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Introduction To Finance Question Paper
Introduction To Finance
Course:Bachelor Of Commerce
Institution: University Of Nairobi question papers
Exam Year:2011
SECOND YEAR SECOND SEMESTER EXAMINATIONS, 2009/2010
DFI 202: INTRODUCTION TO FINANCE
QUESTION ONE:
(a) Suppose a project has a discounted payback period equal to the life of the project, what is the NPV of the project and the IRR of the project? (5 marks)
(b) What are the potential faults in using the IRR as a capital budgeting technique? What role does use of the MIRR play in eliminating those faults? (5 marks)
(c) Kenya Simba Limited is considering two mutually exclusive projects for expanding the firm's production capacity. The relevant cash flows for the projects are given as:
Project A Project B
Partial Cashflow (550,000) (358,000)
Year Cashflows
1 110,000 154,000
2 132,000 132,000
3 165,000 105,000
4 209,000 77,000
5 275,000 55,000
Cost of Capital is 11%
REQUIRED
1) For each project, compute the IRR, MIRR and NPV and advise the company on the suitable project. (15 marks)
QUESTION TWO
(a) Jerome is considering investing in two assets with the following returns and probability distribution:
Probability (%) Return A Return B
20 -10 -16
20 5 0
20 10 8
30 15 12
10 25 32
REQUIRED:
1) Compute the expected returns for each of the assets. (6 marks)
2) Compute the risk in each of the investments (10 marks)
(b) 1) What is the basis for saying that the variance of an individual asset is not a good measure of the asset's risk? (4 marks)
2) Given that the returns on two assets are perfectly negatively related. that is, the correlation coefficient is -1.0. Does this imply that wherever the price of one security goes up, the price of other security goes down? (5 marks)
QUESTION THREE
(A) Geda limited has entered into a contract with Maveni contractors to paint their buildings for a period of five years. The contract requires annual payment of sh. 1 million at the beginning of each year for the next five years in payment for the service contracts. Given that Geda limited cost of capital is 11%, what amount of funds should Geda limited consider as equivalent for the contract at present? (9 marks)
(b) Motor limited expects to pay dividend on their common stock of sh.35 at the end of the year. The dividends are then expected to grow at a rate of 15% for two years, 12 % in the subsequent two years and at 8% indefinitely thereafter.
REQUIRED:
Compute the current value of Motor Limited common stock (9 marks)
(c) Tornado company is in the 35% tax bracket. It has a target debt-total assets ratio of 40 %. The target short term to long term debt ratio is 30 %. Tornado's cost of long term debt, short term debt and ordinary shares is 4 %, 8 % and 15 % respectively. What is the discount factor that Tornado should use for the project evaluation if it prefers to use the WACC based on its target capital structure weight? (7 marks)
QUESTION FOUR:
(a) State and explain the 5 c's of credit and credit selection. (10 marks)
(b) Briefly explain three inventory management techniques. (5 marks)
(c) Kilimanjaro ltd, a manufacturer in Nairobi's Industrial area currently sells its products for sh.10 per unit and all sales are on credit. Last year, the sales were 100,000 units. The variable cost per unit is sh.5 and the firm's fixed costs are sh.192,000. The management of kilimanjaro ltd is contemplating relaxing its credit standards which is expected to result in the following:
1. A 7 % increase in unit sales
2. An increase in account receivable period from 35 days to 50 days
3. An increase in bad debts from 2.5 % of sales to 4 % of sales
You are also informed that the firm's required rate of return on equal risk investment which is the opportunity cost of tying funds in accounts receivable is 13 %
REQUIRED:
Advise the management of Kilimanjaro Ltd. (10 marks)
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