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Cfm 310 F Issues In Financial Management Question Paper
Cfm 310 F Issues In Financial Management
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
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UNIVERSITY EXAMINATIONS: 2010/2011
FIRST YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 310 F ISSUES IN FINANCIAL MANAGEMENT
DATE: DECEMBER2011 TIME: 2 HOURS
INSTRUCTIONS: Answer Question One and Any Other Two Questions
Question One
a) i Define financial distress and state the indicators of financially distressed
firm. (8 Marks)
ii During the last 5 years period, the average annual rate of return on the
Nairobi Stock Exchange (NSE) was 14% and average annual rate of return
on Treasury bills was 8 %. The company wants to renew the investment
contract of the following three managers:
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Manager Average Beta (ß) Standard
Annual Return Portfolio Deviation(s)
______ (%) of Portfolio (%)
A 12 0.90 1.8
B 16 1.05 2.2
C 18 1.2 2.3
Required
a) Evaluate the performance of each manager using
i. Treynor’s Portfolio performance measure
ii. Sharpe’s portfolio performance measure
iii. Jensen’s portfolio performance measure
Interpret your results in each case and recommend which investment should be renewed contract.
(9 Marks)
b) State the uses of Portfolio Theory and the differences between Arbitrage Pricing Theory
(APT) and Capital Assets Pricing Model (CAPM). (6 Marks)
c) The financial analyst have developed Value Based Management Systems (VBMS)
to measure the wealth of shareholders.
Company ABC Ltd uses Marakon Value Based Model and has provided you with the following
information
Return on Equity - 20%
Dividend Payout Ratio - 30%
Required rate of return - 16%
The book value per share is Shs 30.
Required
The market price per share using Marakon Model . (3 Marks)
If equity Return falls to 18% what should be the payout ratio to ensure that the market price per
share remains the same? (4 Marks)
Question Two
State the three main stages of merger analysis. (3 Marks)
Songo company Ltd has decided to acquire Small Company Ltd. The financial data for the two
companies is given below:-
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Songo Ltd Small Ltd
Net Sales (Sh m) 350 45
PAT (Sh m) 28.13 3.75
No. of Shares (m) 7.5 1.5
EPS (Shs) 3.75 2.5
Dividend per share (shs) 1.3 0.6
Total market capitalization (shs m) 420 45
Required
a) Pre-merger market value per share for both companies. (2 Marks)
b) Post-merger EPS market value per share and P/E ratio if Small’s shareholders are
offered a share of :-
i. Shs 30
ii. Ksh 56 or (iii) Sh 20 in share exchange for merger (6 Marks)
c) Songo’s EPS if small shareholders are offered sh 100; 15 per cent convertible
debentures for each 3 shares held in Small. (5 Marks)
d) Briefly discuss the significance of e-commerce in modern financial management
(5 Marks)
Question Three
a) Outline the three principle sources of risks for companies involved in exporting business
(3 Marks)
b) Explain why Total Shareholders return (TSR) is considered the most useful measure
of value creation to shareholders (5 Marks)
c) The following information relate to XYZ Ltd over the past most recent years.
Year 1 Year 2
(sh 000) (sh 000)
Profit after Tax (PAT) 200 200
Depreciation 20 20
Cash flow beginning 50 50
Book Capital 3500 3200
The economic depreciation is Sh 9,000
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Required
i. ROCE
ii. ROGI
iii. CFROI (9 Marks)
d) State the main difference between Security Market Line (SML) and Capital Market Line
(CML) . (3 Marks)
Question Four
a) Differentiate between financial risk and business risk. Explain the two components
of business risk. (6 Marks)
b) The following information relates to a company ABC Ltd
Security Amount Expected Beta
Invested Return E(R) (ß)
A Sh. 1000 8% 0.8
B 2000 12 0.95
C 3000 15 1.1
D 4000 18 1.4
10,000
Required
i. Expected Portfolio Return (4 Marks)
ii. Expected Beta on the Portofolio (4 Marks)
iii. Does the Portfolio has more or less systematic risk than the average asset (2 Marks)
c) Explain the main cost of financially distressed firm (4 Marks)
Question Five
a) Distinguish between certainty equivalent and risk adjustment discount rate method
of incorporating market risk into capital budgeting (4 Marks)
b) KCA Project requires an initial investment of Shs 1,000,000. Its expected cash inflows
are Shs 400,000 for every year for the next five years. The risk free rate is 10
percent. The market risk premium is 18 percent. The estimated beta is 2.4 for this
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project. The company is indifferent between a certain sum of Sh 362,694 at the end of
the year and expected sum of Shs 400,000.
Required
Advice the management regarding the rejection or acceptance of the project applying:-
i. NPV on the basis of certainty equivalent method ( 8 markets)
ii. NPV on the basis of risk adjustment discount rate (RADR) (8 Marks)
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