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Business Finance I Question Paper

Business Finance I

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

KENY ATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2008/2009
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
BAC 203
BUSINESS FINANCE I
DATE: Friday 3rd April, 2009
TIME: 11-I.OOpm
INSTRUCTIONS:
.-e
Answer ALL Questions
QI.
a)
What is the agency problem?
[ 2 marks]
b)
Explain how you would solve the agency problem. [13 marks]
Q2.
Ruiru manufacturers limited need an additional shs 2000 000 which it plans to obtain
through a factoring agreement.
The factory would
purchase Ruiri's accounts
receivable and advance the invoice amount minus a 2 percent commission
on the
invoices purchased each month. Ruiru sells on terms net 30 days.
In addition the
factor charges a 24 percent annual interest rate on the total invoice amount, to be
deducted in advance.
a)
What amount of accounts receivable must be factored to net shs
2 million?
[3 marks]
b)
If Ruiru can reduce its credit collection expenses by shs 24 000 .
and avoid
bad debt losses of 3 percent on the factored amount,
what is the total
shilling cost of the factoring arrangement?
[ 4 marks]
Page 1 of 3
•..

c)
What would be the total cost of the factoring arrangement if Ruiru's funds
needed rose to be 3 million shillings? Would the factoring arrangement be
profitable under these circumstances?
[ 7 marks]
Q3.
You are given the summarized information about firms in the same line of business,
X and Y as follows.
Balance sheet as at 30th March 2009
X
shs
Y
Land
400,000
1300000
Buildings (cost)
600,000
1000000
Accumulated Dept
200,000
400,000
1000000
Plant and Equipment
450000
750,000
Accumulated Dept
350,000
100,000
200,000
550,000
900,000
Inventory
400,000
500,000
Accounts Receivable
500000
450000
Bank
50,000
900,000
1000000
600,000
-,
Accounts payable 550,000
Bank
250,000
800,000
100,000
600,000
400,000
1000000
3250000
Capital b/f
500,000
1500000
Profit for the Year
150,000
500,000
650,000
200,000
Drawings
150,000
200,000
500,000
1800000
Land evaluation
800,000
Loan( IO%pa)
500,000
650,000
1000000
3,250,000
Sales
5000000
15000
000
Cost of sales
2000000
10
000
000
REQUIRED
a)
Produce a table of eight ratios for both businesses
[16 marks]
Page 2 of3

b)
Comment on the strengths and weakness of each company
[ 4 marks]
Q4.
a)
The stockj has the following characteristics
..
Possible outcomes
Return if stale occurred
Probability of state
occurring
(a)
0.20
0.15
(b)
0.40
0.30
(c)
0.35
0.35
(d)
0.60
0.20
REQUIRED:
(i)
The expected return on stock j
[ 3 marks]
(ii)
The standard deviation of the returns of stock j
[ 3 marks]
(iii)
The co-efficient of variation for stockj
[ 2 marks]
b)
You are considering investing in projects which has the following cash flow
stream
.
Year
Net cashflow (shs)
,:
o
(300,000)
100,000
2
120,000
3
130,000
4
80,000
Given that the firms cost of capital is 15 percent compute the projects MIRR and
NPY
[ 11 marks]
Page 3 of3
e-

Business Finance I Question Paper

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