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Msf 506 Advanced Theory Of Finance Weekend Question Paper

Msf 506 Advanced Theory Of Finance Weekend

Course:Masters Of Science In Commerce Finance And Accounting Specialization

Institution: Kca University question papers

Exam Year:2014

UNIVERSITY EXAMINATIONS: 2013/2014
EXAMINATION FOR THE MASTER OF SCIENCE COMMERCE
FINANCE AND ACCOUNTING SPECIALIZATION
MSF 506 ADVANCED THEORY OF FINANCE WEEKEND
DATE: AUGUST 2014
TIME: 3 HOURS
INSTRUCTIONS: Answer Question One and any other THREE questions
QUESTION ONE (31 marks)
Mr. J.R. Fox is a finance manager at AllPack Tax consultants company Ltd. He is charged with
the responsibility of ensuring all matters relating to finance in the organisation are properly
handled. Additionally, he is directly answerable to the shareholders but reports to the managing
directors on routine basis.
Required
a.
To ensure that all matters relating to finance in the organisation are properly handled,
state and explain any five managerial functions that Mr. Fox must perform in the
organisation.
b.
(5 Marks)
Apart from profit maximisation, state and explain any other six objectives that Allpack
Tax consultants company ltd is expected to achieve.
c.
(6 Marks)
The relationship existing between Mr. Fox and the shareholders of Allpack Tax
consultants company Ltd is called shareholders and management relationship
i)
Mention any five factors that may cause conflict of interest between shareholders
and management.
ii)
(5 Marks)
Highlight any five ways in which the conflict can be resolved. (5Marks)
1
iii)
Citing relevant examples. Explain four types of principal-agent relationship other
than shareholders and management relationship.
d.
Explain four ethical issues that Mr. Fox should observe so as to achieve his objective as a
finance manager.
e.
(4 Marks)
(4 Marks)
Financial management has evolved over years due to changes globalisation and
advancement in technology. Explain any two ways Mr. Fox can use technology to
improve his financial management practices.
(2 Marks)
QUESTION TWO (23 MARKS)
a. Briefly explain three practical uses of capital asset pricing model. (6 Marks)
b. Identify and explain three method of handling risks in capital budgeting. (8 Marks)
c. The investment portfolio of Mapani ltd consists of shares in five companies operating in
different industries.
Company amount invested beta coefficient
A 160 0.5
B 120 2.0
C 80 4.0
D 80 1.0
E 60 3.0
The risk free rate is 8%. The market returns have the following probability distribution
for the next period.
Market return % probability
10 0.1
12 0.2
13 0.4
16 0.2
17 0.1
Required:
i) Compute the expected return from the market (2 Marks)
ii) Calculate the beta coefficient for portfolio (4 Marks)
iii) Determine the equation for the security market line (3 Marks)
2
QUESTION THREE (23 MARKS)
a.
Using appropriate examples distinguish between discounting techniques and non-
discounting techniques
b.
(4 Marks)
A project with the initial investment of Kshs. 5 million has the following details:
Year 1 2 3 4 5
Sales (units) 20,000 15,000 25,000 30,000 28,000
The selling price per unit is Kshs. 25 while the variable cost per unit is Kshs. 2.
Depreciation is provided on a straight line basis with a salvage value of Kshs. 1,500, 000.
Tax rate is at 30%
Required: Determine
i) (7 Marks)
ii) Present value of the project. (3 Marks)
iii) The net present value of the project. (2 Marks)
iv)
c.
Cash flows to be discounted. Advise on whether to undertake the project. (1 Marks)
Explain why cash flows are considered important than accounting profits in project
appraisal.
d.
(3 Marks)
Point out the difficulties faced in capital budgeting. (3 Marks)
QUESTION FOUR (23 MARKS)
a. Relate financial management in public sector and corporate sector. (4 Marks)
b. Mention six reasons why valuation of common stocks is complicated. (4 Marks)
c. Point out the difference between ordinary share capital and preference share capital.
(4 Marks)
d.
A share currently has the following dividend pattern
Year D.P.S
2012 1.2
2013 1.4
2014 1.6
The cost of capital is 10%
Required:
Determine the theoretical value of the security.
3
(5 Marks)
e. Explain how a convertible security valued (3 Marks)
f. Define the following terms (3 Marks)
(i) Conversion price
(ii) Conversion value
(iii) Conversion premium
QUESTION FIVE (23 MARKS)
a.
Briefly explain the following option concepts.
i) Put option in the money.
ii) Call option out of money.
iii) Option at money.
(6 Marks)
b. Highlight four factors that determine the value of options.
c. The profit maximisation is not an operational feasible criterion. Do you agree? Illustrate
your views.
d.
(3 Marks)
Explain how the wealth maximisation goal take case of the conflict between shareholders
and managers.
e.
(4 Marks)
(4 Marks)
A company has a debt ratio of 40%. Its pay-out ratio is 50%. The management wants a
growth of 20% per annum in the future. Is this rate sustainable? If tax interest is 5%
(3 Marks)
f.
List and briefly explain any three methods of corporate valuation. Use practical
examples.
(3 Marks)
QUESTION SIX (23 MARKS)
a.
Discuss the assumptions of consistency and transitivity as advanced by the ordinalists.
(5 Marks)
b.
Using a well-labelled diagram, explain the consumer equilibrium under the ordinalists.
(5 Marks)
c. State and explain the criticisms against the cardinalist theory of consumption. (5 Marks)
d. Explain the consumer equilibrium under the cardinalist approach. (5 Marks)
e. Citing relevant examples, explain the term marginal propensity to consume. (3 Marks)
4

Msf 506 Advanced Theory Of Finance Weekend Question Paper

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