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Hbf2302:Advanced Financial Management Question Paper
Hbf2302:Advanced Financial Management
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2014
QUESTION ONE (30 MARKS)
a) Describe basic objectives for a business organization (4 Marks) b) Explain the following financial management terms; i. Agency costs ii. Venture capital iii. Cost of capital iv. Time value of money (10 Marks) c) Juhudi Ltd is considering a purchase of equipment which will cost shs. 3,000,000, the estimated annual cash inflows arising from this investment is shs. 800,000 the life of the new machine is 6years and its residual value is shs. 200,000. Assume the required rate of return is 12% a tax of 30% and straight-line method of depreciation. What advice would you give management if; i. If the shs. 800,000 is after tax inflows-NPV ii. The shs. 800,000 is before tax and depreciation (12 Marks)
QUESTION TWO (20 MARKS)
a) Describe the various ways of adjusting for inflation in investment appraisal (6Marks) b) Distinguish the following terms as applied in financial management; i. Operating leverage and financial leverage ii. Capital structure and financial structure iii. Business risk and financial risk (6Marks)
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c) The following two projects P and Q are being considered for investment by Fahe Ltd.
P Q Cost of capital 10% 12% 12% 14% Present value cash inflows 480,000 600,000 500,000 400,000 NPV 60,000 50,000 80,000 (10,000)
REQUIRED:
For each project calculate;
i. Profitability index (PI) using a risk discounted rate of 10% for P and 12% for Q (4 Marks) ii. Internal rate of return (IRR) (4Marks)
QUESTION THREE (20 MARKS)
a) Two companies Neko and Mako Ltd have the same level of financing but different 7000 000 for both. The corporation tax rate is 30% for both companies. The capital structure of the companies is given below;
Neko Ltd Mako Ltd Sh Sh Ordinary Share capital shs. 20 each 3,000,000 2,000,000 1,000,000 - _______ 2,000,000 Total Capital 4,000,000 4,000,000
Calculate the earnings per share (EPS) for each company and explain the difference in EPS between the two companies. (12 Marks) b) Describe three main sources of long term financing for a business firm (8 Marks) QUESTION FOUR (20 MARKS)
a) What is the rationale for Modigliani and \Miller (1958) hypothesis that the capital structure of a firm is irrelevant in determining the value of the firm? (7Marks) b) The following table gives the expected return of two stocks, A and B, under different states of the economy, the investment in Stock a is Sh. 220,000 and that in stock B shs 280,000.
State of Economy Probability Return on A Return on B Poor 0.5 0.02 0.01 Average 0.3 0.10 0.11 Good 0.2 0.15 0.21
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Calculate the expected return standard deviation and the expected value of the portfolio after one year of the portfolio of these two stocks in. (9Marks)
c) Describe four dividend policies practices for listed companies in Nairobi securities exchange. (4Marks)
QUESTION FIVE (20 MARKS)
A firm is considering the following investment projects.
Project Initial cost
Expected annual cashflows
Project Life
1 50,000 20,000 2 100,000 30,000 3 120,000 25,000 4 180,000 40,000 5 200,000 40,000
The firms cost of capital is 10%.
a) To rank the investment project using Net Present Value and Profitability index Criteria (10Marks) b) . 350,000,000, which projects would be fully undertaken using the criteria above (3Marks) c) Describe three various ways of evaluating investment under risk and uncertainties in expected cashflows. (6Marks)
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