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Cfm 310-F Issues In Financial Management (Saturday Class) Question Paper
Cfm 310-F Issues In Financial Management (Saturday Class)
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
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UNIVERSITY EXAMINATIONS: 2009/2010
THIRD YEAR STAGE 2 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 310-F ISSUES IN FINANCIAL MANAGEMENT
(SATURDAY CLASS)
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions
QUESTION ONE
a) i) Describe the term corporate restructing (2 Marks)
ii) Highlight financial and operational symptoms of a company in need of restructuring
(8 Marks)
b) i) Define the term management buyout (2 Marks)
ii) Describe five forms of management buyout (5 Marks)
iii) What are the advantages management buyout (3 Marks)
c) i) The following are the historical returns for the Anita computer company ltd
Year Anita computer company ltd General index
1 37 15
2 9 13
3 -11 14
4 8 -9
5 11 12
6 4 9
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Required:
i) Compute the correlation coefficient between Anita computer company ltd and the general
index. (8 Marks)
ii) Compute the beta for the Anita computer company ltd (2 Marks)
QUESTION TWO
The Wakulima manufacturing co.ltd has been in business for many years. During 2005 substantial
losses have been made and the directors have proposed a capital reduction scheme which is expected to
produced kshs 450,000 p.a before interest and taxation as follows:-
1. New ordinary share of 0.5 will be created
2. The kshs 20 ordinary shares will be written off and the shareholders will be offered one new
ordinary share for every six shares held.
3. The sh 20 6% redeemable preference shares will be cancelled and the holders will be offered
for every for every three existing preference shares, one new ordinary share and shs 20 of a
new 8% debenture
4. The existing11 ½ debenture will be exchangeable for anew debenture yielding 8% and in
addition existing debenture holder will be offered one new ordinary share for every shs 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 written off which is necessary is to be achieved by writing down
plant and equipment
8. Existing ordinary shareholders will be invited to subscribe for two fully paid new ordinary
shares at par for every three old share held.
9. There are no termination costs
10. Goodwill has no value
The balance sheet of wakulima manufacturing company ltd immediately prior to the capital reduction
is as follows:-
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Balance sheet as at 31 December 2007
Fixed and intangible asset shs shs shs
Goodwill 1,000,000
Freehold land and building at cost 1,900,000
plant and equipment at cost 5,500,000
Less depreciation (1,790,000) 3,710,000
6,610,000
Current assets
Debtors 1,000,000
Stock 500,000
1,500,000
Current liabilities
Creditors 1,270,000
Bank overdraft 317,000 (1,587,000) (87,000)
6,523,000
Long term loan secured on free hold 2,000,000
4,523,000
Capital reserves
Shs 20 ordinary shares fully paid 1,800,000
6% shs 20 preference shares 3,000,000
6% shs 20 preference shares 500,000
Share premium a/c (777,000)
Profit and loss a/c 4,523,000
Required
a) Assuming that the necessary approval is obtained and that the new shares issue is
Successful, prepare a balanced sheet as at 31.12.2007 of the company showing the
Position immediately after the scheme has been put into effect. (12 Marks)
b) Show the effect of the scheme on the expected earnings of the of the old shareholders
(4 Marks)
c) Indicate the points which a prefence shareholder should take into account before
Voting on the scheme
Assume that the corporation tax rate is 35%
QUESTION THREE
Directors of two divisions of Axion Pic. Were each asked last year to improve their
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division’s performance
Summarized financial data at that time for the divisions is shown below
Division A
000
Division B
000
Turnover 840 610
Operating profit 95 78
Interest 6 8
Taxable profit 89 70
Fixed assets 580 430
Current assets 290 250
Current liabilities 210 180
Medium and long-term debt 40 55
Shareholder’s equity 620 445
Capital employed 660 500
The results for the current year have just been announced as
Division A
000
Division B
000
Turnover 1000 650
Operating profit 122 94
Interest 18 8
Taxable profit 104 86
Fixed assets 680 440
Current assets 350 240
Current liabilities 260 170
Medium and long-term debt 140 55
Shareholder’s equity 630 455
Capital employed 770 510
Required
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Analyse the performance of the two divisions, and from the perspective of The future strategic
development of Axion suggest what controls the director’s Of Axion might introduce to influence the
future development of the divisions
Approach to the Question
You need to discuss how both divisions have achieved any boost in performance And what
Axion needs to do achieve long term growth (20 Marks)
QUESTION FOUR
a) Describe the term business valuation (2 Marks )
b) when is business valuation necessary ( 8 Marks)
c) Profed Ltd provides a tuition service to professional students. This includes Courses of lectures
provided on their own premises and provision of study materials for home study. Most of the
lecturers are qualified professionals with many years experience in both their profession and
tuition. Study materials are written and word processed in house but sent to an external printer.
The business was started fifteen years ago and now employs around 40 full time lecturers, 10
authors and 20 support staff. Freelance lecturers and authors are employed from time to time in
times of peak demand. The shareholders of Profed Ltd. mainly comprise the original founders
of the business who would now like to realize their investment. In order to arrive at an estimate
of what they believe the business is worth; they have identified a long- established quoted
company City Tutors who have a similar business, although they publish texts for external sale
to universities and colleges e.t.c
Summary financial statistics for the two companies for the most recent financial year s follows.
Profed Ltd City Tutors Ltd
Issued shares (millions) 4 10
Net asset value 7.2 15
Earnings per dividend 0.35 0.20
Dividend per share 0.20 0.18
Debt/Equity Ratio 1:7 1:6:5
Share price 3.62
Expected rate of growth 9% p.a 7.5% p.a
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in earnings and dividend
Additional information
1. The net assets of Profed. Ltd are the notebook values of tangible fixed assets plus net working
capital. However,
a recent valuation of the building was Kshs. 1.5 Million above the book value
stock include past edition of text books which have a realizable value of Kshs.
100,000 below their cost.
Due to a dispute with one of their clients, an additional allowance for bad debts
of Kshs. 750,000 could prudently be made.
2. Growth rates should be assumed to be constant per annum. Profed’s earnings growth
rate estimate was provided by the Marketing manager, based on expected growth in
sales adjusted by normal profit margins. City Tutors growth rates were gleaned from
press reports.
3. Profed uses a discount rate of 15% to appraise its investments and has done that for
many years.
Required
i) Computer a range of valuation for the business of Profed Ltd. using the information
available and starting any assumptions made.
ii) Comment upon the strengths and weaknesses of the methods you used in (i) above
and their suitability for valuing Profed Ltd.
QUESTION FIVE
a) What is financial engineering and financial innovation ( 4 Marks)
b) Identify any four factors that are responsible financial innovation? (4 Marks)
c) What is e-commerce? ( 2 Marks)
d) What are benefits or e-commerce to the business? ( 6 Marks)
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