Exam Practice Workbook

EXAM PRACTICE WORKBOOK

DPB5043 Business Finance

Zaimilatun Laila bt Zainal Abidin
Eva Faridah bt Zulkarnain

Politeknik Merlimau Melaka

1

Preface

This Exam Practice Workbook is written for Diploma in
Accountancy and Diploma in Business Studies
students at Politeknik Merlimau, Melaka who are
taking the Business Finance (DPB5043) courses.

The workbook consist of revision questions from
seven chapters – Financial Management, Risk and
Return, Financial Analysis, Working Capital
Management, Short Term and Long Term Financing,
Capital Budgeting and Leverage. The students can
practice the concepts and formula learn during
class, in order to prepare for their examination.

We would like to thanks everyone who have
provided encouragement and comments towards
the arrangement of this workbook. It is our hope that
this workbook would help the students to gain better
understanding of the course.

2

Table of Contents

CHAPTER 1: FINANCIAL MANAGEMENT Page
CHAPTER 2: RISK & RETURN 3
CHAPTER 3: FINANCIAL ANALYSIS 6
CHAPTER 4: WORKING CAPITAL MANAGEMENT 12
– Receivable Management 25
CHAPTER 4: WORKING CAPITAL MANAGEMENT
– Inventory Management 28
CHAPTER 5: SHORT TERM & LONG TERM FINANCING
CHAPTER 6: CAPITAL BUDGETING 32
CHAPTER 7: LEVERAGE 35
42

3

CHAPTER 1: FINANCIAL
MANAGEMENT

LEARNING OUTCOMES

By the end of this chapter, students should be able to:
Explain the nature and purposes of financial management
Explain the basics of financial management
Describe the financial manager responsibilities in organization

REVIEW QUESTIONS [3 m]
[2 m]
QUESTION 1 [5 m]
[5 m]
State THREE (3) disadvantages for the objective of profit maximization. [2 m]
[3 m]
QUESTION 2

State TWO (2) roles of Financial Manager in a large company.

QUESTION 3

List FIVE (5) roles of Financial Manager in an organization.

QUESTION 4

Identify FIVE (5) financial manager responsibilities in an organization.

QUESTION 5

Define “financial management‟.

QUESTION 6

(ii) State THREE (3) roles of financial manager in an organization.

4

QUESTION 7

The most preferable goal of the firm is maximization of shareholders wealth. Elaborate

THREE (3) reasons for choosing the goal. [6 m]

QUESTION 8 [9 m]

Discuss THREE (3) roles of the financial manager in an organization.

QUESTION 9 [10 m]

Explain these terms in the basic principles of financial management.

(i) The risk return trade off
(ii) The time value of money
(iii) The curse of competitive markets
(iv) All risk is not equal
(v) Ethical behavior

QUESTION 10 [2 m]

Define financial management

QUESTION 11 [6 m]
[15 m]
Explain the following company objectives:

(i) Maximizing profit
(ii) Maximizing shareholder wealth

QUESTION 12

Explain briefly the following basic principles of financial management:

(i) Time value of money
(ii) The curse of competitive market
(iii) The agency problems
(iv) The risk return trade off
(v) All risk is not equal

QUESTION 13 [2 m]

List TWO (2) responsibilities of a financial manager in an organization.

5 [2 m]
[6 m]
QUESTION 14
[15 m]
Define financial management. [2 m]

QUESTION 15

Explain the differences of the following company‟s objective:
(i) Maximizing profit
(ii) Maximizing shareholder wealth

QUESTION 16

Explain briefly the following basic principles of financial management:
(i) Time value of money
(ii) The curse of competitive market
(iii) The agency problems
(iv) The risk return trade off
(v) All risk is not equal

QUESTION 17

List any TWO (2) of financial mangers‟ responsibilities in an organization.

6

CHAPTER 2: RISK & RETURN

LEARNING OUTCOMES

By the end of this chapter, students should be able to:

Explain the concept of return
Explain the relationship between risk and return

REVIEW QUESTIONS

QUESTION 1

Based on the above projects as well as the further information below:

Economic Probabilities Expected Return (RM)
condition

Growth 0.4 PRO X PRO Y
Boom 0.2 6,500 6,582
Decline 0.3 6,000 7,219
Depression 0.1 5,000 6,991
21,000 23,938

You are required to calculate: [4 m]
[6 m]
(i) Expected rate of return for both projects.
(ii) Standard deviation for both projects.

QUESTION 2

ZARA Enterprise that is still new in the market is planning to invest some funds to make
money. The approach used is based on low risk motive. Two security investment options,
which are Security A and Security B have the following information:

Security A Security B

Probability Return (%) Probability Return (%)

0.50 9 0.40 -5

0.50 10 0.60 45

7

Based on the given information:

(i) Calculate the expected returns for each security. [2 m]

(ii) Calculate the standard deviation for each security [6 m]

(iii) Which security should be chosen based on the calculation? State your

reason. [2 m]

QUESTION 3 [4 m]
[6 m]
Explain the followings:

(i) TWO (2) types of risks
(ii) THREE (3) types of investors

QUESTION 4

Assume that, you are considering investing in different economic situations for the
future. The information of the situations as below:

Economic conditions Probabilities Return (RM)

Strong growth 0.6 Project A Project B
Moderate 0.2
Recession 0.2 3,000 2,500

2,300 2,100

1,950 1,520

Based on the information above, calculate for each project the following matters:

(i) Expected rate of return [4 m]
(ii) Coefficient of variation [5 m]
(iii) Which investment should you choose? [1 m]

QUESTION 5

Distinguish between systematic risk and unsystematic risk. Give suitable example of

each risk [5 m]

8

QUESTION 6

Assume that you are considering investments in different economic circumstances in
year ahead. The information of the situation are as below:

Economic conditions Probabilities Project A Return (RM) Project C
3,500 Project B 3,800
Strong growth 0.4 2,700 2,800 2,500
Moderate 0.5 2,000 2,300 1,900
Recession 0.1 1,800

Based on the information above, calculate the following items for each project.

(i) Expected rate of return [6 m]

(ii) Standard deviation [7.5 m]

(iii) Coefficient of variation [4.5 m]

(iv) Which investment will you choose as a risk adverse investor? Why?[2 m]

QUESTION 7

Ariff is considering to buy THE SHARE OF EITHER Mee Bhd, Nee Bhd or Yee Bhd. The
possible returns for the companies shares next year are as follows:

Economic Probability Rate of return (r)
condition
0.6 Mee Bhd Nee Bhd Yee Bhd
Strong 0.2 5% 6% 4%
Normal 0.2 6% 4% 5%
Recession 0% 3% -2%

Based on the information given:

(i) Calculate the expected rate of returns for each share. [10 m]

(ii) Calculate the standard deviation of expected returns for each share.

