QUESTION 1

Explain why a company should seek to maximize its shareholders’ wealth rather than to maximized its profit.       

QUESTION 2  

FAA Furniture, a manufacturer and wholesaler of high quality home furnishings has been experiencing low profitability in recent years. As a result, the board of directors has replaced the president of the firm with a new president, Jalal Idris, who has asked you to make an analysis of the firm’s financial performance. The most recent industry average ratios and FAA Furniture’s financial statements are as follows:

a) Compute the relevant ratios from the financial statements provided above.                            

b) Based on your answer in (a) above , analyse the firm’s financial performance as compared to the industry average ratios given.             

c) Give any TWO (2) advantages and limitations of ratio analysis?                                             

QUESTION 3

a) Discuss the factors involved in the selection of market securities.                    

b) Define cash budget and why it is important to the company            

INSTRUCTION: Answer ALL questions.

PART B: TOTAL: 50 marks

QUESTION 1

Today is your 40^th birthday. Your expect to retire at age 65 and actuarial tables suggest that you will live until 100 years. You want to move to Hawaii when you retire. You estimate that it will cost you RM200,000 to make the move (on your 65^th birthday) and that your annual living expenses will be RM25,000 a year after that. You expect to earn an annual return of 7% on your saving.

a) How much do you need to save now before your retirement date comes?                   

b) You already have RM50, 000 in saving. How much would you need to save at the end of each of the next 25 years to be able to afford this retirement plan?                                      

c) If you do not have any savings currently and do not expect to start saving money for the next 5 years (that is, your first saving payment will be made on your 45^th birthday), how much would you have to set aside each year after that in order to be able to afford this retirement plan?

QUESTION 2

a) Explain the differences between expected return and required rate of return

b) On 1 January 2015 an American investor bought USD1, 000,000 worth of Malaysian Ringgit and put it in a savings account for 1-year. The annual interest rate in Malaysian Ringgit was 5%. During that period, the interest rate in the US was 3.50%. On the purchase date the exchange rate was USD1 = MYR4.45.             

i. One year after the start of the savings in Malaysia, the exchange rate was RM4.03 per US dollar. If the investor turned his savings back into dollars, what dollar rate of return did he earn?       

What should be the exchange rate on 1 January 2015 for the investment in RM to be better than the investment in US dollars?