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Hbc2202:Financial Management Question Paper
Hbc2202:Financial Management
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2014
QUESTION ONE (30 MARKS)
a) Discuss the role of a finance manager in a publicity quoted company b) The following is the capital structure of Nyote Enterprises.
Shs. Ordinary shares of Sh. 10 each 600,000 9% preference shares of 10 each 600,000 14% debentures 400,000 15% loan 400,000
Additional information; i. Ordinary shares affect dividend at the rate of 6% ii. The market value of ordinary shares is shs. 18 iii. The market value of preference share is 22 and debentures shs. 102 iv. The growth rate for the company is 3% v. Corporation tax is at the rate of 30%
REQUIRED:
Compute the Weighted Average Cost for Capital WACC) using the market value weights.
QUESTION TWO (20 MARKS)
a) What factors influence the cost of capital in any given economy? (5Marks) b) What practical considerations should directors of a company take into account in determining a dividend policy? (8Marks)
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c) Financial management activities are the back bone of any business organization. Explain. (7Marks)
QUESTION THREE (20 MARKS)
a) Define the term capital structure ( 4 Marks) b) Two companies Niki Ltd and Mimi Ltd have the same level of financing but ksh. 7000,000 for both. The corporation tax rate is 30% for both companies. The capital structure of the companies is given below:
Niki Ltd Mimi Ltd Sh Sh Ordinary Share capital shs. 20 each 2,000,000 1,000,000 1,000,000 - _______ 2,000,000 Total Capital 3,000,000 3,000,000
i. Calculate the earnings per share (EPS) for each company and explain the difference in EPS between the two companies. (8Marks) ii. Describe main short term sources of financing for a business firm (8Marks)
QUESTION FOUR (20 MARKS)
a) Explain the reasons why it may be cheaper for a firm to raise debt Finance compared to equity finance. (6Marks) b) Explain various methods a business firm can use to improve its liquidity position. c) A Ganjoini enterprises is considering buying a new machine at a cost of sh 60 million with an economic life of 5 years and a residual value of 4 million. The corporation tax is 30% and no investment allowance is granted. The expected net profit before tax and depreciation are;
YEAR PROFITS 1 15,000 2 10,000 3 10,000 4 20,000 5 20,000 The company uses straight line method of depreciation.
REQUIRED:
i. Calculate the expected cashinflows expected for each of the five years (6 Marks)
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ii. Calculate the net present value NPV at 12% discount rate and recommend whether the machine should be purchased ( 6Marks) iii. Distinguish between a capital and a money market.
QUESTION FIVE (20 MARKS)
A firm is considering the following investment projects.
Project Initial cost
Expected annual cashflows
Project Life
1 100,000 25,000 7 2 120,000 30,000 6 3 150,000 25,000 8 4 180,000 40,000 6 5 200,000 40,000 8
The firms cost of capital is 10%
REQUIRED:
a) To rank the investment project using NPV and PI criteria (14Marks) b) undertaken using the criteria above. (6Marks)
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