[10 m]

9

QUESTION 8 [4 m]
[3 m]
(i) Briefly explain:
TWO (2) types of risk

(ii) State THREE (3) types of investor‟s preference towards risk.

QUESTION 9

Multitask Enterprise that is still new in the market is planning to invest some funds to
make money. The approach used is based on low risk motive. Two security investment
options, which are LARA stock and NANA stock have the following information:

LARA STOCK NANA STOCK
Probability
RM Probability RM
0.20 7,200
0.30 8,400 0.30 5,200
0.50 9,200
0.30 5,200

0.40 7,200

Based on the given information:

(i) Calculate the expected returns for each stock. [4 m]

(ii) Calculate standard deviation of expected returns for each stock. [6 m]

(iii) Calculate the coefficient of variation for each stock. [6 m]

(iv) Which stock should be chosen based on the calculation? State your reason.

[2 m]

QUESTION 10

Chris, a risk averse investor, is considering 2 possible investments. The possible returns on
investments and related probabilities are as follows:

Investment A Investment B

Probability Return Probability Return

0.40 -2.5 0.35 -2.5

0.20 9 0.35 9

0.40 12 0.30 12

10 [6 m]
[10 m]
Calculate the following: [4 m]
(i) Expected rate of return [2 m]
(ii) Standard deviation
(iii) Coefficient of variation
(iv) Which investment should Chris choose?

QUESTION 11 [3 m]

Define the term “return”

QUESTION 12

Mamu Corporation, a toy manufacturing company is considering three projects, which
cost RM250,000. The forecasted returns from the projects are as follows:

BOBO LOLO MOMO
Probability Probability
Return Return Probability Return
0.25 19% 0.30 18%
0.35 22% 0.40 25% 0.20 20%
0.40 25% 0.30 29%
0.60 23%

0.20 30%

Based on the given information:

(i) Calculate the expected rate of returns for each project. [6 m]

(ii) Calculate the standard deviation of expected returns for each project.

[6 m]

(iii) Calculate the coefficient of variation for each project. [6 m]

(iv) Based on the calculation, which project should be chosen by Mamu

Corporation? [2 m]

QUESTION 13 [2 m]

Define risk and return.

QUESTION 14 [3 m]

Why the risk and return is important concept in finance?

11

QUESTION 15

Assume that you are considering investments with different economic circumstances
coming year ahead. Three economic conditions may occur. The alternative for the
three year returns are as follows:

Economic Probabilities Project A Return (RM) Project C
conditions 3,000 Project B 3,200
Strong growth 0.4 2,700 2,800 2,500
Moderate 0.5 2,200 2,300 1,900
Recession 0.1 2,000

You are required to calculate:

(i) Risk and expected rate of return for each investment alternative. [12 m]

(ii) Based on co variance of each investment alternative, which investment

would you choose? [8 m]

QUESTION 16 [2.5
[2.5
Define the meaning of:

(i) Expected rate of return
m]

(ii) Required rate of return
m]

12

CHAPTER 3: FINANCIAL ANALYSIS

LEARNING OUTCOMES

By the end of this chapter, students should be able to:

Explain the concept of financial statement
Explain the concept of financial ratios

REVIEW QUESTIONS [2 m]
[3 m]
QUESTION 1

(i) List TWO (2) types of financial statements.
(ii) List THREE (3) purposes of computing financial ratio.

QUESTION 2

The data below represents two finance companies in Malaysia known as Han and
Gook. The table below shows the Income Statement and Statement of Financial
Positions for the two companies.

Sales Han Gook
Net Income RM2,500,000 (iv)
Total Assets
Total Assets Turnover RM50,000 RM60,000
Net Profit Margin RM250,000 (v)
Return on Assets (vi)
(i) 6.5%
(ii) 2.5%
(iii)

(i) Complete the data for those two companies by filling in the blanks with

appropriate values. [15 m]

(ii) From the data in (i), which company has the best financial performance?

Provide TWO (2) reasons for your answer. [5 m]

13

QUESTION 3 [5 m]

Briefly discuss TWO (2) importance of financial ratios to outsiders.

QUESTION 4

You are the financial controller of KEJAYAAN Co. the company is in the process of
applying a term loan from a major bank in Kuala Lumpur. The followings are the
financial statements for KEJAYAAN Co for the year 2017.

Statement of Profit & Loss and Other Comprehensive Income for the Year Ended 31

Disember 2017

Net sales RM2,750,000

Less : Cost of Goods Sold RM2,029,500

Gross Profit RM720,500

Less : Operating Expenses

- Selling RM275,000

- General Expenses RM316,800

Eanings Before Interest & Taxes RM591,800

Interest Expenses RM128,700

Earnings Before Taxes RM13,200

Taxes (50%) RM57,750

Earnings After Taxes RM57,750

KEJAYAAN CO

Statement of Financial Position as at 31 Disember 2017

Assets

Cash RM220,000

Account Receivables RM275,000

Inventories RM825,000

Total Current Assets RM1,320,000

Net Non-Current Assets RM605,000

Total Assets RM1,925,000

Liabilities & Stockholders’ Equity

Account Payables RM165,000

Notes Payables RM220,000

Other Current Liabilities RM110,000

Total Current Liabilities RM495,000

Non Current Liability RM220,000

Shareholders‟ Equities RM1,210,000

Total Liabilities & Shareholder’s Funds RM1,925,000

14

The followings are the industry average ratio for the year 2017

Industry Ratio Industry Average
Current Ratio 1.7x
Quick Ratio 0.9x
Debt Ratio 50%
Time Interest Earned 6x
Inventory Turnover 4x
Average Collection Period
Total Assets Turnover 20 days
Net Profit Margin 2x
Return on Asset 1.5x
Return on Equity
2.5%
3.5%

As a Financial Controller, you are given the task of determining the company‟s last year
performance.

(i) Prepare an analysis of the company‟s performance by comparing with the

industry average and indicate it is favorable (F) and unfavorable (UF). [15 m]

(ii) Discuss TWO (2) limitations of using financial ratio to evaluate financial

performance in company. [5 m]

15

QUESTION 5

List any THREE (3) categories of financial ratios and TWO (2) main financial statements in

evaluating financial ratios. [5 m]

QUESTION 6

Anggerik Co has the following statement of the financial position ended December 31,
2017. Below are the information of Anggerik Co.

