CONFIDENTIAL MAF653/NOV2017

UNIVERSITI TEKNOLOGI MARA

TEST 1

COURSE : FINANCIAL MARKET

COURSE CODE : MAF653
EXAMINATION : NOVEMBER 2017
TIME : 1 HOUR 30 MINUTES

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of THREE (3) questions.

2. Answer ALL questions. Start each answer on a new page.

3. Do not bring any material into the examination room unless permission is given by the
invigilator.
CONFIDENTIAL MAF653/NOV2017

Answer all questions.

Question 1

A. “A financial market is a market where financial instruments are exchanged or traded.”

Required:

Explain briefly three (3) importance of financial markets for economic development of a
country.
(5 marks)

B. Explain any two (2) features of corporate debt securities.

(5 marks)
(Total: 10 marks)

Question 2

A. The current dividend per share paid by Elopura Bhd is RM1.50 per share. The
company’s dividend payout ratio is 50% with P/E ratio of 10. Calculate the estimated
share price of Elopura Bhd for the current year.
(3 marks)

B. Synergy Bhd has paid dividend of RM5.00 per share for the past 5 years. Recently, the
firm announced that the current dividend to be RM6.80 per share and is expected to be
constant indefinitely. Adreana, who has invested her money in Synergy Bhd requires a
20% return.

Advise Adreana if she should sell her shares if the current market share price of Synergy
Bhd is RM43.
(3 marks)

C. Legomania Bhd has been experiencing an above normal dividend growth rate of 10%
per year for the last 5 years. This trend is expected to continue for another 5 more years
before it levels off at a normal rate of 5%. The company’s last dividend was RM 0.50 per
share. Currently, the shares are traded at RM8.50 per share.

Required:
i. Calculate the maximum price of Legomania’s stock if its required rate of return is
15%.
(7 marks)

ii. Discuss whether investing in Legomania’s share is a good decision.

(2 marks)
CONFIDENTIAL MAF653/NOV2017

D. Ashraf Zharif contacted his broker and has placed a limit order to buy 200 shares of
Easycash Berhad at RM18. The current price of the Easycash Berhad’s share is RM30.
Explain the action that would be taken by the broker if,

i. The stock price fall to RM20 per share.

ii. The stock price fall to RM15 per share.
(3 marks)

iii. Explain the term “Limit Order”

(2 marks)
(Total: 20 marks)

Question 3

A. Era Bhd issued an 8% 20-year RM1,000 par value bond 8 years ago. The current
market price of the bond is RM850 per unit. Ferhad, an investor who is also your friend
is interested in investing in the firm’s bond. However, he is not sure of what is the yield to
maturity from this investment. To assist Ferhad, estimate the yield to maturity of Era
Bhd’s bond.
(5 marks)

B. Puan Suria plans to sell the bonds that she currently owns in Bersatu Berhad. At
present, the bonds pay RM70 interest annually with remaining maturity period of 10
years. The bond is now selling at RM910 per bond and the par value of the bond is RM
1,000.

Required:

i. If the current interest rate is 8%, advise Puan Suria whether she should sell the
bonds at the market price, and why?
(5 marks)

ii. If the coupon rate is 9%, what would be the present value of the bond?

(2 marks)

iii. Compare the bond price in (i) and (ii) above and justify your answer.
(3 marks)

C. Briefly explain the circumstances in which the bond will be call back by the issuer.
(2 marks)

D. Briefly explain TWO (2) characteristics of money market instruments.

(3 marks)
(Total: 20 marks)
CONFIDENTIAL MAF653/NOV2017

END OF QUESTION PAPER

Suggested solution Test 1 MAF653 Nov 2017

Question 1

A. Financial markets are becoming ever important for economic growth and development
because:

 Market structure allows buyers and sellers to determine the price of financial
claims or equivalently determine the required rate of return on different types of
financial assets. The pricing mechanism of the market allows efficient allocation
of funds among financial instruments.
 Financial market provides a mechanism for an investor to sell a financial
instrument; because of this feature, it is said that a financial market offers liquidity
to investors. In the absence of such mechanism, the investors would be forced to
hold a financial instruments for an unspecified period of time.
 Financial market allows risk sharing, a mechanism that lower the cost of capital
for the various issuers of financial instruments.
(5 marks)

