acer BBF302/05 Financial Management and Analysis TMA 2 QUESTION 1: BOND CHARACTERISTICS AND VALUATION (35 MARKS] Azmin's broker has shown him two bonds. Each has a maturity of 6 years, a par value of RM1,000, and a yield to maturity of 12.00 percent. Bond A has a coupon interest rate of 6.50 percent paid annually. Bond B has a coupon interest rate of 14.00 percent paid annually. a) Calculate the selling price for each of the bonds. (9 marks) + Shift b) Azmin has RM50,000 to invest. Judging on the basis of the price of the bonds, calculate either one Azmin could purchase if he were to choose it over the other. (Azmin cannot really purchase a fraction of a bond, but for purposes of this question, assume that he can.) (6 marks) v c) Find the yearly interest income of each bond on the basis of its coupon rate and the number of bonds that Azmin could buy with his RM50,000. (6 marks) d) Assume that Azmin will reinvest the interest payments as they are paid (at the end of each year) and that his rate of return on the reinvestment is only 10.00 percent. For each bond, estimate the value of the principal payment plus the value of Azmin's reinvestment account at the end of the 6 years. (9 marks) e) Explain the reason why the two values calculated in part d) are different. If Azmin were worried that he would earn less than the 12.00 percent yield to maturity on the reinvested interest payments, justify which of these two bonds would be a better choice. (5 marks) Page 2 of 4 Home QUESTION 2: STOCK CHARACTERISTICS AND VALUATION (35 MARKS) Backspace a) Compute the value of a share of common stock of Lexus Hotel Berhad whose most recent dividend was RM2.50 and is expected to grow at 3.50 percent per year for the next 5 years, 5 percent per year for the next 3 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10.00 percent required rate of return. (23 marks) Enter Shit b) Glass Art Manufacturing Berhad has a beta of 1.50, the risk-free rate of interest is currently 12 percent, and the required return on the market portfolio is 18.00 percent. The company plans to pay a dividend of RM1.96 per share in the coming year and anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2016-2018 period. Year Dividend (RM) 2016 1.68 2017 1.77 2018 1.86 A/B Estimate the value of Glass Art Manufacturing's stock. (6 marks) c) Tina's Medical Equipment Berhad paid RM1.15 common stock dividend last year. The company's policy is to allow its dividend to grow at 5.50 percent per year indefinitely Estimate the value of the stock if the required rate of return is 8.50 percent. (6 marks) QUESTION 3: CAPITAL BUDGETING (30 MARKS] Swee Rien Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of RM 1,500,000. The company's board of directors has set a maximum 4-year payback requirement and has set its cost of capital at 9.50 percent. The cash inflows associated with the two projects are shown in the following table. Year 2 Cash inflows (CF) Project A (RM) 450,000 450,000 550,000 400,000 450,000 450,000 up w Project B (RM) 750,000 600,000 300,000 350,000 250,000 300,000 6 a) Find the payback period for each project. (6 marks) b) Calculate the NPV of each project at 9.50 percent. (7 marks) c) Compute the Profitability Index. (5 marks) d) Derive the IRR of each project. (4 marks) e) Rank the projects by each of the techniques used. Make and justify a recommendation. (8 marks) -0000000- acer BBF302/05 Financial Management and Analysis TMA 2 QUESTION 1: BOND CHARACTERISTICS AND VALUATION (35 MARKS] Azmin's broker has shown him two bonds. Each has a maturity of 6 years, a par value of RM1,000, and a yield to maturity of 12.00 percent. Bond A has a coupon interest rate of 6.50 percent paid annually. Bond B has a coupon interest rate of 14.00 percent paid annually. a) Calculate the selling price for each of the bonds. (9 marks) + Shift b) Azmin has RM50,000 to invest. Judging on the basis of the price of the bonds, calculate either one Azmin could purchase if he were to choose it over the other. (Azmin cannot really purchase a fraction of a bond, but for purposes of this question, assume that he can.) (6 marks) v c) Find the yearly interest income of each bond on the basis of its coupon rate and the number of bonds that Azmin could buy with his RM50,000. (6 marks) d) Assume that Azmin will reinvest the interest payments as they are paid (at the end of each year) and that his rate of return on the reinvestment is only 10.00 percent. For each bond, estimate the value of the principal payment plus the value of Azmin's reinvestment account at the end of the 6 years. (9 marks) e) Explain the reason why the two values calculated in part d) are different. If Azmin were worried that he would earn less than the 12.00 percent yield to maturity on the reinvested interest payments, justify which of these two bonds would be a better choice. (5 marks) Page 2 of 4 Home QUESTION 2: STOCK CHARACTERISTICS AND VALUATION (35 MARKS) Backspace a) Compute the value of a share of common stock of Lexus Hotel Berhad whose most recent dividend was RM2.50 and is expected to grow at 3.50 percent per year for the next 5 years, 5 percent per year for the next 3 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10.00 percent required rate of return. (23 marks) Enter Shit b) Glass Art Manufacturing Berhad has a beta of 1.50, the risk-free rate of interest is currently 12 percent, and the required return on the market portfolio is 18.00 percent. The company plans to pay a dividend of RM1.96 per share in the coming year and anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2016-2018 period. Year Dividend (RM) 2016 1.68 2017 1.77 2018 1.86 A/B Estimate the value of Glass Art Manufacturing's stock. (6 marks) c) Tina's Medical Equipment Berhad paid RM1.15 common stock dividend last year. The company's policy is to allow its dividend to grow at 5.50 percent per year indefinitely Estimate the value of the stock if the required rate of return is 8.50 percent. (6 marks) QUESTION 3: CAPITAL BUDGETING (30 MARKS] Swee Rien Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of RM 1,500,000. The company's board of directors has set a maximum 4-year payback requirement and has set its cost of capital at 9.50 percent. The cash inflows associated with the two projects are shown in the following table. Year 2 Cash inflows (CF) Project A (RM) 450,000 450,000 550,000 400,000 450,000 450,000 up w Project B (RM) 750,000 600,000 300,000 350,000 250,000 300,000 6 a) Find the payback period for each project. (6 marks) b) Calculate the NPV of each project at 9.50 percent. (7 marks) c) Compute the Profitability Index. (5 marks) d) Derive the IRR of each project. (4 marks) e) Rank the projects by each of the techniques used. Make and justify a recommendation. (8 marks) -0000000