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Bac 605: Corporate Finance Question Paper
Bac 605: Corporate Finance
Course:Master Of Business Administration
Institution: Kenyatta University question papers
Exam Year:2010
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
INSTITUTE OF OPEN LEARNING EXAMINATION FOR THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
BAC 605: CORPORATE FINANCE
DATE: Friday 23rd July, 2010
TIME: 2.00 p.m. – 5.00 p.m.
________________________________________________________________________
INSTRUCTIONS
Answer ALL questions.
Marks allocated are shown at the end of each question.
Question One
a)
Discuss the advantages of a rights issue from the point of view of;
i.
Issuing company
[3 marks]
ii.
Shareholder
[3 marks]
b)
Hosea Limited has 1 million ordinary shares outstanding at the current market price of Ksh 50 per share. The company requires Ksh 8 million to finance a proposed expansion project. The board of directors has decided to make a one for five rights issue at a subscription price of Ksh 40 per share. The expansion project is expected to increase the firm’s annual cash inflow by Ksh 945,000. Information on this project will be released to the market together with the announcement of the rights issue. The company paid a dividend of Ksh 4.50 in the previous financial year. This dividend together with the company’s earnings is expected to grow by 5% annually after investing in the expansion project.
Required
i.
Compute the price of the shares after the commencement of the rights issue but before they start selling. [4 marks]
ii.
Compute the theoretical ex rights price of the shares. [2 marks]
iii.
Calculate the theoretical value of the rights when the shares are selling rights. [2 marks]
iv.
What would be the cum rights price per share if the new funds are used to redeem a Ksh 8m 10% debenture at par (assume a corporate tax rate of 30%)? [6 marks]
Question Two
a)
State and explain the main forms in which the efficient market hypothesis is commonly stated. [6 marks]
b)
Discuss the main implications that differentiate the adaptive market hypothesis from the efficient market hypothesis. [4 marks]
c)
Highlight any four anomalies affecting the rationality of the efficient market hypothesis. [4 marks]
Question Three
a)
An essential component of the industrialization process is the development of an independent financial system. While all industrial societies have a specialized financial system cross national comparison of these systems indicates considerable structural diversity are key difference in the degree to which financial systems are bank based or market based. Clearly distinguish the two forms of financial systems and highlight with supporting reasons which form currently exists in Kenya. [10 marks]
b)
Rationing is the controlled distribution of resources and scarce goods or services. Explain the concept of credit rationing as applied in banking and finance. [6 marks]
Question Four
In finance and contract theory, information asymmetry deals with study of decisions in transactions where one party has more or better information than the other thus creating an imbalance of power in transactions, which can sometimes cause transactions to go awry. In light of this, elaborate the meaning of adverse selection and moral hazard and explain the two primary solutions to the problem of adverse selection.
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