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Financal Planning And Control – Sunday Class Question Paper
Financal Planning And Control – Sunday Class
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR STAGE 3 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 201: FINANCAL PLANNING AND CONTROL – SUNDAY CLASS
DATE: APRIL 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions
QUESTION ONE
a) What are the merits of an ABC system? (5 Marks)
b) What benefits are derived from budgetary financial control? (4 Marks)
c) Index Ltd has been experiencing a Sh. 200,000 increase in sales each month for the past half year and it anticipates this monthly increase will continue for the immediately foreseeable
future. Its profit statement for last month was as follows:
Sh. Sh
Sales 2,000,000
Costs: Direct Materials 1,000,000
Direct labour 400,000
Variable overheads 200,000
Fixed overheads 200,000
Rent 50,000 (1,850,000)
PROFIT 150,000
The company’s sales are on credit, the debtors paying two months after the sale while creditors for materials and overheads are paid after the company has taken one month’s credit. Labour costs are paid as they are incurred and rent is paid quarterly. Last month the rent was paid and the month-end cash balance was sh. 100,000. Sh. 100,000 capital expenditure is planned for month 2. There are no stocks at any time.
Prepare the cash budget for the next four months. (11 Marks)
d) What are some of the differences between master budgets and zero-base budgets? (6Marks)
e) Describe two signs that help indicate when Activity Based Costing is likely to provide the most
benefits. (4Marks)
QUESTION TWO
a) Explain three methods of determining transfer prices (9 Marks)
b) What are some of the criticisms levelled against standard costing? (3 Marks)
c) Consider two firms with the following characteristics
L UEBIT 900,000 900,000
Debt @ 7.5% 2,000,000 -
Cost of Equity (Ke) 10% 10%
If the firms are identical in all respects apart from the way they are financed and their total market value, determine;
i. The value of each firm using the net income approach (3 Marks)
ii. The arbitrage opportunities available to an investor who owns 10% of the overvalued
firm. (5 Marks)
QUESTION THREE
a) RBC Ltd has a total market value of Sh. 10,000,000. The market value of its equity is Sh.6,000,000 consisting of 60,000 shares and debt is valued at Sh. 4,000,000. The before tax cost of debt is 8%. The firm issued a dividend of Sh. 5 last year and is projected to grow at 5% perpetually. The marginal tax rate is 35%.
i. Estimate the weighted average cost of capital for the company. (5 Marks)
ii. RBC Ltd is considering a project expected t produce Sh. 600,000 in annual after tax
cash flows for the next 5 years. The project has the same risk as the company’s existing
operations and is expected to support the same debt capacity. What is the project’s NPV
if sh. 2,000,000 is required for the project? (5 Marks)
iii. RBC Ltd is planning to spend larger amounts on Research and Development over the
next few years and feels it may not be able to use the entire tax shield generated by a
40% debt ratio. It is considering lowering the debt to 20% and reduce before tax cost of
debt to 7.5%. Should it implement this plan? (5 Marks)
b) Explain why Net Present Value is considered technically superior to Pay back and Accounting Rate of Return as an investment appraisal technique even though the latter are said to be easier to understand by management. Highlight the strengths of the Net present Value method and the weaknesses of the other two methods. (5 Marks)
QUESTION FOUR
a) What is the significance of cost of capital to financial managers? (4 Marks)
b) Differentiate between investing and financing decisions (4 Marks)
a) Voi Products Ltd wished to calculate an operating budget for the forthcoming period.
Information regarding products, costs and sales levels is as follows;
PRODUCT A B
Materials required
X (Kg) 2 3
Y (Litres) 1 4
Labour hours
Skilled (hours) 4 2
Semi-skilled (hours) 2 5
Sales level (units) 2000 1500
Opening Stocks (units) 100 200
Closing stock of materials and finished goods will be sufficient to meet 10% of demand.
Opening stocks of material X was 300 kg and for material Y was 1000 litres. Material Prices
are Sh. 10 per Kg for material X and Sh. 7 per litre for material Y. labour costs are Sh. 120 per hour for skilled workers and Sh 80 per hour for semi skilled workers.
Prepare
i. Production in units (3 Marks)
ii. Materials usage in Kgs and Litres (3 Marks)
iii. Materials purchases in Kgs and Litres (3 Marks)
iv. Labour in hours and Sh (3 Marks)
QUESTION FIVE
Bags Ltd is considering the purchase of a new machine that is expected to save labour on an existing project. The estimated data for the two machines available on the market are as follows:
Machine A (Sh.
000)
Machine B (Sh.
000)
Initial cost (Year 0) 120 120
Residual value of machines (Year 5) 20 30
Annual labour cost savings:
Year 1 40 20
2 40 30
3 40 50
4 20 70
5 20 20
Which machine will be selected under the following criteria:
a)Pay Back Period (3 Marks)
b) Accounting Rate of Return (3 Marks)
c) Net present Value, assuming a cost of finance of 10% per annum? (6 Marks)
d) Internal Rate of return (8 Marks)
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