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Financial Planning And Control Question Paper

Financial Planning And Control

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

EXAMINATION FOR THE DEGREE OF BACHELOR OF COMMERCE
FINANCIAL PLANNING AND CONTROL
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer ONE and Any other TWO Questions
QUESTION ONE
a) What are the merits of an ABC system? (5 Marks)
b) What are some of the differences between ‘normal’ budgeting and zero-base budgeting?
(5 Marks)
c) What are the three methods for determining transfer prices? (6 Marks)
d) 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
2
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. (10 Marks)
e) What are some of the criticisms levelled against standard costing? (4 Marks)
QUESTION TWO
a) API 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 Per share 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 to 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 THREE
a) Consider two firms with the following characteristics
3
L U
EBIT 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)
b) 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.
4
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 FOUR
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)
QUESTION FIVE
Top Shine Car Wash provides basic car wash services at Sh. 150 per car and a wash and wax option
for Sh. 250. The washing equipment, which cost Sh. 600,000 installed, has a useful life of five years
and has been in use now for one year.
5
Rent and rates for the forthcoming year amount to Sh. 225,000 and will be paid half in April and half
in October. In addition, annual operating costs (all paid in cash) are estimated at;
Washing Solution Sh. 20 per vehicle
Wax (used only on wash and wax) Sh. 45 per vehicle
Maintenance and repair Sh. 5000 per month
During the forthcoming year, customer usage is expected to be as follows;
Period Basic Wash (per
month)
Wash and Wax (per
month)
April 1,000 150
May – September 1,300 230
October 1,200 220
November 1,050 210
December 900 205
January 850 200
February 500 80
March 700 130
a) Construct a profit and loss budget for the month of February (5 Marks)
b) Construct a profit budget for the forthcoming year (5 Marks)
c) Construct a monthly cash budget. In which month is the cash flow largest and when is it
lowest? (10 Marks)

Financial Planning And Control Question Paper

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