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Financial Statement Analysis Question Paper
Financial Statement Analysis
Course:Bachelor Of Commerce
Institution: Kenyatta University question papers
Exam Year:2010
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KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
BAC 407 N: FINANCIAL STATEMENT ANALYSIS
=================================================================
DATE: THURSDAY 24TH DECEMBER 2009 TIME: 8.00 A.M. – 10.00 A.M.
INSTRUCTIONS
Answer ALL Questions
Q.1 Real Estate Speculators (RES) and Kenya Electricals (KE) have the following
earnings before interest and taxes (EBIT) and debt-servicing burden:
RES KE
Expected EBIT Sh. 5,000,000 100,000,000
Annual Interest 1,600,000 45, 000,000
Annual principal payment on debt 2,000,000 35,000,000
The tax rate for RES is 40 percent, while that of KE is 50 percent
Required
a) Compute times-interest earned ratio and debt service coverage ratio for the
two companies.
b) With which company would you feel more comfortable if you were a lender?
Give reasons. (17 marks)
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Q.2 Grade regulator company currently has 100,00 share of common stock outstanding
with a market price of sh. 60 per share. It also has sh. 2,000,000 in 6 percent bonds.
The company is considering a sh. 3,000,000 expansion program that it can
finance with either
(1) All common stock at sh. 60 / share;
(2) All straight bonds at 8 percent interest;
(3) All preferred stock at 7 percent.
Required:
a) For a hypothetical EBIT of sh. 1,000,000, calculate earning per share (EPS)
for each alternative method of financing assuming tax rate = 50%.
b) Construct an EBIT – EPS chart
c) What are the indifference points between alternatives?
d) What is your interpretation of indifference points? (17 marks)
Q.3 Assume that the consumer price index was 100 on January 1, 2009; 110 on
December 31, 2009; and averaged 105 for the year. You are given the following
data:
Beginning inventory (historical cost sh 6,000) at current cost sh 7,000
Ending inventory (historical cost Sh. 9,000) at current cost sh 12,000
Purchases sh 20,000
Cost of goods sold at current cost sh 19,000
Required:
Compute the increase in current cost of inventory for the year (the holding gain), the
effect of general inflation (the fictional holding gain), and the increase in current
cost, net of the effect of general inflation (real holding gain) with the last two
amounts expressed in average shillings for the year. (18 marks)
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Q.4 A partial balance of a company is given below.
Year 2 Year 1
Net fixed assets Sh 176,000 Shs 150,000
Long term debt 55,000 25,000
Capital stock 30,000 20,000
Retained earings 177,000 142,000
Additional information: Dividends of sh 25,000 were paid during the year and depreciation
of Sh 14,000 was deducted on the income statement. No fixed assets were sold.
Required: Develop statement of sources and uses of net working capital for the year 2.
(18 marks)
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