Anggerik Co

Statement of Financial Position as at December 31, 2017

Cash RM Current Liabilities RM
Account Receivable (a) Long Term Debt (d)
Inventory 25,000 Common Shares (e)
Fixed Asset (b) Retained Earnings 37,500
Total Asset (c) Total Liabilities & Equity (f)
200,000 (g)

Ratio Company Ratio Industry Ratio
Current Ratio 5 7
Return on Asset
Fixed Asset Turnover 14% 15%
Inventory Turnover 7 4
Net Profit Margin 7 6
5% 8%
Debt Ratio
20% 25%

You are required to:

(i) Complete the financial position of the firm by fill in the blanks for a, b, c, d, e, f

and g with appropriate value. [16 m]

(ii) Explain the financial performance of the firm according to profitability ratios

and activity ratios. [4 m]

16

QUESTION 7

List TWO (2) external parties who have interest in the company‟s financial strength and

weakness. [2 m]

QUESTION 8 [3 m]

State THREE 9#) limitations of using financial analysis.

QUESTION 9

Kimber Company Ltd

Summary of Financial Position as at 31 December 2017

RM RM

Cash (i) Curent liabilities (iv)

Accounts 10,000 Long term debt (v)

receivable

Inventory (ii) Common share 150,000

Net fixed assets (iii) Retained earnings (vi)

Total assets 800,000 Total liabilities & (vii)

equity

Current ratio Company Ratio Industry Ratio
Return on assets 4 15
Fixed asset turnover 14%
Inventory turnover 15% 3
Net profit margin 4 8
Debt ratio 6 9%
40%
10%
45%

Based on the information provided, you are required to:

(i) Find the missing values (show calculations). [17 m]

(ii) Give your comments on the activity ratios of Kimber Company Ltd as

compared to the industry ratio. [3 m]

17

QUESTION 10

a) List down TWO (2) purposes of financial ratios. [2 m]

b) Explain THREE (3) limitations of using financial analysis. [3 m]

c) The following financial information is provided to you by the finance manager of

UTERUS Bhd to prepare the company‟s financial analysis.

UTERUS Bhd

Statement of Profit & Loss and Other Comprehensive Income for the Year Ended 31

Disember 2017

RM

Sales: Credit 90,000

: Cash 20,000 110,000

Cost of goods sold (78,000)

Gross profit 32,000

Operating expenditure 20,000

Operating profit 12,000

Bank interest (2,500)

Earnings before tax (EBT) 9,500

Tax (40%) (3,800)

Earnings after tax (EAT) 5,700

Preferred shares dividend (1,020)

Net income for ordinary shareholder 4,680

UTERUS Bhd

Statement of Financial Position as at 31 Disember 2017

RM RM

Current Asset

Cash 1,000

Account Receivable 8,900

Inventory 4,350

Total Current Asset 14,250

Non-Current Asset 35,000
Equipment (13,250)
(-) Accumulated Depreciation
Net Non-Current Asset 21,750
TOTAL ASSET 36,000

Current Liability 8,000
Payable Account 6,675
Accrual Account
Total Current Liability 14,675
Long Term Loan 5,125
Total Liability 19,800

18

Owner Equity 2,000
Preferred Share 1,000
Ordinary Share 13,200
Retained Earning
Total Equity 16,200
TOTAL LIABILITY & OWNER EQUITY 36,000

Based on the above financial information, calculate the following financial ratios for
UTERUS Bhd.

(i) Current Ratio [20 m]
(ii) Quick Ratio
(iii) Inventory Turnover
(iv) Average Collection Period
(v) Total Asset Turnover
(vi) Debt Ratio
(vii) Gross Profit Margin
(viii) Net Profit Margin
(ix) Return on Asset
(x) Return on Equity

19

QUESTION 11

Complete the following Statement of Financial Position using the following information
(Assuming that there are 360 days in a year).

Statement of Financial Position RM(„000)
Current Asset
Bank 1,025
Account Receivable (a)
Inventory (b)
Total Current Assets (c)
Fixed Assets (d)
TOTAL ASSETS
Current Liability 37,500
Account Payable
Note Payable (e)
Other Current Liabilities 145
Total Current Liability 88
Long Term Liability (f)
Owner Equity 5,000
Ordinary Stock
Retain Earning 10,000
TOTAL LIABILITY & OWNER EQUITY (g)
Total Asset Turnover = 1.2x
Current ratio = 3.0x 37,500
Fixed Asset Turnover = 2.0x
Average Collection Period = 35 days

[20 m]

QUESTION 12 [2 m]

List TWO (2) external parties who have an interest in the company‟s financial
informations.

QUESTION 13 [3 m]

State THREE (3) limitations of using financial analysis.

20

QUESTION 14

The financial statement of VICI Corp as following below:

VICI Corporation

Statement of Comprehensive Income for the Year Ended 31 December 2017

2017 (RM)

Sales 981,900

Cost of goods sold 717,600

Gross profit 264,300

Operation cost 133,200

Earning before interest and tax 131,100

Interest expenses 24,200

Profit before tax 106,900

Tax (28%) 29,932

Net profit 76,968

Statement of Financial Position VICI Corporation

As at 31 December 2017

2017 (RM)

ASSET

Cash 59,500

Account receivable 133,200

Inventory 130,000

Net Fixed Asset 249,500
Total Assets 572,200
LIABILITIES & OWNER EQUITIES
Account payable 96,000
Notes payable 42,600
Overdraft 47,400

Long term liabilities 127,800
Total liabilities 313,800

Ordinary share 120,000
Retained earnings 138,400
Total liabilities & owner equity 572,200

21

Below is an industry average ratio: Industry Average
1.5x
Industry Ratio 1.0x
Current Ratio 5x
Quick Ratio
Inventory Turnover 52 days
Average Collection Period 1.56x
Total Assets Turnover 8.0x
Net Profit Margin 14%
Return on Asset 25%
Return on Equity 62%
Debt Ratio 5x
Time Interest Earned

Assume that there are 365 days in a year.

a) Based on industry average ratio, calculate the company‟s financial ratios for the

year 2017 and compare to the industry ratio. State your comment on the

company‟ performance in every ratio whether favorable or unfavorable. [20 m]

b) Analyze whether the management have full use of the companies resources

with an efficient way. [5 m]

22

QUESTION 15

The following financial information is provided to you by the Finance Manager of Zara
Khalef Berhad to prepare the company‟s financial analysis.

