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Business Finance Question Paper
Business Finance
Course:Diploma In Business Management
Institution: Kca University question papers
Exam Year:2009
UNIVERSITY EXAMINATIONS: 2009/2010
STAGE IV EXAMINATION FOR DIPLOMA IN BUSINESS MANAGEMENT
DFM 101: BUSINESS FINANCE
DATE: DECEMBER 2009 TIME: 1½ HOURS
INSTRUCTIONS: Answer any THREE questions
QUESTION ONE
i) Highlight the four functions of a finance manager [8 Marks]
ii) Explain the two financial objectives of a firm and give two advantages and two disadvantages of
each [8 Marks]
iii) A person is to pay Ksh 200,000 after one year, Ksh 300,000 after three years and ksh 500,000
after 5 years. It is expected that the rate of inflation will remain fairly constant during the period
at 12% per annum. The person wants to negotiate a deal in which he will pay the amount now.
How much should he be prepared to pay to settle? [4 Marks]
QUESTION TWO
a) i) Mshahulu intends to invest in a project whose initial cost is ksh 120,000. The project has an
economic useful life of 8 years. The annual cash flows are expected to be as follows;
Year Cashflows
Shs
1 20,000
2 18,000
3 22,000
4 28,000
5 42,000
6 12,000
2
7 28,000
8 17,000
Determine the project payback period [4 Marks]
ii) Explain any Two weaknesses of the Pay back period [2 Marks]
iii) What is the Present value of receiving an annuity of Ksh 75,000 at the end of each year for
the next six years, if the discount rate is 10%. [4 Marks]
b) i) Project JP21 has an initial cost of sh 72,000,000 and an estimated economic useful life of 10
years. The project is expected to generate annual cash flow of 16,000,000 each year. The firm’s
cost of capital is 12%. Determine the projects IRR. [6 Marks]
ii) Provide TWO advantages and TWO disadvantages of IRR [4 Marks]
QUESTION THREE
a) A company is faced with two options; to invest in two projects either project I or project II.
Project I requires an initial capital outlay of Ksh 1,000,000 while project II requires Ksh
1,500,000. The net cash inflows from the two projects are:
Year Project I Project II
1 100,000 300,000
2 350,000 650,000
3 600,000 200,000
4 400,000 350,000
5 - 400,000
The prevailing market rate of interest is 10%.
Required:
i) Compute the Net Present Value (N.P.V) of each of the projects [8 Marks]
ii) Advice the company on which project to undertake. Provide a reason for your answer
[2 Marks]
b) In respect of agency theory discuss the conflict that may exists between the shareholders and
management and the solutions of such conflicts. [10 Marks]
3
QUESTION FOUR
a) Define the following terms:
- Broker [2 Marks]
- Bull [2 Marks]
- Bear [2 Marks]
- Stags [2 Marks]
- Prospectus [2 Marks]
b) Highlight FIVE problems experienced by small business enterprises when raising funds to
expand their business [10 Marks]
QUESTION FIVE
a) The following is a capital structure of a firm together with the expected cost component.
Source of capital Amount Cost
Equity 450,000 18%
Retained earnings 150,000 18%
Preference shares 100,000 11%
Debt 300,000 8%
Required:
Taking the tax rate to be 30%, compute the weighted average cost of capital (WACC).
[10 Marks]
b) Explain the meaning of “overtrading” [4 Marks]
c) State SIX limitations of using ratios as a basis of financial analysis. [6 Marks]
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