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Buss 321: Financial Management 1 Question Paper
Buss 321: Financial Management 1
Course:Financial Management I
Institution: Kenya Methodist University question papers
Exam Year:2009
KENYA METHODIST UNIVERSITY
END OF SECOND TRIMESTER
MAY TO AUGUST 2009 EXAMINATIONS
FACULTY : BUSINESS STUDIES AND MANAGEMENT
DEPARTMENT : BUSINESS ADMINISTRATION
COURSE CODE : BUSS 321
COURSE TITLE : FINANCIAL MANAGEMENT 1
TIME : 2 HOURS (PART-TIME EXAMINATION)
Instructions
Answer Questions ONE and any other Two questions
a) Discuss the three main financial management duties 6 marks
b) Highlight methods to entice managers to act in the best interest of stock holders
4 marks
c) A company has issued debentures of kshs 50 to be repaid after 7 years. How much should the company invest in a sinking fund earning 12% in order to be able to repay debentures 4 marks
d) i) An investor holds two shares X and Y in equal proportions with the following risk and return characteristics. Expected return of X is 24%, Expected return for Y is 19% and the dof x is 28% and dof y is 23%. The returns of these securities have a positive correlation of 0.6. required calculate the portfolio return and risk 4marks
ii) Suppose that the investor wants to reduce the portfolio risk (dp) to 15%. How much should the correlation be to bring the portfolio risk to the desired level
4 marks
e) A bond is sold for kshs 94 at par. And it has a new issue of 7 years, 15% and the company will pay kshs 100 principal to bondholders at maturity. Compute the cost of debt. 5 marks
f) Highlight three advantages of ratio analysis. 3 marks
Question Two
a) Discuss at least five activities that are conducted by the finance manager on a day- to-day basis (10 marks)
b) A machine (A) has a cost of kshs 75,000 and a net cashflow of ksh 20,000 per year for six years. A substitute machine (B) would cost Kshs 50,000 and generate net cash flow of kshs 14,000 per year for six years. The required rate of return of both machines is 11 %.
Required
Calculate the IRR and NPV for the machines
Which machines should be accepted and why. (6 marks)
c). Highlight four reasons why working capital management is important to a firm.
(4marks)
Question Three
Kimathi company plan to buy a new machine to meet expected demand for new product T. this machine will cost Ksh 250,000 and last for four years, at the end of which time it will be sold for Ksh 5,000.Kimathi Company expects demand for product T to be as follows:
Year 1 2 3 4
Demand (units) 35,000 40,000 50, 0000 25,000
The selling price for product T is expected to be Kshs 12 per unit and the variable cost of production is expected to be ksh 7.80 per unit. Incremental annual fixed production overheads of Ksh 25,000 per year will be incurred. Selling price and costs are all incurrent price terms.
Selling price of product T: 3% per year
Variable cost of product: 4 % per year
Fixed production production overheads: 6%
Additional information
Kimathi company has a real cost of capital of 5.7% and pays tax at an annual rate of 30% one year in arrears. It can claim capital allowance s on a 25% reducing balance basis. General inflation is expected to be 5% per year.
Kimathi Company has a target return on capital employed of 20%. Depreciation is charged on a straight line basis over the life of an asset.
Required
a) Calculate the NPV of buying the new machine and comment on your findings
(Work to the nearest ksh 1,000) (10 marks)
b) Identify and explain the key areas of accounts receivable management
(5 marks)
c) Briefly highlight the theories that explain the source of yield curves 5 marks
Question four
a) Discuss the two key activities of the financial manager as related to the firm’s balance sheet 4 marks
b) Highlight the five characteristics of convertible debentures 5 marks
c) XYZ Company has made plans for the next year. It is estimated that the company will employ total assets of ksh 800,000, 50% of the assets being financed by borrowed capital at an interest cost of 8% per year.
The direct costs for the year are estimated at kshs 480,000 and all other operating expenses are estimated at ksh 80,000. The goods will be sold to customers at 150% of the direct costs. Tax rate is assumed to be 50%
Required: Calculate
a. Net profit margin
b. Return on assets
c. Asset turnover
d. Return on owners equity (8 marks)
d) Differentiate between capital gearing and financial gearing (3 marks)
Question Five
Ngari enterprises limited had the following structure as at 31/12/2008
Ordinary shares: Ksh
200,000 @ Ksh 20 each 4,000,000
10% preference shares 1,000,000
14% debentures 3,000,000
Total Capital Employed 8,000,000
The shares of this company sell at 20/= each. It is expected that the company will pay next year a dividend of 2 shillings per share which will grow at 7% for ever. Assume a 50% tax rate. You are required to;
a) Compute the weighted average cost of capital based on existing capital structure
b) Compute the new weighted average cost of capital if the company raises an additional Ksh 2,000,000 debt by issuing 15% debenture. This would result in increasing the expected dividends to Ksh 3/= and have the growth rate unchanged, but the price of the share will fall to Ksh 15per share. (15 marks)
c) Highlight factors that influence the working capital needs for a company. (5 marks)
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