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Bcom 335: Financial Management I Question Paper
Bcom 335: Financial Management I
Course:Bachelor Of Commerce
Institution: Chuka University question papers
Exam Year:2013
CHUKA
UNIVERSITY
UNIVERSITY EXAMINATIONS
THIRD YEAR EXAMINATION FOR THE AWARD OF DEGREE OF
BACHELOR OF COMMERCE
BCOM 335: FINANCIAL MANAGEMENT I
STREAMS: BCOM Y3S2 TIME: 2 HOURS
DAY/DATE: MONDAY 12/8/2013 8.30 A.M. – 10.30 A.M.
INSTRUCTIONS:
• Answer Question ONE and any other TWO questions.
• Do not write on the question paper.
QUESTION ONE
(a) The following data is available for firm A.
Firm A
Quantity 20,000 units
Selling price Sh.20
Variable cost Sh.15
Fixed costs Sh.40,000
Interest Sh.10,000
Preferred dividend Sh.5,000
Tax rate 30%
Required:
(i) Overall break-even point in units [2 marks]
(ii) Degree of operating leverage [2 marks]
(iii) Degree of financial leverage [2 marks]
(iv) Degree of total leverage [2 marks]
(b) Explain five factors that affect the leverage of a firm. [10 marks]
(c) Researchers at Annex Electrical Ltd have invented a new television model. The company is ready for pilot production and test marketing within six months at a cost of Sh.40 million. It is expected that there is a 70% chance of pilot production and test marketing being successful. In case success, Annex Electrical Ltd can build a plant at a cost of Sh.300 million.
The plant will generate an annual cash flow of Sh.60 million for 20 years if demand is high or an annual cash flow of Sh.40 million if demand is low. A high demand has a probability of 0.6. The company’s required rate of return is 12%.
Required:
Advise the management of Annex Electrical Ltd on the best course of action. [8 marks]
(d) Describe four ways that could be used to mitigate agency conflict between managers and shareholders. [4 marks]
QUESTION TWO:
(a) Explain any four factors that affect bond pricing. [8 marks]
(b) MXY Ltd has a current dividend of Sh.2.00 per share. The following are the expected annual growth rates for the dividend:
Year Dividend growth rate (%)
1 – 3 25
4 – 6 20
7 – 9 15
10 and there after 9
The required rate of return for the ordinary share is 10%.
Required:
The intrinsic value of the ordinary share. [8 marks]
(c) Evarex Ltd has bonds which currently sell for Sh.1,150 with an 11% coupon interest rate and a Sh.1000 par value. The bonds pay interest annually and have 18 years to maturity. The company’s tax rate is 30%.
Required:
(i) The current yield of the bond. [2 marks]
(ii) The yield to maturity (YTM) of the bond. [2 marks]
QUESTION THREE:
(a) Explain any three practical uses of Capital Asset pricing model. [6 marks]
(b) Mr. Walubengo is currently holding a portfolio consisting of shares of four companies quoted on Nairobi Securities Exchange as follows:
Company
____________ Number ofshares held
______________ Beta equitycoefficient
_____________ Market price pershare
______________ Expected Returns on equity in the next year______
%
A 20,000 1.12 65 18
B 30,000 0.89 50 23
C 30,000 0.70 45 11
D 20,000 1.60 80 18
The current market return per annum and the treasury bills yield is 9% per annum.
Required:
(i) Calculate Walubengo’s portfolio risk relative to that of the market. [5 markets]
(ii) Explain whether or not Walubengo should change the composition of his
portfolio. [9 marks]
QUESTION FOUR:
(a) Betty Muyes has invested 75% of her funds in shares of Company X and 25% in shares of Company Y. The following probability distribution relates to the shares of the two companies.
State of economy
______________ Probability
___________ Return on Company X
Shares (%) Return on Company Y
Shares (%)
Boom 0.2 24 5
Steady growth 0.6 12 30
slump 0.4 0 -5
Required:
(i) Expected returns on the shares of Companies X and Y. [2 marks]
(ii) Standard deviation of returns on shares of Companies X and Y. [2 marks]
(b) Distinguish between weighted average cost of capital and marginal cost of capital.
[4 marks]
(c) The following was the Capital structure of Fahari Ltd as at 31 October 2007:
Sh.
Ordinary share capital (Sh.10 par) 10.0 million
12% preference share capital (Sh.20 par) 4.8 million
10% debentures (Sh.1000 par) 3.6 million
Additional information:
1. The market prices per ordinary share, preference share and debenture were Sh.45, Sh.30 and Sh.1200 respectively on 31 October 2007.
2. The dividend per ordinary share for the year ended 31 October 2006 was Sh.8.00. Dividends are expected to grow at an annual rate of 12%.
3. The rate of corporation tax is 30 percent.
Required:
(i) The Weighted Average Cost of Capital. [10 marks]
(ii) The relevance of the WACC in decision making by Fahari Ltd. [2 marks]
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