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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:2013

KENYA METHODIST UNIVERSITY
END OF 3''RD ''TRIMESTER 2013 (DAY) EXAMINATION
SCHOOL : BUSINESS AND ECONOMICS
DEPARTMENT : ACCOUNTING, FINANCE AND INVESTMENT
UNIT CODE : FINA 432
UNIT TITLE : FINANCIAL CORPORATE POLICY

TIME: 2 HOURS
Instructions: Answer question one and any other two questions.
Question one
Discuss operating leverage and financial leverage.
(8mks)
What is the difference between debt and equity capital
(12mks)
Explain the impact of gearing on the cost of capital of a firm
(5mks)
What is meant by "trading on equity"
(5mks)
Question Two
Distinguish between net operating income and net income approaches to capital structure.
(10mks)
Discuss any three dividend policies
(10mks)
Question Three
Companies A and B are identical in every respect except that A is unlevered while B has 10 million of 5% bonds outstanding. Assume
That all of MM assumptions are met.
There are no personal or corporate taxes
That EBIT is ksh. 2 million
Cost of equity to company A is 10%
Required
Determine the value estimates for each firm using MM theory
Calculate the cost of equity for both firms
What is the overall cost of capital both firms
(20mks)
Question Four
In detail, outline factors that influence decision on merger and acquisition.
(10mks)
Discuss three theories of dividend distribution.
(10mks)

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