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Hbc2119:Business Finance Question Paper
Hbc2119:Business Finance
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2011
QUESTION ONE – (20 MARKS)
(a) Compare and contrast loan capital from equity capital. (6 Marks) (b) The following is the capital structure of Juhudi Ltd. Sh 200,000 ordinary shares of Sh20 each 4,000,000 10% preference shares 1,000,000 14% debentures 3,000,000 8,000,000 The shares of the company sell for Sh20 per shares in the market. The company will pay Sh2 per share as dividend and is expected to grow at 7% forever. Assuming corporate tax rate of 50% Required: (i) Corporate weighted average cost of the company. (7 Marks) (ii) Suppose the company would like to raise additional capital by issuing 15% debt of Sh2,000,000 which would result to increasing the expected dividends to Sh3 per share and price per share to Sh15 while leaving the growth rate unchanged. Compute the weighted marginal cost of the capital. (7 marks)
QUESTION TWO – (15 MARKS)
(a) Discuss the qualities of good investment evaluation criteria. (4 Marks)
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(b) Maua Ltd is considering investing in a project which will cost Ksh2,400,000. The project is expected to have a useful life of 5 years with a residual value of Ksh20,000. Earnings before depreciation and taxes (EBID&T) is expected to be as follows:
Year EBID&T (Sh) 1 820,000 2 840,000 3 860,000 4 900,000 5 960,000
The corporate tax rate is 40% and depreciation is on a straightline basis. The firms cost of capital is 20%.
Required: (i) Calculate the projects NPV (6 Marks) (ii) Calculate the project IRR (4 Marks) (iii)Should the company undertake the project? (1 Mark)
QUESTION THREE – (20 MARKS)
(a) In context of corporations, explain various agency relationship that exists and how the conflict can arise. (6 Marks) (b) Using any two of the above agency relationship, explain how the conflicts could be resolved. (6 Marks) (c) Discuss various managerial roles played by finance manager in any organization. (8 Marks)
QUESTION FOUR – (15 MARKS)
(a) Discuss various theories that explain the dividends policy of a firm. (9 Marks) (b) Explain the factors that affects the amount of dividends to be paid by a firm. (6 Marks)
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