Get premium membership and access revision papers, questions with answers as well as video lessons.
Cam 310-F: Issues In Financial Management Question Paper
Cam 310-F: Issues In Financial Management
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
1
UNIVERSITY EXAMINATIONS: 2008/2009
THIRD YEAR STAGE II EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CAM 310-F: ISSUES IN FINANCIAL MANAGEMENT
DATE: APRIL 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a)
i) What is financing engineering and financial innovation? (2 Marks)
ii) Identify any three factors that are responsible for financial innovations (3 Marks)
a) What is corporate restructuring and what are its symptom (8 Marks)
b) XYZ Ltd is retailing outlet quoted on the Nairobi Stock Exchange. The outlet has over 30
branches spread across the country. For the last two years, the company has registered negative
performance in terms of after tax profits and earnings per share. The shareholders of the
company have not received any dividend during the two years covered by the consolidated
financial statements.
A large proportion of current liabilities relate to amounts owned by the company to its
suppliers and bank borrowings initially used to financed an unprecedented expansion
programme which is yet to yield any positive results.
The company is unable to obtain short term credit facilities because its credit rating has
significantly declined owing to poor financial performance reflected in the financial statements
and cash flow problems.
2
The directors have proposed a right issue through the Nairobi Stock Exchange expected to realize
Ksh 1.5 billion which should be subsequently injected in the business operation.
The consolidated financial statements of the company are as shown below:
Consolidated Profit and Loss Account
Year ended 30 June 2008
2008 2007
Shs'000 Shs’ 000
Sales 7,962,986 8.900,858
Cost of sales (6,814,950) (7,452,417)
Gross profit 1,148,036 1,448,441
Other operating income and expense 232,896 162,630
Operating costs (2,010,617) (1,778,936)
Operating loss (629,685) (167,865)
Finance costs (24,673) (78,167)
Loss before tax (654,358) (246,032)
Tax (charge)/credit (44,553) 49,463
Net loss (698,911) (196,569)
Shs Shs.
Loss per share (basic and diluted) (11.65) (3.28)
Consolidated Balance Sheet
Year ended 30 June 2008
2008 2007
Shs’000 Shs’000
Capital employed
Share capital 300,000 300,000
Share premium 129,452 129,452
Revaluation reserve 178,652 101,946
Translation reserves (12,042) 841
Accumulated losses (486,097) 169,602
Shareholders' funds 109,965 701,841
Non-current liabilities
Borrowings 416,308 -
526,273 701,841
3
Represented by
Non-current assets
Property, plant and equipment 1,481,493 1,370,537
Prepaid operating rentals 161,456 230,267
Deferred tax - 44,553
Intangible assets 209,200 210,742
Non-current receivables 1,582 5,995
1,853.731 1.862,094
Current assets
Inventories 940,837 1,264,141
Receivables and prepayments 367,349 179,023
Tax recoverable 30,882 30,882
Cash and bank balances 72.298 100,621
1,411.366 1,574,667
Current liabilities
Payables and accrued expenses 2,026,617 1,805,027
Borrowings 712,207 929.893
2,738,824 2.734,920
Net current liabilities (1,327,458) (1,160,253)
526,273 701.841
Required:
As a financial consultant evaluate the performance of the company based on the consolidated financial
statements and recommend the strategic alternatives required to put the company to a profitable path.
(12 Marks)
(Total: 20 Marks)
QUESTION TWO
a) Briefly explain three practical uses of the capital asset pricing model ( 6 Marks)
b) Mr. Wetu is currently holding a portfolio consisting of shares of four companies quoted at
the Bahati stock exchange as follows:
4
Company No. of shares held Beta equity co-efficient Market expected return
Price per on equity in
Share the next year
%
A 20,000 1.12 65 18
B 30,000 0.89 50 23
C 30,000 0.70 45 11
D 20,000 1.60 80 17
The current Market return is 14% per annum and the treasury bills yields is 9% per annum.
