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Dfm 200 Financial Management Question Paper
Dfm 200 Financial Management
Course:Diploma In Business Management
Institution: Kca University question papers
Exam Year:2014
UNIVERSITY EXAMINATIONS: 2013/2014
STAGE V ORDINARY EXAMINATION FOR THE DIPLOMA IN
BUSINESS MANAGEMENT
DFM 200 FINANCIAL MANAGEMENT
DATE: AUGUST 2014
TIME: 1 1/2 Hours
INSTRUCTION: Answer any THREE questions
QUESTION ONE: (20 MARKS)
(a)
Consider two firms A and B with the following characteristics:
A
B
EQUITY shs 10,000,000 Shs 8,000,000
Cost of equity 10% 10%
7.5% debt - 2,000,000
Assume EBIT is 10% of the total capital structure of the firms.
Required:
(i) Calculate the weighted average cost of capital of A and B. (6 Marks)
(ii) Calculate the value of each firm using the net income approach. (6 Marks)
(b) Outline 5 general assumptions of the capital structure theories. (5 Marks)
(c) Discuss 3 assumptions relevant to the net operating income approach. (3 Marks)
QUESTION TWO: (20 MARKS)
(a) Define financial management (2 Marks)
(b) Discuss the objectives of financial management. (6 Marks)
(c) Discuss the role of financial manager. (6 Marks)
1
(d)
Explain the importance of financial management.
(6 Marks)
QUESTION THREE: (20 MARKS)
(a)
With regard to Mergers and acquisitions explain the following
(10 Marks)
i) Synergy
ii) Horizontal integration
iii) Conglomerate merger
iv) Vertical integration
(b)
Identify and explain any six benefits of mergers
(10 Marks)
QUESTION FOUR: (20 MARKS)
XYZ ltd is considering to invest on a project whose initial outlay is kshs 100,000.00 and the
project is expected to generate the following cash flows
Year
1
2
3
4
5
Cash flows
''000''
(a)
160,000.00 120,000.00 80,000.00 40,000.00 20,000.00
If the cost of capital is 12%, determine the NPV of this project. (8 Marks)
(ii)
(b)
(i) Should the company invest in the project? (2 Marks)
Calculate the Profitability Index for the company and advice if they should accept the
project?
(c)
(6 Marks)
Give two advantages and two disadvantages for Net Present Value technique. (4 Marks)
QUESTION FIVE: (20 MARKS)
(a)
The following information relates to two firms Bora Limited and Beta limited.
Firm
Sales (Shs)
Variable cost(Shs)
Fixed cost (Shs)
Bora Ltd. 1,800,000 420,000 900,000
Beta Ltd. 1,500,000 725,000 350,000
2
Required:
i) Degree of operating leverage for each firm
ii) Comment on how operating leverage has impacted on earnings available to
shareholders of each firm
(b)
(6 Marks)
(2 Marks)
Discuss the following dividend policy theories
(i) Bird in hand theory (4 Marks)
(ii)Tax differential theory (4 Marks)
(iii)Clientele theory (4 Marks)
3
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