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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 UNIVERTISY
END OF FIRST TRIMESTER 2009 EXAMINATIONS
FACULTY : BUSINESS AND MANAGEMENT STUDIES
DEPARTMENT : BUSINESS ADMINISTRATION
COURSE CODE : BUSS 321
COURSE TITLE : FINANCIAL MANAGEMENT 1
TIME : 2 HOURS
INSTRUCTIONS
• Answer Question ONE and any other TWO Questions
Question 1
a) 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. (8marks)
b) Discuss the key factors to be considered when formulating a working capital funding policy. (7marks)
c) The shares of ABC Company limited has the following anticipated returns with associated probabilities
Return (%) Probability
-20 0.05
-10 0.10
10 0.20
15 0.25
20 0.20
25 0.15
Required:-
Calculate the
a) Expected rate of return
b) variance of return
c) standard deviation
d) mean variance of criterion (4 marks)
d) Assume that a company share is currently selling at kshs 134. Current dividend is kshs 3.50 per share and are expected to grow at 15 % over the next 6 years and then at a rate of 8% for ever. Calculate the cost of equity (6marks)
e) What is financial management and how does it aid enterprise growth? (5marks)
Question 2
a) Discuss the factors you would consider when selecting a long-term finance package for a medium sized enterprise? (10marks)
b) What is meant by an agency problem or agency cost?. Do these interfere with shareholder wealth maximization? Why? What mechanisms minimize these problems/costs? Are compensation contracts effective in mitigating these problems/costs? (5marks)
c) Njunjiri 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 ( 5 marks)
Question 3
a) Discuss at least five activities that are conducted by the finance manager on a day- to-day basis (10marks)
b) The following are the income and expenditure estimates of City-cross Textiles Ltd. for the quarter ending December 2006.
Sales: October 100,000
November 145,000
December 175,000
• All sales are cash sales
• The purchase budget for the quarter is estimated at Ksh 40,000 per month
• Wages and salaries for the quarter are estimated at Ksh 55,000 per month
• Administrative and other expenses are estimated at Ksh 30,000 each for the months of October and December and Ksh 45,000 for December.
• Opening balance for the quarter is Ksh 15,000
• In the month of December every sale was allowed a 5% discount
Using the receipt and payment method prepare a cash budget for City-cross Textiles Ltd. for the quarter. (10marks)
Question 4
Njogu Company has annual sales revenue of ksh 6 million and all sales are on 30 days credit, although customers on average take ten days more than this to pay. Contribution represents 60% of sales and the company currently has no bad debts. Accounts receivable are financed by an overdraft at an annual interest rate of 7%
Njogu Company plans to offer an early settlement discount of 1.5% for payments within 15 days and to extend the maximum credit offered to 60 days. The company expects that these changes will increase annual credit sales by 5%, while also leading to additional incremental costs equal to 0.5% of turnover. The discount is expected to be taken by 30% of customers, within the remaining customers taking an average of 60 days to pay.
Required
a) Evaluate whether the proposed changes in credit policy will increase the profitability of Njogu company (5 marks)
b) Njoroge Company, a subsidiary of Njogu Company, has set a minimum cash account balance of ksh 7,500. The average cost to the company of making deposits or selling investments is ksh 18 per transaction and the standard deviation of its cashflows was ksh 1,000 per day during the last year. The average interest rate on investment is 5.11%.
Determine the spread , upper limit and the return point for cash account of Njoroge company using the miller Orr model and explain the relevance of these values for cash management of the company (5marks)
c) Identify and explain the key areas of accounts receivable management (5marks)
d) Explain three general motives for holding inventories (5marks)
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