Get premium membership and access revision papers, questions with answers as well as video lessons.
Bcom 431: Financial Management Ii Question Paper
Bcom 431: Financial Management Ii
Course:Bachelor Of Commerce
Institution: Chuka University question papers
Exam Year:2013
NB
CHUKA
UNIVERSITY
UNIVERSITY EXAMINATIONS
FOURTH YEAR EXAMINATION FOR THE AWARD OF
DEGREE OF BACHELOR OF COMMERCE
BCOM 431: FINANCIAL MANAGEMENT II
STREAMS: BCOM Y4S1 TIME: 2 HOURS
DAY/DATE: MONDAY 12/8/2013 2.30 PM – 4.30 PM
INSTRUCTIONS:
Attempt Question ONE and any other TWO Questions
QUESTION ONE
(a) Describe the strong form of Efficient Market Hypothesis (EMH) [3 Marks]
(b) An analyst has gathered the following information about SGL Ltd stock:
A beta of 1.375
An actual return of 10.5%
The market rate of return of 6%
The risk free rate is 2%
Required:
Calculate SGL’s stock’s abnormal return. [3 Marks]
(c) With the help of a diagram, explain the minimum variance portfolio [4 Marks]
(d) An investor on the securities exchange intends to construct a minimum variance portfolio comprising the stocks of two companies; Faida Ltd and Fontier Ltd.
State of economy probability Faida Ltd (%) Fontier Ltd (%)
Boom 0.30 18 10
Normal 0.45 16 14
Recession 0.25 9 16
Required:
(i) The weights of the two stocks in the minimum variance portfolio. [6 Marks]
(ii) The expected return for the minimum variance portfolio [2 Marks]
(iii) The standard deviation for the minimum variance portfolio [2 Marks]
(e) Distinguish between the following terms:
(i) American options and European options. [2 Marks]
(ii) Covered options and naked options [2 Marks]
(f) Hekima Ltd faces an interest rate of 18% per annum and broker’s commission of sh 750 for each transaction in the money market. The company finance director has stated that the minimum cash balance that is acceptable is sh 20,000 and that the variance of cash flows on a daily basis is sh 160,000. What is the maximum level of cash the firm should hold, and at what point should it start to purchase or sell securities? (Assume a 360 day year) [6 Marks]
QUESTION TWO
(a) Briefly explain the approaches that could be used by a company to finance its working capital requirements. [6 Marks]
(b) The following data relates to Deco Ltd, a manufacturing company
Turnover for the year Sh 15 million
Costs as a percentage of sales %
Direct materials 30
Direct labour 25
Variable overheads 10
Fixed overheads 15
Selling and distribution costs 5
Additional information:
1. Debtors take 2.5 months before payment while raw materials are in stock for three months
2. Work-in-progress represents on month’s worth of half processed goods
3. Finished goods represent one month’s production
4. Credit is taken as follows:
Direct materials 2 months
Direct labour 1 week
Variable overheads 1 month
Fixed overheads 1month
Selling and distribution overheads 0.5 months
5. Work-in-progress and finished goods are valued at material, labour and variable expense cost. Assume that all the sales have been made on credit.
Required:
Assuming a 360 day year, compute Deco Ltd’s working capital requirements.
[10 Marks]
(c) Faida Ltd has annual sales revenue of sh 6 million and all sales are on 30 days’ credit, although customers on average take ten days more than this to pay. Contribution represents 60% of sales and the company currently has no bad debts. Accounts receivable are financed by an overdraft at an annual interest rate of 7%. Faida Ltd plans to offer an early settlement discount of 1.5% for payment within 15 days and to extend the maximum credit offered to 60 days. The company expects that these changes will increase annual credit sales by 5%, while also leading to additional incremental costs equal to 0.5% of turnover. The discount is expected to be taken by 30% of customers, with the remaining customers taking an average of 60 days to pay.
Required:
Evaluate whether the proposed changes in credit policy will increase the profitability of Faida Ltd. [6 Marks]
QUESTION THREE
(a) Explain the following market anomalies
(i) Size-effect [2 Marks]
(ii) Value-effect [2 Marks]
(iii) Winner’s curse [2 Marks]
(b) Explain the implications to financial managers of the level of efficiency of the stock. [5 Marks]
(c) An investor holds title to an asset worth sh 125.72. In order to raise money for unrelated purposes, the investor plans to sell the asset in 9 months. The investor is concerned about the uncertainty in the price of the asset at the time.
The investor decides to enter into a forward contract in order to manage this risk and sell the asset in 9 months. The applicable risk free rate of interest is 5.625% p.a
Required:
(i) Determine the appropriate price the investor could receive in 9 months using the forward contract. [2 Marks]
(ii) Suppose the counter party to the forward contract is willing to engage in such a contract at a forward price of sh 140, demonstrate the type of transaction the investor could execute to take advantage of such a situation. [3 Marks]
(iii) Determine the value of the forward contract at expiration assuming that the contract is entered into at the price computed in (i) above and the price of the underlying asset is sh 123.50 at expiration. Comment on the overall position in terms of the rate of return. [4 Marks]
QUESTION FOUR
(a) Explain the delta of an option and demonstrate how it is used in dynamic hedging.
[4 Marks]
(b) An investor constructs a long straddle by buying a call for sh 4 and a put for sh 3 for an exercise price of sh 30. If the price of the underlying share is sh 27 at expiration, what is the profit on the position? [2 Marks]
(c) The following data relate to call options on two shares, Y and Z
Calls
Y Z
Months to expiration 3 9
Risk-free rate 10% 10%
Standard deviation of stock returns 40% 40%
Exercise price Sh 55 Sh 55
Stock price Sh 50 Sh 50
Required:
Using the black-scholes option model:
(i) Calculate the call option price of share y [8 Marks]
(ii) Of the two options, which would you expect to have the higher price? Why (do not compute) [2 Marks]
(iii) Highlight four assumptions of the Black-Scholes option pricing mode.
[4 Marks]
______________________________________________________________________________
More Question Papers
Popular Exams
Return to Question Papers