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Business Finance Question Paper
Business Finance
Course:Bachelor Of Commerce
Institution: Jomo Kenyatta University Of Agriculture And Technology question papers
Exam Year:2011
WI-2-60-1-6
JOMOKENYATTA UNIERSITY OF AGRICULTURE AND TECHNOLOGY
UNIVERSITY EXAMINATIONS 2011/2012
SECOND TWO FIRST SEMISTER EXAMINATION FOR THE DEGREE OF SCIENCE AND TECHNOLOGY
HBC 2119: BUSINESS FINANCE
DATE APRIL, 2012 TIME: 2 HOURS
INSTRUCTIONS: Answer one and any other two questions
Question One
WEB Co. operates a low cost airline and is a listed company. By comparison to its major competitors it is relatively small, but it has expanded significantly in recent years. The shares are held mainly by large financial institutions. The following are extracts from WEB cos. Budgeted statement of financial position at 31st May 2012.
$M
Ordinary share of $ 1 100
Reserves 50
9% Bonds 2015(at nominal value) 200
350
Dividends have grown in the past at 3% a year, resulting in an expected dividend of $ 1 per share to be declared on 31st May 2012.Due to expansion, dividends are expected to grow at 4% a year from 1st June 2012 for the foreseeable future the price per share is currently $10.40 ex divan this is not expected to change before 31st May 2012.
The existing bonds are due to be redeemed at par on 31st May 2015.the market value of these bonds at 1st June 2012 is expected to be redeemed at par on 31st May 2012 is expected to be $100.84(ex interest)per $ 100 nominal. Interest is payable annually in arrears on 31st M ay and is allowable for the tax purposes .tax is payable on profit at a rate of 30%.Assume taxation is payable at the end of the year in which the taxable profits arise.
New finance
The co. has now decided to purchase three additional aircraft at a cost of $10 million each.
The board has decided that the new aircraft will be financed in full by a 8% bank loan on 1st June 2012.
Required:
a) Calculate expected weighted average cost of capital of WEB Co. at 31st May 2012.
(8 marks)
b) Without further calculations, explain the impact of the new bank loan on WEBs cos.
Cost of equity
Cost of debt
Weighted average cost of capital (using traditional model) (8 marks)
c) Explain and distinguish
Bank loan
Bonds
d) Explain why WEB might decide to raise capital in the form of convertible debt issue rather than straight equity or debt.(5 marks)
e) Discuss ways in which the agency problem could be dealt with in public ltd co.(5 marks)
Question two:
Try co. is small, profitable, owner-managed company which is seeking finance for a planned expansion. A local bank has indicated that it may offer a loan of sh.100, 000 at a fixed annual rate of 9%.TFR co. would repay sh.25, 000 of the capital each year for the next four years. Annual interest would be calculated on the opening balance at the start of each year. Current financial information on TFR CO. Is as follows:
Current sales sh 210000
Net profit margin 20%
Annual taxation rate 25%
Average overdraft sh 20000
Average interest on overdraft 10% per year
Dividend payout ratio 50%
Shareholders’ funds sh200000
Market value of non- current assets sh 180000
As a result of the expansion, turnover would increase by sh 450000 per year for each of the next 4 years, while the net profit margin would remain unchanged.
TFR co. currently has no other debt than the existing and continuing overdraft and has no cash or near cash investments he noncurrent assets consists largely of the building from which the co. conducts its business. The current dividend payout ratio has been maintained for several years.
Required:
a) Assuming that TFR is granted the loan, calculate the ratios for TFR co. for each of the next 4 years.
Interest cover
Medium to long term debt/equity ratio
Return on equity
Return on capital (10 marks)
b) Discuss two other financing options available for TFR for the planned expansion. (5 marks)
c) discuss the difficulties commonly faced by small firms such as TFR co. when seeking additional finance.(5 marks)
Question three:
You are presented with the following flow forecasted cash flow data for your organization for the period May 2012 to December 2012.it has been extracted from functional flow forecasts that have already been prepared.
2012
Sales
Purchases
Wages
Overheads
Dividends
Capital expenditure May
Shs
80000
40000
10000
10000 June
Shs
100000
60000
12000
10000
20000 July
Shs
110000
80000
16000
15000
30000 Aug
Shs
130000
90000
20000
15000 Sept
Shs
140000
110000
24000
15000 Oct
Shs
150000
130000
28000
20000
40000 Nov
Shs
160000
140000
32000
20000 Dec
Shs
180000
150000
36000
20000
40000
You are also told the following:
a) Sales are 40% cash 60% credit. Credit sales are paid two months after month of sale
b) purchases are paid month following purchase
c) 75% of wages are paid in current month and 25% the following month.
d) Overheads are paid the month after they are incurred
e) Dividends are paid 3 months after they are declared.
f) Capital expenditure is paid two months after it’s incurred.
g) The opening cash balance is shs. 15000
The managing director is pleased with) the above figures as they show sales will have increased by more than 100% in the period under review. In order to achieve this he has arranged a bank overdraft with a ceiling of shs.50000 to accommodate the increase inventory levels and wage bill for overtime worked.
Required:
a) prepare a cash flow forecast for the six month period July to Dec 2012(5
Marks)
b) comment on your results in the light of managing Directors comments and offer advice.(5 marks)
Question four:
a) explain the following concepts as used in finance:
Time value of money
Annuity due
Financing planning
Price earnings ratio
Capital gain (10 marks)
b) explain the role played by the capital markets in the Kenyan economy.(10 marks)
Question five:
a) ABC co. wishes to borrow a 3 year loan of sh.1000000 at 9% from the bank. The bank requires that ABC Pays the loan on equal end of year installments. How much will the installment be? And prepare loan amortization schedule.(12 marks)
b) You have recently been appointed the finance manager of a reputable manufacturing entity. Briefly explain 4 main decisions that you would be required to make within your department.(8 marks)
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