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Business Finance Ii Question Paper

Business Finance Ii

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2008/2009
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR
COMMERCE
BAC 204: BUSINESS FINANCE II

DATE: Wednesday 26th August, 2009

INSTRUCTIONS
Answer ALL questions.
Question One

TIME: 11.00 a.m. – 1.00 p.m.

a)Describe the determinants of an optimum capital structure. [5 marks]
b)Kilaguni Enterprises Ltd is considering the following six projects;
Project Cost (Ksh.000) NPV (ksh.000)
1 1000 210
2 6000 1560
3 5000 850
4 2000 260
5 2500 500
6 500 95
Required:

i)Calculate the profitability index of each project and rank them in some
order. [7 marks]

ii)Which projects (combination) would you choose if the total available
funds are ksh.8000000? [8 marks]

Question 2
An equipment X has a cost of ksh.75000 and net cash flow of ksh.20000 per year
for six years. A substitute equipment Y would cost ksh.50000 and generate net
cash flow of ksh.14000 per year for six years. The required rate of return of both
equipments is 1 per cent.
Required:

i)Calculate the IRR and NPV for each equipment.[16 marks]

ii)Which equipment should be accepted and why?[4 marks]

Question 3

a)“An issue of bonus shares represents a distribution of shares in addition to the
cash dividends to the existing shareholders”. Explain the statement and discuss
the benefits that accrue from the bonus shares issuance to the shareholders and the
company. [9 marks]

b)“A share split is a method of increasing the number of outstanding shares through
proportional reduction in the par value of the share”. Comment on the concept of
“reverse splits”. [3 marks]

Question 4

a)Voi Ltd needs ksh.1000000 for expansion. The expansion is expected to yield an
annual EBIT of ksh.160000. In choosing a financial plan, Voi Ltd has an
objective of maximizing earnings per share. It is considering the profitability of
issuing equity shares and raising debt of ksh.100000, or ksh.400,000 or
ksh.600,000. The current market price per share is sh.25 and is expected to drop
to ksh.20 if the funds are borrowed in excess of ksh.500000. Funds can be
borrowed at the rates indicated below:
i) Up to ksh.100000 at 8%
ii) Over ksh.100000, up to ksh.500000 at 12%
iii) Over ksh.500000 at 18%
Assume a tax rate of 50 per cent.
Required:

a) Determine the EPS for the three financing alternatives. [15 marks]

b)“Cash flow should not be confused with profit. Changes in profits do not
necessarily mean changes in cash flows”. Explain the statements.[5 marks]

………………..

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Business Finance Ii Question Paper

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