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Financial Management (Day&Amp; Evening Class) Question Paper
Financial Management (Day&Amp; Evening Class)
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR STAGE1 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 200: FINANCIAL MANAGEMENT (DAY& EVENING CLASS)
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions
QUESTION ONE
a) A company is considering undertaking a project whose initial cash outlay is Kshs. 100,000. Its
annual cash inflow is summarized bellows.
Year Annual cash inflows Certainty equivalent coefficient
1 35000 0.9
2 35000 0.8
3 35000 0.7
4 35000 0.3
5 35000 0.2
The cost of capital is 10% and the rsk free rate is 7.5%.
i) Determine the project’s Net Present Value (NPV) without adjusting for the inherent
risk in the respective year cash flows. [3 Marks]
ii) Calculate the projects NPV after adjusting for the inherent risk in each years cash
flows. [5 Marks]
b) XYZ limited maintains a minimum cash balance of Shs. 500,000. The standard deviation of
the company’s daily cash changes is Shs. 200,000. The annual interest rate is 14%. The
transaction cost of buying or selling is Shs. 150 per transaction. Using Miller-On cash
management model determine the following.
i) The return point [2 Marks]
ii) The upper cash limit [2 Marks]
iii) The average cash balance [2 Marks]
c) Outline five reasons for valuation of companies. [10 Marks]
d) Discuss 3 types of financial policies giving their risk return trade off. [6 Marks]
QUESTION TWO
Outline 10 factors that a company could consider when paying dividends. [20 Marks]
QUESTION THREE
a) Assume you are given the following information concerning 2 companies A and B.
A B
EBIT 10000 10000
5% debt interest - 1500
10000 8500
Ke 10% 11%
i) Determine the value of the 2 firms. [4 Marks]
ii) Assume that an investor owns 10% in one of the firms. Determine how s/he will
practice the arbitrage process. [6 Marks]
b) Explain 5 general assumptions necessary for the theories of capital structure to apply.
[10 Marks]
QUESTION FOUR
a) An agency problem or conflict o finterst between the bondholders (principal) and the
shareholders (agents) will arise when shareholders take action which will reduce the Market
value of the bond and by extension, the wealth of the bondholders. Outline 5 actions.
[10 Marks]
b) Discuss 5 solutions to the agency problem above. [10 Marks]
QUESTION FIVE
a) The following information relates to the operations and capital structure of XYZ limited.
Installed capacity 1200 units
Actual production 800 units
Selling price per unit shs15
Variable cost shs10
Fixed Costs Situation A Shs. 1000
Situation B Shs. 2000
Situation C Shs. 3000
Capital Structure
Future plans
1 2 3
Equity (shs) 5000 1500 2500
Debt (shs) 5000 2500 7500
The cost of debt for all the plans is 12%.
i) Determine the operating leverage under situation A, B and C respectively. [2 Marks]
ii) Determine financial leverage under financial plans 1, 2 and 3 respectively. [6 Marks]
b) Identify and discuss six defensive tactics that a company may employ to resist an unwelcome bid.
[12 Marks]
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