Msf 506 Advanced Theory Of Finance Town Campus Question Paper
Msf 506 Advanced Theory Of Finance Town Campus
Course:Masters Of Science In Commerce Finance And Accounting Specialization
Institution: Kca University question papers
Exam Year:2014
UNIVERSITY EXAMINATIONS: 2013/2014
EXAMINATION FOR THE MASTER OF SCIENCE COMMERCE
FINANCE AND ACCOUNTING SPECIALIZATION
MSF 506 ADVANCED THEORY OF FINANCE TOWN CAMPUS
DATE: AUGUST 2014
TIME: 3 HOURS
INSTRUCTIONS: Answer Question One and any other THREE questions
QUESTION ONE (31 marks)
Braxton financials ltd is a company specializing in giving financial advisory to corporate
organization in Kenya. The company has been in operation for the last seven years and it plans to
expand to other East African countries with the head office in Kenya. The company therefore
plans to recruit more staff at the same time penetrating other East African markets to be able to
grow its customer base to boost its income. The company is also worried about the recent
increase in terrorist attacks in the East Africa region
Required
a.
Explain any five benefits East African countries will derive from Braxton Financial Ltd
as a result of its expansion.
b.
(5 Marks)
Mention five functions the management of Braxton Financial Ltd must perform to ensure
proper financial stewardship within the organization
c.
(5 Marks)
Highlight five factors that may cause conflict of interest between owners of Braxton
Financial Ltd and various East African governments
(5 Marks)
d. Explain five ways the conflict of interest in (c) above can be resolved
(5 Marks)
e. Citing relevant examples, explain how recent terrorist attacks within East African region
may affect the operations of Braxton Financial Ltd
1
(5 Marks)
f.
How can the management of the company ensure that all the subsidiary branches in the
other East African countries properly coordinate with the head office in Kenya to boost
profitability
(6 Marks)
QUESTION TWO (23 MARKS)
a) Discuss three methods of stock valuation and their limitations
(14 Marks)
b) The investment portfolio of Mapeni Limited consists of shares in five companies
operating in different industries.
Company
Amount Invested Stock beta
(Sh. million) Coefficient
A Ltd. 160 0.5
B Ltd. 120 2.0
C Ltd. 80 4.0
D Ltd. 80 1.0
E Ltd. 60 3.0
The risk free rate (Rf) is 8%. The market returns have the following probability
distribution for the next period.
Market return % Probability
10 0.1
12 0.2
13 0.4
16 0.2
17 0.1
Required:
(i) Compute the expected return from the market (Rm). (2 Marks)
(ii) Calculate the beta coefficient for the portfolio (ßp). (4 Marks)
(iii) Determine the equation for the security market line. (3 Marks)
2
QUESTION THREE (23 MARKS)
a)
Gome Drug Products Ltd (GDPL) is faced with several possible investment projects. For
each, the total cash outflows required will occur in the initial period. The cash outflows
expected net present values and standard deviations are as follows:
Project
Cost Sh. ‘000’
Net present value
Standard deviations
A 10,000 1,000 2,000
B 5,000 1,000 3,000
C 20,000 2,500 1,000
D 1,000 500 1,000
E 50,000 7,500 7,500
All projects have been discounted at a risk-free rate of 8% and it is assumed that the
distribution of their possible net present values are normal.
REQUIRED:
(a)
(i)
Construct a risk profile for each of these projects in terms of the profitability index.
(2 Marks)
(ii)
Ignoring size problems do you find some projects clearly dominated by others?
(2 Marks)
(iii) What is the probability that each of the projects will have a net present value?
(2 Marks)
b)
Write explanatory notes on
(i) Common Shares
(ii) Debentures
(iii) Term Loans
(iv) Preference Shares
(v) Warrants and Convertible Securities
(vi) Venture Capital
(vii) Lease Financing
(7 Marks)
c) Explain why valuation of ordinary shares is complicated (5 Marks)
d) State the out the difference between ordinary shares and preference shares (5 Marks)
3
QUESTION FOUR (23 MARKS)
a)
With the help of a well labeled diagram distinguish between an efficient portfolio and an
optimum portfolio.
b)
(6 Marks)
Mr. K. Patel has an investment capital of Sh.1, 000,000. He wishes to invest in two
securities, A and B in the following proportion; Sh.200, 000 in security A and Sh.800,
000 in security B.
The returns on these two securities depend on the state of the economy as shown below:
State of Economy
Probability
Returns on Returns on
Security A Security B
Boom 0.4 18% 24%
Normal 0.5 14% 22%
Recession 0.1 12% 21%
Required:
i) Compute the expected portfolio return
(2 Marks)
ii) Determine the correlation coefficient between security A and security B.
(6 Marks)
iii) (2 Marks)
iv)
c)
Calculate the portfolio risk. Calculate the reduction in risk due to portfolio diversification (4 Marks)
Mention any three difficulties experienced in capital budgeting.
(3 Marks)
QUESTION FIVE (23 MARKS)
a) Discuss the goals of Financial Management and state which is the best goal (5marks)
b) A company is considering two mutually exclusive projects requiring an initial cash outlay
of Shs.10,000 each and with a useful life of 5 years. The company required rate of return is
10% and the appropriate corporate tax rate is 50%. The projects will be depreciated on a
straight line basis. The before depreciation and taxes cash flows expected to be generated
by the projects are as follows.
YEAR
1 2 3 4 5
Project A Shs 4,000 4,000 4,000 4,000 4,000
Project B Shs 6,000 3,000 2,000 5,000 5,000
4
Required:
Calculate for each project
(i) The payback period
(ii) The average rate of return
(iii) The net present value
(iv) Profitability index
(v) The internal rate of return
Which project should be accepted? Why?
(18 Marks)
QUESTION SIX (23 MARKS)
a.
Discuss the assumptions of consistency and transitivity as advanced by the ordinalists
(5 Marks)
b.
Using a well-labelled diagram, explain the consumer equilibrium under the ordinalists.
(5 Marks)
c. State and explain the criticisms against the cardinalist theory of consumption. (5 Marks)
d. Explain the consumer equilibrium under the cardinalists approach. (5 Marks)
e. Citing relevant examples, explain the term marginal propensity to consume. (3 Marks)
5
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