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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:2010
KENYA METHODIST UNIVERSITY
END OF THIRD TRIMESTER 2010 EXAMINATIONS
FACULTY : BUSINESS AND MANAGEMENT STUDIES
DEPARTMENT : ACCOUNTING AND FINANCE
COURSE CODE : BUSS 321
COURSE TITLE : FINANCIAL MANAGEMENT 1
TIME : 2 HOURS
INSTRUCTIONS
• Answer Question ONE and any Other TWO Questions
Question 1
a) Briefly outline both the managerial and routine functions of a financial manager. (5marks)
b) ABC ltd is considering investing in two projects A and B. Both require an initial investment of Kshs 10,000. The expected cash flows for the next four years are as follows:
Year Project A (Kshs) Project B (Kshs)
1 6,000 5,000
2 5,000 5,000
3 4,000 5,000
4 5,000 5,000
Company’s cost of capital is 6%
Required:
Calculate each of the projects’
i) Payback period (PbP) (2marks)
ii) Net present Value (NPV) (6marks)
iii) Internal rate of return (IRR) (6marks)
iv) Which project(s) should the company invest in if they are independent? (1mark)
v) Which project(s) should the company invest in if they are mutually exclusive? (1mark)
c) The present capital structure of a company comprises of 50,000 ordinary shares @ sh40 per share. The firm wants to finance the purchase of its additional assets by raising additional capital of Kshs 500,000. The alternative sources of finance available to the company are:
i) To issue 12,500 ordinary shares at sh40 each
ii) To borrow Kshs. 500,000 at interest rate of 8%
iii) To issue preference shares 2,500 at Kshs 200 each at 8% rate of dividend.
After acquiring the additional assets the company’s earnings is Kshs 625,000. Assuming that the company’s tax rate is at 50%, calculate the effects of earnings per share under the above modes of financing and advice on the best alternative. (10marks)
Question 2
a) XYZ Ltd has the following capital structure KSHS
5,000 equity shares of Kshs. 100 each 5,000,000
10% preference shares 200,000
11% Debentures 500,000
The current market price of the share is Kshs 105. The company is expected to declare a dividend of Kshs 10 at the end of the current year, with an expected growth rate of 10%. The applicable tax rate is 50%.
i) Find out the cost of each specific capital and the WACC (10marks)
ii) Assuming that the company can raise 3,000,000 12% debentures, find out the new WACC if
a) Dividend is increased from Kshs 10 to 12
b) Growth rate is reduced from 10% to 8% and
c) Market value is reduced to Kshs 95 (10marks)
Question 3
a) Briefly discuss the factors that influence the working capital needs for a company. (10marks)
b) The demand for a commodity is 30,000 p.a. at a steady rate. It costs Kshs 150 to place an order and Kshs 5 to hold a unit for a year. Find the;
i) Batch size to minimize inventory costs
ii) The number of orders placed per year
iii) The total costs per year (10marks)
Question 4
Write short notes on the following:
a) Agency theory and problem
b) Profit maximization Vs wealth maximization
c) Role of the capital market authority in a developing country like Kenya
d) Limitations of Ratio analysis (20marks)
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