Zara Khalef Berhad

Statement of Comprehensive Income for the Year Ended 31 December 2017

2017 (RM)

Sales 100,000

Cost of goods sold (87,000)

Gross profit 13,000

Operation expenditure (11,000)

Earnings before interest and tax 2,000

Interest (500)

Earnings before tax 1,500

Tax (28%) (420)

Net profit 1,080

Zara Khalef Berhad

Statement of Financial Position as at 31 December 2017

RM RM

Current Asset 14,250

Cash 1,000 21,750
36,000
Account Receivable 8,900
15,675
Inventory 4,350 4,125
19,800
Total Current Asset
16,200
Non-Current Asset 36,000

Equipment 35,000

(-) Accumulated Depreciation 13,250

Net Non-Current Asset

TOTAL ASSET

Current Liability

Payable account 9,000

Accrual Account 6,675

Total Current Liability

Long Term Loan

Total Liability

Owner Equity

Ordinary Share 1,000

Retain Earning 15,200

Total Equity

TOTAL LIABILITY & OWNER EQUITY

Based on the financial information above, calculate the following financial ratios:

23

(i) Current ratio
(ii) Debt ratio
(iii) Quick ratio
(iv) Gross profit margin
(v) Average collection period
(vi) Net profit margin
(vii) Inventory turnover
(viii) Return on asset
(ix) Total asset turnover
(x) Return on equity

[20 m]

QUESTION 16

List TWO (2) external parties who have an interest in the company‟s financial strength

and weakness. [2 m]

QUESTION 17 [3 m]

State THREE (3) limitations of using financial analysis

24

QUESTION 18

There are three fashion companies in Sun City; Zalora, PopUp and Santek. The table
below shows the Income Statement and Statement of Financial Position for the three
companies.

Sales Zalora, PopUp Santek
Net Income RM800,000 (iv) (vii)
Total Assets RM35,000 (viii)
Total Assets Turnover RM130,000 RM45,000
Net Profit Margin (v) RM375,000
Return on Total Assets (i) (vi) 0.8
(ii) 0.8% 5%
(iii) 4% (ix)

You are required to find the values associated by using your calculations. [18 m]

QUESTION 19

The Statement of Financial Positions of Coke (RM in thousands) on December 31,2017 is
provided as follows:

Statement of Financial Position as at 31 December 2017

2017 (RM)

Assets 12,000,000

Current Asset 3,000,000

Long Term Investment 5,300,000

Fixed Assets 1,100,000

Other Assets 2,600,000

Liabilities 4,000,000
Current Liabilities (x)
Long Term Liabilities
Other Liabilities & Provision 550,000
Stockholders‟ Equity 214,000

(y)

Calculate the amount of current liabilities and stockholders‟ equity at the end of the

year. [7 m]

25

CHAPTER 4: WORKING CAPITAL
MANAGEMENT – Receivable
Management

LEARNING OUTCOMES

By the end of this chapter, students should be able to:
Explain the receivables management

REVIEW QUESTIONS [2.5 m]
[2.5 m]
QUESTION 1

Count the effective cost for the following trade credit terms:

(i) 3/10 net 30
(ii) 4/15 net 60

QUESTION 2

Gudan Corporation has an annual credit sale of Rm16 million and average collection
period of 40 days. The level of bad debt is RM480,000 and the required rate of return
before tax is 16 percent. Assumed Gudan Corporation only produces one product, it
has a variable cost of 70% of the cost price. The company is considering a change in
credit policy where customers will get 1% discount if payment is made within 20 days.
However, if the customers are unable to pay within 20 days, they would not get any
discount and have to pay the full amount within 60 days.

If the change is implemented, it is expected that 40% of customers will take the
discount and pay on day 20, while 60% will ignore the discount and pay on day 60. This
will increase the average collection period from 40 days to 44 days. Gudan
Corporation is considering making changes because it is expected to generate an
additional sales credit of RM2 million. Besides that, the increment in sales will also
influence the increment in bad debt for additional sales is 6%. In addition, the average
inventory level is RM2 million currently. After the implementation of the plan, Gudan
Corporation will have average inventory level at RM2,050,000.

26

Using marginal analysis, calculate whether the proposed credit policy changes should

be implemented or otherwise. [15 m]

QUESTION 3

AQSA Trading Sdn Bhd is considering to change its credit policy that will result in
average collection period from 30 days to 2/20 net 40 days. The relaxation in credit is
expected to produce increase in sales. It is estimated that 90% of its customers will take
the discount offer and the rest will pay on day 40. You are given the following
additional information:

Original credit sales RM20,000,000
New credit sales RM30,000,000
Contribution margin
Percentage of bad debts on additional sales 25%
Additional inventory required 5%
Required rate of return on investment RM700,000
Assume 360 day a year. 15%

You are required to:

(i) Calculate the changes in credit policy based on the information given.
[18 m]

(ii) Should changes in credit policy be implemented? Give your comment.
[2 m]

QUESTION 4 [8 m]

Calculate the cost of effective credit for each of the following terms.

(i) 1/10 net 20
(ii) 2/10 net 40
(iii) 3/15 net 30
(iv) 3/10 net 60

QUESTION 5 [5 m]

Calculate the effective cost of credit for the following:

(i) 1/10 net 20
(ii) 3/15 net 30

27

QUESTION 6

Determine the annualized opportunity cost of foregoing the cash discount under each
of the following term of sale. (Assume 365 day year)

(i) 4/15 net 90 [5 m]
(ii) 3/12 net 40

QUESTION 7 [8 m]

Calculate cost of effective credit for each of the terms below:

(i) 1/10 net 20
(ii) 2/10 net 40
(iii) 3/15 net 30
(iv) 3/10 net 60

28

CHAPTER 4: WORKING CAPITAL
MANAGEMENT – Inventory
Management

LEARNING OUTCOMES

By the end of this chapter, students should be able to:
Explain the inventory management

REVIEW QUESTIONS

QUESTION 1

Tae Group‟s annual demand is 1700 units. Ordering cost is RM75 per order and its
storage cost is RM7 per box. The usage for safety stock is equal to 15 days and the
delivery time is 7 days. Assume 360 days a year in your calculation.

Calculate:

(i) Economic Order Quantity [2.5 m]
(ii) Reorder point [2.5 m]

QUESTION 2

List FIVE (5) importance of inventory management for company.

