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Cfm 101: Business Finance Question Paper
Cfm 101: Business Finance
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
1
UNIVERSITY EXAMINATIONS: 2008/2009
FIRST YEAR STAGE III EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 101: BUSINESS FINANCE
DATE: AUGUST 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
(a) Outline why individuals or investors prefer current cash to future cash. (4 marks)
(b) The following 6 companies constitute the index of the stock exchange:
Sh. A B C D E F
Today’s prices 28 54 80 96 50 48
Yesterday’s prices 25 53 80 90 52 42
Compute the stock market index for today. (2 marks)
(c) Explain the following terms:
(i) Systematic and unsystematic risk
(ii) Primary and secondary markets.
(iii) Money and capital markets. (6 marks)
(d) A company has a 4 year 10% Sh.1000 debenture which is redeemable at par. The current
market value of the debenture is Sh.900. The tax rate is 30%. Determine the redemption yield
for this debenture. (3 marks)
2
(e) The capital structure of a company consist of the following items:
Sh.
3m Ordinary shares 30m
Retained earnings 20m
1m 10% preference shares 20m
0.2m 6% debentures 30m
100m
The current market value of the company’s ordinary shares is Sh.30. The expected dividends
per share at the end of the year is sh.1.20. The average growth rate in dividends has been 10%
and this is expected to be maintained in the foreseeable future. The debentures of the company
have a face value of sh.150, however they currently sell for sh.100 in the market. The
debentures will mature in 100 years time. The preference shares of the company still sell at
their par value. Assume a tax rate of 30%. Calculate the weighted average cost of capital for
this company. (9 marks)
(f) Discuss the financial objectives of a firm. (6 marks)
QUESTION TWO
(a) Outline FIVE limitations of the use of ratios as a basis of financial analysis. (10 marks)
(b) The following information represents the financial position and financial results of AMETEX
Limited for the year ended 31 December 2008.
Trading, Profit and Loss Account
Sh.’000’ Sh.’000’
Sales – Cash 300,000
- Credit 600,000
900,000
Less: Cost of sales:
Opening stock 210,000
Purchases (660,000)
870,000
Less: Closing stock (150,000) 720,000
Gross profit 180,000
Less expenses:
Depreciation 13,100
Directors’ emoluments 15,000
General expenses 20,900
Interest on loan 4,000 (53,000)
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Net profit before tax 127,000
Corporation tax at 30% (38,100)
Net profit after tax 88,900
Preference dividend 4,800
Ordinary dividend 10,000 14,800
Retained profit for the year 74,100
Balance Sheet
Sh.’000’ Sh.’000’ Sh.’000’
Fixed assets 213,900
Current assets
Stock 150,000
Debtors 35,900
Cash 20,000 205,900
Current liabilities:
Trade creditors 60,000
Corporation tax payable 63,500
Proposed dividend 14,800 138,300 67,600
281,500
Financed by:
Ordinary share capital (Sh.10 par
value)
100,000
8% preference share capital 60,000
Revenue reserves 81,500
10% bank loan 40000 281,500
Additional information
(i) The company’s ordinary shares are selling at sh.20 in the stock market.
(ii) The company has a constant dividend payout of 10%.
Determine the following ratios:
(i) Acid test ratio (2 marks)
(ii) Operating ratio (2 marks)
(iii) Return on total capital employed. (2 marks)
(iv) Price earnings ratio (2 marks)
(v) Total assets turnover. (2 marks)
QUESTION THREE
(a) Explain any 5 factors that a company would consider before raising funds. (10 marks)
(b) The scope of business finance can be determined by the functions of a finance manager.
Discuss. (10 marks)
4
QUESTION FOUR
(a) The balance sheet of x Limited as at 31/12/X1 was as follows:
Net fixed assets 12,000
Current assets 4,000
16,000
Ordinary share capital 8,000
Retained earnings 5,000
12% debt 2,000
Current liabilities 1,000
16,000
Additional information
1. For the year 20X1 sales amounted to £20,000. The sales are expected to increase by
40% during the year 20X2.
2. The after tax profit on sales is 15%
3. The firm has a dividend payout ratio of 70% which is expected to be maintained during
the year 20X2.
(i) Determine the external financial requirement of the firm. (7 marks)
(ii) Prepare a proforma balance sheet as at 31/12/20X2. (6 marks)
(iii) State any assumptions made in your computations above. (2 marks)
(b) Outline any three methods of forecasting. (5 marks)
QUESTION FIVE
(a) Discuss any 5 differences between weighted average cost of capital and weighted marginal
cost of capital. (10 marks)
(b) XYZ Limited wishes to take advantage of the new commercial paper market now popular in
Kenya. It wishes to issue two debenture paper. Both bear coupons of 14% and the effective
yield required on each is 20 percent. Paper X has a maturity of 10 years and paper Y a
maturity of 20 years. Both will be paying interest annually and Ksh.100,000 at maturity.
(i) What is the price of each paper?
(ii) If the effective yield on each paper rises to 24% what is the price of each paper?
(10 marks)
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