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Financial Management Ii Question Paper

Financial Management Ii

Course:Accf 430

Institution: Kenya Methodist University question papers

Exam Year:2008

KENYA METHODIST UNIVERSITY

END OF SECOND TRIMESTER 2008 EXAMINATIONS

FACULTY : BUSINESS AND MANAGEMENT STUDIES
DEPARTEMENT : BUSINESS ADMINISTRATION
COURSE CODE : ACCF 430
COURSE TITLE : FINANCIAL MANAGEMENT II
TIME : 2 HOURS

INSTRUCTIONS:
• Answer question One and any other Two questions

Question 1
a) Highlight five features on an appropriate capital structure of a company.
(5marks)
b) Ukwala ltd is proposing acquiring a milling machine whose cost is sh.3,600,000. The machine is expected to have an economic life of 4 years with a nil residue value at the end of its economic life. The following details relate to the machine.
Year Gross sales (shillings)
1 4,800,000
2 2,400,000
3 3,600,000
4 1,800,000

The unit selling price is sh.20 while variable selling cost is sh.5. The fixed production cost is sh.300,000 per annum. The company uses straight line method in charging depreciation. Corporation tax is 30% and cost of capital is 20% before tax.

Calculate:
i) The net present value
ii) The payback period
iii) Accounting rate of return

c) Advise the management based on accounting rate of return whether the acquisition of the machine is viable. (20marks)

Question 2
a) Explain the different types of capital rationing. (5marks)

b) Kambu ltd intends to replace its existing machinery with a new one. The following information is available:
Existing machine New machine
Cost sh.2,000,000 sh.2,700,000
Economic life 5years 3years
Current market value sh.70,000 sh.2,700,000
Profit before depreciation
Years 1-3 sh.600,000 sh.960,000
Years 4-6 sh.400,000 sh.960,000

The existing machine is 2 years old and is being depreciated on straight line basis. The corporation tax is 30% and the required rate of return is 15%.

Calculate
i) The net investment cost.
ii) The incremental cash flows for each of the next six years.
iii) Using internal rate of return, under dominance technique, advice the management whether the replacement decision is viable. (20marks)

Question 3
The following information was obtained from Nairobi Stock Exchange for two securities, X and Y.

State of probability of Nature Return %
State X Y
(pi)
Boom 0.2 20 18
Normal 0.5 15 16
Recession 0.3 8 9

Calculate:
i) The expected return of each security.
ii) The variance of portfolio consisting of 60% of X and 40% of Y.
iii) The correlation coefficient between the returns in X and Y
iv) Comment on the results obtained in (iii) above. (25marks)

Question 4
a) Explain five factors that affect dividend polity of a company. (10marks)

b) the following information was extracted from the books of Waita Ltd. As at 31 December 2007
sh.
Ordinary share capital (per value sh.15 3,000,000
8% preference shares capital (per value sh.10 2,000,000
15% Bank loan 1,000,000
20% debentures of sh.100 each 1,200,000
7,200,000

Additional information:
The market price for the securities is:
Sh.
Ordinary shares 36
8% preference shares 25
20% debentures 90

The company has maintained payment of ordinary dividend per share of sh.7.00 and is expected to grow at 3% per annum in perpetuity.

Calculate:
i) Cost of each source of capital
ii) Weighted average cost of capital (15mark)

Question 5
a) Explain the importance of capital assets pricing model in finance. (5marks)

b) Explain each of the following terms:
i) Systematic risk
ii) Financial risk
iii)Business risk
iv) Venture capital
v) Capitalization. (20marks)

Question 6
a) Explain the effect of capital structure on the value of the firm when both corporate and personal income taxes are considered. (10marks)

b) Discuss the assumptions of the Net Income (NI) approach and the Net Operating Income (NOI) Approach (15marks)

Financial Management Ii Question Paper

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