QUESTION 3

Double Sdn Bhd is a local toys manufacturer which produces toy trains. Double Sdn Bhd
is trying to determine the optimal order quantity of parts of the toys. The manufacturer
anticipates that it will sell 300,000 units of toy trains every year. Parts of toy trains are
purchased at RM1.20 per unit and cost for carrying a unit of the parts are 10% from
purchase price. It will cost the manufacturer RM30 for each order and the company
requires one week to receive the order. Assume there are 50 weeks in a year. The
desired safety stock which does not include delivery time stock is 800 units.

29

(i) Determine the optimal EOQ. [4 m]

(ii) How many orders of parts will be placed annually? [2 m]

(iii) What is the average inventory level? [2.5 m ]

(iv) At what inventory level should the company place an order? [2.5 m]

(v) Compute the total inventory cost at the EOQ level. [4 m]

QUESTION 4 [5 m]

List FIVE (5) importance of inventory management to a company.

QUESTION 5

Hanadia Corporation is currently producing cameras that requires 200,000 units of raw
material every year. The carrying cost is 20% from the purchase of the goods. Ordering
cost is estimated at RM90, 000. Goods are purchased at RM2 per unit. The
management team has decided to keep 10,000 units as safety stocks. Company
supplier usually takes 7 days to deliver the stock to the company.

Assume the company works 50 weeks in a year. Calculate:

(i) Economic Order Quantity (EOQ) [4 m]
(ii) Number of order in a year [4 m]
(iii) Reorder point [5 m]
(iv) Average inventory [4 m]

QUESTION 6

PG Company is durrently selling anti dandruff shampoo to many major Giant
Hypermarket in many big cities. The copany‟s annual sales are 80,000 units. The carrying
cost and ordering costs are RM3 and Rm300 respectively. The company keeps 2,000
units for its safety stocks. Usually the company would have to wait 7 days to receive the
orders from its regular supplier. Assume the company works 50 weeks in a year. You are
required to calculate:

(i) Economic order quantity [4 m]
(ii) Annual number of orders [3 m]
(iii) The average inventory [3 m]
(iv) The total inventory cost [6 m]
(v) Inventory re order point [4 m]

30

QUESTION 7

Neelofa Bakery is currently producing cupcakes that requires 250,000 kg of raw material
every year. The carrying cost is 20% from the purchase price of the goods. Ordering cost
is estimated at RM95.00. Goods are purchased at RM2.00per unit. The management
team has decided to keep safety stock of 15,000 kg. Company‟s regular supplier usually
takes 7 days to deliver the stocks to the company. Assume that the company works 50
weeks in a year, calculate:

(i) The Economic Order Quantity [4 m]
(ii) The annual number of order [3 m]
(iii) Inventory reorder point [4 m]
(iv) The average inventory [3 m]
(v) The total inventory cost [5 m]

QUESTION 8 [6 m]

Explain THREE (3) reasons why inventory management is important.

QUESTION 9

Hagimaru Corporation is currently producing cameras that requires 200,000 units of raw
material every year. The carrying cost is 20% from the purchase price of the goods.
Ordering cost is estimated at RM90.00. Goods are purchased at RM2 per unit. The
management team has decided ti keep 10,000 units as safety stocks. Company
supplier usually take 7 days to deliver the stock to the company.

Assume that the company works 50 weeks in a year. Calculate:

(i) Economic Order Quantity (EOQ) [4 m]
(ii) Number of order in a year [4 m]
(iii) Inventory order point [5 m]
(iv) Average inventory [4 m]

31

QUESTION 10

a) A retailing firm sells a single product at a price of RM5. Its annual sales is

RM160,000. The firm purchases its stock from a whole seller and resells it without

any further processing. The carrying cost per unit is RM2 and the ordering cost

per order is fixed at RM20.

Calculate the following:

(i) The economic order quantity (EOQ) [3 m]

(ii) The firm‟s average stock level [3 m]

(iii) The total inventory cost associated with the firm‟s stock policy [4 m]

b) Based on the above question (a), the firm buys its stock at RM4 per unit and

gains RM1 gross profit for each item sold. Its supplier offers cash discount at

RM3.95 if the firm purchases at least 1,000 unit per order. Calculate the net

saving acquire by the firm if it take cash discount. [8 m]

c) Sofia Group‟s annual usage is 1,700 units. Ordering cost is RM75 per order and its

storage cost is RM7 per box. The usage for safety stock is equal to 15 days and

the delivery time is 7 days.

Assume 360 days a year in your calculation

(i) Calculate the Economic Ordering Quantity [3.5 m]

(ii) Determine the Re-Order Point [3.5 m]

QUESTION 11

Haruman Corporation has an annual usage of 4,000 units. The cost of placing one order
is RM100 and the firm‟s carrying cost per unit for every three months is RM0.80.

Calculate:

(i) Economic Order Quantity [4 m]
(ii) Total carrying costs [3 m]
(iii) Total ordering costs [3 m]
(iv) Total inventory costs [3 m]

32

CHAPTER 5: SHORT TERM & LONG
TERM FINANCING

LEARNING OUTCOMES

By the end of this chapter, students should be able to:
Explain short term loan
Explain long term loan

REVIEW QUESTIONS

QUESTION 1

KAW Bhd needs to increase its working capital by RM8,000,000. Two financing
alternatives are available:
OPTION 1:
Borrow from a bank at 12% interest. The company must maintain a 5% compensating
balance.
OPTION 2:
Issue a commercial paper. Interest charged is 7% and a fee of 3% is payable to dealer.

Calculate the effective annual cost of each source of fund and choose the best.
[10 m]

33

QUESTION 2

Raspberry Sdn Bhd requires immediate additional working capital of Rm2 million. There
are TWO (2) possible sources:

Source 1 A loan from Blueberry Bank at a simple interest rate of 10% and a
Source 2 compensating balance of 20%. A deposit of RM5,000 with the bank
exists.
Issue RM 2 million worth commercial paper. Interest charged is 8% and a
fee of 3.5% is payable to the dealer.

You are required to:

(i) Calculate the effective annual cost of each sources of financing. [8 m]

(ii) Choose the most suitable source of financing for Raspberry Sdn Bhd and

state your reason. [2 m]

QUESTION 3

Aznil Sdn Bhd is seeking for sources of fund or a period of one year loan of RM250,000.
There are two possible alternatives as follows:

Alternative 1 Short term loan from Bank A at a discounted interest of 5% per annum.
Alternative 2 The bank requires customer to maintain a compensating balance of
10% of the loan amount.
Short term bank loan from Bank B at a simple interest loan of 8% per
annum and have to maintain a compensating balance of 10% of the
loan amount.

