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OUM BUSINESS SCHOOL
ASSIGNMENT SUBMISSION AND ASSESSMENT
INSTRUCTIONS TO STUDENTS
1. This assignment contains question that is set in English.
2. Answer in English only.
3. Your assignment should be typed using 12 point Times New Roman font and 1.5 line spacing.
4. You must submit your hardcopy assignment to your Facilitator according to the due date.
5. Your assignment should be prepared individually. You should not copy another person?s assignment.
You should also not plagiarise another person?s work as your own.
This assignment accounts for 60% of the total marks for the course.
Instruction: Please answer ALL questions (Total = 120 marks)
(a) If the goal of a firm is to maximize the shareholders? wealth, does that mean that profit is
not important all? Explain your answer.
(b) Using debt can help reduce the agency problem that may arise between the management
of a company and its shareholders. How is this possible?
(c) By giving one example, describe how corporate social responsibility can be consistent with
effort of the management to maximize the firm?s value.
(d) Doing business in the era of globalization exposes a company to more challenges. Give one
example of these challenges and explain the action that a financial company must take to
face the challenge.
[TOTAL: 20 MARKS]
Your company?s current ratio is 0.5x, while your competitor?s current ratio is 1.5x. Both
firms want to "window dress" the coming end-of-year financial statements. As part of
the window dressing strategy, each firm will double its current liabilities by adding
short-term debt and placing the funds obtained in the cash account. Describe the actual
results of these transactions?
What would be the effect if a company increases its debt ratio, but leaves its operating
income (EBIT) and total assets unchanged?
A fire has destroyed a large percentage of the financial records of the Sunlight Inc. You
have the task of piecing together information in order to release a financial report. You
have found the return on equity to be 18 percent. If sales were RM4 million, the debt
ratio was 0.40, and total liabilities were RM2 million, what was the return on assets
Creative Technologies Corp. has the following information:
Days sales outstanding (DSO) (365-day year)
Inventory Turnover ratio
The company?s current assets consist of cash, inventories, and accounts receivable.
How much cash does the company have on its balance sheet?
[TOTAL: 20 MARKS]
a) Discuss the advantages and disadvantages of issuing common stock versus long-term debt?
b) A financial analyst has been following Biostar Inc., a new high-growth company. She
estimates that the current risk-free rate is 6.25 percent, the market risk premium is 5
percent, and that Biostar Inc beta is 1.75. The current earnings per share (EPS0) isRM2.50.
The company has a 40 percent payout ratio. The analyst estimates that the company's
dividend will grow at a rate of 25 percent this year, 20 percent next year, and 15 percent
the following year. After three years the dividend is expected to grow at a constant rate of
7 percent a year. The company is expected to maintain its current payout ratio. The analyst
believes that the stock is fairly priced. What is the current price of the stock?
c) The Ship Corp. has paid annual dividends of RM0.48, RM0.60, and RM0.62 a share over the
past three years, respectively. The company now predicts that it will maintain a constant
dividend since its business has leveled off and sales are expected to remain relatively
constant. Given the lack of future growth, at what price will you only buy this stock if you
can earn at least a 14 percent rate of return?
d) Active Adventures will pay an annual dividend of RM3.15 a share on their common stock
next week. Last year, the company paid a dividend of RM3.00 a share. The company
adheres to a constant rate of growth dividend policy. What will one share of this common
stock be worth ten years from now if the applicable discount rate is 12.5 percent?
[TOTAL: 20 MARKS]
a) A corporate bond with RM1000 maturity value carries a 7.5% coupon rate. It currently
makes interest payments semi-annually.
(i) This 12-year bond currently sells for RM961.88. What is the rate of return on this
(ii) If the bond sold for RM1,030.32, what is the rate of return on this bond?
b) Briefly explain the cash flows associated with a bond to the investor.
c) What is the relationship between interest rates and bond prices? When is a bond sold at (i)
a premium, (ii) at a discount, and (iii) at par?
d) Raul has recently inherited RM10,000 and is considering purchasing 10 bonds of the
Twilight Corporation. The bond has a par value of RM1,000 with 10 percent coupon rate
and will mature in 10 years. Does Raul have enough money to buy 10 bonds if the required
rate of return is 9 percent?
[TOTAL: 20 MARKS]
Assuming that all other variables remain unchanged, what impact would each of the
following have on stock price?
(a) The firm?s beta increases.
(b) The firm?s required return decreases.
(c) The dividend expected next year decreases.
(d) The rate of growth in dividends is expected to increase.
Barracuda Inc., has a beta of 1.40, the annual risk free rate of interest is currently 10
percent, and the required return on the market portfolio is 16 percent. The firm
estimates that its future dividends will continue to increase at an annual compound rate
consistent with that experienced over the 2009?2012 period.
(a) Estimate the value of Barracuda Inc., stock.
(b) A lawsuit has been filed against the company by a competitor, and the potential loss
has increased risk, which is reflected in the company?s beta, increasing it to 1.6. What
is the estimated price of the stock following the filing of the lawsuit.
A number of publicly traded firms pay no dividends yet investors are willing to buy
shares in these firms. How is this possible? Does this violate our basic principle of stock
valuation? Explain your answer.
The risk free rate of return is 8 percent; the expected rate of return on the market is 12
percent. Stock X has a beta coefficient of 1.3, an earnings and dividend growth rate of 7
percent, and a current dividend of RM2.40. If the stock is selling for RM35, what should
[TOTAL: 20 MARKS]
a) Hugh has opened a retirement fund account which pays 7 percent interest and requires
$5,000 annual deposits. Hugh will retire in 15 years and expects 10 years of retirement life.
What is the maximum annual retirement benefit Hugh can get during his retirement years?
b) To expand its operation, Sunbeam Ltd. has applied to the Lion Bank for a 3-year, $3,500,000
loan. Prepare a loan amortization table assuming 10 percent rate of interest.
c) You have just been promoted as the new assistant branch manager of a local-based
international bank. The branch manager, who is an expatriate, has asked you a question on
the different types of interest rate quotations. The question he asked is which rate should
the bank advertise on monthly-compounded loans - the nominal annual percentage rate or
the effective annual percentage rate? And which rate should the bank advertise on
quarterly-compounded savings accounts? Please explain to the branch manager which
quotation would attract consumers and why?
d) You are considering an investment in a 40-year security. The security will pay RM25 a year
at the end of each of the first three years. The security will then pay RM30 a year at the end
of each of the next 20 years. The nominal interest rate is assumed to be 8 percent, and the
current price (present value) of the security is RM360.39. Given this information, what is
the equal annual payment to be received from Year 24 through Year 40 (i.e., for 17 years)?
[TOTAL : 20 MARKS]
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