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Bmit 222: Business Finance Question Paper
Bmit 222: Business Finance
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2008
KABARAK UNIVERSITY EXAMINATIONS
2008/2009 ACADEMIC YEAR
FOR THE DEGREE OF BACHELOR OF COMMERCE
COURSE CODE: BMIT 222
COURSE TITLE: BUSINESS FINANCE
STREAM: Y2S2
DAY: TUESDAY
TIME: 8.30-11.30 A.M.
DATE: 9/12/2008
INSTRUCTIONS:
This paper contains five questions.
1. Attempt all questions
2. Show all your workings clearly
Question One
a) i) Distinguish between systematic risk and unsystematic risk. Illustrate with the help of a
diagram. (4 Marks)
ii) Briefly explain the weaknesses of the Capital Asset Pricing Model (C.A.P.M).
(6 Marks)
b) A financial analyst has provided you with the following data relating to Merica Hotel
Ltd’s returns and market returns for five years from 2000 to 2004.
Year Return on Return on the
Merical Hotel Ltd. Market
2000 18% 20%
2001 16 14
2002 10 12
2003 6 10
2004 8 11
The risk free rate is 5%.
Required
i) Determine the beta coefficient of Merica Hotel Ltd. Interpret your answer
(6 Marks)
ii) Determine the required rate of return on Merica Hotel Ltd’s shares. (4 Marks)
Question Two
a) Identify and discuss circumstances under which financial leverage may not enhance the
value of a company (12 Marks)
b) What forces or mechanisms might serve to reduce potential conflict between
management and shareholders. (8 Marks)
Question Three
a) Write brief explanatory notes on the following concepts as used in business finance.
i) Multiple directorships
ii) Having staggered boards
iii) Financial structure
iv) Diversification
v) Risk (10 Marks)
b) Zawadi Ltd. is analyzing two mutually exclusive projects whose details are shown
below:-
Year Project A Project B
Cash Flow (Shs.) Cash Flow (Shs.)
1 3,000,000 6,000,000
2 1,000,000 5,000,000
3 4,000,000 4,000,000
4 5,000,000 3,000,000
5 6,000,000 1,000,000
Addition Information
1. The above cash flows have been acted on after-tax basis.
2. Each of the projects will cost Shs. 10,000,000 at commencement. The company intends
to raise this finance through an issue of debentures at an interest rate of 10% per annum.
Required:
Advise the management of Zawadi Ltd. on which of the two projects to undertake using:
i) Payback period approach (5 Marks)
ii) Net present value approach (5 Marks)
Question Four
a) The directors of Yote Ltd. are considering a takeover bid for Toa Ltd. However, they
recognize that there are two potential problems with any proposal bid. First, directors of
Yote Ltd. believe that any takeover bid would be resisted by the directors of Toa Ltd.
Secondly Yote Ltd. is short of cash and so any offer made to the stakeholders of Toa Ltd.
would have to be in other alternative forms of payment.
Required:
Briefly explain six defensive tactics the directors of Toa Ltd. may employ to resist an unwelcome
bid. (6 Marks)
b) Lake Fish mongers Ltd. is considering the acquisition of Nyalenda Ltd. Currently Lake
has annual earnings of Kshs. 51 million, 20 million ordinary shares outstanding, and each
share sells for Kshs. 130. Likewise the annual earnings for Nyalenda are Kshs. 9 million,
it has 6 million ordinary shares outstanding and a market price per share of Shs. 160.
Whereas the earnings of Lake are expected to grow at the rate of 5 percent per annum,
those of Nyalenda would grow at the annual rate of 12 per cent in the absence of any
mergers.
Lake offers 1.5 shares for each share of Nyalenda. Assume that there are no synergistic
effects likely from the merger.
Required:
i) Determine the effect of the acquisition on each company’s EPS. (8 Marks)
ii) Suppose the shareholders of both companies are growth oriented investors what would be
their likely reactions to the proposed acquisition. Explain (6 Marks)
Question Five
As a financial analyst at KABU Ltd., you are conducting an analysis of four alternative
investment projects. Each project has a holding period of one year. The estimated rates of return
for three alternative states of the economy are show in the table below:
State of the Probability A B C M
Economy
Recession 0.20 10% 5% 22% 5%
Average 0.60 10% 11% 14% 15%
Boom 0.20 10% 31% 4% 15%
Required:
i) Determine the expected rate of return, variance, standard deviation and coefficient of
variation for each project. (13 Marks)
ii) Your boss, the company’s financial manager, has asked you to assess the total risk of the
four investment alternatives. Also he requested that you apply the mean-variance
criterion to determine whether any of the alternative projects can be eliminated.
Present a well reasoned response to him. (7 Marks)
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