Required:

(i) Calculate the effective annual cost of each source of funds. [15 m]

(ii) Advise the company on which alternatives of financing to choose. Give

reason to your choice decision. [3 m]

QUESTION 4

IDAMT Bhd is planning a commercial paper issue of RM10 million. The commercial

paper will carry a 270 day maturity and require interest based on a rate of 12% per

annum. In addition, the company will have to pay fees totaling RM80,000 to bring the

issue to market and place it. Calculate the effective annual cost of this commercial

paper. [7 m]

34

QUESTION 5 [4 m]

Differentiate collateral and non-collateral financing.

QUESTION 6

Britannia Sdn Bhd needs RM800,000 to finance two months anticipated expansion in
receivables due to the increased sales. The company is considering to pledge its
accounts receivable for two months. Its average monthly credit sales is RM400,000.
Matsu Bank agrees to give Britannia Sdn Bhd 90% of the receivables as an initial loan.
Commission is 1.5% on total loan and processing fee is 1% monthly. Loan interest rate is
6.5% annually.

Calculate the cost of effective credit for the loan. [6 m]

QUESTION 7

Mawar Merah Sdn Bhd requires immediate additional working capital of RM2 million.
There are THREE possible sources:

Source 1 A loan from Galla bank at 12% discounted interest. A 15%
Source 2 compensating balance will be required.
A loan from Berry bank at a simple interest rate of 10% and a
Source 3 compensating balance of 20%. A deposit of RM5,000 with the bank
exists.
Issue RM2 million worth of commercial paper. Interest charged is 8% and
a fee of 3.5% is payable to the dealer.

You are required to:

(i) Calculate the effective annual cost of each source of financing. [12 m]

(ii) Choose the most suitable source of financing for Mawar Merah Sdn Bhd and

state your reason. [3 m]

35

CHAPTER 6: CAPITAL BUDGETING

LEARNING OUTCOMES

By the end of this chapter, students should be able to:
Explain the capital budgeting concept
Apply the project valuation techniques

REVIEW QUESTIONS

QUESTION 1

You are a financial manager of OYA Sdn Bhd. The director of capital budgeting
asked you to analyze two proposed capital investments, projects X (PRO X) and Y
(PRO Y). The relevant information for each project is stated as below:

 Each project has a cost of RM26,000
 The cost of capital for each project is 12%
 The projects‟ expected net cash flows are as follows:

Year PRO X (RM) PRO Y (RM)
1 6,500 6,582
2 6,000 7,219
3 5,000 6,991
4 21,000 23,938

You are required to calculate: [2 m]
[8 m]
(i) Payback period for both projects [5 m]
(ii) Internal rate of return for both projects
(iii) Choose the best project and state TWO (2) reasons.

36

QUESTION 2

Mata Haree Company Limited is looking at two gas projects at SEA Straits. The gas
exploration machines being used are currently imported from oversea. They are WISH
and GMAT machine. The manager of the company predicts that both exploration
machines will have a life span of 3 years. Purchase cost for each machine is RM30,000.
Cash flow information related to the two machines is as follows:

Year WISH machine GMAT machine
(RM30,000)
0 (RM30,000) RM10,500
RM10,500
1 RM11,500 RM9,500

2 RM11,500

3 RM10,000

The capital cost of the two machines is 10% each.

AS financial manager, calculate Net Present value (NPV) for both machine and

determine which machine to choose. [10 m]

QUESTION 3

TechNo Trading is considering these two mutually exclusive projects which required an
initial outlay of RM125,000. Below is the expected cash flow for each project. The cost of
capital is 14%.

Year TT Project KK Project
1 RM35,000 RM30,000
2 RM35,000 RM34,000
3 RM35,000 RM39,000
4 RM35,000 RM44,000
5 RM35,000 RM50,000

Calculate the payback period for both projects. [5 m]

37

QUESTION 4

Syarikat Kenyalang Bhd is considering investing in two mutually exclusive projects that is
Project Enggang and Project Helang. Both projects need the same amount of initial
investment of RM60,000. The table below showed the cash flows for both projects for
the period of 5 years.

Year Enggang Project Helang Project
0 (60,000) (60,000)
1 20,000 10,000
2 20,000 15,000
3 20,000 20,000
4 20,000 25,000
5 20,000 30,000

(i) You are required to calculate internal rate of return for each project. [10 m]

(ii) Determine the best project to be invested by the company. State your

reason. [5 m]

QUESTION 5

SUKAMARI Sdn Bhd is considering these two mutually exclusive investments which
involve an initial outlay of RM160,000. Below is the cash flows expected from each type
of investments. The rate of return is 14%.

Year Project Makmur (RM) Project Megah (RM)
1 38,000 42,000
2 42,000 42,000
3 44,000 42,000
4 45,000 42,000
5 48,000 42,000
6 49,000 42,000

a) For each type of investments, calculate:

(i) Net Present Value [6 m]

(ii) Profitable Index [6 m]

(iii) Internal Rate of return [11 m]

b) Determine the best investment will be chosen by SUKAMARI Sdn Bhd. State the

reason. [2 m]

38

QUESTION 6

Zimmer Co Ltd is considering two mutually exclusive projects, one with a life span of 6
years and the other one with a life span of 4 years. The after tax cash flow from the two
projects are as follows:

Year Project Scanner (RM) Project Printer (RM)

0 (450,000) (460,000)

1 100,000 120,000

2 100,000 140,000

3 100,000 180,000

4 100,000 250,000

5 100,000 -

6 100,000 -

Assume a capital cost of 14% for both projects

You are required to calculate: [4 m]
[6 m]
(i) Payback period [4 m]
(ii) Net present value [1 m]
(iii) Profitability index
(iv) Which project should be chosen?

QUESTION 7

The operation manager of Black Forest Bhd is planning to increase production of the
company. He therefore considers to replace a manually operated machine, which was
purchased 8 years ago, with an automatic machine. The details of both machine are
as follows:

Manual Machine Expected life Automatic Machine
5 years left Purchase price 5 years
RM40,000 Installation expenses
Transportation RM50,000
RM4,000 RM2,000
RM4,000 expenses RM2,000
RM20,000 Insurance
Salvage value RM4,000
Maintenance RM15,000
expenses RM5,500

Defect RM2,000
Salary -
Increase in working
capital RM10,000

39

Assumptions:

 Tax rate is 28%.
 Fully qualified for 10% investment tax credit.
 Depreciation method – simplified straight line method.
 Depreciation rate – according to accounting method.
 Tax are paid in the same year the income is received.
 Cost of capital is 15%.
 Current selling price for the manually operated machine is RM15,000.

