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Financial Management Question Paper
Financial Management
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 200: FINANCIAL MANAGEMENT – SUNDAY
DATE: AUGUST 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
(a) Shareholder wealth maximization is widely believed to be the modern objective of the firm.
However, agency conflicts are advanced as a challenge in attaining this objective. Using
suitable illustrations discuss forms of agency conflicts in organization and outline the agency
costs incurred by the organizations. (8 Marks)
(b) Mergers and acquisitions currently dominate the corporate market, discuss the justifiable
reasons for mergers and acquisitions (7 Marks)
(c) Compare and contrast over capitalization to overtrading and clearly outline the indicators of
over capitalization and the symptoms of overtrading (5 Marks)
(d) Thika filters Company is a distributor of air filters to retail stores. It buys its filters from several
manufacturers. Filters are ordered in lot sizes of 1,000 and each order costs Kshs. 40 to place.
Demand from the retail stores is 20,000 filters per month and carrying cost is Kshs. 0.10 a filter
per month.
(i) What is optimal filter order quantity in lot sizes of 1,000
(ii) What would be the optimal order quantity if the carrying costs were cut I half to Kes. 0.05 a
filter per month.
(iii)What would be the optimal order quantity if ordering costs were reduced to Kshs. 10 per
order.
2
QUESTION TWO
Ndovu Limited is considering the following mutually exclusive projects:
Year Poject A NCF Project B NCF
Shs Shs
0 (400,000) (600,000)
1 55,000 300,000
2 55,000 300,000
3 55,000 50,000
4 225,000 50,000
5 225,000 50,000
Required:
(i) Calculate the NPV of each project (4 Marks)
(ii) Calculate the BCR of each project (4 Marks)
(iii) Calculate the PBP of each project (4 Marks)
(iv) Calculate the IRR of each project (4 Marks)
(v) Calculate the MIRR of each project (4 Marks)
QUESTION THREE
Discuss the following dividend theories:
• Bird in hand theory
• Tax differential theory
• Signaling theory
• Clientele effect theory
QUESTION FOUR
(a) Discuss the financial manager’s roles in decision making for the firm (10 Marks)
(b) Distinguish between stock price maximization and profit maximization. Under what conditions
might profit maximization not lead to stock price maximization? (10 Marks)
QUESTION FIVE
The selected data for Laga Limited and Ugenya Limited companies are as follows:
Leveraged firm, Laga Unlevered firm, Ugenya
EBIT Sh 200,000 Sh 200,000
Interest (Rate - 10%) Sh 50,000 0
Cost of equity 20% 20%
Corporate tax rate 30% 30%
Required:
(a) Determine the value of each firm using:
(i) Net Income Approach (NI) (7 Marks)
(ii) Net Operating Income Approach (NOI) (7 Marks)
(b) Without taxes or imperfections, why doesn’t it matter how the firm distributes earnings.
(6 Marks)
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