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Dpba 022: Financial Management Question Paper

Dpba 022: Financial Management

Course:

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 : DBA 022
COURSE TITLE : FINANCIAL MANAGEMENT
TIME : 2 HOURS

INSTRUCTIONS:
• Answer Question ONE (Compulsory) and any other TWO Questions

Question 1
(a) Write descriptive notes on the following:
(i) Finance lease (2 marks)
(ii) Operating lease (2 marks)
(iii) Commercial paper (2 marks)
(iv) Treasury bills (2 marks)
(v) Treasury bonds (2 marks)
(vi) Corporate bonds (2 marks)

(b) An amount is invested in a fund that promises an annual return of 20%. Determine
how long the amount is expected to take to double it self. (5 marks)

(c) Project PK requires an initial cash outlay of sh.1,000,000 the cash flows expected from
the project are as follows:
Year Sh. ‘000’
1. 100
2. 202
3. 200
4. 25
5. 250
6. 320
7. 280
8. 50
9. 58
10. 65

Required:
(i) Using NPV, advice on whether the project should be undertaken using discount rate of 15% (10 marks)
(ii) State three limitations of NPV. (3 marks)

Question 2
(a) Highlight six factors you would consider when selecting a source of finance
(12 marks)
(b) Give four advantages of debt finance (8 marks)

Question 3
A company is considering a project which requires an initial investment of sh.2,400,000 and which would generate annual cash flow as follows:
Year Cash Flow
Sh.
1 780,000
2 600,000
3 420,000
4 740,000
5 920,000
The company’s cost of capital is 18%

Required:
Using internal rate of return, determine whether the project is viable. (20 marks)

Question 4
(a) Define agency problem and suggest three way of mitigating it. (5 marks)
(b) State any five non- financial goals of the firm (10 marks)
(c) Distinguish between profit maximization and wealth maximization (5 marks)

Question 5
(a) Define capital rationing and give four reasons behind capital rationing. (8 marks)

(b) Bank house limited is experiencing capital rationing in year 0, when only £60,000 of investment will be available. No capital rationing is expected in future periods. But none of the projects under consideration by the company can be postponed. The expected cash flows of the three projects are as follows:

Year
0 1 2 3 4

Project sh ‘000’ sh ‘000’ sh ‘000’ sh ‘000’ sh ‘000’
A (50,000) 20,000 20,000 40,000 40,000
B (28,000) (50,000) 30,000 40,000 20,000
C (30,000) (30,000) 40,000 40,000 10,000

The cost of capital is 10%

Required:
Decide which projects should be undertaken in year 0, in view of the capital rationing, given that projects are divisible; and hence determine the optimal investment policy. (12 marks)

Dpba 022: Financial Management Question Paper

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