Get premium membership and access revision papers, questions with answers as well as video lessons.

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
THIRD YEAR STAGE 1 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 101: BUSINESS FINANCE
DATE: APRIL 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) In relation to capital markets, differentiate between the terms stock markets and financial
markets. (4 marks)
b) Explain any 4 non-financial goals of the firm. (4 marks)
c) The nominal value of a company’s share is sh. 45 and its dividend for the year is 10% of the
nominal value of the share. The current market price per share is sh.90 and the earning yield
is 15%.
Required
i) Earnings per share
ii) Price earnings ratio (4 marks)
d) Biashara Ltd has the following capital structure:
Sh.000
Long-term debt 3,600
Ordinary share capital(sh.10 pr) 6,500
Retained earnings 4,000
2
The finance manager of Biashara Ltd has proposed for a project requiring shs.45 million. He has
proposed the following method of raising the funds.
• Utilize all the existing retained earnings
• Issue ordinary shares at the current market price
• Issue 100,000 10% preference shares at the current market prices of sh.100 per share which
is the same as the par value.
• Issue 10% debentures at the current market price of shs.1,000 per debenture.
Additional information
1 Currently, Biashara Ltd pays a dividend of sh.5 per share which is expected to grow at the rate
of 6% due to increased returns from the intended project Biashara Ltd’s price/earnings (P/E)
ratio and earnings per share (EPS) are 5 and sh.8 respectively.
2 The ordinary shares would be issued at a floatation cost of 10% based in the market price.
3 The debenture par value is sh.1,000 per debenture.
4 The corporate tax rate is 30%
Required
Biashara Ltd’s weighted average cost of capital (WACC). (10 marks)
e) The scope of business finance can be determined by the functions of a finance manager.
Elucidate. (8 marks)
QUESTION TWO
a) Explain why the weighted average cost of capital of a firm that uses relatively more debt
capital is generally lower than that of a firm that uses relatively less debt capital. (6 marks)
b) The total of the net working capital and fixed assets of Faida Ltd as at 30 April 2003 was shs.
100,000,000. The company wishes to raise additional funds to finance a project within the next
one year in the following manner.
Shs. 30,000,000 from debt
Shs. 20,000,000 form selling new ordinary shares.
3
The following items make up the equity of the company.
Sh
3,000,000 fully paid up ordinary shares 30,000,000
Accumulated retained earnings 20,000,000
1,000,000 10% preference shares 20,000,000
200,000 6% long term debentures 30,000,000
The current market value of the company’s ordinary shares is sh.30. The expected dividend on
ordinary shares by 30 April 2004 is forecast at sh .20 per share. The average growth rate in both
earnings and dividends has bee 10% over the last 10 years and this growth rate 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 shs. 100.
The debentures will mature in 100 years.
The preference shares were issued four years ago and still sell at their face value.
Assume a tax rate of 30%
Required
i) The expected rate of return on ordinary shares. (2 marks)
ii) The effective cost to the company of:
• Debt capital (2marks)
• Preference shares capital (2 marks)
iii) The company’s existing weighted average cost of capital. (4marks)
iv) The company’s marginal cost of capital if it raised the additional sh50, 000,000 as intended.
(4 marks)
4
QUESTION THREE
a) The following information is on a company in the power generation business:
Sh.’000’
10% preference shares (sh.10 par) 400,000
Ordinary share capital (sh 10 par) 400,000
800,000
Rented profits 700,000
1,500,000
15% debentures 1,200,000
2,700,000
Required
(i) Calculate the gearing ratio for the above company. ( 2 Marks)
(ii) If the company’s net profit (before interest and tax) is sh.2, 000,000,000 and assuming a
dividend payout ratio of 60% of the earnings, compute the dividend per share (DPS) .
Assume a tax rate of 40%. (6 marks)
(iii) If the market price per share now is sh.80, compute the dividend yield. (2 marks)
b) List and explain five factors that should be taken into account by a businessman in making the
choice between financing by short-term and long term sources. (10 marks)
QUESTION FOUR
a) Seagull Plc has identified that it could make operating cost savings in production by buying an
automatic press. There are two suitable such processes on the market, the Zenith and the
super. The relevant data relating to each of these are as follows;
Zenith Super
£ £
Cost(payable immediately) Annual
savings:
20,000 25,000
Year 1 4000 8000
2 6000 6000
3 6000 5000
4 7000 6000
5 6000 8000
5
The annual savings are, in effect, opportunity cash-inflows I that they represent savings from
the cash outflows that would occur if the investment were not undertaken. Which, if either, of
these machines should be bought if the borrowing/lending cost is 12 percent p.a? (8 marks)
b) Outline any three financing policies giving their risk return trade off. (6 marks)
c) Assume that you have won a charity sweepstake lottery which promises to pay sh.50,000 for
the next 20 years. The government has announced this to be a sh. 1,000,000 lottery since
50,000 x 20 = 1,000,000. If the discounting rate is 20% advise the government on the actual
value of this lottery. (2 marks)
d) Outline any 4 reasons why individuals or investors prefer current cash to future cash.
(4 marks)
QUESTION FIVE
The management of ABC Ltd want to establish the amount of financial need for the next two years.
The balance sheet of the firm as at 31 December 2007 is as follows;
Sh.’000’
Net fixed assets 124,800
Stock 38,400
Debtors 28,800
Cash 7,200
Total assets 199,200
======
Financed by:
Ordinary share capital 84,000
Retained earnings 35,200
12% long-term debt 20,000
Trade creditors 36,000
Accrued expenses 24,000
199,200
======
For the year ended 31 December 2007, sales amounted to sh. 240,000,000. The firm projects that the
sales will increase by 15% in the year 2008 and 20% in the year 2009.
The after tax profit on sales has been 11% but the management is pessimistic about future operating
costs and intend to use an after-tax profit on sales rate of 8% per annum.
6
The firm intends to maintain its dividends payout ratio of 80%. Assets are expected to vary directly
with sales while trade creditors and accrued expenses form the spontaneous sources of financing. Any
external financing will be effected through the use of commercial paper.
Required
a) Determine the amount of external financial requirements for the next two years. (8 marks)
b) (i) A proforma balance sheet as at 31 December 2009. (8 marks)
ii) State the fundamental assumption made in your computations in (a) and b(i) above.
( 4 marks)

Cfm 101: Business Finance Question Paper

More Question Papers

Popular Exams