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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:2012
QUESTION ONE (30 MARKS)
a) Discuss the following financial goals of the firm; i) Profit maximization ( 5 Marks) ii) Wealth maximization ( 5 Marks)
b) Discuss the factors to consider in determining the source of finance for your business. ( 5 Marks c) State the cases where IRR conflicts with NPV method of project appraisal. ( 3 Marks) d) Explain the relevance of business finance knowledge is in your field of study and subsequently to your career. ( 2 Marks) e) Outline the features of a sound investment appraisal technique. (10 Marks)
QUESTION TWO (20 MARKS) a) XYZ Limited presented the following financial statements on 30th June 2011
Income statement for the year ended 30th June 2011
Shs. Sales (All Credit 4,000,000 Operating profit 440,000 Less: Debenture interest (40,000) 400,000 Corporation tax (176,000)
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224,000 Ordinary dividend proposed (107,200 Retained profit 116,800 Statement for financial position as at 30th June 2011
Non-current Assets: Freehold property 480,000 Plant & Machinery 800,000 Motor vehicle 200,000 Furniture & fittings 200,000 1,680,000 Current Assets: Stocks 1,000,000 Debtors 400,000 Investments 120,000 1,520,000
Less Current Liabilities Trade creditors 238,400 Bank overdraft 878,400 Corporation tax 176,000 Dividend payable 107,200 1,400,000
Financed by: Authorized share capital: 800,000 sh. 1 ordinary shares 800,000 Issued and fully paid: 400,000 ordinary shares 400,000 Capital reserve 200,000 Loan capital:40,000 sh. 100 10% debentures 400,000 1,800,000
Additional information
1. 1. An analysis of the industry in which the company operates reveals the following industrial averages;
Current ratio: 1.5:1
Quick ration: 0.8:1
2. Purchase for the year were Shs. 2,160,000 while cost of sales were Shs. 3,000,000 3. The market price of the company share as at 30th June 2011 was shs. 5
Required: a) Compute the following ratios for XYZ Ltd and explain their significance ( 14 Marks) i) Return on capital employed ii) Operating expenses ration
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iii) accounts Receivable turnover days iv) Dividend yield v) Price Earnings Ratio iv) Market value to book value ratio vii) Current ration
b) ( 6 Marks) c) Explain the limitations of using ratios in evaluating a firms performance ( 5 Marks)
QUESTION THREE (20 MARKS)
a) Explain five factors that might lead to capital rationing. ( 5 Marks)
b) Explain the limitations of profit maximization goal. (5 Marks) c) In making investment decisions, cash flows are considered to be more important than accounting profits. Explain why this is the case. ( 5 Marks) d) Orange Ltd has approached you for advice on an equipment to be purchased for us in a five year project. The investment will involve an initial capital outlay of sh. 1.4 million and the expected cash flows are 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 costs of capital and tax rate are 12% and 30% respectively. The net present value (NPV0 of the investment. ( 5 Marks)
QUESTION FOUR (20 MARKS) The following information represents the capital structure of Kikoy Ltd.
Shs. Ordinary shares (sh. 25 par value) 800,000 8% preference shares (sh. 24 par value) 600,000 10% preference share (sh 24 par value) 600,000 10% debenture ( sh. 20 each) 400,000 2,400,000
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The current market prices of each of the above sources of capital are: a) Sh. 31 for ordinary shares and this is inclusive of floatation costs of sh. 1 per share b) The 8% preference shares were issued 10 years ago and are currently selling for sh. 20 per share. c) The 10% preferences shares that were issued 5 years ago are currently selling for Sh. 25 per share. d) The 10% debentures are currently selling for 25 per debenture.
The ordinary shareholders expect cash dividends of sh. 3.80 per share at the end of the year.
The divided is expected to grow at 5% into perpetuity. The corporation tax rate is 30%.
Required:
a) The weighted average cost of capital of the firm. ( 10 Marks) b) State five uses of weighted average cost of capital. ( 5 Marks) c) Distinguish between compounding and discounting of cash flows. (4 Marks) d) Distinguish between marginal cost of capital and weighted average cost of capital. ( 1 Marks)
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