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Business Finance 1 Question Paper
Business Finance 1
Course:Bachelor Of Commerce
Institution: Kenyatta University question papers
Exam Year:2009
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2008/2009
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR
OF COMMERCE
BAC 203: BUSINESS FINANCE I
DATE: Friday 11th September, 2009 TIME: 11.00 a.m. – 1.00 p.m.
INSTRUCTIONS
1.
Answer ALL questions.
2.
Financial tables are provided at the back.
1.
Chuka Entertainment Centre is located on the slopes of Mt Kenya. The management is considering enlarging the facility to tap into an emerging market whose orders are currently being turned down due to inadequacy of facilities. Two proposals A and B are under consideration. Proposal A involves a temporary structure and umbrellas while proposal B will involve the construction of a permanent structure to be used in all weather. The useful life of each alternative is 10 years. The accounting department of Chuka entertainers have assembled the following data regarding the two alternatives:
Proposal A
Proposal B
Initial Investment
Shs.28,000,000
Shs.35,000,000
Estimated salvage value
1,400,000
3,500,000
Estimated annual net cashflow
5,600,000
6,650,000
Depreciation (Straight line basis)
2,660,000
3,150,000
REQUIRED: (a) For each proposal, compute
(i)
The payback period. [4 marks]
(ii)
The NPV given that the managements required rate of return is 15%. [8 marks]
(iii)
The MIRR [7 marks]
(b)
Based on each of the above computations which project should be chosen and why? [6 marks]
2.
(a)
What is the agency problem? [5 marks]
(b)
Explain the various ways in which the agency problem can be solved. [10 marks]
3.
The returns expectations of a stock quoted at the Nairobi Stock Exchange are shown here-below:
Possible rate of return
Probability
-0.60
0.15
-0.30
0.10
-0.10
0.05
0.20
0.40
0.40
0.20
0.80
0.10
REQUIRED:
(i)
The expected return on this stock. [8 marks]
(ii)
The standard deviation of the return expectations. [8 marks]
(iii)
The coefficient of variation. Explain this value. [4 marks]
4.
(a)
State any six limitations of financial ratios. [6 marks]
(b)
Distinguish between activity ratios and profitability ratios. [4 marks]
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