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Cfm 200 Financial Management Question Paper
Cfm 200 Financial Management
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
UNIVERSITY EXAMINATIONS: 2011/2012
YEAR 2 EXAMINATION FOR THE BACHELOR OF COMMERCE
CFM 200 FINANCIAL MANAGEMENT- DAY + EVENING
DATE: APRIL 2012 TIME: 2 HOURS
INSTRUCTIONS: Answer Question One and Any other Two Questions
QUESTION ONE
(a) Outline 5 benefits of mergers and acquisitions. (10 marks)
(b) XYZ Limited a debt collection agent has estimated that the standard deviation of its daily net cash
flows is Sh.22,750. The company pays Sh.120 in transaction cost every time it transfers fund
into and out of the money market. The rate of interest in the money market is 9.465%. The
company uses Miller-Orr model to set its target cash balance. The minimum cash balance has
been set at Sh.87,500.
Required:
(i) The return pint. (3 marks)
(ii) The upper cash limit. (2 marks)
(iii) The company’s decision rule. (3 marks)
(c) Discuss any three theories of valuation of a security or business. (9 marks)
(d) Explain any 3 types of leverage. (3 marks)
QUESTION TWO
a) Goldstar manufacturing Limited is evaluating an investment opportunity that would require an
outlay of sh.100 million. The annual net cash inflows are estimated to vary according to
economic conditions.
Economic conditions Probability Cash-flow (sh. Million)
Very good 0.1 35
Good 0.45 28
Fair 0.30 24
Poor 0.15 18
2
The firm’s required rate of return is 14%. The project has an expected life of six years.
Compute the expected net present value of the proposed investment. (5 marks)
b) ABC Limited is planning advertising campaigns in three different market areas. The estimates
of probability of success and associated additional profits in each of the three markets are
provided below:
Market I Market 2 Market 3
Profit
Sh.
Probability Profit
Sh.
Probability Profit
Sh.
Probability
Fair 10,000 0.4 5,000 0.2 16.000 0.5
Normal 18,000 0.5 8,000 0.6 20,000 0.3
Excellent 25,000 0.1 12,000 0.2 25,000 0.2
Required
i) Compute the expected return and standard deviation of profits resulting from advertising
campaigns in each of the market areas. (5 marks)
(ii) Rank the three markets according to risksness using the coefficient of variation. (3 marks)
(c) Outline the advantages and disadvantages of sensitivity analysis. (7 marks)
QUESTION THREE
(a) Discuss 5 assumptions of the capital structure theories. (10 marks)
(b) Assume that you are given the following information concerning 2 companies A and B:
A B
EBIT 10,000 10,000
5% debt interest ______ 1,500
EBT 10,000 8,500
Ke 10% 8%
(i) Determine the value of the 2 firms. (4 marks)
(ii) How will an investor practice the arbitrage process assuming that the investor owns 10% in
any of the two companies. (4 marks)
3
(c) Outline two specific assumptions of the net operating income approach. (2 marks)
QUESTION FOUR
(a) Explain 4 different dividend policies which influence the amount of dividend per share a company
can pay. (8 marks)
(b) Outline any 6 dividend theories which attempt to explain how the payment of dividends affects the
value of the firm. (12 marks)
QUESTION FIVE
(a) Outline any 5 sources of conflict between the shareholders (principal) and management (agent).
(10 marks)
(b) Discuss any 5 solutions to the agency problem between bondholders (principal) and the
shareholders (agents). (10 marks)
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