Final Examination Semester 2 / Year 2012

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1 Southern College Kolej Selatan 南 方 学 院 Final Examination Semester 2 / Year 2012 COURSE : BUSINESS FINANCE COURSE CODE : FINE2003 TIME : 2 1/2 HOURS DEPARTMENT : ACCOUNTING & FINANCE LECTURER : NG PEK LENG Students ID : Batch No : Notes to candidates: 1) The question paper consists of 2 sections and 5 pages. 2) Section A: Answer ALL questions. Section B: Answer ALL questions. 3) Return the question paper and answer booklet. 4) Financial calculator is allowed during the examination.

2 Section A: Multiple Choice Questions Answer ALL questions (10 x 2 marks = Total 20 marks) 1. Which of the following statement about Finance is false? A. Finance is about money management B. Finance is about making investment decisions C. Finance is about profit maximization for the shareholders D. Finance is about making financing decisions 2. Which of the following statements about statement of cash flow is/are correct? (i) Statement of cash flow is a summary of cash flow over the period of concern (ii) Statement of cash flow is a summary of cash flow at a given point in time (iii) Statement of cash flow is a summary of firm s operating, investment and financing cash flow over the period of concern (iv) Statement of cash flow is a summary of financial position at a given point in time A. (i) and (ii) only B. (ii) and (iii) only C. (i) and (iii) only D. (iii) and (iv) only 3. Superfast company provides its 2013 sales forecast as follows: January February March April Sales forecast RM300,000 RM400,000 RM200,000 RM150,000 Superfast anticipates cash sales represent 30% of its sales forecast for that month and 70% of accounts receivables resulting from sales are collected one month later ie. January s account receivables are collected in February. Superfast total expected cash receipts for March is and April is.. A. RM200,000 and RM300,000 B. RM340,000 and RM185,000 C. RM330,000 and RM200,000 D. RM220,000 and RM185,000 Page 1 of 5

3 4. Which of the following statements about annuity is/are false? (i) An annuity is a stream of equal periodic cash flow over a specified time period (ii) An annuity is a stream of unequal periodic cash flow over a specified time period (iii) Annuity due is an annuity for which the cash flow occurs at the end of each period (iv) Ordinary annuity is an annuity for which the cash flow occurs in the beginning of each period A. (i) and (iv) only B. (i), (ii) and (iii) only C. (ii),(iii) and (iv) only D. All are correct 5. Icy corporation is involved in seasonal business selling frozen desserts. At the peak of its summer selling season, the company has RM20,000 in cash, RM80,000 in inventory, RM60,000 in accounts receivable and RM55,000 in accounts payable. Other than summer peak season, the company holds, on average, RM10,000 in cash, RM40,000 in inventory, RM35,000 in accounts receivable and RM45,000 in accounts payable. Icy corporation s permanent funding is.. seasonal peak funding is.. and total funding is A. RM65,000, RM40,000 and RM105,000 B. RM40,000, RM65,000 and RM105,000 C. RM35,000, RM40,000 and RM75,000 D. RM40,000, RM35,000 and RM75, Aggressive funding strategy is a funding strategy under which the firm funds its seasonal requirement with.. and its permanent requirement with.. A. short-term debt, short-term debt B. short-term debt, long-term debt C. long-term debt, short-term debt D. long-term debt, long-term debt 7. Five C s of credit are : A. Credibility, capacity, capital, cash and conditions B. Character, credit, capital, collateral and cash C. Credit card, cash, capital, collateral and conditions D. Character, capacity, capital, collateral and conditions Page 2 of 5

4 8. Financing that arises from the normal course of business is called. A. Spontaneous B. Continuous C. Normal D. Short-term 9. Which of the following statement about Just-in-Time (JIT) is true? A. Just-in-Time (JIT) is about time management B. Just-in-Time (JIT) is about accounting management C. Just-in-Time (JIT) is about minimization of inventory investment D. Just-in-Time (JIT) is about minimization of production cost 10. Activity ratios measure the speed with which various accounts are converted into sales or cash and the ratios available for measurement are.. A. Inventory turnover, average collection period, average payment period and total asset turnover B. Inventory turnover, average collection period, average payment period and total liability turnover C. Average collection turnover, average payment period, total asset turnover and total liability turnover D. Average collection turnover, average payment period, profit turnover and debt turnover Page 3 of 5

5 Section B: Answer ALL questions. Question 1 (Total 36 marks) Flying Sdn Bhd has three projects under consideration. The relevant cash flows for each projects are shown in the following table. The firm s cost of capital is 14%. Project X (RM) Project Y (RM) Project Z (RM) Initial investment (CF 0 ) 35,000 50,000 45,000 Year (n) Cash inflow ( CF n ) 1 10,000 20,000 18, ,000 15,000 16, ,000 15,000 22, ,000 20,000 12,000 (a) Calculate each project s payback period. Which project should the company accept according to this method? Explain. (11 marks) (b) If the company s maximum acceptable payback period were two years, which project should the company accept? (1 mark) (c) Calculate each project s net present value (NPV). Which project should the company accept according to this method? Explain. (17 marks) (d) List any three weaknesses that are associated with payback period. (3 marks) (e) Explain the meaning of internal rate of return (IRR). (4 marks) Question 2 (Total 10 marks) Cooling Sdn Bhd sells 900 units of air-conditioners (AC) per year. The cost of ordering is RM10 per order and the cost of carrying is RM5 per unit. It takes 7 days to receive a shipment after an order is placed and the company wishes to hold a safety stock of 15 units. The company operates 300 days per year. (a) Calculate the Economic Order Quantity (EOQ). (3 marks) (b) Discuss and comment on your answer in part (a). (2 marks) (c) Determine the reorder point. (3 marks) (d) Discuss and comment on your answer in part (c). (2 marks) Page 4 of 5

6 Question 3 (Total 20 marks) Delicious company is a manufacturer of noodles. It has annual sales of RM5,000,000, a cost of goods sold of 70% of sales and purchases that are 60% of cost of goods sold. On the average, inventories have an age of 30 days. Accounts receivable are collected in 45 days while accounts payables are paid in 60 days. (Assuming 300 days in a year) (a) Calculate the Delicious company s operating cycle. (3 marks) (b) Calculate the Delicious company s cash conversion cycle. (3 marks) (c) (d) Calculate the amount of resources needed to support the Delicious company s cash conversion cycle. Discuss the strategies that Delicious s management may use in order to reduce the cash conversion cycle. (6 marks) (8 marks) Question 4 (Total 14 marks) Skyblue Sdn Bhd has obtained a short-term unsecured loan of RM50,000 from a local bank at a stated annual rate of 8% for one year. (a) How much interest does Skyblue need to pay for one year? (3 marks) (b) If Skyblue pays the interest at maturity, what is the effective annual rate? (2 marks) (c) If Skyblue pays the interest in advance, what is the effective annual rate? (3 marks) (d) Define the following terms: (i) Secured loan vs. unsecured loan (2 marks) (ii) Fixed-rate loan vs. floating-rate loan (2 marks) (iii) Prime rate (Base Lending Rate) vs. commitment fee (2 marks) 000 Page 5 of 5

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