Required to calculate:

(i) Initial outlay [10 m]

(ii) Net cash flow over a project‟s life [9 m]

(iii) Terminal cash flow [4 m]

(iv) Should the manual operated machine be replaced by the automatic

machine? State your reason. [2 m]

QUESTION 8

ADAMA Holding is evaluating the proposed acquisition of a new machine at RM20,000.
To allow this machine to operate, the company needs to spend RM1,000 for the cost of
transportation and RM2,000 for the cost of installation. The new machine will also
requires additional inventory of RM2,500. ADAMI Holding is using a simple straight line
depreciation method and the new machine will be depreciated over a period of 5
years lifespan of the machine.

The new machine will be used to replace an old machine purchased 5 years ago at
the price of RM20,000. Old machine is depreciated using the straight line method which
is 7 years to a value of zero and depreciation expenses of old machine is RM2,000 per
year. Old machine can be sold today for RM10,000. Book value for this machine is
RM18,000. The new machine is expected to save the salary of RM5,000 per year and the
cost of damages amounting to RM2,000 a year for its use. However maintenance costs
will be increased by RM3,000 per annum. The new machine is expected to be priced at
RM1,000 at the end of year 5. Assume the tax rate is 25% and the rate of return is 10%.

Calculate: [10 m]
[11 m]
(i) The initial outlay [4 m]
(ii) The annual cash flow
(iii) The terminal cash flow

40

QUESTION 9

Infinity Co Ltd is considering two mutually exclusive projects, one with a life span of 6
years and the other with a life span of 4 years. The after tax cash flow from the two
projects are as follow:

Year Project Tati (RM) Project Wawi (RM)
0 (450,000) (500,000)
1 120,000 140,000
2 120,000 153,000
3 120,000 162,000
4 120,000 180,000
5 120,000 -
6 120,000 -

a) Assuming a capital cost of 14% both the projects, calculate: [4 m]
(i) Payback period [6 m]
(ii) Net present value [9 m]
(iii) Internal rate of return [4 m]
(iv) Profitability index [2 m]

b) Which project should be chosen? Explain.

41

QUESTION 10

Sera Sdn Bhd is considering the purchase of a new printing machine. Its costs RM310,000
and requires installation costs of RM30,000. The new machine is estimated to have an
expected useful life of 6 years with salvage value of RM10,000 and will be depreciated
using the straight line method.

The old printing machine has terminal book value of RM20,000 and 5 years remaining
useful life. it is being depreciated using straight line method. It was purchased 5 years
ago for RM200,000 and can be sold today for RM70,000. To buy the new machine, Sera
Sdn Bhd plans to take a long term loan of RM200,000 and 10% interest will be paid
annually. The balance will be financed by retained earnings.

With the new machine, annual sales are expected to increase by RM200,000 and
expenses (including depreciation) will represent 40% of sales. This new machine will
require an increase of RM25,000 in inventories. Sera Sdn Bhd needs a larger space to
store these inventories, and hence a small room that is currently being rented out for
RM15,000 per year will be converted into a store room. 3 staffs were sent for training last
month and the firm has paid RM5,000 training fee. The firm is subject to a 30% tax rate.

You are required to calculate the following after tax cash flows attributable to the new
printing machine:

(i) Initial outlay [10 m]
(ii) Differential cash flow over the project‟s life [11 m]
(iii) Terminal cash flow [4 m]

42

CHAPTER 7: LEVERAGE

LEARNING OUTCOMES

By the end of this chapter, students should be able to:
Explain the concept of risk
Explain the concept of leverage

REVIEW QUESTIONS

QUESTION 1

An income statement for TAPE Sdn Bhd is shown as below:

Income STattement for the year ended 31 December 2017

Sales RM
Variable cost 30,000,000
Earning Before Fixed Cost 16,000,000
Fixed cost 14,000,000
Earning Before Interest & Taxes (EBIT) 7,000,000
Interest expense 7,000,000
Earning Before Taxes 1,000,000
Taxes 6,000,000
Net Income 1,620,000
4,380,000

(i) Degree of Operating Leverage [3 m]

(ii) Degree of Financial Leverage [3 m]

(iii) Degree of Combined Leverage. If the industrial degree of combined

leverage is 2.5 times, illustrate your comment on the TAPE Sdn Bhd degree of

combination leverage. [4 m]

QUESTION 2

Integrated ZAPPY Sdn Bhd, a special car tyre retailer in Malaysia. Given below are some
of the financial data from their recent operations in year 2016.

43

Average selling price per unit RM35.00
Average variable cost per unit RM20.00
Unit sold 25,000 units
Fixed costs RM30,000
Interest expense RM12,000
Government tax rate
29%

(i) Calculate the degree of operating leverage (DOL) [4 m]
(ii) Calculate the degree of financial leverage (DFL) [4 m]
(iii) Calculate the degree of combined leverage (DCL) [2 m]

QUESTION 3

The Statement of Comprehensive Income for Mario Ltd Co are as follow:

Items RM(‘000)
Sales 43,300
(-) Variable Cost (18,120)
Earning Before Fixed Costs 25,180
(-) Fixed Cost (12,000)
Earnings Before Interest & Tax 13,180
(-) Interest Expense (59)
Earning Before Tax 13,121
(-) Tax (35%)
Earnings After Taxes (4,592.35)
Preferred share dividend 8,528.65
Net Income (1,200)
7,328.65

Using the data given, you are required to determine: [4 m]
[4 m]
(i) Degree of Operating Leverage [2 m]
(ii) Degree of Financial Leverage
(iii) Degree of Combined Leverage

44

QUESTION 4

Below is the last year analytical income statement for Comel Mama Shoppe.

Sales (RM)
Variable cost 75,000
Contribution margin 37,000
Fixed costs 38,000
EBIT 19,000
Interest expense 19,000
EBT 7,000
Taxes 12,000
Net Income 6,000
6,000

(i) What is the degree of operating leverage at this level of output?[4 m]

(ii) What is the degree of financial leverage? [4 m]

(iii) What is the degree of combined leverage? [4 m]

(iv) If sales should increase by 30%, by what percent would Earnings Before

Interest and Taxes (EBIT) increase? [3.5 m]

(v) Prepare an income statement to prove your answer in (iv). [9.5 m]

QUESTION 5

Below is the Statement of Comprehensive Income for Mizzi Sdn Bhd for the year ended
31 December 2017.

