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Corporate Finance Question Paper

Corporate Finance

Course:Bachelor Of Commerce

Institution: South Eastern Kenya University question papers

Exam Year:2013

PROGRAMME: BACHELOR OF COMMERCE
TASK: CONTINUOUS ASSESSMENT TEST
UNIT: DFI 305 (CORPORATE FINANCE)
19TH AUGUST 2013

INSTRUCTIONS
ANSWER ALL QUESTIONS
QUESTION ONE
a) Explain the main reasons for undertaking a stock split (4 Marks)

b) Two companies A and B are in the same industry with identical earnings per share for the last five years. Company A has a policy of paying 40% of earnings as dividends while company B pays a constant amount of dividends per share is lower than that of B. The following is data on earnings, divided and market price for the two companies.
YEAR EPS DPS MARKET PRICE
2006 4 1.6 12
2007 1.5 0.6 8.5
2008 5 2.0 13.5
2009 4 1.6 1.5
2010 8 3.2 14.5
REQUIRED
I. Calculate for each company
a) Payout ratio
b) Divided yield
c) Earning yield for both companies (9 Marks)
ii. Explain the reason for the differences in the market prices of the two company’s shares. (4 Marks)
ii. Advice the management of company A on how they can improve the share price. (3 Marks)

QESTION TWO
a) . The following two projects (X and Y) are being considered for investment by smith ltd,
CRITERIA PROJECT X PROJECT Y
COST OF CAPITAL 6% 10% 10% 15%
TOTAL PRESENT VALUE(KSH) 537690 478360 489610 394200
NET PRESENT VALUE(KSH) 37690 21640 89610 5800

Calculate for each project
I. Profitability index (P?) at a discount rate of 10% (4 Marks)
ii. Internal rate of return (IRR) for both projects (3 Marks)

b) Explain the following terms as used in working capital management
i. Working capital cycle
ii. Over trading
iii. Over capitalization
iv. Matching approach
(8 Marks)
c) P ltd. buys raw materials from suppliers that allow P Ltd 3.5 Months credit. The raw materials remain in the inventory for two months and it takes P Ltd. 2 months to produce the goods. The goods are sold as soon as production is completed and customers take on average 2.5 months to pay. Determine P Ltd. cash operating cycle (5 Marks)

Corporate Finance Question Paper

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