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Business Finance Fnce 2201 Question Paper
Business Finance Fnce 2201
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2010
Page 1 of 4
KABARAK UNIVERSITY
UNIVERSITY EXAMINATIONS
2010/2011 ACADEMIC YEAR
FOR THE DEGREE OF BACHELOR OF COMMERCE
COURSE CODE: FNCE 220
COURSE TITLE: BUSINESS FINANCE
STREAM: Y2S2
DAY: WEDNESDAY
TIME: 2.00 – 4.00 P.M
DATE: 8/12/2010
INSTRUCTIONS:
1. The paper has FIVE questions
2. Question ONE is compulsory
3. Answer any other TWO questions from the remaining FOUR
QUESTION ONE
a) Explain the following terms as used in finance
(i) Agency conflict (2 marks)
(ii) Covariance (2 marks)
(iii) Capital Rationing (2 marks)
b) What are the determinants of portfolio risk? (4 marks)
c) Explain the importance of Capital Budgeting for firms (6 marks)
d) A five year 8% coupon bond has a par value of kshs.150,000. If interest is paid annually,
determine the value of this bond when market interest rate is:
(i) 10% (ii) 6% (6 marks)
(iii) Comment on your results above (2 marks)
(iv) Explain the relationship between bond values and interest rates in the bonds market.
(2 mark)
e) Suppose Alfred has ksh.1,500,000 to invest in a portfolio of two securities one of which is the
bond whose expected return is 12% with a volatility of 15%. The other security has an
expected return of 10% and a standard deviation of 6%. The correlation between the two
securities is 0.45. Determine his portfolios expected return and portfolio standard deviation
if he invested ksh.900,000 in the bond. (4 marks)
QUESTION TWO
a) Juma would like to purchase a house some time in future from his savings. He deposits
kshs. 15,000 at the beginning of each year for the next 10 years which attracts interest of
12% compounded semi annually. Determine the value of his account at the end of the 10th
year. (6 marks)
b) Acommercial farmer plans to purchase a harvester costing kshs5,200,000 and he applies
for a loan to be repaid over 6 years time at a 12% interest rate. Determine the annual
installments that he will pay for him to clear the loan (4 marks)
c) Awino wants to invest kshs.12,000 each year which is expected to increase at 10% per
year. Determine the present value of her investment after 5 years if the required rate of
return is 9% (4 marks)
d) Discuss ways of minimizing Agency conflict between owners and management of a firm
(6 marks)
QUESTION THREE
a) Differentiate between the Discounting and Non- Discounting investment techniques available
for valuation in long term investments (4 marks)
b) As a financial manager of a firm, you want to invest kshs.2.5 million and you have identified
two investment opportunities (X and Y) that are independent of each other. Your firm has no
cash flow problems and can undertake both projects if they are value adding. The following
are the cash flows estimated for each investment opportunity:
Net cash Flows (ksh.000)
Year project X project Y
1 4,000 8,000
2 4,500 6,800
3 5,000 5,000
4 6,800 4,500
5 6,200 3,000
6 5,500 2,500
The cost of capital for your company is 12%
Required
i) Calculate the payback periods for the two projects (4 marks)
ii) Using NPV analysis, determine which project you will undertake (6 marks)
iii) Calculate the Internal Rate of Return for each project (6 marks)
QUESTION FOUR
a) Explain any three reasons why investors hold and manage portfolios (3 marks)
b) Mungai has kshs. 200,000 that he wants to invest. He decides to form a portfolio of two assets
X and Y. The possible returns of the two assets over a one year investment horizon an
associated probabilities of occurrence are as below:
Probability . 05 .10 .15 .15 .10 .05
Returns X(%) 9 10.5 12 13 12.5 12
Return Y(%) 12 13 14 15 16 16
Required
i) Determine the Expected return and Risk for each asset (6 marks)
ii) Determine the return and risk of a portfolio made of the assets if Mungai decided to invest ¼
of his total investment in Y (6 marks)
iii) What is the correlation coefficient of the two assets (2 marks)
iv) Using the coefficient determined in c) describe the relationship between the returns of
these two asssets (3 marks)
QUESTION FIVE
a) Explain the capital Investment process (4 marks)
b) What is the role of the Stock Exchange in the development of an economy? (4 marks)
c) Explain the concept of valuation of securities in finance (4 marks)
d) Using relevant examples differentiate between capital markets and money markets. (4 marks)
e) Explain the role of a financial manager in a modern corporate setting and environment.
(4 marks)
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