UNIVERSITI TEKNOLOGI MARA

ONLINE TEST 1

COURSE : CORPORATE FINANCE

COURSE CODE : MAF 603
TEST : MAY 2021
TIME : 1.5 HOURS

INSTRUCTIONS TO CANDIDATES:

1. This online test question consists of TWO (2) Sections, A and B.

2. Section A consists of 10 Multiple Choice Questions.
3. Section B consist of 3 subjective questions.
4. Answer ALL questions in your own answer sheets, scan, save them all in one pdf
file, rename the file to your full name and upload the pdf file to the provided link.

HONESTY DECLARATION:

▪ I declare that I have observed and will adhere to the Faculty Online Assessment
Regulations or any of the Chief Invigilator/ Invigilators’ instructions. If found
otherwise, I can be barred from taking the assessment or can be brought to the
Student Disciplinary Action Board.

▪ I do understand that I can be penalised under Rules 48, Act 174 of the Educational
Institutions (Discipline) Act 1976 as at 1 November 2012 or other enforceable
Acts, and can be charged with a maximum penalty of dismissal from the University
if I am found guilty of a disciplinary offence

▪ I declare that all answers on this assessment are based on my own work and
effort that depicted to the best level of my knowledge. I do not copy other
student’s answer neither collaborate nor communicate with anyone via any kind
of medium communication.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This question paper consists of six (6) printed pages

 MAF603/TEST 1/MAY 2021

SECTION A

Choose the best answer for each of the following questions.

1. Which of the followings is NOT TRUE about agency cost?

A. Agency cost is borne by the shareholders of the company.

B. An example of direct agency cost is when managers are reluctant to invest in high
risk projects that could favourably impact share price.
C. Agency costs exists when owners are not managers of the business.
D. Costs of preparing audited financial statements is an example of direct agency
cost.

2. Which of the following statements is/are CORRECT?

i. Maximizing market share is the primary financial objective for a company

listed on a stock exchange.
ii. Among the responsibilities of financial managers are to select investment
projects, choose between different financing methods, and increase
company’s daily sales.
iii. Financial objectives should be quantitative so that their achievement can be
measured.

A. i and ii
B. ii and iii
C. ii only
D. iii only

3. Which of the following statement is NOT TRUE regarding the control measures to
reduce the agency problem?

A. Prepare contracts which clearly explain the principal-agent relationship.

B. Devise managerial incentive schemes that links with company’s earnings and
performance to motivate managers to pursue the goal of the shareholders.
C. Threat of firing to management who are not acting in the best interest of
shareholders
D. Provide a stable dividend policy with low dividend payout so that there will be
more free cash flow in the company.

4. With regards to the Efficient Market Hypothesis, choose an INCORRECT statement.

A. If the market is weak efficient, you would not be able to gain abnormal return by
using fundamental analysis.
B. If the market is semi-strong efficient, you would be able to gain abnormal return
using technical analysis.
C. Trading strategies based on historical market data can result in abnormal return
is the market is not efficient.
D. If the strong form efficiency is true, insiders would not be able to get abnormal
profit from trading on their information

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5. Which of the following is evidence that stock markets are semi-strong form efficient?

A. The majority of share price reaction to news occurs when it is announced.

B. Repeating patterns appear to exist.
C. Attempting to trade on consistently repeating patterns is unlikely to work.
D. Share price reaction occurs before announcements are made public.

6. If the weak form of efficient markets holds, then:

A. Technical analysis is useless.

B. Stock prices reflect all information contained in past prices.
C. Stock prices follow a random walk.
D. All of the above

7. The following statements relate to market efficiency. Are the statements True or
False?

I. Technical analysis is based on the theory that share prices can be derived from
an analysis of future dividends.
II. Under the strong form hypothesis of market efficiency, share prices only reflect
available information about past changes in the share price.

A. Both statements are true

B. Both statements are false
C. Statement I is true and statement II is false
D. Statement II is true and statement I is false

8. If the market is efficient:

A. Investors can be “fooled” by changing accounting methods to report desired

earnings.
B. Stock prices follow a random and predictable pattern.
C. Speculating on future stock prices is of no value.
D. “Timing decision”, as to when is best to issue stocks, is important.

