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Business Finance (Day) Question Paper
Business Finance (Day)
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
UNIVERSITY EXAMINATIONS: 2009/2010
FIRST YEAR STAGE 3 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 101: BUSINESS FINANCE (DAY)
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer ONE and Any other TWO Questions
QUESTION ONE
a) Explain the meaning of the following terms.
i) Bull and bear Markets [2 Marks]
ii) Bid-ask spread. [2 Marks]
iii) Short selling. [2 Marks]
b) Consider a 12 year project with the following pattern f cash flows.
Years Cash flows
1-5 years 4500 p.a.
6-8 years 6000 p.a.
9-12 years 5200 p.a.
Suppose the cost of capital is 10%, calculate the present value of the differentials annuity.
[4 Marks]
c) Outline 5 factors to consider when raising funds. [10 Marks]
d) Discuss 3 non-financial goals of the firm. [6 Marks]
e) With the aid of a diagram, explain the difference between systematic and unsystematic risk.[4 Marks]
QUESTION TWO
a) Explain fully the effect of the use of debt capital on the weighted average cost of the capital of
a company. [6 Marks]
b) Millennium Investments ltd wishes to raise funds amounting to Shs. 10 million to finance a project in the following manner:
Shs. 6 million from debt, and
Shs. 4 million from floating new ordinary shares
The present capital structure of the company is made up as follows:
1. 600,000 fully paid ordinary shares of shares of sh. 10 each.
2. Retained earning of shs. 4 million.
3. 200,000, 10% preference shares of shs. 20 each.
4. 40,000 6% long term debentures of shs. 150 eacg.
The current Market value of the company’s ordinary shares is shs. 60 per share. The expected ordinary share dividends in a year’s time is shs. 2.40 per share. The average growth rate in both dividends and earning has been 10% over the past ten year and this growth rate is expected to be maintained in the foreseeable future.
The company’s long-term debentures currently change hands for shs. 100 each. The
debentures will mature in 100 years. The debentures will mature in 100 years. The preference shares were issued four year ago and still change hands at face value.
i) Compute the component cost of:
• ordinary share capital [2 Marks]
• Debt Capital [2 Marks]
• Preference share capital [2 Marks]
ii) Compute the company’s current weighted average cost of capital. [ 4 Marks]
iii) Compute the company’s margin cost of capital if it raised the additional shs. 10
million as envisaged. (Assume a tax rate of 30%) [4 Marks]
QUESTION THREE
a) Outline 5 main advantages claimed by ratio analysis. [10 Marks]
b) Discuss 5 limitations of ratio analysis. [10 Marks]
QUESTION FOUR
a) Explain 4 ways in which financial forecasting is important. [8 Marks]
b) The balance sheet of X ltd as at 31/12/X/ was as follows.
Net fixed assets 12000
Current assets 4000
16000
Ordinary share capital 8000
Retained Earnings 5000
12% Debt 2000
Current liabilities 1000
16000
Additional Information
• For the year 20X1 sales amounted to # 20000. The sales are expected to increase by 40%
during the year 20X2.
• The net profit margin is 15%.
• The firm has a dividend payout ration of 70% which is expected to be maintained during the year 20X2.
i) i. Determine the external financial requirement of the firm. [5 Marks]
ii) ii. Prepare a proforma/projected balance sheet as at 31/12/20X2. [5 Marks]
iii) iii. State the assumptions made in your computation. [2 Marks]
QUESTION FIVE
Discuss the difference between the weighted marginal cost of capital and the weighted average cost
of capital. [20 Marks.]
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