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Fnce 220: Business Finance 2010 Question Paper
Fnce 220: Business Finance 2010
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2010
KABARAK UNIVERSITY
UNIVERSITY EXAMINATIONS
2009/2010 ACADEMIC YEAR
FOR THE DEGREE OF BACHELOR OF
COMMERCE
COURSE CODE: FNCE 220
COURSE TITLE: BUSINESS FINANCE
STREAM: Y2S2
DAY: MONDAY
TIME: 9:00 – 11:00 A.M.
DATE: 22/03/2010
INSTRUCTIONS:
1. Answer questions ONE (compulsory) and any other TWO questions only.
QUESTION 1 (COMPULSORY)
a) Briefly explain why commercial banks prefer to lend short term loans as opposed to long term
loans. (4 marks)
b) Explain any two reasons attributed to individual’s time preference for money. (4 marks)
c) Explain the reasons behind the fast development of plastic money in Kenya. (4 marks)
d) Distinguish between revenue reserves and capital reserves as sources of business
finance. (4 marks)
e) Highlight on any three types of agency costs. (3 marks)
f) Lease finance is an important source of business funds. Briefly explain why lease finance is not
well developed in Kenya. (6 marks)
g) What are capital budgeting decisions? Briefly explain why investment decisions are critical to the
success of a firm. (5 marks)
QUESTION 2
Nakuru holdings limited is a company that deals in fresh farm produce for export but now wants to
diversify in milk production. Two machines have been identified as suitable for the purpose. Machine A
will cost an initial cost of sh.50, 000,000while machine B will cost sh.60, 000,000. The following cash
flows have been identified for both machines;
Net cash flow
End of the year Ksh.,000
Machine A Machine B
0 22,000 6,000
1 16,000 8,000
2 13,000 11,000
3 10,000 12,000
4 8,000 14,000
5 7,000 19,000
6 3,000 27,000
a) Assess the suitability of the capital project using the following methods;
(i) Pay back period. (3 marks)
(ii) Net present value method. (3 marks)
(iii) Profitability index. (3 marks)
b) Comment on the problems of financing which a small business is likely to encounter at the early
stage of its development. (6 marks)
c) Marigat holdings limited would like to invest sh1000,000 in a savings account at the end of each
year for four years at 6% interest rate. Calculate the compound value of the annuity at the end of
four years. (5 marks)
QUESTION 3
a) Briefly explain the following forms of financing the acquisition of a capital asset.
(i) Term loans. (3 marks)
(ii) Bonds. (3 marks)
b) Onyango is considering investing in a corporate bond with possible one year returns distributed as
follows.
Returns 6% 9% 11% 13% 16%
Probability 0.15 0.20 0.30 0.20 0.15
Required:
(i) Determine the expected return and standard deviation (risk) of the above security. (6 marks)
(ii) Suppose that Onyango now wants to form a portfolio of sh.2 million with sh.800,000
invested in the above bond while the rest of the funds are invested equally in stocks H
and P of two companies, determine the expected returns of the portfolio given the
following information. (4 marks)
Security Expected Return %
? 15%
? 14%
c) Highlight the main business finance functions. (4 marks)
QUESTION 4
a) Distinguish between profit satisficing and profit maximization goals of the firm.
(4 marks)
b) From your knowledge of agency theory, discuss how to resolve the conflicts arising
between shareholders and management. (6 marks)
c) Briefly explain the following terms.
(i) Sinking fund (2 marks)
(ii) Discounting (1 mark)
(iii) Compounding. (1 mark)
d) Naivasha Holding limited are considering making an investment in either security
X or Y. They have received the following information.
Possible rates of
return (%)
Probability of
occurrence
A 40 0.4
20 0.3
30 0.3
B 40 0.3
20 0.5
20 0.2
Required:
Calculate the expected return for each security separately and for a portfolio comprising 30% X
and 70% Y assuming no correlation between the possible rates of return from the shares
comprising the portfolio. (6 marks)
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