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

Issues In Financial Management Question Paper

Issues In Financial Management

Course:Bachelor Of Commerce

Institution: Kca University question papers

Exam Year:2010

UNIVERSITY EXAMINATIONS: 2009/2010
THIRD YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 310-F ISSUES IN FINANCIAL MANAGEMENT
DATE: AUGUST 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) Explain the assumptions of Black - Scholes model. (4 Marks)
b) A Ltd is considering the acquisition of B Ltd. The financial data at the time of acquisition is as
follows:
A Ltd B Ltd
Net profit after tax 60 12
Number of shares 12 5.0
Earnings per share 10 4.80
Market price per share 150 48
Price earning ratio 30 20
Assuming that the net profit after tax of the two companies would remain the same after
amalgamation, using Earnings Approach, explain the effect on EPS of the merged company under
the following situations:
i) A Ltd offers to pay sh. 60 per share to the shareholders of B Ltd.
ii) A Ltd offers to pay sh. 80 per share to the shareholders of B Ltd
iii) The amount in both cases is to be paid in the form of shares of A Ltd
Do you have any comments to offer? (10 Marks)
c) Explain the benefits of E- commerce to an organization (8 Marks)
d) Explain the terms:
i) Spin-offs
2
ii) Split-offs
iii) Split-ups
iv) Buy-ins (8 Marks)
QUESTION TWO
a) The following are the financial statements for A Ltd. and B Ltd for the current financial year.
Both the firms operate in the same industry:
BALANCE SHEETS
A Ltd B Ltd
Shs (000) Shs (000)
Total current assets 1400 1,000
Total fixed assets (net) 1,000 500
2400 1500
Equity capital (sh 10 each) 1,000 800
Retained earnings 200 -
14% Long-term debt 500 300
Total current Liabilities 700 400
2,400 1,500
INCOME STATEMENTS
A Ltd B Ltd
Shs (000) Shs (000)
Net sales 3,450 1,700
Cost of sales 2,760 1,360
Gross profit 690 340
Operating expenses 200 100
Interest 70 42
Earnings before taxes 420 198
Taxes (50%) 210 99
Earnings after taxes (EAT) 210 99
Additional Information:
3
Number of equity shares 1, 00,000 80,000
Dividend payment ratio 40% 60%
Market price per share sh, 40 sh. 15
Assume that the two firms are in the process of negotiating a merger through an exchange of equity
shares.
Required
i) Decompose the share prices of the companies into EPS and PE components, and also
segregate their EPS figures into ROE and book value components (6 Marks)
ii) Estimate future EPS Growth rates for each firm (4 Marks)
iii) Calculate the post- merger EPS based on the an exchange ratio of 0.4:1 being offered by A
Ltd. Indicate the immediate EPS accretion or dilution, if any, that will occur for each group
of shareholders (4 Marks)
b) Write short notes on the following:
i) Demergers
ii) Sell-offs
iii) Amalgamation (6 Marks)
QUESTION THREE
a) Explain the Limitations of portfolio theory (6 Marks)
b) The Beta coefficient of Malo Ltd is 2.0. The company has been maintaining 10% rate of growth
in dividends and earnings. The last dividend paid was sh 6 per share. Return on Government
securities is 15%. Return on Market portfolio is 20%. The current Market price of one share of
Malo Ltd is sh 54
i) What will be the equilibrium price per share of Malo Ltd?
ii) Would you advise purchasing the share? (8 Marks)
c) Explain the factors to be taken into consideration before undertaking an investment proposal
(6 Marks)
QUESTION FOUR
a) Explain the Interorganizational Information Systems (IOS) in the context of E- commerce.
(10 Marks)
b) Low Ltd and High Ltd had returns and measures of risk given by their standard deviation as
follows:
4
Investment Return standard deviation
Low 10% 5%
High 14% 8%
Calculate the risk in a portfolio of 60% Low and 40% High if the correlation between their returns
is:
i) Positive 1
ii) Negative 1
iii) Zero (10 Marks)
QUESTION FIVE
a) Calculate the value of a call option using the B-S model given the following information:
Current Marker price of the share sh.75
Volatility 0.45
Exercise price sh. 80
Risk-free rate 0.12
Time to expiration 6 months (10 Marks)
b) Explain the forms of corporate restructuring (10 Marks)

Issues In Financial Management Question Paper

More Question Papers

Popular Exams