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Financial Planning And Control Question Paper

Financial Planning And Control

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: FINANCIAL PLANNING AND CONTROL
DATE: APRIL 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions
QUESTION ONE
a) Briefly highlight the importance of a budgets (10 Marks)
b) You are a trainee in the finance department of Baraka Ltd. The head of department has requested
you to assist in the preparation of a cash budget for the months of January, February, March and
April 2009.
The actual revenues and costs for the moths of September, October and November 2008 and
the estimated amounts for December 2008, January, February, March and April 2009 are
shown below:
Month Sales Wages Material purchases Overheads
Year 2008 sh.’000’ sh.’000’ sh,’000’ sh.’000’
September 3,000 600 2,000 1,000
October 4,000 800 3,000 1,200
November 6,000 1,000 2,500 1,600
December 5,000 900 3,500 1,400
2
Year 2009
January 7,000 1,200 3,000 1,800
February 6,000 1,000 2,500 1,600
March 5,000 900 2,500 1,400
April 5,000 900 3,000 1,400
Additional information:
1. It is expected that the cash balance on 31 December 2008 will be sh. 2,200,000
2. Overdraft facilities are available if and when required
3. The company pays the wages on the last day of the month in which they accrue.
4. It is the company’s policy to pay creditors three months after receipt of the supplies
5. Ten percent of the monthly sales are for cash while the balances are sold on credit.
Debtors are expected to pay two months after delivery of the goods.
6. Included in overheads is sh200, 000 per month representing depreciation on motor
vehicles. There is a one-month delay in paying overhead expenses.
7. A commission of 5% is paid to sales agents on all the sales on credit. The payment of
commission is made in the month following that of sale. This commission has not been
included in the overhead expenses above.
8. Delivery is expected in February 2009 of a new machine costing sh. 4,500,000 of which
sh.1,500,000 will be paid on delivery and sh.1,500,000 in each of the following two
months.
Required:
A cash budget for the months of January, February and March 2009 (20 Marks)
QUESTION TWO
a) Describe the financial planning process (10 Marks)
b) Jamhuru Ltd has 1.4 million shares of stock outstanding. The stock currently sells for Ksh 20 a
share. The firm debt is publicly traded at the NSE and was recently quoted at 93% of the face
value. It has a total face value of Ksh 5 million and currently priced to yield 11% before tax.
3
The risk free rate is 8% and the market risk premium is 7%. The estimated beta is 0.74. Corporate
tax rate is 30%.
Required:
i) Compute the Market weighted WACC (8 Marks)
ii) Explain the importance of WACC to a firm (2 Marks)
(Total: 20 Marks)
QUESTION THREE
The following information relates to budgeted operation of division X of a manufacturing company
Shs
Sales (50,000 units of Shs. 8) 400,000
Less: Variable cost @ Shs. 6. Per unit (300,000)
Contribution margin 100,000
Less: Fixed cost (75,000)
Divisional profits 25,000
The amount of divisional investment is Shs 150,000 and the minimum desired rate of return on the
investment is the cost of capital of 20%
Required:
i. Calculate divisional expected ROI
ii. Calculate divisional expected Residual Income
iii. Comment on the result of (i) and (ii)
iv. The divisional manager has the opportunity to sell 10,000 units at Shs 7.50 per unit. Variable
cost per unit would be the same as the budgeted, but fixed cost would increase by Shs 5,000.
Additional investment of Shs 20,000 would also be required. If the manager accepts the special
order, by how much and in what direction would his residual income change?
QUESTION FOUR
Modern Company Ltd. manufactures and sells three products namely: D, E and F.
The company’s production departments consist of processing and assembly.
4
The management accountant of Modern Company Ltd. has provided you with the following budgeted
information for the six-month period ending 31 December 2009:
Product Production
In a bid to embrace modern business techniques, the management accountant intends to adopt the
activity-based costing (ABC) method of cost allocation and has identified the following activities as
the main cost drivers for the overhead costs:
Overhead costs Cost driver
Processing services
Assembly services
Quality control
Materials handling and dispatch
Selling and administration
Machine set-ups
Machine hours
Direct labour hours
Number of inspections
Number of internal requisitions
Number of customer orders
Number of production runs.
The following additional information is provided:
The company’s projected overhead costs for the period are:
Cost pool Sh.
Processing services
Assembly services
Quality control
714,000
636,000
52,000
5
Materials handling and dispatch
Selling and administration
Machine set-ups
156,000
168,000
156,000
1,882,000
All units produced will be sold within the six-month period.
Production takes place in batches of 1,000 units.
The following estimates have also been provided for the period:
Product Number of
inspections
Number of internal
requisitions
Number of
customer orders
D
E
F
240
400
400
8,000
8,000
16,000
3,000
4,000
4,200
Required:
(i) Prepare budgeted income statements for the period ending 31 December 2009 based on
activity-based costing. (16 Marks)
(ii) Highlight the shortfalls of the activity-based costing method over the conventional cost
allocation methods. (4 Marks)
(Total: 20 Marks)
QUESTION FIVE
Orient Enterprises Ltd. Have under consideration two projects A and B for the present it wants to take
up only one of the two projects and not both. The details regarding the two projects are given below.
Project A Project B
Cash flows:
Year 0 (95) (200)
Year 1 40 80
Year 2 40 80
6
Year 3 45 120
The cost of capital of the company is 12%.
Required
Which project would you choose using
i. NPV method,
ii. IRR method
iii. Profitability Index

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