COURSE CODE : MAF 603 TEST : MAY 2024 TIME : 1 HOUR 30 MINUTES
INSTRUCTIONS TO CANDIDATES
1. The Question consists of TWO SECTIONS: A AND B.
2. Section A consists of 15 Multiple Choice Questions. 3. Section B consists of 2 Essays and Numerical Questions. 4. Appendix 1 on the formulae sheet is provided. 5. Answer ALL Questions in Your Own Answer Sheet.
MAY 2020/MAF603
DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO
This examination paper consists of 3 printed pages TEST MAY 2024/MAF603
SECTION A: MULTIPLE CHOICE QUESTION
Instruction: Choose the most appropriate answer.
1. Corporate finance covers three main questions EXCEPT:
A. What types of long-term assets should the firm invest in? B. How can the firm raise financing for the required capital budgeting? C. How can the firm raise financing for the required capital expenditures? D. How does the firm manage short-term operating cash flows for day-to-day business operation? (1 mark)
2. Which of the following statement is CORRECT?
A. The total value of the firm’s assets equals the sum of non-current assets and net working capital. B. The total value of the firm’s assets is lower than the value of the financial claims by the firm’s claimant. C. The shareholders’ equity represents the sum of the value of the assets and the firm’s debt. D. The shareholders’ claim on the value of the firm’s assets is the residual amount that remains after the debt holders and creditors are paid. (1 mark)
3. The ultimate objective of corporate finance is
A. Sales maximization. B. Profit maximization. C. Shareholders’ maximization. D. Stakeholders’ maximization. (1 mark)
4. Which of the following is the CORRECT explanation of the objectives of stakeholders
toward company? A. Directors and managers are concerned with customers satisfactions. B. Societies are concerned with the company’s ability to pay principals. C. Suppliers are concerned with the product quality. D. Regulators are concerned with adherence of rules and regulations. (1 mark)
5. The following are factors that contribute to the agency problem:
I. Moral hazard. II. Effort level. III. Risk aversion. IV. Time horizon.
A. I, II and III B. I, III and IV TEST MAY 2024/MAF603
C. II, III and IV
D. All the above (1 mark)
6. Ways to reduce the agency problem include:
I. Establishing a set of contracts. II. Maintaining a compensation ratio. III. Establishing corporate control. IV. Maintaining a dividend policy.
A. I, II and III B. I, III and IV C. II, III and IV D. All the above. (2 marks)
7. What does NOT constitute a direct agency cost according to corporate governance principles? A. Expenses related to auditing financial statements. B. Bonuses paid to executives that align with shareholder goals. C. Investment in projects that are personally beneficial to managers but not to the firm. D. Salaries paid to non-executive directors. (1 mark) 8 The random walk theory suggests that the movement of stock prices in the future: A. Can be predicted based on market trends. B. Is primarily guided by fundamental analysis. C. Is completely independent of past price movements. D. Is significantly influenced by past price movements. (1 mark)
9. Which of the following statements is TRUE about semi-strong form market
efficiency? A. Only all past trading information is reflected in current prices. B. A market which is semi-strong form efficient is also weak form efficient. C. Investors are unable to beat the market consistently using confidential information. D. Tests of semi-strong form efficiency include serial correlation tests. (1 mark)
10. Which of the following is a behavioral finance phenomenon where investors' decisions are influenced by the perceived similarity of outcomes to past experiences? A. Representative bias. B. Conservatism. C. Belief perseverance. D. Loss aversion. TEST MAY 2024/MAF603
(1 mark)
11. Samuel, head of operations at GreenGlow Inc., knows about a confidential agreement with a major technology company that could significantly increase the company’s market share and profitability. However, he believes that he could generate only normal returns by trading on this private information due to economic changes. This reflects: A. Weak form efficiency. B. Semi-strong form efficiency. C. Strong form efficiency. D. Inefficient market. (1 mark) 12. Which of the following is consistent with strong form efficiency? A. Technical analysis is useful for predicting price movements. B. Investors are unable to earn abnormal returns using historical price data. C. Market prices reflect all information, including non-public information. D. Fundamental analysis is the only reliable method for evaluating stocks. (1 mark)
13. If the market is _________, the investor can use ___________ information to generate abnormal returns. A. weak; past B. strong; private C. semi-strong; past D. inefficient; both public and private (1 mark)
14. Which of the following is an example of a market imperfection?
A. All investors have equal access to information. B. Transaction costs are minimal or non-existent. C. Market prices always accurately reflect intrinsic value. D. Insider trading is legal and commonly practiced in the industry. (1 mark)
15. Choose the CORRECT statement:
A. Behavioral finance implies the rational behavior of investors influences the share price movement. B. 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. C. In a semi-strong efficient market, it is impossible to earn average profit using public information. D. Efficient market hypothesis is similar to the random walk theory as both suggest that all available information is already reflected in stock prices. (1 mark) (Total: 16 marks) TEST MAY 2024/MAF603
SECTION B: ESSAY AND NUMERICAL QUESTION
QUESTION 1 A. For each of the scenarios below, determine which form(s) of the Efficient Market Hypothesis (EMH) are either supported or violated. Provide a justification for your response. i. Azim claims he can consistently outperform the market index by analyzing the historical prices of shares from the 30 companies he has been investing in over the past 10 years. ii. Petronas is undertaking the Pengerang Integrated Complex (PIC) project in Johor, Malaysia. This massive development is intended to create a world-class downstream oil and gas processing hub, which is projected to boost the country's economic growth. Investors are informed that trading on this information will yield normal returns. iii. Aqua Bhd has changed its inventory valuation method from FIFO (First In, First Out) to LIFO (Last In, First Out), leading to higher reported earnings. Michelle believes that by trading based on this newly disclosed information, she can achieve abnormal returns. (5 marks) B. Explain the types of anomalies that violate the assumption of efficient market hypothesis below: i. Earnings announcement ii. Price earnings effect (4 marks) (Total: 9 marks)
QUESTION 2
Malik is a portfolio manager of a unit trust fund and expects an excess fund of RM5 million for the upcoming investment period. He forecasts a 70% probability that the upcoming period will be an expansion phase and reserves a 30% probability for a recession due to geopolitical tension. Malik is considering investing the excess funds into two companies, namely Maju Bhd and Hebat Bhd. The following information is available:
Economic conditions Maju Bhd’s Return Hebat Bhd’s Return
Expansion 25% 8% Recession 5% 10%
Additional information: Beta for Maju Bhd and Hebat Bhd are 1.5 and 1.2 respectively. The government T-Bill rate is 5 percent. The expected market return is 13 percent. TEST MAY 2024/MAF603
Required:
a. Calculate the following for Maju Bhd and Hebat Bhd shares:
i. Expected return ii. Standard deviation iii. Covariance iv. Correlation (10 marks)
b. If Malik intends to hold a portfolio consisting of shares in Maju Bhd and Hebat Bhd with an expected return of portfolio at 12.76%, evaluate the weightage of investment in each company and the standard deviation of the portfolio. (5 marks)
c. Assume Capital Asset Pricing Model (CAPM) holds, advise whether Malik should invest in the portfolio. (5 marks)
d. Assuming that the portfolio is not the best investment opportunity, recommend an alternative for Malik’s investment (either solely in Maju Bhd only or Hebat Bhd). (5 marks)
