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Business Finance Ii Question Paper

Business Finance Ii

Course:Bachelor In 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 204: BUSINESS FINANCE II

DATE: Wednesday, 16th September, 2009 TIME: 11.00 a.m. – 1.00 p.m.

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INSTRUCTIONS:

Answer ALL questions.

Question 1:

a) “The function of business finance is to review and control decisions to commit or
recommit funds to new or ongoing uses. Thus in addition to raising funds,
business finance is directly concerned with production, marketing and other
functions within an enterprise whenever decisions are made about the acquisition
or destruction of asset”. Discuss. (8 marks)
b) The initial cast outlay of a project is Ksh. 50000 and it generates cash inflows of
Ksh. 20000, Ksh. 15000, Ksh. 25000, and Ksh. 10000 in four years. Using
present value index method, appraise profitability of the proposed investment
assuming 10% rate of discount. (7 marks)

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Question 2:

a) A company called Leghari projects is considering the following projects:

Projects Cash outflow Cash Inflows

Ist Year IInd Year IIIrd Year
A 10000 10000 - -

B 10000 7500 7500 -

C 10000 2000 4000 12000

D 10000 10000 3000 3000

a) Rank the projects according to each of the following methods:
i) Payback period (5 marks)
ii) Accounting rate of return (5 marks)
iii) Net present value assuming discount rate of 10% and 30%
(5 marks)
b) Assuming that projects are independent, which project should be accepted? If the
projects are mutually exclusive, which project is the best? (5 marks)
Question 3:
a) “An investor gains nothing from bonus shares”. Examine the statement critically.
(5 marks)

b) Explain any FOUR critical determinants of working capital level. (5 marks)

c) Discuss the concept of profit maximization Vs Wealth maximization.

(5 marks)

Question 4:

As a finance advisor, Chalanga Inc. has approached you to help in calculating for the company the level of EBIT at which the indifference point between the following alternatives will occur:
a) Ordinary share capital Ksh.1000,000 or 15% bonds of Ksh.500,000 and ordinary

share capital of Ksh.500,000. (5 marks)

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b) Ordinary share capital of Ksh.1000000 or 13% preference share capital of Ksh.500,000 and ordinary share of Ksh. 500000. (5 marks)
c) Ordinary share capital of Ksh. 600000 and 15% debentures of Ksh.400000 or ordinary share capital of Ksh. 400000, 13% unit preference share capital of Ksh. 200000 and 15% debentures of Ksh.400000.
d) Ordinary share capital of Ksh. 800000 and 13% preference share capital of Ksh.200000 or ordinary share capital of Ksh.400000, 13% unit preference share

capital of Ksh.200000 and 15% debentures of Ksh.400000. (5 marks) Assume that the corporate tax is 50 per cent and the price of the ordinary share is Ksh.10 in each case.

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Business Finance Ii Question Paper

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