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Cfm 201 – Financal Planning And Control Question Paper
Cfm 201 – Financal Planning And Control
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
1
UNIVERSITY EXAMINATIONS: 2008/2009
SECOND YEAR STAGE III EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 201 – FINANCAL PLANNING AND CONTROL – SUNDAY CLASS
DATE: AUGUST 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) Explain two capital structure theories and how they influence financing by firms. (6 Marks)
b)
i.) What benefits are derived from budgetary financial control? (4 Marks)
ii.) Differentiate between a budget and a forecast. (2 Marks)
c) Paka Ltd has the following data to be used for establishing its 2009 budget.
PRODUCTION DATA
Production volume 1,200,000 bottles
Estimated variable production overhead Sh. 5,400,000
Estimated fixed production overhead (excluding
depreciation)
Sh. 7,200,000
Standard material cost Sh. 27 per bottle
Standard labour cost Sh. 50 per bottle
SELLING AND ADMINISTRATIVE DATA
Fixed administrative and selling expenses Sh. 1,500,000
Variable administrative and selling expenses Sh. 32 Per bottle
INVESTMENT DATA
Estimated plant and equipment depreciation expense for
2009
Sh. 4,800,000
Depreciation expense for 2009 tools Sh. 600,000
2
Required:
i.) Compute the selling price if the desired gross profit is 33?% of sales using standard
costing. (3 Marks)
ii.) Construct the budgeted profit and loss account for 2009 (6 Marks)
d) What are some of the differences between ‘normal’ budgeting and zero-base budgeting?
(5Marks)
e) Describe two signs that help indicate when Activity Based Costing is likely to provide the
most benefits. (4Marks)
QUESTION TWO
a) Explain three methods of determining transfer prices (9 marks)
b) What are some of the component costs of the cost of capital? (3 marks)
c) Consider two firms with the following characteristics
L U
EBIT 900,000 900,000
Debt @ 7.5% 2,000,000 -
Cost of Equity (Ke) 10% 10%
If the firms are identical in all respects apart from the way they are financed and their total
market value, determine;
i.) The value of each firm using the net income approach (3 Marks)
ii.) The arbitrage opportunities available to an investor who owns 10% of the overvalued
firm. (5 Marks)
QUESTION THREE
a) RBC Ltd has a total market value of Sh. 10,000,000. The market value of its equity is Sh.
6,000,000 and debt is valued at Sh. 4,000,000. The before tax cost of debt is 8%. The firm has
a beta of 0.8, the market risk is 4% and risk free rate is 6%. The marginal tax rate is 35%.
3
i.) Estimate the weighted average cost of capital for the company. (5 Marks)
ii.) RBC Ltd is considering a project expected to produce Sh. 600,000 in annual after tax
cash flows for the next 5 years. The project has the same risk as the company’s existing
operations and is expected to support the same debt capacity. What is the project’s NPV
if sh. 2,000,000 is required for the project? (5 Marks)
iii.) RBC Ltd is planning to spend larger amounts on Research and Development over the
next few years and feels it may not be able to use the entire tax shield generated by a
40% debt ratio. It is considering lowering the debt to 20% and reduce before tax cost of
debt to 7.5%. Should it implement this plan? (5 Marks)
b) What is the significance of cost of capital to financial managers? (5 Marks)
QUESTION FOUR
a) Explain and elaborate on the process of the budget cycle. (5 Marks)
b) Index Ltd has been experiencing a Sh. 200,000 increase in sales each month for the past half
year and it anticipates this monthly increase will continue for the immediately foreseeable
future. Its profit statement for last month was as follows:
Sh. Sh
Sales 2,000,000
Costs: Direct Materials 1,000,000
Direct labour 400,000
Variable overheads 200,000
Fixed overheads 200,000
Rent 50,000 (1,850,000)
PROFIT 150,000
The company’s sales are on credit, the debtors paying two months after the sale while creditors
for materials and overheads are paid after the company has taken one month’s credit. Labour
costs are paid as they are incurred and rent is paid quarterly. Last month the rent was paid and
the month-end cash balance was sh. 100,000. Sh. 100,000 capital expenditure is planned for
month 2. There are no stocks at any time.
4
Prepare the cash budget for the next four months. (15 Marks)
QUESTION FIVE
Easy Dig Co. makes shovels, spades and garden forks which they sell to local retailers. During
the last three months they made and sold 8,000 forks, 7,000 spades and 5,000 shovels. The
gross manufacturing labour cost (including holiday pay, sick pay, and statutory payments) is
Sh. 200 per hour for each man. The manufacturing times and material costs are as follows
Fork Spade Shovel
Labour minutes per unit
Fabrication 6 6 9
Assembly 3 3 3
Material cost per unit
Steel 230 180 170
Wood 50 50 60
Fasteners 10 10 10
Total manufacturing overheads for the last three months were Sh. 3,900,000 for the last three
months and are recovered direct on direct labour minutes.
Determine for each product:
a) Labour cost per unit (4 marks)
b) Material cost per unit (4 marks)
c) Manufacturing overhead cost per unit (4 marks)
d) Total cost per unit (4 marks)
e) Selling price per unit if a margin of 20% is expected (4 marks)
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