9. Choose the CORRECT statement:

A. In a semi-strong efficient market, it is impossible to earn abnormal profit using

private information.
B. If the market is inefficient, a diligent analysis of financial statements is of no
economic value as investors still cannot get abnormal return.
C. Continuous fluctuations of the stock prices indicate that the market is efficient.
D. In an efficient market, the concept of “dart throwing” holds true; investors can
just pick any stock to invest in as the stocks are fairly priced.

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10. If you can use _____ information to earn abnormal returns consistently, then the
market cannot be _____ form efficient.

A. private, weak
B. public, semi-strong
C. private, semi-strong
D. public, weak
(Total: 10 marks)

SECTION B

QUESTION 1

a. “The primary goal of financial management is to maximize shareholders’ wealth by

selecting value creating projects, and making smart investment and financing
decisions”.

Discuss why maximizing shareholders’ wealth has always been considered as the
ultimate goal of financial management rather than maximizing profit.
(4 marks)

b. Apart from the shareholders, a company has many other stakeholders such as
creditors, managers, and the customers.

i. Briefly explain why conflicts arise between different stakeholder groups of a

company.

ii. Provide an example of a possible conflict between shareholders and

managers.
(3 marks)
(Total: 7 marks)

QUESTION 2

A. You are provided with the following information about two stocks and the market:

State of Probability Return on Return on

Economy of Outcome Security Ketupat Security Lemang
I 0.1 0.40 0.60
II 0.6 0.60 0.48
III 0.3 0.30 0.34

The expected return and standard deviation of Ketupat are 44% and 12%
respectively. The correlation between the two securities is -0.65.

Required:

a. Calculate the expected return and standard deviation of Lemang.

b. Calculate the expected return and standard deviation of a portfolio that

consists of 60% of funds invested in Ketupat and 40% of funds in Lemang.

(5 marks)

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B. Miss Bae is considering investing in a portfolio consisting of four stocks for the past
few years. However, she asks you, as her financial manager to review the
performance of the portfolio before she makes any decision. The following data is
available for consideration:

Stock EPS (RM) Beta P/E Ratio Expected Return (%)

Suji 0.50 1.6 1 20
Makmur 0.20 1.2 2.5 10
Semperit 0.40 0.5 2.5 15
Mazola 0.80 2 1.5 -5

The investment in each of the four (4) stocks is based on the following proportion:

Number of shares in Suji is (24,000 units), Makmur (6,000 units), Semperit (9,000
units) and Mazola (5,000 units).

It has also been ascertained that the market risk premium is 6% and Treasury bill
rate is 4%.

Required:

a. Calculate the expected return and beta of the portfolio.

(10 marks)

b. Applying CAPM, evaluate whether each of the stocks and the portfolio is
correctly priced or not.
(5 marks)

c. Discuss the difference between systematic risks and unsystematic risks. How
is each type of risk impacted by holding a well-diversified portfolio?
(5 marks)
(Total: 25 marks)

QUESTION 3

a. Discuss whether there are possibilities to make abnormal returns for each of the
situations below, assuming that the market is semi-strong form efficient:

Situation 1: Technical traders’ analysis of Gamefreeze Bhd discovered that the

stock price has risen steadily for the past five days, and this is consistent with
previous cyclical patterns in which it is expected that the price will continue to rise
for another two days before decreasing gradually thereafter.

Situation 2: A Member of Parliament realizes that a new regulation will be passed

soon, which would significantly benefit a certain company. He secretly purchases
the company’s shares and pushes for the regulation to be passed as soon as
possible.

Situation 3: Besties Bhd announced in a press conference that it has been

awarded a major government contract that will increase its earnings by 250% for
the next three years. An investor decides to invest in the company as soon as he
heard the news.
(6 marks)

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b. Suppose the market is weak form efficient. Is there a possibility to make abnormal
return for Situation 1 above? Explain your answer.
(2 marks)
(Total: 8 marks)

END OF QUESTION