Hbc2202:Financial Management Question Paper
Hbc2202:Financial Management
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2013
QUESTION ONE (30 MARKS)
a) Although profit maximization has long been considered as the main goal of the firm, shareholder wealth maximization is gaining acceptance amongst most companies as the key goal of the firm. Required: i) Distinguish between the goal of profit maximization and shareholder wealth maximization. (4 marks) ii) Explain THREE limitations of the goal of profit maximization. (6 marks) b) Explain FIVE factors that should be taken into account by a business in making the choice between financing by short-term or long-term sources. (10 marks) c) Discuss the functions of a Financial Manager. (10 marks)
QUESTION TWO (20 MARKS)
a) Isiolo Limited has negotiated a Kshs.30 million loan for eight years from ABN Bank Limited. The interest rate will be 14% per annum on the outstanding balance of the loan. The principal and the interest will be repaid in eight equal year-end instalments.
Required:
i) Prepare a loan repayment schedule. (15 marks) b) What will Kshs.750,000 accumulate to in 10 years at an interest rate of 4.5% compounded semi-annually. (5 marks)
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QUESTION THREE (20 MARKS)
a) Maua Limited has approached you for advise on an equipment to be purchased for use in a five year project. The investment will involve an initial cash outlay of Shs.1,400,000 and the expected cash flow is as given below:
Year Cash inflows (Shs.) Cash Outflows (Shs. ) 1 800,000 65,000 2 750,000 80,000 3 900,000 50,000 4 1,200,000 55,000 5 1,100,000 70,000
The equipment is to be depreciated on a straight line basis over the duration of the project with a nil residual value. The cost of capital and the tax rate are 12% and 30% respectively.
Required:
i) Calculate the Net Present Value (NPN) of the investment. (10 marks) b) (10 marks)
QUESTION FOUR (20 MARKS)
a) Drew investment limited has the following capital structure.
Type of Capital Amount KShs. 8% Preference share 2,000,000 7% Debenture 4,000,000 Equity 1,400,000
Additional information:
1. Preference shares are sold at par. 2. The 7% debentures are perpetual debentures and are sold at par. 3. Ordinary share is selling at a current market price of Kshs.120 and paying a current dividend of Kshs.9 per share, which is expected to grow at the rate of 8%. 4. Tax rate is at 50%.
Required:
Calculate:
i) The after tax cost preference share, debentures and equity. (5 marks) ii) The weighted average cost of capital. (10 marks)
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b) Explain FIVE differences between weighted average cost of capital and marginal cost of capital. (5 marks)
QUESTION FIVE (20 MARKS)
a) Discuss the agency problems that might exist between shareholders and the auditor. What are solutions to the conflict? (12 marks) b) Required: i) Discuss the limitation of the above financing policy. (8 marks)
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