKS)

a) Share A and Share B have the following returns under different states of the

economy.

State of economy Probability Share A

(Returns)

Share B

(Returns)

Recession 0.2 (10%) 11%

Normal 0.5 13% 7%

Boom 0.3 25% 8%

Calculate the following:

i) The expected rate of returns for both shares.

(4 marks)

ii) The standard deviation for both shares.

(6 marks)

iii) On a stand-alone basis, discuss which share out of the two is riskier.

(2 marks)

b) If given that the correlation between the two shares above is -0.7455, comment

on the overall portfolio risk and on the level of diversification.

(8 marks)

c) Explain unsystematic risk and elaborate ONE way to reduce this type of risk

(diagrams are not necessary).

(5 marks)

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QUESTION 4 (25 MARKS)

Topex Sdn Bhd’s management is always looking for ways to improve productivity and

efficiency. This is the more important in view of rising wage costs and difficulty in hiring

workers.

The company is looking to buy a new CNC grinding machine to replace the old

machine that had been bought for RM100,000 5 years ago. The old machine has a life

of 4 years. If sold now this old machine can fetch RM 5,000.

Topex’s management is considering a new and more efficient machine. This new

machine will cost RM170,000 and can last for 4 years. The resale value then is

RM20,000. Topex will also incur freight and installation charges of RM1,000 and

RM9,000 respectively.

The new machine is more productive and can generate RM62,000 more contributions

a year. Spoilage cost of the new machine would be RM2,000 a year, while the current

spoilage is RM5,000 a year.

The business is also going to increase its working capital by RM10,000 to provide this

machine with more inventories.

Tax rate is 30%.

a) Complete the cash flows for initial outlay, life and termination.

(13 marks)

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b) Topex’s CEO now asks you to confirm the viability of yet another CNC machine.

This machine will cost RM160,000 and have the following cash flows.

Year Cash Flow (RM)

1 40,000

2 50,000

3 60,000

4 80,000

Assess the project’s viability by computing its:

i) Payback period

(2 marks)

ii) Accounting rate of return

(2 marks)

iii) Net Present Value (use 12%)

(5 marks)

iv) Internal rate of return (use 15%)

(3 marks)

END OF QUESTION PAPER