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Hrd036:Introduction To Financial Management Question Paper
Hrd036:Introduction To Financial Management
Course:Diploma In Business Management
Institution: Kenyatta University question papers
Exam Year:2012
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2011/2012
SECOND SEMESTER EXAMINATION FOR A DIPLOMA IN BUSINESS
MANAGEMENT
HRD 036: INTRODUCTION TO FINANCIAL MANAGEMENT
DATE: Monday, 26th March 2012
TIME: 8.00 a.m. – 10.00 a.m.
INSTRUCTIONS:
Question One (Compulsory)
(a)Distinguish between the following finance functions
(i)Financing and investing functions(4 marks)
(ii)Liquidity and Dividend function(4 marks)
(b)Define the following investment rules stating the criteria for accepting or rejecting an investment under each rule
(i)Payback period
(3 marks)
(ii)Internal Rate of Return(3 marks)
(iii)Profitability Index(3 marks)
(iv)Net Present Value(3 marks)
(c)In relation to financial markets, explain the meaning of the following terms
(i)Primary market(2 marks)
(ii)Secondary market(2 marks)
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(d)Kamwaro intends to invest Ksh. 180,000 at the end of each year for four years. Hisrequired rate of return from the investment is 20% compounded quarter annually.
(i)Determine the compounding value factor assuming he invested one shillings(3 marks)
(ii)Determine the future value of his investment after 6 years.(3 marks)
Question Two
The following cash flows relates to a project being considered for investment by Dimples co.
ltd.
Year
Cash inflow
1 750,000
2 200,000
3 2,150,000
4 3,300,000
5 2,800,000
The project’s initial investment is 6.2 million. The firm’s cost of capital is 12%.
Required
(i)Compute the project’s Net Present Value(8 marks)
(ii)Compute the project’s Internal Rate of Return
(8 marks)
(iii)
Advice the management of Dimples Co ltd on the viability of the project based on the
two methods.(4 marks)
Question Three
(a)Explain the meaning of the following capital components in the capital structure of acompany
(i)Bonds(3 marks)
(ii)Preference Shares(2 marks)
(iii)
External Equity(2 marks)
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(b)Top Finance Limited expects to issue a dividend of sh. 5 per share one year from now.The shares of Top Finance Limited currently sell for sh. 50 per share at the stock market. It was envisaged that dividends and earnings will grow at the rate of 6% intothe foreseeable future. The management of Top Finance Limited have been advised
by their broker that they can issue new shares to the public at sh. 42 (net)
Required;
(i)What will be the company’s floatation costs?(2 marks)
(ii)Compute the company’s cost of external debt(6 marks)
(iii)Explain three advantages that accrue to companies quoted at the Nairobi Stock
Exchange.(6 marks)
Question Four
(a)Explain five ways through which agency conflict between shareholders andmanagement can be resolved.(10 marks)
(b)Explain three disadvantages of a company financing its operations through debts.
(10 marks)
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