Dfm 101 Business Finance Question Paper
Dfm 101 Business Finance
Course:Diploma In Business Management
Institution: Kca University question papers
Exam Year:2014
UNIVERSITY EXAMINATIONS: 2013/2014
STAGE IV ORDINARY EXAMINATION FOR THE DIPLOMA IN
BUSINESS MANAGEMENT
DFM 101 BUSINESS FINANCE
DATE: AUGUST 2014
TIME: 1 1/2 Hours
INSTRUCTION: Answer any THREE questions
QUESTION ONE: (20 MARKS)
Bidii Limited is considering which of the two mutually exclusive projects to invest in. each
project will generate cash flows over a period of 5 years.
Cash flow
CPM
PERT
cost 12,000,000
14,000,000
Yr 1 1,200,000 3,600,000
Yr 2 3,600,000 4,800,000
Yr 3 4,000,000 6,000,000
Yr 4 6,000,000 3,600,000
Yr 5 4,800,000 3,200,000
Bidii’s cost of capital is 12% per annum.
Required:
a) Compute the net present value of each machine. (8 Marks)
b) Compute the profitability index for each machine (4 Marks)
c) Advise the company on which on which project to implement (2 Marks)
d) Outline any three advantages and any three disadvantages of the Net Present Value method
of project appraisal
(6 Marks)
1
QUESTION TWO: (20 MARKS)
a)
Nahashon Yuma borrowed Sh.160, 000 from Pesa Commercial Bank at an interest rate of
10% per annum compounded quarterly. The loan is to be amortised using reducing
balance method and be repaid within a duration of two years. The instalments are payable
at the end of the period.
Required:
A loan amortization schedule
b)
(8 Marks)
Distinguish between profit maximization goal and shareholders wealth maximization
goal.
c)
(2 Marks)
Although non financial objectives are important, they sometimes suppress the ability of
the firm to achieve financial objectives of the firm. They are however indispensable
because a firm must always interact with various stakeholders.
Required: Explain any five non-financial goals that a firm may seek to pursue.
(10 marks)
QUESTION THREE: (20 MARKS)
The management of Ngomongo wants to establish the amount of external financial needs for the
next three years. The balance sheet of the firm as at 31 December 2012 is as follows:
Shs. ‘000’
Net fixed assets 312,000
Stock 96,000
Debtors 72,000
Cash
Total assets
18,000
498,000
Financed by:
Ordinary share capital 210,000
Retained earnings 88,000
12% long-term debt 50,000
Trade creditors 90,000
Accrued expenses
60,000
2
498,000
For the year ended 31 December 2012 sales amounted to shs. 600,000,000. The firm projects that
the sales will increase by 15% in year 2013.
The firm intends to use an after-tax profit on sales rate of 8% per annum.
The firm intends to maintain its dividend pay out ratio of 80%. Assets are expected to vary
directly with sales while trade creditors and accrued expenses form the spontaneous sources of
financing. Any external financing will be effected through the use of notes payable.
Required:
a) Determine the amount of external financial requirements for year 2013 (10 Marks)
b) i. A proforma balance sheet as at 31 December 2013 (6 Marks)
ii. State the fundamental assumption made in your computations in (a) and (b) i. above.
(4 Marks)
QUESTION FOUR: (20 MARKS)
Ushindi Limited presented the following financial statements on 30 June 2013:
Income statement for the year ended 30 June 2013
Shs.
Sales (all on credit)
4,000,000
Operating profit
440,000
Less: debenture interest
40,000
400,000
Corporation tax
176,000
224,000
Ordinary dividends proposed 107,200
Retained profit 116,800
Balance sheet as at 30 June 2013
Shs.
Shs.
Shs.
Fixed assets:
Freehold property (Net book value) 480,000
Plant and machinery (Net book value) 800,000
Motor vehicle (Net book value) 200,000
3
Furniture and fittings
200,000
1,680,000
Current assets:
Stock
1,000,000
Debtors 400,000
Investment 120,000
1,520,000
Current liabilities:
Trade creditors 238,400
Bank overdraft 878,400
Corporation tax 176,000
Dividend payable 107,200
(1,400,000)
120,000
1,800,000
Financed by:
Authorized share capital: 800,000 sh. 1
ordinary shares
800,000
Issued and fully paid: 400,000 shs. 1
ordinary shares 400,000
Capital reserve 200,000
Revenue reserve 800,000
Loan capital: 400,000 shs. 1 10% debentures 400,000
1,800,000
Additional information:
1. An analysis of the industry in which the company operates reveals the following
industrial averages:
Current ratio 1.5:1
Quick ratio 0.8:1
2. The purchases for the year were sh. 2,160,000 while the cost of sales was sh. 3,000,000.
3. The market price of the company’s shares as at 30 June 2013 was sh. 5.
4
Required:
a)
Compute the following ratios for Ushindi Limited:
i. Current ratio. (2 Marks)
ii. Quick ratio (2 Marks)
iii. Debtors turnover (2 Marks)
iv. Total assets turnover. (2 Marks)
v. Net profit margin (2 Marks)
vi. Debtors collection period (2 Marks)
b) Compare the company’s liquidity performance with that of the industry. (4 Marks)
c) Outline four limitations of the use of ratios as a basis of financial analysis. (4 Marks)
QUESTION FIVE: (20 MARKS)
a)
Following is the capital structure and cost of each source of finance of ABC ltd.
Source Cost Book value Debt 8% 300,000 270,000
Preference capital 14% 200,000 230,000
Equity Capital 17% 500,000 750,000
1,000,000
Market value
1,250,000
Calculate the weighted Average Cost of Capital (WACC) using book value weights and
market value weights.
(8 Marks)
b) Explain any three limitations of weighted average cost of capital
(6 Marks)
c) Explain the factors that influence the type of finance sought by a manufacturing company
(6 Marks)
5
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