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Fina 432: Financial Corporate Policy Question Paper

Fina 432: Financial Corporate Policy

Course:Accounting,Finance And Investiments

Institution: Kenya Methodist University question papers

Exam Year:2012

KENYA METHODIST UNIVERSITY
END OF 3''RD ''TRIMESTER 2012 (EVENING) EXAMINATIONS
SCHOOL : BUSINESS AND ECONOMICS
DEPARTMENT : ACCOUNTING, FINANCE & INVESTMENTS
UNIT CODE : FINA 432
UNIT TITLE : FINANCIAL CORPORATE POLICY

TIME: 2 HOURS
Instructions:
Question One
Most large multi-businesses, multinational companies have top three decision makers as chief finance officer (CFO), Chief Operations Officer (COO) and chief executive officer (CEO) discuss roles of each named decision maker.
(9 Marks)

Discuss how incentives design can be linked to performance given the objective of the shareholders as wealth maximization.
(11 Marks)
Discuss in detail;
Dividend Policy
Capital Structure
Cost of Capital
Transaction costs
Money market
Question Two
The modiglian – miller theory provides conditions under which a firm’s financial decisions do not affect its value. Discuss the 4 assumptions stated in this theory.
(12 Marks)

Discuss what cost of capital means to a firms financial position.
(6 Marks)
What do we mean by ’stretch targets’ when looking at incentive design.
(2 Marks)
Question Three
Taxation affects the required rate of return on debt and equity in several ways. Discuss.
(6 Marks)
Discuss;
Strategies for value creation via growth.
Three strategies for value creation via shrinkage.
(6 Marks)

Discuss how taxation affects a dividend policy.
(8 Marks)
Question Four
Discuss strategies of value creation via growth.
(3 Marks)

What are divestitures and how are they used to create firm’s value by shrinkage.
(3 Marks)
A firm has a net operating income of Kshs 24,000. The cost of equity is 12% and 18 respectively. The firm has Kshs 70,000 debt & Kshs 34,000 equity.
What is the marginal cost of capital? Cost of capital?
(4 Marks)

Suppose the firm raised its debt to ksh 100,000 and uses the proceeds to repurchase stocks. What is the new value of common equity.
(5 Marks)

Suppose the firm raised the debt to Kshs 800,000 and no equity. What would be the new value of common equity.
(5 Marks)

Fina 432: Financial Corporate Policy Question Paper

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