SECTION A: STRUCTURED QUESTIONS (100 MARKS)

ANSWER ALL QUESTIONS

QUESTION 1 (25 MARKS)

1. In mergers, the bidder buys the voting common stock of the target firm. It is considered as a complete absorption of one firm by another. One firm should acquire another only if doing so generates a positive net present value to the shareholder. However, not all mergers will improve the firm. Explain any TWO (2) principal reasons why a merger might fail.

(4 marks)

2. Mergers and acquisitions are regarded as an essential part of strategic management with different motives behind this activity. Explain any THREE (3) on this matter.

(6 marks)

3. Distinguish the THREE (3) basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.

(9 marks)

4. Sometimes the management of a target firm fights a takeover attempt even when that attempt appears to be in the best interest of the shareholders. Why would management take this stance?

(6 marks)

QUESTION 2 (25 MARKS)

1. Syawal, a potential investor with an expected return of 12%, is interested to invest in an 8 years, 9% bond which is selling for RM800. Calculate for him the bonds:

1. Current yield

(4 marks)

ii. Yield to maturity

(5 marks)

2. Syahirah Corporation is considering the purchase of a 10%, 20 years corporate bond with a market interest yield of 12%. The corporation expects the market interest to be 9% next year. Determine the price of the bond today and in one years time (6 marks)

3. Marsh Berhad is experiencing a period of rapid growth. Dividends per share are expected to grow at a rate of 16% during the next 2 years, 14% in the third year and at a constant rate of 8% thereafter. Marsh Bhds last dividend, which has just been paid, was RM1.25. If the required rate of return on the stock is 12%, current P/E ratio is 40 and earnings per share are RM0.88.

1. Calculate the intrinsic value of Marshs stock.

(6 marks)

2. Would you buy Marsh Bhds share? Why?

(4 marks)

QUESTION 3 (25 MARKS)

1. Indah Wangi Corporation has a debt equity ratio of 0.72. The firm is analyzing a new project which requires an initial cash outlay of RM420,000 for equipment. The floatation cost is 9.6 percent for equity and 5.4 % for debt. What is the initial cost of the project including the floatation cost?

(5 marks)

2. Terompah Klasik Inc. Has paid dividends of RM0.65, RM0.70, RM0.72, and RM0.75 over the foru years respectively. The stock is currently selling for RM26 a share. Determine the firms cost of equity.

(5 marks)

3. Below is the balance sheet in market value term for CumiCiki Corporation. There are 8,000 shares of stock outstanding. The company has declared a dividend of RM1.30 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects.

Market Value Balance Sheet
Cash	RM 38,500
Fixed Aset	270,000	Equity	RM308,500
Total	RM 308,500	Total	RM308,500

1. Calculate the stock selling for today.

(2 marks)

2. Calculate the stock selling tomorrow.

(2 marks)

3. CumiCiki Corporation has announced it is going to repurchase RM10,400 worth of stock. Calculate the shares outstanding.

(4 marks)

4. Calculate price per share after the repurchase

(3 marks)

5. Explain how share repurchase and cash dividend is effectively the same?

(4 marks)

QUESTION 4 (25 MARKS)

1. Consider the following are mutually exclusive project . Whichever project that will be chosen, a 15% return is required on both investment.

Year	Cash Flow (M)	Cash Flow (N)
0	(RM350,000)	(RM40,000)
1	RM30,000	RM19,000
2	RM60,000	RM12,000
3	RM60,000	RM18,000
4	RM400,000	RM10,500

1. Apply the discounted payback criterion and state which investment is chosen.

(9 marks)

2. Apply the NPV criterion and state which investment is chosen.

(6 marks)

b. Sinar, Inc., a south eastern advertising agency, is considering the purchase of new computer equipment and software to enhance its graphics capabilities. Management has been considering several alternative systems, and a local vendor has submitted a quote to the company of RM15,000 for the equipment plus RM16,800 for software. Assume that the equipment can be depreciated for tax purposes over three years as follows: year 1, RM5,000; year 2, RM5,000; year 3, RM5,000. The software can be written off immediately for tax purposes. The company expects to use the new machine for four years and to use straight-line depreciation for financial reporting purposes. The market for used computer systems is such that Sinar Inc. could sell the equipment for RM2,000 at the end of four years. The software would have no salvage value at that time.

Sinar Inc. management believes that the introduction of the computer system will enable the company to dispose of its existing equipment, which is fully depreciated for tax purposes. It can be sold for an estimated RM200 but would have no salvage value in four years. If Sinar Inc. does not buy the new equipment, it would continue to use the old graphics system for four more years.

Management believes that it will realize improvements in operations and benefits from the computer system worth RM16,000 per year before taxes. Sinar Inc. uses a 10 % discount rate for this investment and has a marginal income tax rate of 40 % after considering both state and federal taxes.

1. Prepare a schedule showing the relevant cash flows for the project.

(8 marks)

2. Indicate whether the project has a positive or negative net present value.

(2 marks)