TUNKU ABDUL RAHMAN UNIVERSITY OF MANAGEMENT AND TECHNOLOGY

FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

ACADEMIC YEAR 2023/2024

OCTOBER EXAMINATION

BBMF2093 CORPORATE FINANCE

TUESDAY, 24 OCTOBER 2023 TIME: 2.00 PM – 4.00 PM (2 HOURS)

BACHELOR OF BUSINESS (HONOURS) IN BUSINESS ANALYTICS

BACHELOR OF BANKING AND FINANCE (HONOURS)

BACHELOR OF CORPORATE ADMINISTRATION (HONOURS)

BACHELOR OF FINANCE (HONOURS)

BACHELOR OF FINANCE AND INVESTMENT (HONOURS)

BACHELOR OF BUSINESS (HONOURS) ACCOUNTING AND FINANCE

Instructions to Candidates:

This paper is divided into two sections and you are required to answer ALL FOUR (4) questions as
follows:

Section A: This ONE (1) question is compulsory and must be attempted. (25 marks)

Section B: Answer ALL THREE (3) questions. (75 marks)

Marks will be awarded for clarity in presentation and logical arguments.

You are required to continue with a fresh page when answering new questions or parts of the
questions.

Present value, future value and annuity tables are provided.

This question paper consists of 4 questions on 4 printed pages.

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BBMF2093 CORPORATE FINANCE

SECTION A (25 marks)

This ONE (1) question is compulsory and must be attempted.

Question 1

Bayer Bhd. (Bayer) is a listed company on Bursa Malaysia. It manufactures and distributes health
care products. Due to increased demand for its products, the management of Bayer has proposed to
purchase a new machine to replace an existing machine and must choose between two machines.
Under consideration are Machine A and Machine B. Both machines have a useful life of 5 years.

The company has anticipated a cost of capital of 12% and the respective forecasted net after tax
cashflows generated by the two machines are as follows:

Year Machine A (RM) Machine B (RM)

1 40,000 80,000
2 50,000 70,000
3 90,000 60,000
4 70,000 50,000
5 70,000 60,000

The initial cost (cash outlay) for Machine A is RM170,000 and for Machine B is RM210,000. At the
end of the economic life of the machines, Machine A will be sold for RM10,000 and Machine B will
be sold for RM20,000.

Required:

(a) Calculate the Net Present Value (NPV) of Machine A and Machine B respectively, given that
the cost of capital is 12%. Assuming that they are mutually exclusive, advise the
management on which machine to purchase. (8 marks)

(b) Bayer’s current investment policy is to accept only investments that are recoverable within 4
years.

Calculate the discounted payback period of Machine A and Machine B if the cost of capital is
12%. Advise the management on which machine to purchase if they are mutually exclusive.
(5 marks)

(c) Briefly explain the differences in the analysis for a replacement project versus that for a new
expansion project. (8 marks)

(d) Describe TWO (2) advantages of using the payback method in investment appraisals.
(4 marks)
[Total: 25 marks]

This question paper consists of 4 questions on 4 printed pages.

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BBMF2093 CORPORATE FINANCE

SECTION B (75 marks)

Answer ALL THREE (3) questions.

Question 2

(a) John Lee is the portfolio manager of a Singapore based equity fund. He is analysing the value
of Pacific Chemical Bhd. which manufactures fertilizers and food additives. The company’s
dividend per share for the fiscal year ended 30 June 2022 was RM0.20 and its current share
price is RM8.50. Analysts have forecasted an annual dividend growth rate of 30% for the
next 5 years and thereafter grows at 9.0% per year forever.

Required:

(i) Assuming a required rate of return of 13.9%, estimate the value of Pacific Chemical
Bhd. (9 marks)

(ii) Determine whether Pacific Chemical Bhd. is undervalued or overvalued. (3 marks)

(iii) The constant-growth model should not be used with just any stock.

Explain with reasons the assumptions used by analysts in using the constant-growth
dividend model. (6 marks)

(b) Explain the rationale behind a company’s decision to issue a stock dividend instead of cash
dividend. (7 marks)
[Total: 25 marks]

Question 3

(a) Discuss FIVE (5) comparative advantages of investing in mutual funds. (10 marks)

(b) An efficient market is a market in which stock prices are close to their intrinsic values and
stocks seem to be in equilibrium. When the market is efficient, investors can buy and sell
common stocks and be confident that they are getting good prices. When the market is
inefficient, investors may be afraid to invest and lead to poor allocation of capital and
economic stagnation.

Explain the THREE (3) forms of the Efficient Market Hypothesis. (9 marks)

(c) Operating leverage is a measurement of the extent to which a business incurs a combination
of fixed and variable costs.

Explain how does operating leverage affect a firm’s business risk. (6 marks)
[Total: 25 marks]

This question paper consists of 4 questions on 4 printed pages.

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BBMF2093 CORPORATE FINANCE

Question 4

(a) Peter is a shareholder of Maxim Construction Sdn Bhd (Maxim) and owns 100 shares of
Maxim. The board of directors of Maxim recently announced a 20% stock dividend to all
shareholders as at 30 June 2023. Assuming that Maxim’s current stock price is RM30 per
share and there are 1,000,000 shares of stock outstanding and its earning per share (EPS) for
last year was RM1.50.

Required:

(i) Calculate the market capitalisation and earnings per share of Maxim before and after
the stock dividend. (5 marks)

(ii) Based on the above calculations, explain the impact of the stock dividend on Peter’s
ownership position and market price of his stock investment in the company.
(7 marks)

(b) An importer wishes to have sufficient time to sell goods, before making payment, whilst the
exporter wishes to have certainty of payment after shipment of goods.

Explain briefly the use of Letter of Credit as a very important aspect of international trade.
(7 marks)

(c) Explain the THREE (3) benefits of a private placement. (6 marks)

[Total: 25 marks]

This question paper consists of 4 questions on 4 printed pages.