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Cfm 101: Business Finance Question Paper

Cfm 101: Business Finance

Course:Bachelor Of Commerce

Institution: Kca University question papers

Exam Year:2009

1
UNIVERSITY EXAMINATIONS: 2009/2010
FIRST YEAR STAGE 3 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 101: BUSINESS FINANCE (SATURDAY CLASS)
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer ONE and Any other TWO Questions
QUESTION ONE
(a) The shares of Ndege Airways Company Ltd. have been trading at Sh.8.00 per share for the last
several months. The existing shareholders argue that such shares are undervalued. They say
that, the shares should normally be trading at around Sh.15 per share.
(i) Outline four factors that influence the price of a share. (8 Marks)
(ii) If the price earnings ratio for Ndege Airways Company Ltd. ordinary shares is 2.5 times
while the price earnings ratio of the shares of Piki Piki Company Ltd. is 10 times, which
is more attractive to a potential investor? Give reasons.
(4 Marks)
(b) In relation to the financing of a firm, differentiate between business risk and financial risk.
(5 Marks)
(c) Assume that you have won a charity sweepstake lottery which promises to pay Sh.50,000 for
the next 20 years. The government has announced this to be a sh.1,000,000 lottery since
50,000 x 20 = Sh.1,000,000. If the discounting rate is 20% advice the government on the actual
value of this lottery. (3 Marks)
2
(d) A company has a 4 year 10% Sh.1000 debenture which is redeemable at par. The current
Market value of the debenture is Sh.900. Given that the tax rate is 30% determine the yield to
maturity for this debenture. (3 Marks)
(e) Outline the advantages and disadvantages of shareholders wealth maximization goal.
(7 Marks)
QUESTION TWO
(a) Explain fully the effect of the use of debt capital on the weighted average cost of capital
(WACC) of a company. (6 Marks)
(b) Millennium Investments Ltd. wishes to raise funds amounting to Sh.10 million to finance a
project in the following manner:
Sh.6 million from debt; and
Sh.4 million from floating new ordinary shares.
The present capital structure of the company is made up as follows:
1. 600,000 fully paid ordinary shares of sh.10 each
2. Retained earnings of Sh.4 million
3. 200,000, 10% preference shares f Sh.20 each
4. 40,000 6% long term debentures of Sh.150 each
The current Market value of the company’s ordinary shares is Sh.60 per share. The expected
ordinary share dividends in a year’s time is sh.2.40 per share. The average growth rate in both
dividends and earnings has been 10% over the past ten years and this growth rate is expected to
be maintained in the foreseeable future.
The company’s long term debentures currently change hands for Sh.100 each. The debentures
will mature in 100 years. The preference shares were issued four years ago and still change
hands at face value.
Required:
a) Compute the component cost of:
i) Ordinary share capital; (2 Marks)
ii) Debt capital; (2 Marks)
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iii) Preference share capital. (2 Marks)
b) Compute the company’s current WACC. (5 Marks)
c) Compute the company’s marginal cost of capital if it raised the additional Sh.10 million as
envisaged. (Assume a tax rate of 30%). (5 Marks)
QUESTION THREE
(a) The nature and scope of business finance can be determined by the functions of the finance
manager. Discuss. (10 Marks)
(b) ABC Limited wishes to take advantage of the new commercial paper Market now popular in
Kenya. It wishes to issue two debenture papers. Both bear coupons of 14%, and the effective
yield required is 20%. Paper A has a maturity of 10 years and paper B a maturity of 20 years.
Both will be paying interest annually and Ksh.100,000 at maturity.
(i) What is the price of each paper? (6 Marks)
(ii) If the effective yield on each paper rises to 24%, what is the price of each paper.
(4 Marks)
QUESTION FOUR
The following balance sheet relates to ABC Limited as at 31/12/2008:
Sh.’M’ Sh.’M’
Net fixed assets 13
Stock 2
Debtors 3
Creditors 6
Ordinary shares (Sh.10) 4
Retained earnings 6
8% long term debt _____ 2
18 18
Additional information
(i) The sales for 2008 was 20m and it is expected to increase by 4m in 2009.
(ii) The net profit margin is 8%
(iii) The company has a dividend payout ratio of 70% which is expected to be maintained in future.
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Required:
(a) Determine the amount of external financing requirements. (8 Marks)
(b) Prepare the company’s proforma balance sheet as at 31/12/2009. (8 Marks)
(c) State any assumptions you have made in your computation above. (4 Marks)
QUESTION FIVE
Outline 10 limitations of ratio analysis. (20 Marks)

Cfm 101: Business Finance Question Paper

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