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Financial Management-Sunday Class Question Paper
Financial Management-Sunday Class
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR STAGE 1 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 200: FINANCIAL MANAGEMENT-SUNDAY CLASS
DATE: APRIL 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions
QUESTION ONE
(a) Briefly discuss the importance of capital budgeting decisions to a firm (10 Marks)
(b) Macheusi Ltd is considering the acquisition of a new machine to replace an old one. The new
machine is expected to lead to increased production and hence sales. To support the increased sales, it
is estimated that accounts receivable, inventory and accounts payable would increase by Sh 2,800, 000;
Sh2,000,000 and 4,000,000 respectively.
The projected profit before depreciation and taxes fo the two machines over the next five year period is
given below.
YEAR NEW
MACHINE
OLD
MACHINE
1 3,200,000.00 2,000,000.00
2 3,200,000.00 2,000,000.00
3 3,200,000.00 2,000,000.00
4 3,200,000.00 2,000,000.00
5 3,200,000.00 2,000,000.00
Additional Information
2
1) The old machine was purchased two years ago at a cost of Shs 4,000,000. The estimated
economic life of the machine was five years however, a review of the economic life has
established the machine has a further economic life of five years with a nil residual value.
2) The new machine is estimated to cost Shs 5,600,000. An additional Shs 680,000 would be
incurred to install the machine. The machine has an estimated life of five years with a residual
value of Shs 2,000,000.
3) The estimated old machine could be sold now for Shs 1,300,000 in the market.
4) The company uses straight line depreciation.
5) Corporation tax rate is 30% while the cost of capital is 8% p.a.
Required
(i) The initial investment required for the project (4 Marks)
(ii) Using NPV approach, advise the management on whether to replace the existing machine
(16Marks)
(Total Marks 30 Marks)
QUESTION TWO
Discuss the agency problem between managers and shareholders clearly indicating how it is
exemplified and how the shareholders can try to resolve it. (20 Marks)
QUESTION THREE
(a) Define business risk and describe its component (4 Marks)
(b) The following financial statements relate to Dob Ltd.
Income Statement for the Year Ended 31.09.08
‘000’
Revenue 9200
Cost of sales (5750)
Gross profit 3450
Admin and Selling exp (2194)
3
Operating Profit 1256
Debenture Interest (84)
Profit before tax 1172
Tax (480)
Profit attributed to ordinary shareholders 692
Balance Sheet as at 31.09.08
‘000’ ‘000’ ‘000’
Non-current Assets 1750
Current Assets
Inventory 620
Debtors 1540
Cash 200 2360
Less CL (1240)
Net Current Assets 1120
Net Assets 2870
Finance By
Share capital (90,000 shares
@Sh5)
450
Retained earnings 1020
6% Debenture 1400
2870
Required
Calculate any two ratios which measure:
i) Liquidity (4 Marks)
ii) Management performance (4 Marks)
iii) Earning (4 Marks)
(c) Dob Ltd directors have recommended a DPS of Sh4 for the year ended 31.09.08 and the current
MPS is Sh110.
Required
i) Compute any two ratios that would be useful to investors. (4 Marks)
4
QUESTION FOUR
a) Distinguish between capital structure and financial structure (4 Marks)
b) Describe the factors that influence the cost of capital in an organisation (16 Marks)
QUESTION FIVE
(a) Naikuru council is in the process of determining the optimal cash levels it should hold in the
fiscal year 2008/09. It has established that the annual cash requirements is Sh2,500,000. The cost per
transaction is Sh500 and the opportunity cost of fund is 12%.
Required
i) Determine the optimal level of cash the council should maintain (3 Marks)
ii) What is the total cost of maintaining this cash balance (4 Marks)
iii) State the importance of holding cash in the organization (3 Marks)
(b) Mageuzi Ltd has provided the following information for the current year.
(i) Average inventories and annual sales are expected to be Shs2m and Sh10m
respectively.
(ii) Accounts receivable are Sh666,667 while all the sales are not credit.
(iii) Its accounts payable average Sh666,667 and the cost of good sold is Sh6m.
Required
Using the information provided compute the cash conversion cycle (6 Marks)
(c) Outline the factors that influence the dividend policy of a firm (4 Marks)
(Total 20 Marks)
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