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Business Finance Question Paper
Business Finance
Course:Diploma In Business Management
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2009/2010
STAGE IV EXAMINATION FOR DIPLOMA IN BUSINESS MANAGEMENT
DFM 101: BUSINESS FINANCE
DATE: APRIL 2010 TIME: 1½ HOURS
INSTRUCTIONS: Answer any THREE questions
Question One
a) Discuss the usefulness of a cash flow statement (8 Marks)
b) Kebokero investment Co. ltd wants to raise further finance from the following sources
• To issue 500,000 ordinary shares of Kshs. 10 at Kshs. 15 each
• To issue 600,000 10% preference shares of Kshs. 10 at Kshs. 12 each
• To issue 400,000 15% debentures of Kshs. 100 at Kshs. 90 each
• To raise a medium term loan of Kshs. 5,000,000 at an interest rate of 20%
The company will pay an annual dividend to ordinary shares of 14%. Assume a corporate tax of 50%
Required:-
Calculate the average cost of additional finance (12 Marks)
Question Two
Morgan Enterprises wants to invest in one of the projects X and Y.
Project X costs Kshs. 300,000 and project Y costs Kshs. 1,000,000. The annual returns are as follows:
Project X Kshs. Project Y Kshs.
Year 1 100,000 150,000
Year 2 120,000 260,000
Year 3 140,000 480,000
Year 4 150,000 500,000
Year 5 80,000 400,000
Year 6 60,000 320,000
Required
a) Calculate the net present value (NPV) for each of the projects using 12% as the discount rate
(12 Marks)
b) Use the payback period to determine the viable project (8 Marks)
Question Three
a) In the context of a business organization, explain the concept of profit maximization giving its
advantages and disadvantages (5 Marks)
b) Ecowas Ltd wants to by a new item of equipment which will be used to provide a service to
customers of the company. Two models of equipment are available, one with a slightly higher
capacity and greater reliability than the other. The expected costs and profits of each item are
as follows:-
Equipment item Equipment item
X Y
Capital cost Kshs. 800,000 Kshs. 1,500,000
Life 5 years 5 years
Profits before depreciation Kshs Kshs
Year 1 500,000 500,000
Year 2 500,000 500,000
Year 3 300,000 600,000
Year 4 200,000 600,000
Year 5 100,000 600,000
Disposal value 0 0
ARR is measured at the average annual profit after depreciation divided by the average net book value
of the assets.
Required
Decide which item of equipment should be selected, if any, if the company’s target ARR is 30%
(15 Marks)
Question Four
Study the following financial statements of Chandu plc and answer the questions that follow.
Tradition, profit and loss account
Sales 555,000
Less cost of good sold
Opening stock 100,000
Add purchases 200,000
300,000
Less closing stock 60,000 240,000
Gross Profit 315,000
Less Depreciation 5,000
Wages 165,000
Other expenses 45,000 215,000
Net profit 100,000
Balance Sheet
Fixed assets
Equipment at cost 50,000
Less depreciation to (40,000) 10,000
Date
Current assets
Stock 60,000
Debtors 125,000
Bank 25,000
210,000
Less current liabilities
Creditors (104,000) 106,000
116,000
Financed by
Capitals:
Balance at start of 76,000
year
Add net profit 100,000
4
176,000
Less Drawings (60,000)
116,000
Required
Calculate the following financial ratios: (20 Marks)
i. Gross profit margin
ii. Net profit margin
iii. Stock turn over
iv. Rate of return on capital employed (use the average of capital account for this purpose)
v. Current ratio
vi. Acid test ratio
vii. Debtor days
viii. Credit/purchase ratio
ix. Expenses as a percentage of sales.
Question Five
a) Discuss any three goals of a business firm (6 Marks)
b) Outline any four limitations of using ratios as a basis for financial analysis (4 Marks)
c) Explain any three functions of a finance manager (6 Marks)
d) i. What is meant by the time value of money (1 Mark)
ii. Miss Queen has won Kshs. 1 million in a lottery. She wants to invest this money for 5 years
so that she can purchase a house worth Kshs. 1.6 million at the end of the period.What rate of
interest will earn her enough to purchase the house (3 Marks)
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