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Buss 321: Financial Management 1 Question Paper
Buss 321: Financial Management 1
Course:Financial Management I
Institution: Kenya Methodist University question papers
Exam Year:2007
KENYA METHODIST UNIVERSITY
END OF SECOND TRIMESTER 2006/2007 EXAMINATIONS
FACULTY : BUSINESS STUDIES AND MANAGEMENT
DEPARTMENT : BUSINESS ADMINISTRATION
COURSE CODE : BUSS 321
COURSE TITLE : FINANCIAL MANAGEMENT 1
TIME : 3 HOURS
INSTRUCTIONS
• Answer Question ONE and any other Three Questions
Question 1
a) Explain the meaning of the tern “agency problem” and highlight five different ways the conflict between management and shareholders may be resolved.
(10marks)
b) Explain five practical difficulties faced by small and micro enterprises (SMEs ) in obtaining finance from the financial markets. (15marks)
Question 2
a) Explain the meaning of each of the following:
i) Primary markets
ii) Secondary market
iii) Over the counter market
iv) Jobbers (8marks)
b) KEMU enterprises intends to invest in a machine whose cash outlay is sh.5,000,000. The machine is expected to have a useful economic life of 5 years with a scrap value of sh.800,000. The following are number of units produces and sold during the 5 years useful economic life:
Year Number of units produced & sold
1 10,000
2 8,000
3 7,600
4 6,000
5 4,500
Additional information:
i) The unit’s variable cost is sh.250 per unit.
ii) The selling price per unit is sh.650.
iii) The fixed production cost per annum is sh.700,000 excluding depreciation.
iv) The company uses straight line methods in calculating depreciation.
v) The cost of capital is 12% per annum.
vi) The corporation tax rate is 30%.
Required:
i) Calculate the net present value(NPV) of the machine.
ii) Calculate the payback period of the machine.
iii) Advise the management whether the machine is viable using the net present value method. (17marks)
Question 3
a) Highlight five difficulties an investor may face in identifying an appropriate investment to invest in. (5marks)
b) The following is the capital structure of Zebu Ltd. as at 31st December 2006
Shs.
Ordinary share capital (par value sh.30) 4,800,000
5% preference share capital (par value sh.20) 1,600,000
12% Debenture stock (issue price sh.100) 800,000
14% Bank loan 600,000
7,800,000
Additional information:
i) The following is the market price of the shares and debentures
- Ordinary shares sh.36
- 5% preference shares sh.18
- 12% debentures sh.19
ii) The company has maintained a dividend per share of sh.4.20 over the past 10 years and is expected to continue in future years.
iv) Corporation tax rate is 30%.
Required:
i) Calculate the cost of each source of capital.
ii) Determine the weighted average cost of capital (WACC) for the company.
(20marks)
Question 4
a) Explain four benefits which have accrued to investors as a result of introduction of central depository system. (CDS) (8marks)
b) Wamwea intends to accumulate sh.1,000,000 at the end of 4 years from now. Calculate the amount of money he should deposit a the end of each year, if the bank is offering an interest rate of 8% per annum. (4marks)
c) Soi Ltd intends to invest in a project whose cost is sh.9,600,00. The project is expected to generate equal annual cash in flows of sh.2,200,000 during its 8 years useful life.
Required:
Calculate the internal rate of return (IRR) of the project. (5marks)
d) Highlight the advantages and disadvantages of internal rate of return (IRR) as a method of evaluating investments. (8marks)
Question 5
a) Explain five reasons why working capital management is important to a firm.
(10marks)
b) Explain five factors an investor may take into consideration when designing an optimum capital structure of the company. (15marks)
Question 6
a) Discuss the various steps involved in capital budgeting process. (10marks)
b) The following financial statements were extracted from the books of Opendi ltd. for the year ended 31st December 2006.
Profit & Loss account
Sh.”million”
Turnover 400
Profit before tax 50
Taxation 15
Profit after tax 35
Dividend 10
Retained earning 25
Balance sheet
Sh.”million”
Fixed assets 190
Current assets(net of current liabilities of sh.12m) 40
230
Issued ordinary share capital @ sh.20 80
Reserves 120
Bank loan 30
230
Additional information:
i) Current assets comprises:
Stock sh.20,000,000
Cash 18,000,000
Debtors 2,000,000
40,000,000
ii) The cost of goods sold was sh.120,000,000.
Required:
Calculate the following ratios:
i) Net profit margin
ii) Current ration
iii) Acid test ration
iv) Debt ration
v) Return on investment. (15marks)
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