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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:2010
KENYA METHODIST UNIVERSITY
END OF SECOND TRIMESTER 2010 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(Compulsory) and any Other TWO Questions
Question One ( Compulsory)
a) Define agency relationship from the context of a public limited company and briefly explain how this arises. (6 marks)
b) Highlight the various measures that would minimize agency problems between the owners and the management. (6 marks)
c) Why does ordinary share capital have a high cost relative to debt capital? (6 marks)
d) Outline the functions of a financial manager in a contemporary corporate set-up. (4 marks)
e) What are the weaknesses associated with profit maximization goal? (8 marks)
Question 2
a) What are the disadvantages of Hire purchase as a source of finance? (4 marks)
b) The following information has been extracted from the published accounts of jitegemee ltd, a
company quoted on the Nairobi Stock Exchange.
Shs.
Net profit after tax and interest 990,000
Less: dividends for the period 740,000
Transfer to reserves 250,000
Accumulated reserves brought forward 810,000
Reserves carried forward 1,060,000
Share capital (Sh.10 par value) Sh.8,000,000
Current Market price per share 12%
Required
Calculate for jitegemee ltd the following ratios and indicate the importance of each to an ordinary share holder.
i) Earnings per share. (4 marks)
ii) Price earnings ratio (4 marks)
iii) Dividend yield (4 marks)
iv) Dividend cover (4 marks)
Question 3
a) Explain the types of agency costs that arise in agent-principal relationship that exist between shareholders and managers. (10 marks)
The following is the existing capital structure of Company XYZ Ltd.
Ordinary shares at Shs.10 par
Retained
12% preference shares Shs.10 par
16% loan Shs.100 par
Total capital employed Shs.
1,000,000
800,000
400,000
300,000
2,500,000
The company’s ordinary shares have a dividend cover of 3 times and pays a dividend of 10% on its ordinary share capital.
Ordinary shares sells at Shs.18
Preference shares sell at Shs.15
Debentures are selling at par. The tax rate is 30%
Compute the weighted Average Cost of Capital (10mark)
Question 4
Koko group of companies has six projects available for investment as follows:
Project Initial cost Sh.’M’ NPV @ 15% cost of capital
1
2
3
4
5
6 60
15
20
55
30
40 21
9
9
15
20
-2
The firm has Sh.100 M available for investment.
a) Identify which projects should be undertaken. Using P.I and NPV ranking, comment on your answer.
(10 marks)
b) Explain the reasons why firms in the same industry with equal earnings and share capital would pay different amount of dividends (6 marks)
c) In making investment decisions, cashflowss are considered to be more important than accounting profits. Briefly explain why this is the case. (4 marks)
Question 5
a) “Since debt capital is cheaper than equity, companies should resort to one hundred percent use of debt to finance their investments”. Discuss the limitations of the above financing policy.(8 marks)
b) Distinguish between the following sets of terms:
(i) Treasury bills and treasury bonds. (4 marks)
(ii) Complementary projects and mutually exclusive projects. (4 marks)
(iii) Stock splits and stock dividends. (4 marks)
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