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Financial Planning And Control (Day+Eve) Question Paper
Financial Planning And Control (Day+Eve)
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
UNIVERSITY EXAMINATIONS: 2010/2011
SECOND YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 201: FINANCIAL PLANNING AND CONTROL (DAY+EVE)
DATE: APRIL 2011 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and any other TWO questions
QUESTION ONE
a) Briefly discuss the advantages of Activity Based costing
b) DISCUSS the advantages of leasing
c) You are provided with the following standard cost information for the production of one unit of
Alpha, Inc.’s Inventory:
2 lbs. of steel x Shs 2 = Shs 4
1 hr. of labor x Shs 5 = Shs 5
In addition to the above materials and labor costs, Alpha applies overhead at a rate equal to
one-half of the standard direct labor cost per unit. At the beginning of 20x1 (its first year of
operations), Alpha purchased 2,000 units of steel for Shs 2.50 per pound to begin production.
During 20x1, Alpha produced 1,000 units of inventory. These units required 1,800 pounds of
steel and 1,150 hours of direct labor. In addition Alpha purchased an additional 2,000 units of
steel for Shs 2.50 per pound during 20x1. The total payroll for direct labor during 20x1 was Shs
6,000.
Required:
Calculate the following variances:
a. Direct materials price variance.
b. Direct materials usage variance.
c. Direct labor rate variance.
d. Direct labor efficiency variance.
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QUESTION TWO
Suppose that your college roommate has approached you with an opportunity to lend $25,000 to her
fledgling home health-care business. The business, called Home Health Care, Inc., plans to offer home
infusion therapy and monitored in-the-home health-care services to surgery patients in the
Birmingham, Alabama, area. Funds would be used to lease a delivery vehicle, purchase supplies, and
provide working capital. Terms of the proposal are that you would receive $5,000 at the end of each
year in interest with the full $25,000 to be repaid at the end of a ten-year period.
a)Assuming a 10% required rate of return, calculate the present value of cash flows and the net
present value of the proposed investment.
b)Based on this same interest-rate assumption, calculate the cumulative cash flow of the proposed
investment for each period in both nominal and present-value terms.
c) What is the payback period in both nominal and present-value terms?
d)What is the difference between the nominal and present-value payback period?
e) Can the present-value payback period ever be shorter than the nominal payback period?
QUESTION THREE
Preferred stock and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually,
a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock
which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins'
beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Rollins is a
constant growth firm which just paid a dividend of $2.00, sells for $27.00 per share, and has a growth
rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the
bond-yield-plus-risk-premium method to find ks. The firm's net income is expected to be $1 million,
and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent and
the firm's marginal tax rate is 40 percent.
a) What is Rollins' component cost of debt?
b) What is Rollins' cost of preferred stock?
c) What is Rollins' cost of retained earnings using the CAPM approach?
d) What is the firm's cost of retained earnings using the DCF approach?
e) What is Rollins' cost of retained earnings using the bond-yield-plus-risk-premium approach?
f) What is Rollins' lowest WACC?
g) What is Rollins' retained earnings break point?
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h) What is Rollins' WACC once it starts using new common stock financing?
QUESTION FOUR
Briefly discuss the following ways of financing a business.
a) Rights issue
b) Venture Capital
c) Franchising
d) Operating Leases
e) Retained earning
QUESTION FIVE
a) Discuss the advantages of the following three methods of measuring performance
i. Return On Investment(ROI)
ii. Residual Income (RI)
iii. Economic Value Added (EVA)
b)The sales director of a manufacturing company reported that in year 2011 he expects to sell
54,000 units of a product. The production manager consulted the purchasing Manager and cast
his figures as follows:-
2 types of raw materials A and B are required for the manufacture. Each unit of the final
product requires 2 kgs of material A and 3 kgs of B.
The estimated balances at the beginning of the period are as follow:
?? Finished products 10,000 units
?? Material A 12,000 kgs
?? Material B 15,000 Kgs.
The balances at the end of the period are expected to be:
?? Finished products 14,000 units
?? Material A 13,000 kgs
?? Material B 16,000 kgs.
Required:
Draw up budgets for the following:
i) Production budget (in units)
ii) Material usage budget (in units)
iii) Material purchase budget (in units)
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