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Dfm 200 Financial Management Question Paper
Dfm 200 Financial Management
Course:Diploma In Business Management
Institution: Kca University question papers
Exam Year:2014
UNIVERSITY EXAMINATIONS: 2013/2014
STAGE V ORDINARY EXAMINATION FOR THE DIPLOMA IN
BUSINESS MANAGEMENT
DFM 200 FINANCIAL MANAGEMENT
DATE: APRIL 2014
TIME: 1 1/2 Hours
INSTRUCTION: Answer any THREE questions
QUESTION ONE: (20 MARKS)
a) A project manager is considering taking a project with a cash outlay of Sh. 30,000,000. The
company’s required rate of return is 10% and the inherent risk is 6%. The following
information represent the forecast cash flows and the certainty equivalent factors:
Certainty equivalent
Year
Cash flow Sh.000
coefficient
2008 50,000 0.8
2009 50,000 0.7
2010 50,000 0.5
2011 50,000 0.9
2012 50,000 0.6
Required
i.
Determine the projects NPV before adjusting for certainty equivalent coefficient
(5 Marks)
ii.
Determine the projects NPV after adjusting for certainty equivalent coefficient
(10 Marks)
iii.
Differentiate between financial risk and business risk as used in Finance
(5 Marks)
QUESTION TWO: (20 MARKS)
a) Describe the specific assumptions of capital structure used in traditional view of capital
structure theory
(5 Marks)
b) The following information is available from two similar companies regarding their capital
structure. Study it and answer the question underneath.
X ltd
Profit before interest
Y ltd
600,000 600,000
- (80,000)
6% debt interest
Profit after tax 600,000 520,000
Cost of equity 10% 11%
An investor holds 10% of investment in firm Y.
Required:
i. Determine the value of each of the firms above (5 Marks)
ii. Where possible, show how the investor will practice the arbitrage process (10 Marks)
QUESTION THREE: (20 MARKS)
a) An organization has a fixed annual purchase cost of Sh. 560,000 for a commodity it buys for
Sh. 56 per item. The carrying cost is set to be 10% of the purchase cost per unit while the
transportation cost is Sh. 200. The supplier of the commodity allows a discount of 10% on
the purchase cost per unit if the purchaser increases its current purchase level by 500 units.
Required:
i. Advice the organization on whether it should continue with its current policy or to adopt
the proposed policy
(10 Marks)
b) A company estimates that its standard deviation of credit sales collection is Sh. 400,000. The
market interest rate per annum is 14%. The management estimates that its transaction cost is
Sh. 500 and the lower cash limit is Sh. 1,000,000, determine:
(i). The Company’s target cash level (4 Marks)
(ii). The upper cash limit for the company (2 Marks)
(iii). The average cash balance of the company (4 Marks)
QUESTION FOUR: (20 MARKS)
a) Discuss at least FIVE tactics which an organization and its management can use to avoid
hostile takeover
(10 Marks)
b) State and describe at least five factors affecting capital structure of a firm
(10 Marks)
QUESTION FIVE: (20 MARKS)
a) Differentiate between Financial leverage and Combined leverage
(5 Marks)
b) The following information is available for a company for the year ended 31 December 2010:
- Sales for the year
6,000,000
- Variable cost
1,000,000
- Fixed cost for the year
2,000,000
- Number of units sold during the year
1,000
- Ordinary share capital
200,000
- 5% Preference share capital
300,000
- 5% debenture capital
1,000,000
- The return on ordinary dividend is decided at 1%. However, this varies for every
period and depends on the operating profit for the company at that period.
- Corporate tax rate is provided at 30% of the net profit.
- Operating profit for the year was reported at Sh. 10 Million
Required:
i. Determine the operating leverage for the company (5 Marks)
ii. Determine the financial leverage for the company (5 Marks)
iii. Determine the combined leverage for the company (5 Marks)
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