Items RM („000)
Sales 24,000
Variable cost 12,000
Earning Before Fixed Cost 12,000
Fixed cost 6,000
Earning Before Interest & Taxes (EBIT) 6,000
Interest 800
Earning Before Taxes 5,200
Taxes (28%) 1,456
Net Income 3,996

45

Based on the above data, you are required to calculate:

(i) Degree of Operating Leverage [2 m]
(ii) Degree of Financial Leverage [2 m]
(iii) Degree of Combined Leverage [1 m]

If sales increased by 10% how much would Earning Before Interest & Taxes (EBIT) be

increased? Prove your answer by constructing a summarized statement of

comprehensive income. [5 m]

QUESTION 6

A financial analyst has collected financial information of two companies for the year of
2017. The information is as follow.

Items LUQMAN AL ALI IMRAN
HAKIM BHD BHD
Average selling price RM27
Sales RM35 1,850
Interest expense 1,500
Variable cost (% from sales) RM750 RM1,000
Fixed cost 60% 45%
Dividend of preferred share RM10,000
Ordinary share RM1,000 RM7,000
5,000 RM0
8,000

a) Prepare an income statement for each company. Assumed that every company

in the industry is taxed at 27%. [8 m]

b) Based on the prepared income statement in (a), for each company, calculate:

(i) Degree operating leverage (DOL) [3 m]

(ii) Degree financial leverage (DFL) [3 m]

(iii) Degree combined leverage (DCL) [3 m]

c) If sales increase by 20%, how much is the increment in percentage of the earning

per share (EPS) for both companies? [4 m]

d) Determine which company would have greater change in earnings per share

(EPS). [4 m]

46

QUESTION 7

Below is the statement of Income Statement for TOYOGO Bhd for the year ended 30
June 2017.

TOYOGO Bhd

Income Statements for the financial ended 30 June 2017

RM(‘000)

Sales 45,300,000

Variable Cost 18,120,000

Earning Before Fixed Cost 27,180,000

Fixed Cost 12,000,000

Earnings Before Interest & Taxes 15,180,000

Interest 59,000

Earnings Before Taxes 15,121,000

Taxes 4,233,880

Earnings After Taxes 10,887,020

Preferred Share Dividend 1,200,000

Net Income 9,687,020

Using the above data, you are required to calculate:

(i) The Degree of Operating Leverage [4 m]

(ii) The Degree of Financial Leverage [4 m]

(iii) The Degree of Combined Leverage [3 m]

(iv) If the sales increase by 10%, what are the effects on earnings before interest

& taxes? [4 m]

(v) Prepare the Income Statement to prove your answer in (b) [10 m]

QUESTION 8

A Financial Analyst has collected financial information of two companies for the year
2017. The information is as follow:

Item ZARA BHD SHERRY BHD
Average selling price RM35 RM27
Sales 1,500 1,850
Interest expenses RM750
Variable cost (% from sales) 60% RM1,000
Fixed cost 45%
Dividend of preferred share RM10,000
Ordinary share RM1,000 RM7,000
RM0
5,000 8,000

47

a) Prepare an income statement for each company. Assume that every company

in the industry is taxed at 27%. [8 m]

b) Based on the prepared income statement in (a), for each company calculate:

(i) Degree operating leverage (DOL) [3 m]

(ii) Degree financial leverage (DFL) [3 m]

(iii) Degree combined leverage (DCL) [3 m]

c) If sales increase by 20%, how much is the increment in percentage of the earning

per share (EPS) for both companies? [4 m]

d) State which company would have the greatest change in the earnings per share

the most? [4 m]

QUESTION 9

Below is the Statement of Comprehensive Income for Maverick Sdn Bhd for the year
ended 31 December 2017.

Sales RM
Variable Cost 22,000,000
Earning Before Fixed Cost 12,000,000
Fixed Cost 10,000,000
Earnings Before Interest & Taxes 5,000,000
Interest 5,000,000
Earnings Before Taxes
Taxes 700,000
Net Income 4,300,000
1,204,000
3,096,000

a) Using the above data you are required to calculate:

(i) Degree of Operating Leverage [4 m]

(ii) Degree of Financial Leverage [4 m]

(iii) Degree of Combined Leverage [3 m]

(iv) If sales increase by 20% what are the effects on Earnings before

Interest and Taxes (EBIT) and Net Income? [4 m]

b) Prepare a Statement of Comprehensive Income to prove your answer in (a) iv.
[10 m]

48

QUESTION 10

Item Furniture Furniture Furniture
Nyatoh Rumbia Cengal
Average selling price per bed RM300 RM500 RM250
Average variable cost per RM150 RM100 RM170
bed
Sales quantities 70,000 10,000 15,000
Fixed cost RM40,000 RM100,000 RM70,000

Based on the data given, you are required to:

(i) Calculate the Earning Before Interest Tax (EBIT) for each of the furniture

companies above. [12 m]

(ii) Compute the degree of operating leverage at the given sales for the three

companies. [7 m]

(iii) If the sales for each furniture companies decrease by 20%, which company

will face the maximize implications on profits due to the sales decreasing?

Verify your answer. [6 m]

49

QUESTION 11

Oxy Sdn Bhd has recorded its sales of 250,000 units at RM12.00 in the financial year of
2017. The operating costs of the company are as follows:

Operating variable cost RM4.00/unit
Fixed operation cost RM750,000

During the period, Oxy Sdn Bhd paid loan interest of RM125,000. The equity of Oxy Sdn
Bhd is shown as below:

5,000 units of preference shares with annual dividend RM5.00/unit
15,000 ordinary shares issued

Earnings are subject to tax of 28%.

(a) You are required to calculate

Breakeven point in unit and ringgit for the Oxy Sdn Bhd [4 m]

(b) Construct an income statement by calculating earnings per share at

(i) Current sales level [3.5 m]

(ii) Sales is expected to increase 10% [3.5 m]

(c) At the current sales level, calculate:

(i) Degree of Operating Leverage [5 m]

(ii) Degree of Financial Leverage [5 m]

(iii) Degree of Combined Leverage [2 m]

(d) State the effect on earnings per share if the sales is escalated. [2 m]