Required
i) Calculate the risk of Wetu portfolio relative to that of the Market (5 Marks)
ii) Explain whether or not Wetu should change the composition of his portfolio (9 Marks)
QUESTION THREE
The Shida Nyingi Co. Ltd. has been in business for many years making furniture and chairs. During
the 2006 and substantial losses have been sustained on the manufacture of chairs and the directors
have decided to concentrate on the furniture side of business which is expected to produce a profit of
at least Sh. 450,000 p. a. before interest and taxation. A capital reduction scheme has been proposed
under which:-
(1) A new ordinary share of Sh.0.5 value will be created.
(2) The Sh.20 ordinary shares will be written off and the shareholders will be offered one new
ordinary share for every six old shares held.
(3) The Sh.20, 6% redeemable preference shares will be cancelled and the holders will be offered for
every three existing preference shares, one new ordinary share and Sh.20 of a new 8% debenture.
(4) The existing 11 ½ % debenture will be exchanged for a new debenture yielding 8% and in addition
existing debenture holders will be offered one new ordinary share for every Sli.80 of the old
debenture held.
(5) Existing reserves will be written off.
(6) Goodwill is to be written off.
(7) Any remaining balance of write off which is necessary is to be achieved by writing down plant and
equipment.
5
(8) Existing ordinary shareholders will be invited to subscribe for two fully paid new ordinary shares
at par for every three old shares held.
(9) There are no termination costs on closing the chair production line.
(10) Goodwill has no value.
The balance sheet of Shida Nyingi Co. Ltd. immediately prior to the capital reduction is as follows:
Balance Sheet as at 31 March 2008
Sh, Sh. Sh.
Fixed intangible assets:
Goodwill at cost less written off, 1,000,000
Fixed tangible assets:
Freehold land and buildings at cost 1,900,000
Plant and Equipment at cost 5,500,000
Less depreciation to-date 1,790,000 3,710,000
6,610,000
Current assets:
Stocks 500,000
Debtors 1,000,000
1,500,000
Current liabilities:
Creditors 1,270,000
Bank overdraft 317,000 1,587,000
Excess of Current Liabilities (87.000)
6,523,000
Long term loan:
1 1½ % debenture, secured on the freehold land and buildings 2.000.000
4,523,000
Capital and reserves Sh.
Sh.20 ordinary share fully paid 1,800,000
6% sh, 20 redeemable preference shares fully paid 3,000,000
Share premium account 500,000
Profit and loss account (777.000)
Required:
6
(a) Assuming that the necessary approval is obtained and that the new share issue is successful,
prepare a balance sheet as at 31 March, 2008 of the company showing the position immediately
after the scheme has been put into effect. (12 Marks)
Show the effect of the scheme on the expected earnings of the old shareholders.
(6 Marks)
(c) Indicate the points which a preference shareholder should take into account before voting on the
scheme. (2 Marks)
Assume that the Corporation tax rate is 35%. (Total: 20 Marks)
QUESTION FOUR
a) Explain the 3 major reasons for business valuations. Discuss two major approaches which are
frequently used. (5 Marks)
b) The directors of Upendo Plc were asked last year to improve their subdiary’s performance.
Summarized financial data at that time for the subsidiary is shown below.
Ksh 000
Turnover 840
Operating profit 95
Interest 6
Taxable profit 89
Fixed assets 580
Current assets 290
Current liabilities 210
Medium and long-term debt 40
Shareholders' equity 620
Capital employed 660
The results for the current year have just been announced as:
Kshs. 000
Turnover 1,000
Operating profit 122
Interest 18
7
Taxable profit 104
Fixed assets 680
Current assets 350
Current liabilities 260
Medium and long-term debt 140
Shareholders' equity 630
Capital employed 770
Required
Analyse the performance of the subsidiary, and from the perspective of the future strategic
development of Upendo Plc suggest what controls the directors of Upendo Plc might introduce
to influence the future development of the subsidiary. (15 Marks)
QUESTION FIVE
a) Describe a merger ( 2 Marks)
b) Identify and discuss four reasons why accompany seeking to maximize the wealth of its
shareholders may wish to take over another company ( 8 Marks)
c) Evaluate the cash share exchange and loan capital for share exchange options as methods of
purchase consideration from the view point of the shareholders of both companies ( 10 Marks)
More Question Papers
Popular Exams
Return to Question Papers