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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:2013
QUESTION ONE (30 MARKS)
a) Define agency relationship from the context of a public limited company and briefly explain how this arises. (6 marks) b) Highlight various measures that can be employed to minimize agency problems between the owners and management. (6 marks) c) Explain briefly the effect of use of debt capital on the weighted average cost of capital of a company. (6 marks) d) What are financial intermediaries? Use relevant examples in your explanation. Briefly explain the role they play in an economy. (6 marks) e) The Finance Manager of QD Company Limited is faced with a decision to set an appropriate level of working capital in his company. Explain to him the factors he needs to consider before arriving at an optimal level of working capital in his firm. (6 marks)
QUESTION TWO (20 MARKS)
Mapambo Limited has a net working capital and fixed assets totalling to Shs.100,000,000 as at 30/06/2013. The company wishes to raise additional finance by obtaining a debt of Shs.30,000,000 and Shs.20,000,000 from selling new ordinary shares.
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The current capital structure of the company is as follows:
3,000,000 fully paid-up ordinary shares Shs.30,000,000 Accummulated retained earnings Shs.20,000,000 1,000,000, 10% preference shares Shs.20,000,000 200,000, 6% Long term debentures Shs.30,000,000
he current maret alue of the oman’s ordinar shares is Shs.0. the expected dividend on ordinary shares one year hence is forecasted at Shs.1.20 per share. The average growth rate in both earnings and dividends has been 10% over the last 10 years and this growth is expected to be maintained in the foreseeable future. The corporate tax rate is 30%.
The debentures of the company have a face value of Shs.150. However, they currently sell for Shs.100. The debentures will mature in 100 years.
The preference shares are still selling at par value. Required:
a) The expected rate of return on ordinary shares. (4 marks) b) The specific cost of each source of capital. (8 marks) c) The existing overall cost of capital. (4 marks) d) he coman’s marginal cost of caital if it raised the additional Shs.50,000,000 as intended. (4 marks)
QUESTION THREE (20 MARKS)
idoo is a children’s to retailer. he oner intends to al for a ban loan to finance an expansion of the business. To assist, in assessing the application, the owner has requested that you as their Accountant, analyse their past two years of operations.
Income statement for year ending 30th June
2011 $
2012 $
Sales: Cash Credit
536,000 216,000
588,000 268,000 752,000 856,000 Cost of Goods sold <436,000> <452,000> Gross profit 316,00 404,000 Operating Expenses: Selling & Distribution 64,500 72,500 General & Administrative 113,500 125,000 Interest Expense 12,200 15,600 Net Profit 125,800 190,900
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Balance sheet as at 30th June 2010 $
2011 $
2012 $
Current Assets: Bank
5,800
5,200
3,400 Accounts Receivable 25,700 30,200 37,800 Inventory 120,100 134,900 153,600 Non-Current Assets: Property, Plant & Equipment 145,300 161,500 196,400 Total Assets 296,900 331,800 391,200 Current Liabilities: Accounts Payable 35,700 46,800 54,700 Other Payables 8,000 10,000 12,000 Non Current Liabilities: Mortgage Loan 125,000 125,000 125,000 Total Liabilities 168,700 181,800 191,700 Net Assets 128,200 150,000 199,500 Capital 128,200 150,000 199,500
Additional Information:
Terms of Trade = 30 days
Accounts aable due in 0 das .. ther aables due in 0 das
Ideal Inventory level = 2 3 months
Required:
a) Calculate the following ratios for 2011 and 2012 (COMMENT ON YOUR ANSWERS)
Industry Averages: Current 1.92 Quick 1.25 Receivables Turnover 31 days Inventory Turnover 75 days Asset Turnover 2.10 Debt Ratio 0.36 Gross Profit 0.41 Expense 0.28 Net Profit 15.2% Return on Assets 0.51 Return on Equity 0.65 (20 marks)
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QUESTION FOUR (20 MARKS)
The following information was extracted from the books of Koni Company limited. Its financed partly by ordinary share capital of 200,000 shares @ Shs.10 but currently selling at Shs.25 in the NSE. This company reported a profit of Shs.1,000,000 before tax and intends to declare a dividend of 10% preference dividends on its 600,000 preference shares and 30% of ordinary dividends. The tax rate is 50%.
Compute:
a) Earnings per share. (4 marks) b) Earnings yield. (4 marks) c) Dividend yield. (4 marks) d) Price Earnings ratio (4 marks) e) Gearing ratio. (4 marks)
QUESTION FIVE (20 MARKS)
a) Explain why there is preference for current money rather than money in the future. (6 marks) b) Congratulations! You have won the Readers Congress Sweepstake. You have an option of receiving 15 payments of Shs.120,000 a year, first payment to be received one year from now or Shs.1,000,000 in cash today. If your opportunity cost is 10%, which option would you take? (8 marks) c) Madam Shebesh is 60 years old and a life insurance is trying to interest her in an annuity that would pay Shs.100,000 per year (payable once a year) for 15 years. What would be the maximum amount that she should pay for the annuity today, assuming her time value of money is 8% and the first payment begins in one year? (6 marks)
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