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Cfm 101: Business Finance Question Paper
Cfm 101: Business Finance
Course:
Institution: Kca University question papers
Exam Year:2009
1
UNIVERSITY EXAMINATIONS: 2008/2009
FIRST YEAR STAGE 3 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 101: BUSINESS FINANCE (SATURDAY CLASS)
DATE: APRIL 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) Discuss the factors that affect the weighted cost of capital ( 3 Marks)
b) Discuss the financial goals of a business and highlight the attendant conflicts that comes with the
pursuit of this goals ( 6 Marks)
c) East African courier ltd is a company operating in Naivasha. Discuss the systematic and the
unsystematic risks that may afflict this business (4 Marks).
d) The government of Kenya is set to divest from 12 state companies by 2011. Discuss the
requirements that should be met by this companies if they are to divest through the Nairobi Stock
exchange ( 7 Marks)
e) Discuss the importance of financial forecasting (4 Marks).
f) Discuss conditions under which a company should use short term debt finance ( 6 Marks)
2
QUESTION TWO.
You are presented with the Financial statements of ABC Ltd as Shown Below
ABC Company
Common Size Balance Sheet
For the year ending December 31, 200x
Assets Kshs
Current Assets
Cash 12,000
Marketable Securities 10,000
Accounts Receivable (net of uncollectible accounts) 17,000
Inventory 22,000
Prepaid Expense 4,000
Total Current Assets 65,000
Fixed Assets
Building and Equipment 105,000
Less Depreciation 30,000
Net Buildings and Equipment 75,000
Land 40,000
Total Fixed Assets 115,000
Total Assets 180,000
Liabilities
Current Liabilities
Wages Payable 3,000
Accounts Payable 25,000
Taxes Payable 12,000
Total Current Liabilities 40,000
Long-Term Liabilities
Mortgage Payable 70,000
Note Payable 15,000
Deferred Taxes 15,000
Total Long-Term Liabilities 100,000
Total Liabilities 140,000
Owner's Equity 40,000
Total Liabilities and Owner's Equity 180,000
3
ABC Company
Income Statement For the year ending
December 31, 200x
Sales $ 200,000
Cost of goods sold 130,000
Gross Profit 70,000
Operating expenses
Selling expenses 22,000
General expenses 10,000
Administrative expenses 4,000
Total operating expenses 36,000
Operating income 34,000
Other income 2,500
Interest expense 500
Income before taxes 36,000
Income taxes 1,800
Net profit 34,200
Calculate:
a)
i. Current ratio (3 Marks).
ii. Quick Ratio (3 Marks).
iii. Inventory ratio (3 Marks).
iv. Return on Assets (3 Marks).
v. Working Capital (3 Marks).
b) Discuss the advantages that may accrue to a company if chooses to use debt financing (5 Marks)
4
QUESTION THREE
Alison Inc
Income Statement
For the Year Ended December 31,19xx
KSHS KSHS
Net sales 900,000
Dividend Revenue 3,000
Intrest Reveneu 6,000
gain in sale of plant assets 31,000
Total revenu and Gains 940,000
Costs, expenses and losses
cost of goods sold 500,000
Operating expenses ( including depreciation
40,000 300,000
Interest income 35,000
Income tax expenses 36,000
Loss on sale of Marketable securities 4,000
Total costs , expenses and losses 875,000
Net Income 65,000
Alison Inc
Comparative balance Sheets
Current Year
Assets
End of Year
Dec 31
Beginning of
year
Cash and Market equivalents 55,000 20,000
Marketable Securities 85,000 64,000
Notes Receivable 17,000 12,000
Accounts receivable 110,000 80,000
Accrued Interest Receivable 2,000 3,000
Inventory 100,000 90,000
Prepaid Expenses 4,000 1,000
Total Current assets 373,000 270,000
Plant and equipment ( accumulated
depreciation 616,000 500,000
Total Assest 989,000 770,000
Liabilities and Stock Holders equity
5
Notes payable ( short term) 45,000 55,000
Accounts payable 76,000 61,000
Interest payable 22,000 15,000
Income taxes payable 8,000 10,000
Other accrued expenses payable 3,000 9,000
Total Current liabilities 154,000 150,000
Longterm Liabilities
Notes payable ( longterm) 40,000 -0-
Bonds Payable 400,000 300,000
Total liabilities 594,000 450,000
Stock holders Equity
Capital Stock 60,000 50,000
Additional Paid in Capital 140,000 100,000
Retained Earnings 195,000 170,000
Total Stock Holders Equity 395,000 320,000
Total Liabilities and stock holders equity 989,000 770,000
Required:
Prepare a cash flow statement for the year (20 Marks)
QUESTION FOUR
The finance manager for kosoiwo ltd is in the process of seeking for additional finance for the
company’s expansion. He has been provided with the data below.
Source of Capital Specific Costs (%) Amount (kshs)
Equity 16 600,000
Preference shares 14 50,000
Debt 12 350,000
The tax rate is 30%.
Required:
Calculate the weighted cost of capital (10 Marks)
ii) discuss the merits and demerits of ratio analysis ( 5 Marks)
iii) outline the steps for calculating the weighted marginal cost of capital ( 5 Marks)
6
QUESTION FIVE
a) Discuss the requirements that should be met by a company before raising debt finance ( 5 Marks)
b) Timothy has placed kshs 1,000 in a savings account of a bank at 5% per annum. How much shall
it grow at the end of three years? (3 Marks)
c) Kigwe will be receiving kshs 50,000 after 15 years from today. Her interest rate is 9%. Calculate
the present value of this future lump sum. (3 Marks)
d) Discuss the arguments in favour of retention as a source of finance ( 6 Marks)
e) Discuss the importance of financial planning ( 3 Marks)
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