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Bcom 230: Introduction To Finance Question Paper
Bcom 230: Introduction To Finance
Course:Bachelor Of Commerce
Institution: Egerton University question papers
Exam Year:2011
INSTRUCTIONS
Attempt Question ONE and any other TWO questions.
QUESTION ONE
(a) Using suitable examples, explain the meaning of primary and secondary markets. (4 marks)
(b) In spite of the fact that long-term debt is cheaper than short term debt, many businesses
organization still use short-term debt financing. Explain. (4marks)
(c) In the recent past, the Kenyan indigenous financial industry has been plagued by loss of Public Confidence arising from the failure of some indigenous financial institutions. Outline the necessary measures that the Central Bank of Kenya and the government should take to restore public confidence. (4 marks)
(d) Given below are budgetary estimates of Chatu Corporation for the coming year 2008.
Direct cost - Kshs. 2,400,000
Estimated sales will be 18% of the direct cost.
Other operating expenses – Kshs. 424,000
Asset employed 4,000,000, financed by 50% equity
Cost of debt is 10% p.a
Assume a tax rate
Required:
Compute
(i) Asset turnover (2 marks)
(ii) Net profit margin ratio (2 marks)
(iii) Return on owners (2 marks)
(e) Set up an amortization schedule for a Kshs. 25,000 loan to be repaid in equal installments at the end of each of the next 5 years. The interest rate is 10%. (3 marks)
(f) A mortgage company offers to lend you Kshs. 85,000, the loan calls for payments of Kshs. 8,273.59 per year for 30 years. Determine the interest rate of the mortgage.
(3 marks)(g) A company currently pays a dividend of Kshs. 2 per share (Do =2). It is estimated that the company''s dividend will grow at a rate of 20% per year for the next 2 years, then the dividend will grow at a constant rate of 7% thereafter. The company cost of equity is 12%. Determine the value of the shares. (3 marks)
(h) Wilson wonder''s bonds have 12 years remaining to maturity. Interest is paid annually; the bonds have a Kshs. 1000 per value, and the coupon interest rate 10%. The bonds sell at a price of Ksh. 850. Determine the yield to maturity. (3 marks)
QUESTION TWO
(a) Briefly explain the importance of capital budgeting. (6 marks)
(b) A company is considering an investment proposal to install new milling controls. The project will cost Kshs. 50,000. The facility has a life expectancy of five years and no salvage value. The company''s tax is 40% and no investment tax credit allowed. The firm uses straight line depreciation. The estimated cash flows before tax and depreciation from the proposed investment are as follows:-
Year CFBDT
1 10,000
2 11,000
3 14,000
4 15,000
5 25,000
Compute the following:-
(i) Pay back period
(ii) Accounting rate of return
(iii) Internal rate of return
(iv) Net present value at 10%
(c) Briefly explain the meaning of discounted cash flow methods and discuss the usefulness
and limitations of this method of evaluating capital projects. (4 marks)
QUESTION THREE
(a) Define the term ''cost of capital'' and explain its significance in financial decision making.
(4 marks)
(b) Bahari Investment Company Ltd had a very good trading period and they plan to expand their business to make use of the favorable business prospects in the next five years.
They have planned to raise the additional finance from various sources as follows:
-To issue 200,000 ordinary shares (Kshs 10 nominal value) at Kshs.20 each
- To issue 200,000 12% preference shares (sh 10 nominal value) at sh. 15 each.
-To issue 100,000 15% debentures of sh 100 at 90 each
- To raise a medium term loan of sh 10 Million from non –bank financial institution which will be
at a an interest rate of 18% (c)
Mwaka Ltd can raise additional capital by issuing more of its Ksh 10 per value ordinary I
share at Ksh. 20 each and paying them the current dividend rate of 30%. Alternatively
the company can borrow by: issuing 12% debenture at Par. The company''s tax rate is
50% Compute: - I
(i) The company''s cost of equity. I
(ii) The company''s effective cost of debenture. (4 marks)
QUESTION FOUR ,
(a) Outline the main causes of bank failure and the implication of such failure in the
Economy of Kenya. (6 marks)
(b) You are provided with the following balance sheet of JAZZ Company for the year
ended 31 December 2010.
Plant and Equipment (Net) 2,400,000
Current Assets:
Stocks 800,000
Trade debtor 600,000
Cash 200.000
1,600,000
Less current liabilities (800.000) 800,000
3,200000
Financed by:
Share capital 2,000,000
Reserves 600,000 2,600,000
Debenture 600,000
3200000
You are furnished with the following relevant additional information.
Turnover (sales) Kshs. 8,000,000
Operating costs 6,000,000
Interest expense 600,000
Depreciation 100,000
Required:
Compute the following financial ratios
(i) Profit margin
(ii) Acid test ratio
(iii) The gearing ratio
(iv) Return on capital employed (8 marks)
(c) Discuss the following dividend theories
(i) Dividend irrelevance theory
(ii) Signaling theory (6 marks)
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