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Fnce 220: Busines Finance Question Paper
Fnce 220: Busines Finance
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2012
KABARAK
UNIVERSITY
UNIVERSITY EXAMINATIONS
2012/2013 ACADEMIC YEAR
FOR THE DEGREE OF BACHELOR OF COMMERCE
FNCE 220: BUSINESS FINANCE
DAY: SATURDAY
DATE: 15/12/2012
TIME: 9.00 – 11.00 A.M. STREAM: Y2S2
INSTRUCTIONS:
Question one
(a) Explain briefly what you understand by agency theory and its importance in the context
of business today (10 marks)
(b) Using the principles of the agency theory, explain how firms with international interests
are able to monitor performance of their managers posted around the world and ensure
that their goals are achieved (20 marks)
Question two
(i)Explain with examples the difference between non-discounted and discounted cash
flow methods of investment appraisal (5 marks)
(ii)Rift Valley Company is considering a new product line to supplement its range line.
It anticipates that the new product line will involve cash investment of Kshs
700,000.00 on inception and Kshs 1,000,000.00 in year 1. After tax inflows of Kshs
250,000.00 are expected in year 2, Kshs 300,000.00 in year 3, Kshs 350,000.00 in
year four and Kshs 400,000.00 thereafter through year 10. While the product line will
be viable after year 10, the company prefers to be conservative and end all operations
at that time.
Required
(a) Calculate the project’s payback period (5 marks)
(b) If the required rate of return is 15%, calculate the net present value of the project and
advise Rift valley company on the basis of the net present value (10 marks)
Question three
(a) Explain the concept of the time value of money and state it’s importance in making long-
term decisions of an enterprise.
(b) A foreign investor wishes to construct a brewing factory in Kenya. He estimates that due
to the unique drinking behavior of Kenyans, the factory will generate after tax profits of
Kshs 8,000,000.00 in the first year through the second year and later increases by 10% to
the fifth year.
Required
Determine the maximum amount of money that the investor would require to spend in
establishing the investment today assuming an interest rate of 10% p.a.
Question four
“Since debt capital is cheaper than equity, companies resort to almost one hundred percent use of
debt to finance their investments”
Required
(a) Explain why debt capital is cheaper than equity capital (10 marks)
(b) Discuss the limitations of the above financial policy ( 10 marks
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