Get premium membership and access revision papers, questions with answers as well as video lessons.
Business Finance Question Paper
Business Finance
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
UNIVERSITY EXAMINATIONS: 2010/2011
FIRST YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 101: BUSINESS FINANCE (SATURDAY)
DATE: AUGUST 2011 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
Question One
a) Define agency relationship between from the context of a public limited liability company
and briefly explain how this arises. (5 Marks)
b) Highlight the various measures that would minimize agency problems between owners and
management (5 Marks)
c) Find the future values of the following ordinary annuities:
i) FV of 400,000 each 6 months for 5 years at a nominal rate of 12 percent,
compounded semiannually. (3 Marks)
ii) FV of 200,000 each 3 months for 5 years at a nominal rate of 12 percent,
compounded quarterly. (3 Marks)
d) Discuss the pitfalls of the percentage of sales method of forecasting (5 Marks)
e) Discuss the requirements required to be fulfilled before listing at the Nairobi stock Exchange
(9 Marks)
Questions Two
Wilfex Inc sells Computers directly to schools at a profit. The following information has been provided.
PROFIT & LOSS ACCOUNT
2010 2011
Sales 1,100,000 880,000
Cost of Sales (550,000) (352,000)
Gross Profit 550,000 528,000
Operating Expenses 350,000 (345,000)
Other Expenses (40,000) (35,000)
Net Income Before Interest and Tax 160,000 147 150
Interest Charges (50,000) (40,000)
Net Income Before Tax 110,000 107 150
Tax (30,800) (30,000)
Net Income for the year
BALANCE SHEET
79,200 77 150
2010 2011
Equity and Liabilities 209,950 212,000
Ordinary Shares 100,000 100,000
Preference Shares 50,000 50,000
Accumulated Profits 59, 950 62,000
Non Current Liabilities
Longterm Loan 320,000 250,000
Curreent Liabilities
Accounts Payable 16,050 15,000
Total Equity and Liabilities 546,000 477000
Assets
Non Current Assets
Property, plant and Equipment 220,000
Current assets
Bank and Cash 45000 350000
Accounts Recievable 31000 42000
Inventory 250,000 180000
Total Assets 546000 477000
Calculate the following ratios and interpret their meaning.
a) Acid test ratio (3 Marks)
b) Return on Equity (3 Marks)
c) Current Ratio (3 Marks)
d) Average Collection Period (3 Marks)
e) Inventory Turnover (3 Marks)
f) Fixed asset ratio (3 Marks)
g) Debt/equity ratio (2 Marks)
Question Three
a) You are provided with the cashflows below:
Project A Project B
Investment 867,000 Investment 774812
Cash flows Cash flows
Year 1 213,432 Year 1 200,000
Year 2 132455 Year 2 145678
Year 3 234456 Year 3 234567
Year 4 234578 Year 4 234123
Year 5 890000 Year 5 345667
i) Use the NPV to determine which project is viable ( Use 12%) (5 Marks)
ii) Use the IRR to determine which project is viable (10 Marks)
b) Discuss the sources of finance for a business enterprise. (5 Marks)
Question Four
Puma plc is a listed company which manufactures and distributes leisurewear under the brand name
Nike. It made sales of 10 million units world-wide at an average wholesale price of £10 per unit during its last financial year ending 30 June 20X. In 20X8 – X9, it is
planning to introduce a new brand, Bolt, which will be sold at a lower unit price to more
price-sensitive market segments. Allowing for negative effects on existing sales of Bolt, the introduction of the new brand is expected to raise total sales value by 20%.
To support greater sales activity it is expected that additional financing both capital and working, will be required. Puma expects to make capital expenditures of £20m in 20X8 – X9, partly to replace worn-out equipment but largely to support sales expansion. You may assume that all current assets and current liabilities will vary directly in line with sales.
Puma’s summarized balance sheet for the financial year ending 30 June 20X8 shows the following.
Assets employed £m £m £m
Fixed (net) 120
Current:
Stocks 16
Debtors 23
Cash 6
45
Current liabilities:
Trade creditors (23)
Net current assets 22
Long-term debt at 12% (20)
Net assets 122
Financed by £m
Ordinary shares (50p par value) 60
Reserves 62
Shareholders’ funds 122
Pumas’s profit before interest and tax in 20X7-X8 was 15% of sales. Puma has an established
distribution policy of raising dividends by 10% p.a. In 20X7-X8, it paid dividends of £3m net.
Assume a 30% tax rate.
You have been approached to advise on the extra financing required to support the sales expansion.
Required
a) By projecting its financial statements, calculate how much additional external finance Puma must
raise. (8 Marks)
b) Prepare the proforma incomes statement and balance sheet to support your calculations. (8 Marks)
c) Outline any 4 assumptions made in your computation above. (4 Marks)
Question Five
a) Discuss the functions of a finance manager (6 Marks)
b) Moon Investments Balance Sheet shows:
Bonds $ 200,000
Common shares $ 200,000
Retained Earnings $ 100,000
-------------
$ 500,000
=========
Bonds:
• Annual interest rate 6%
• Years to maturity is 9 years
Common shares:
• Shares held 100,000
• Current share price $5
• Market return over next year 12%
• Beta (somewhat risky) 1.15
• Treasury bills currently yield 4%
• Tax rate 25%
i) Calculation of Cost of Capital (8 Marks)
ii) Discuss the importance of the cost of capital (3 Marks)
iii) Discuss the factors that affect the cost of capital (3 Marks)
More Question Papers
Popular Exams
Return to Question Papers