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Business Finance I Question Paper
Business Finance I
Course:Bachelor Of Commerce
Institution: Kenyatta University question papers
Exam Year:2009
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATION 2008/2009
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF COMMERCE
BAC 203: BUSINESS FINANCE I
DATE: Friday 11th September, 2009 TIME: 11:00 AM - 1:00 PM
INSTRUCTIONS
Answer all questions.
QUESTION ONE
Chuka entertainment center is located at the slopes pf Mt Kenya. The management is considering enlarging the facility to tap into an emerging market whose orders are currently being turned down due to inadequacy of facilities. Two proposals A and B are under consideration. Proposal A involves a temporary structure and umbrellas while proposal B will involve the construction of a permanent structure to be used in all weather. The useful life of each alternative is 10 years. The accounting department of chuka entertainers have assembled the following data regarding the two alternatives:
Proposal A (Shs) Proposal B (Shs)
Initial investment 28,000,000 35,000,000
Estimated salvage value 1,400,000 3,500,000
Estimated annual net cash flow 5,600,000 6,650,000
Depreciation (Straight line basis) 2,660,000 3,150,000
REQUIRED:
(a) For each proposal, compute
(i) The payback period (4 marks)
(ii) The NPV given that the managements required rate of return is 15%.
(8 marks)
(iii) The MIRR (7 marks)
(b) Based on each of the above computations, which project should be chosen and why?
(6 marks)
QUESTION TWO
(a) What is the agency problem? (5 marks)
(b) Explain the various ways in which the agency problem can be solved. (10 marks)
QUESTION THREE
The returns expectations of a stock quoted at the Nairobi Stock Exchange are shown here below:
Possible rate of return Probability
-0.60 0.15
-0.30 0.10
-0.10 0.05
0.20 0.40
0.40 0.20
0.80 0.10
REQUIRED:
(i) The expected return on this stock. (8 marks)
(ii) The standard deviation of the return expectations. (8 marks)
(iii) The coefficient of variation. Explain this value. (4 marks)
QUESTION FOUR
(a) State any six limitations of financial ratios. (6 marks)
(b) Distinguish between activity ratios and profitability ratios. (4 marks)
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