B. Two features of corporate debt securities

i. Corporate debt securities have a priority over the claims of equity holders in the case
of bankruptcy.
ii. Corporate debt securities can be issued as secured and unsecured debts.
iii. Corporate debt securities can be called and converted into common shares.
(Any 2 points x 2.5 marks= 5 marks)

QUESTION 2

A. Dividend payout ratio = Div.

EPS
0.50√ = 1.50√
EPS
EPS = RM3.00√

Price of the stock for the current year

= EPS x P/E ratio

= RM3 √X 10√
CONFIDENTIAL MAF653/NOV2017

= RM30√

(6√/2 = 3 marks)

B. V = D/k (Zero growth)

= RM6.80√/20%√

= RM34√

Adreana should sell√ the stock because the current market price of the share RM43 is
overvalued √ compared to the intrinsic value of the share RM34. √

(6√/2 = 3 marks)

C. i.

t Dt PVIF15%,t PValue

1 0.50√ x 1.10√ = 0.55 0.8696√ 0.48

2 0.55 x 1.10 = 0.605√ 0.7561 0.46

3 0.605 x 1.10 = 0.6655 √ 0.6575 0.44

4 0.6655 x 1.10 = 0.732 √ 0.5718 0.42

5 0.732 x 1.10 = 0.8052 √ 0.4972 0.40

P1 = RM 2.20√

P2 0.8052√(1 + 0.05)√ = 8.4546 x 0.4972√ = 4.20

( 0.15√ – 0.05√) 

Maximum price 6.40√

(14 √ x 1/2 = 7 marks)

iii. It is not √ a good decision to invest in Legomania’s share as the current market
price RM8.50√ is overvalued√ compared to the intrinsic value RM6.40. Investing
in this share will not generate a return of 15%√.
(4√ x 1.5 marks = 2 marks)
CONFIDENTIAL MAF653/NOV2017

D.

(i) The broker will not execute the order as the share price is above the limit price of
RM18.√

(ii) The order will be execute and the broker will buy 200 shares of Easycash Berhad at
RM15 per share because the share price fall below the limit price. √

(2√ x 1.5 marks = 3 marks)

(iii) A limit order is a request to buy or sell shares at a specified price (the limit) √or at a
better price√.

(2√ = 2 marks)

Question 3

A. YTM

Try at: 10%

Year CF PVIF PV
0 (850) √ 1 (850)
1-12 √ 80 √ 6.8137 545.096
12 1000 √ 0.3186 318.60
NPV 13.696
Try at: 12%

Year CF PVIF PV
0 (850) 1 (850)
1-12 80 6.1944 495.552
12 1000 0.2567 256.70
NPV (97.748)

YTM = 10% √ + (13.696 √ / (13.696 √ + 97.748 √) (12% √- 10% √) = 10.2458 %

10 √ x ½ = 5 marks

B.

i. PV of bond = 70 (PVIFA 8%, 10) √ + 1,000 (PVIF8%, 10) √

= RM 70 (6.7101) + RM 1, 000 (0.4632)

= RM 469.707 + RM 463.20

= RM 932.907 √
CONFIDENTIAL MAF653/NOV2017

Decision: Do not sell √ the bonds because the market price is underpriced √ (Market value of
RM910 is less than present value of RM932.907).

5 √ x 1 = 5 marks

ii. PV of bond = 90 (PVIFA 8%, 10) + 1,000 (PVIF8%, 10)

= RM 90 √ (6.7101) + RM 1, 000 (0.4632)

= RM 603.909 + RM 463.20

= RM 1067.109 √

2 √ x 1 = 2 marks

iii.

- When the market interest rate (8%) √ is higher than the coupon rate (7%) √, the bond will
be sell at discount (RM 932.907) √.
- When the market interest rate (8%) is lower than the coupon rate (9%), the bond will be
sell at premium (RM 1067.109).
- It means that there is a negative relationship between market interest rate and bond
price (with a comparison with coupon rate).

3 √ x 1 = 3 marks

C. The issuer may call back the bond when the market interest rate is lower than their coupon
rate √. It means that the company is paying their bondholder at a higher rate compare to
other similar risk investment (resulting in them to bear high cost of borrowing) √. The issuer
will call back the bond and reissue the bond at a lower coupon rate.
2 √ x 1 = 2 marks

D. Characteristics of money market instruments:

i. Short term √
ii. High liquidity/near cash √
iii. Low risk
iv. Low return
2 √ x 1.5 (with explanation) = 3 marks

(TOTAL: 20 MARKS)