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Fnce 510: Financial Management Question Paper
Fnce 510: Financial Management
Course:Master Of Business Administration
Institution: Kabarak University question papers
Exam Year:2013
KABARAK UNIVERSITY
UNIVERSITY EXAMINATIONS
2013/2014 ACADEMIC YEAR
FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION
FNCE 510: FINANCIAL MANAGEMENT
DAY: SATURDAY
DATE: 7/12/2013
TIME: 3.00 – 6.00 P.M.
STREAM: SEM 1
INSTRUCTIONS:
Answer Question ONE and any other THREE Questions.
QUESTION ONE
One of the key failures of most companies is lack of a competent board of directors. The directors
need to have as a minimum basic knowledge on financial management to guide the company in
terms of governance and overall policy direction. MABU Ltd has contracted you as a consultant to
educate the board on financial management. Outline in detail your discussion with the board
ensuring you discuss importance of financial management, role and what it entails. (40 marks)
QUESTION TWO
The Board of Directors of ZEETEX, a medium size company, wants to expand its catering
business that has been growing over the past six years. The local authority has granted the business
planning permission to extend its current premises. The company will invest sh 1,000,000 in
buildings and non-current assets. It will also require financial support for working capital.
Page 1 of 3
The Board of Directors has asked you, the Chief Finance Officer (CFO), to evaluate the following
sources of finance and report back before the next meeting.
Required:
(a) Compare and contrast a rights issue of shares and loan notes. (10 marks)
(b) Explain which source of finance in (a) above would be more beneficial for the buildings
and non-current assets. (6 marks)
(c) Advise the Board of Directors on a source of finance for working capital. (4 marks)
QUESTION THREE
ExPlor is a medium size company that trades and invests in alternative energy for domestic use.
Recent research and development (R&D) have established the following financial information:
(i) The expected return on future projects 11%
(ii) The risk free rate 4%
(iii) The Beta value 1.1
Required:
a) Calculate the capital asset price model (CAPM) rate. (6 marks)
b) Identify the problems with applying the CAPM to future projects. (6 marks)
c) Explain the drawback of using the dividend growth model to determine cost of capital
(8 marks)
QUESTION FOUR
Merika Hotel is a medium size organisation based in the Nakuru providing food, leisure and
accommodation to tourists from all over the world. The Board of Directors is considering growth
by acquisition of other similar organisations in other parts of the country.
The Chief Executive Officer (CEO) is in negotiations on the possible takeover of a chain of hotels
in Nairobi or Mombasa. The capital outlay to be invested now and the future net cash inflows for
the next four years are shown below:
1. Hotel chain in Nairobi:
Investment now sh 7,500,000
Return on investment:
(a) Payback period 2 years
(b) Accounting rate of return 35%
(c) Net present value sh1,875,000
2. Hotel chain in Mombasa:
Investment now sh 8,000,000
Revenue for 1st year sh 25,000,000
Revenue for 2nd year 10% increase on the 1st year
Revenue for 3rd year 12% increase on the 2nd year
Revenue for 4th year 11% increase on the 3rd year
Net profit for each year is 10% on revenue
Depreciation sh 95,000 per year
The company’s cost of capital is 8%.
Extract from present value tables of sh1 @ 8%:
Year 1 0.926
Year 2 0.857
Year 3 0.794
Year 4 0.735
Required:
(a) Explain the benefits of net present value (NPV) method of appraisal. (10 marks)
(b) Use the following investment appraisal techniques to calculate for the Mombasa investment
opportunity:
(i) The payback period. (2 marks)
(ii) The accounting rate of return (the average net profit to capital investment outlay).
(2 marks)
(iii) The net present value. (6 marks)
QUESTION FIVE
BrandArt is a small company operating in a niche market in the art industry.
The company gets its business through word-of-mouth advertising and its products are customised
to customers’ orders.
As a small company it relies on the bank for an overdraft facility to be able to purchase inventory
and pay its suppliers on time. Some suppliers of inventories have warned the company that they
will withdraw their credit if there is no improvement to the payment terms agreed. However, the
bank would like the business to ensure that customers are paying within their agreed credit terms
which on average is 30 days.
As a requirement for the overdraft facility, the bank has received the latest financial statements for
the year ended 30 September 2011, but would also appreciate an analysis of the performance of the
business.
The accountant has provided the relevant figures extracted from the financial statements as follows:
sh
Revenue 1,750,000
Cost of sales 500,000
Closing inventories 190,000
Trade receivables 300,000
Trade payables 195,000
Bank overdraft 80,000
Required:
a) Prepare a report calculating the ratios relevant for the determining financial health of the
company. (10 marks)
b) Discuss the various techniques for financial statement analysis (10 marks)
QUESTION SIX
Valuation is very important for any company especially for those not listed the stock exchange.
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