Cfm 101 Business Finance (Day+Eve) Question Paper
Cfm 101 Business Finance (Day+Eve)
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
1
UNIVERSITY EXAMINATIONS: 2010/2011
FIRST YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 101 BUSINESS FINANCE (DAY+EVE)
DATE: DECEMBER2011 TIME: 2 HOURS
INSTRUCTIONS: Answer All The Questions
Question One
(a) What economic advantages are created by the existence of:
(i) Primary markets. (3 Marks)
(ii) Secondary markets. (3 Marks)
(iii) Portfolio management firms. (3 Marks)
(b) Outline two disadvantages of the shareholders wealth maximization goal. (4 Marks)
(c) The scope of business finance can be explained by the functions of a finance manager.
Discuss. (4 Marks)
(d) A debenture is denoted as 12% Sh.1000, 3 years debenture. Determine the value of this
debenture assuming the cost of capital is 10%. (3 Marks)
(e) Discuss 5 limitations of the profit maximization goal. (10 Marks)
Question Two
(a) Explain why the weighted average cost of capital of a firm that uses relatively more debt
capital is generally lower than that of a firm that uses relatively less debt capital.
(6 Marks)
2
(b) The total of the net working capital and fixed assets of Faida Ltd. as at 30 April 2003 was
Sh.100 million. The company wishes to raise additional funds to finance a project within
the next one year in the following manner.
Sh.30M from debt
Sh.20M from selling new ordinary shares.
The following items make up the equity of the company.
Sh.
3,000,000 fully paid up ordinary shares 30,000,000
Accumulated retained earnings 20,000,000
1,000,000 10% preference shares 20,000,000
200,000 6% long term debentures 30,000,000
The current market value of the company’s ordinary shares is Sh.30. The expected
dividend on ordinary shares by 30 April 2004 is forecast at sh.1.20 per share. The average
growth rate is expected to be maintained in the foreseeable future. The debentures
currently sell for Sh.100 and will mature in 100 years. The preference shares were issued
six years ago and still sell at their face value. Assume a tax rate of 30%.
Required:
(i) The expected rate of return on ordinary shares. (2 Marks)
(ii) The effective cost to the company of:
• Debt capital (2 Marks)
• Preference share capital (2 Marks)
(iii) The company’s existing weighted average cost of capital. (4 Marks)
(iv) The company’s marginal cost of capital if it raised the additional Sh.50,000,000 as
intended. (4 Marks)
Question Three
(a) The balance sheet of X Limited as at 31/12/X1 was as follows:
Net fixed assets 12,000
Current assets 4,000
3
16,000
Ordinary share capital 8,000
Retained earnings 5,000
12% debt 2,000
Current liabilities 1,000
16,000
Additional information
1. For the year 20X1 sales amounted to £20,000. The sales are expected to increase
by 40% during the year 20X2.
2. The after tax profit on sales is 15%.
3. The firm has a dividend payout ratio of 70% which is expected to be maintained
during the year 20X2.
Required:
(i) Determine the external financial requirement of the firm. (7 Marks)
(ii) Prepare a proforma balance sheet as at 31/12/20X2. (5 Marks)
(iii) State any assumptions made in your computations above. (2 Marks)
(b) Outline any 3 methods of forecasting. (6 Marks)
Question Four
(a) Explain the term venture capital. (2 Marks)
(b) Why is the market for venture capital not yet well developed in Kenya or your country?
(18 Marks)
Question Five
(a) An investor has received conflicting investment advice from 3 advisors. He has £1000 he
intends to invest and the investment advice given is as follows:
1. Invest in Equity Bank which pays interest at 12% p.a. semi-annually.
2. Invest in finance bank which pays interest at 10% p.a. after every 4 months.
3. Invest in savings bank which pay interest at 8% p.a. on a monthly basis.
His investment horizon is one year. Classify to him the most valuable investment
opportunity and for this opportunity compute the effective interest rate. (8 Marks)
(b) Outline 6 limitations of ratio analysis. (12 Marks)
More Question Papers
Exams With Marking Schemes