Bbm 410: Financial Management Question Paper
Bbm 410: Financial Management
Course:Bachelor Of Business Management
Institution: Moi University question papers
Exam Year:2014
BBM 410 FINANCIAL MANAGEMENT.
INSTRUCTIONS TO CANDIDATES: ANSWER ALL IN SECTION AND ANY TWO QUESTIONS IN SECTION B
Question 1
a) Discuss the following financial terms used in financial management giving practical examples
i) SOCIAL RESPONSIBILITY (4marks)
ii) CORPORATE GOVERNANCE (4marks)
iii) AGENCY THEORY (4marks)
b) Define YIELD CURVE and describe at least three theories that attempt to explain the nature of yield curve (13marks)
Question 2
JUBILEE CORPORATION intends to CONTINUE DOMINATING THE POLITICAL ARENA by investing in an ambitious and very risky project. The available data in the market indicate that return on 90-day government securities is 90% and aggregate market expected return is 19%. The covariant of this project returns and returns on the market is estimated at 4.5% and market variance at 3%
The project is to cost a cool Ksh. 100 million with annual net cash inflows of Ksh 25 million p.a for its 5 years economic life.
Required:
a) Determine viability of the project under Risky scenario (10 marks)
b) Determine viability under the CERTAINTY EQUIVALENT APPROACH (15 marks)
SECTION B ANSWER ANY TWO QUESTIONS
Question 3
a) Define CAPITAL RATIONING and Distinguish SOFT CAPITAL RATIONING from HARD CAPITAL RATIONING and suggest factors that are likely to influence capital rationing in a modern firm. (7marks)
b) A firm has the following independent projects for consideration in the current year 0
PROJECT INITIAL COST YEAR 1 YEAR 2 YEAR 3
A KSH. 4000000 4,000,000 4,000,000 4,000,000
B 20,000,000 20,000,000 10,000,000 5,000,000
C 30,000,000 30,000,000 20,000,000 15,000,000
D 10,000,000 5,000,000 4,000,000 3,000,000
The company’s opportunity cost of capital is 10%
i) Evaluate the viability of the project using NPV criterion (5 marks)
ii) Evaluate the viability of the project using P.I criterion (5 marks)
iii) Suppose the firm has fixed its current year’s capital expenditure ceiling at Ksh. 80 million, show which projects should be undertaken and find the effect of these undertaking on the value of the firm (8marks)
Question 4
KAMATUSA LTD. Wishes to undertake a project to boost its current production facilities by investing in a K£ 2000,000 project. Finance towards this project is to be sourced from a loan of K£100,000 at 14% at an issue cost of K£10,000 and the balance through an issue of rights share at an issue cost of K£50,000. The existing capital structure of 50% debt and 50% equity is to remain unchanged even after injecting of this company requires a 2.0% return. Corporation tax is pegged at 40%. The project cash flows net of tax are estimated at K£740,000 p.a for years of the project’s economic life.
a) determine the viability of the project under Adjusted Present Value (APV) criterion (17 marks)
b) suggest any tangible prosand cons of APV over the traditional NPV (8marks)
Question 5
“Dividend policy that a firms settles may or may not affect the value of its shares.” In the light of this, discuss the two conflicting schools of thought on dividend policy (25marks)
Question 6
MAMBO LEO CORPORATION wishes to add to its existing production facilities by investing in a project whose initial cost is estimated at Ksh 2,000,000. The project is to be financed by aloan of Ksh 1,000,000 at an interest of 15% p.a. issue costs of this loan are estimated at Ksh. 50, 000. The balance of the initial cash outlay is vide issue of Rights shares at an issue cost of Ksh. 30,000. The debt-equity ratio will remain at 1:1 even after injection of this project. Annual net cash flows are to be Ksh. 670,000 p.a for four years. The cost of equity capital for this levered firm is 20%. The company is in the 50% tax bracket.
a) Determine the Adjusted Present Value of the project and advice on its viability. (17marks)
b) Highlight the pros and cons of APV over the traditional NPV (8marks)
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