FIN2102: Clifford Asnees notes that while “critics of international diversification observe that it does not protect investors against short-term market crashes: Financial Management, Individual Assignment, INTI, Malaysia



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FIN2102: Financial Management

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Q2. (a) Clifford Asnees notes that while “critics of international diversification observe that it does not protect investors against short-term market crashes because markets become more correlated during downturns, this observation misses the big picture’. Over longer horizons, underlying economic growth matters more than short-lived panics with respect to returns, and international diversification does an excellent job of protecting investors. Comment on this statement.

(b) i) As the accountant for Prolific Sdn. Bhd., you will be doing the analysis of the company’s financial position and present the report to the CEO. While
preparing for the presentation, you realised that the information of the
company’s net profit after tax is missing for the recent year. Therefore, you
are required to find the company’s net profit after tax based on the following
available information in order to complete the report.

Return on total assets = 3%
Total asset turnover = 0.4
Cost of goods sold = RM135,000
Gross profit margin = 0.25

(b) ii) Among the various profitability ratios, which one do you think is most likely of greatest concern to the investing public? Explain.

(c) When assessing the potential return on investment, consider all the elements at play, including yield, capital gain, risk, expenses and taxation. Return comprises both income and capital gain, less expenses. There are also significant tax implications when purchasing an investment property. Risk plays a part when you consider the worst-case scenario and whether or not you can afford it. Broadly speaking, investment decision relies on making most of its return from the project activity, whereas residential investments tend to rely more heavily on making a capital gain.

Calculating your figures before you invest is critical to make sure your investment return is worth the risk. Thus, definition of the required rate of return is the minimum that a project or investment must earn before company management approves the necessary funds or renews funding for an existing project. Give your comment on the above statement.

(d) Discuss TWO (2) types of agency costs in an agency problem and provide an example for each.

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