a) Each bond differs with respect to risk and expected return. Differentiate between treasury bonds, corporate bonds, municipal bonds and foreign bonds.
Marks: (10)
b) TexasCorporation has a level-coupon bond with a 9% coupon rate and is paid annually. The bond has 20 years to maturity and a face value of RM1,000; similar bonds currently yield 7%. By prior agreement, the company will skip the coupon interest payments in years 8, 9, and 10. These payments will be repaid, without interest, at maturity.
Calculate the bond’s current value.
Marks: (10)
(Total Marks: 20) [Maximum 3 pages]
a) What actions that shareholders can take to ensure that management’s and shareholders’ interests are aligned? Explain.
Marks: (10)
b) Harmony Corporation will pay a dividend of RM1.50 a share next year. After this, earnings and dividends are expected to grow at a 9% annual rate indefinitely. Investors currently require a rate of return of 13%. The company is considering the following two business strategies and wishes to determine the effect of these strategies on the market price per share of its stock.
Strategy 1:
Continuing the present strategy will result in the expected growth rate and required rate of return stated above.
Strategy 2:
Expanding Harmony Corporation sales will increase the expected dividend growth rate to 11% but will increase the risk of the company. As a result, the rate of return required by investors will increase to 16%.
From the standpoint of market price per share, which strategy is better? Show relevant workings to support your answer.
Marks: (10)
(Total Marks: 20) [Maximum 3 pages]
a) Explain the distinction between systematic risk and unsystematic risk. Provide relevant examples to support your explanation.
Marks: (8)
The possible returns from investing in TopImage share are as follows:
State of economy Probability of state of economy Return if state occurs
Strong 0.26 96%
Normal 0.51 12%
Weak 0.23 -83%
Based on the above information, calculate the following for TopImage share:
Expected return Marks: (3)
ii) Standard deviation of return Marks: (6)
iii) Coefficient of variation Marks: (3)
(Total Marks: 20)
[Maximum 3 pages]
a) Why is the cash budget regarded as a primary tool in short-run financial planning? Discuss.
Marks: (10)
b) Why do most audited financial reports to the shareholders include a statement of cash flows in addition to the balance sheet and income statement? Discuss.
Marks: (10)
(Total Marks: 20) [Maximum 3 pages]
A firm is considering an investment project that requires an initial outlay of RM10,000,000. The project is expected to provide net cash flows of RM6,500,000 in year 1, RM3,000,000 in year 2, RM3,000,000 in year 3 and RM1,000,000 in year 4.
Calculate the net present value (NPV) for the project if its cost of capital is 15%.
Marks: (7)
Calculate the payback period for the project.
Marks:(3)
Why is NPV considered to be a superior method of evaluating the cash flows from a project?
Marks: (5)
Although it is conceptually unsound, the payback period is very popular in business as a criterion for assigning priorities to investment projects. Why is it unsound and why is it popular?
Marks: (5)
(Total Marks: 20) [Maximum 3 pages]