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Mbad 631: Financial Management Question Paper
Mbad 631: Financial Management
Course:Master Of Business Administration
Institution: Chuka University question papers
Exam Year:2013
CHUKA
UNIVERSITY
UNIVERSITY EXAMINATIONS
FIRST YEAR EXAMINATION FOR THE AWARD OF DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
MBAD 631: FINANCIAL MANAGEMENT
STREAMS: MBA Y1S2 TIME: 3 HOURS
DAY/DATE: MONDAY 12/8/2013 5.30 P.M. – 8.30 P.M.
INSTRUCTIONS:
• Answer ALL Questions.
• Do not write on the question paper.
QUESTION ONE:
(a) Agency problems can be resolved by proper corporate governance. Corporate governance lays emphasis on shareholders rights and enhancement of shareholder value. In many countries including Kenya, the concept of corporate governance has gained increasing prominence in recent times as evidenced by the issue of corporate governance guidelines by the Capital Markets authority (CMA).
Required:
(i) Explain the reasons motivating the increasing interest in corporate governance.
[5 marks]
(ii) Identify the benefits of good corporate governance to shareholders. [4 marks]
(iii) Explain any Four corporate governance guidelines issued by the Capital Markets Authority (CMA) or similar authority in your country. [8 marks]
(b) Identify and explain four methods of handling risk in Capital Budgeting. [8 marks]
QUESTION TWO:
(a) In an effort to lower its debtor balance, Zen Manufacturing Ltd is considering switching from its no discount policy to a 2% discount for payment by the fifteenth day. It is estimated that 60% of Zen’s customers would take the discount and the average collection period is expected to decline from 60 days. Company officials project a 20,000 unit increase in annual sales to 220,000 units at the existing price of Sh.2500 per unit. The variable cost per units is Sh.2100 and the average cost per unit is Sh.2300.
If the firm requires a 15% return on investment, should the discount be offered?
[11 marks]
(b) Explain the following sources of funds
(i) Venture Capital [3 marks]
(ii) Mortgage Finance [3 marks]
(iii) Institutional Investors [3 marks]
(c) Explain the role of a Finance Manager in a large corporation. [5 marks]
QUESTION THREE:
(a) Describe four ways that could be used to mitigate agency conflict between managers and shareholders. [4 marks]
(b) XYZ 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 thereafter 9
The required rate of return for the ordinary share is 10%.
The Intrinsic value of the ordinary share. [8 marks]
(c) Highlight three assumptions necessary for the dividend irrelevance theory
to hold. [3 marks]
(d) The following was the capital structure of Kanungo 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 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%.
2. The rate of corporation tax is 30%.
3. The current market prices per ordinary share capital, preference share, and debenture were Sh.45, Sh.30 and Sh.1200 respectively on 31 October 2007.
Required:
(i) The weighted average cost of capital. [8 marks]
(ii) The relevance of weighted average cost of capital in decision making
byKanungo Ltd. [2 marks]
QUESTION FOUR:
(a) Broom Ltd has found out that, after only two years of using a machine, a more advanced model had arrived in the market. The advanced model is expected to increase output. The existing machine had cost Sh.32,000 and was being depreciated using the straightline method over ten years. The current market value of the existing machine is Sh.15000.
Broom Ltd is considering the acquisition of the advanced model which cost Sh.123,500 including installation costs and has a salvage value of Sh.20,500 at the end of 8 years of its useful life. The following data has been provided:
Existing machine Advanced model machine
Capacity per annum 200,000 units 230,000 units
Sh.
Sh.
Selling price per unit 0.95 0.95
Production cost per unit:
Labour 0.12 0.08
Materials 0.48 0.46
Fixed overheads (allocated) 0.25 0.16
The required rate of return is 15%. Ignore taxation.
Required:
Compute the following in respect of the new machine
(i) Payback period [2 marks]
(ii) Net Present Value (NPV) [4 marks]
(iii) Internal rate of return (IRR) [4 marks]
(b) TexasLtd’s share has a nominal value of Sh.80. the company pays 10% of the nominal value of the share as dividend for the year. The current market price of the share is Sh.160 with 15% earnings yield.
Required:
(i) Earnings per share [2 marks]
(ii) Dividend cover ratio [2 marks]
(iii) Price-earnings ratio [2 marks]
(c) Differentiate between the following sets of terms:
(i) Real interest rate and nominal interest rate. [2 marks]
(ii) Current yield and yield to maturing. [2 marks]
(d) Exarex Ltd has bonds which currently sell for Sh.1150 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 at 30%.
Required:
(i) The current yield of the bond [2 marks]
(ii) The yield to maturity (YTM) of the bond. [3 marks]
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