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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
TIME : 2 HOURS
INSTRUCTIONS
• Answer Question ONE (compulsory) and any Other THREE Questions.
Question 1
a) State and explain the four main functions of financial management (8 marks)
b) A company is considering an investment proposal to install new milling controls. The project will cost Shs 50,000. The facility has a life expectancy of five years and no salvage value. The company’s tax rate is 40% and no investment tax credit is allowed. The firm uses straight-line depreciation. The estimated cash flows before tax (CFBT) from the proposed investment proposal are as follows:
YEAR Cash flow before tax
1 10,000
2 11,000
3 14,000
4 15,000
5 25,000
Compute the following:
(i) Payback period (2 marks)
(ii) Accounting rate of return (2 marks)
(iii) Net present value at 10% discount rate (3 marks)
(iv) Internal rate of return (Use 6% discount rate) (4 marks)
(v) Profitability index at 10% discount rate. (3 marks)
c) Highlight the conflict between probability and liquidity in working capital management.
(8 marks)
Question 2
What do you understand by:
a) The marginal cost of capital. (1mark)
b) The shares of XYZ LTD sell at 15/= each. It is expected that the company will pay next year a dividend of 3 shillings per share which will grow at 6% for ever. Assume a 30% tax rate.
Required
Compute the specific cost of capital and weighted average cost of capital given the following information: (11marks)
XYZ LTD Capital Structure
FORM OF FINANCING VALUE IN SHS
Ordinary shares: 200,000 @ Shs 15 3,000,000
10% preference shares 1,000,000
14% debentures 2,000,000
Total Capital Employed 6,000,000
Question 3
a) As financial manager what methods would you institute in your company to ease cash shortages. Explain (8marks)
b) State the four main functions of a cash budget. (4marks)
Question 4
a) State any four sources of finance for your company (4marks)
b) ‘A highly Geared company is not good choice for investment’. Give reasons to justify this statement in reference to the disadvantages of debt finance. (6marks)
c) Define the term shareholders wealth (2marks)
Question 5
Mombasa Ltd. is an expanding private company in the Fishing business. Accounts prepared in January 2002 included the following information:
MOMBASA LTD
STATEMENT OF COMPREHENSIVE INCOME
AS AT 31ST DECEMBER 2000 AND 31ST DECEMBER 2001 RESPECTIVELY
2000 2001
Shs Shs
Sales 2,000,000 3,200,000
Less cost of goods sold 1,100,000 1,800,000
Gross profit 900,000 1,400,000
Less: Trading expenses 450,000 550,000
Trading profit 450,000 850,000
Less: Debenture interest 25,000 25,000
Net profit before taxation 425,000 825,000
Less: Corporation Tax 160,000 320,000
Net profit after tax 265,000 505,000
Less: Ordinary share dividend 125,000 175,000
Undistributed profit for year 140,000 330,000
Mombasa Ltd
Statement of financial position
As at 31st December 2000 and 31st December 2001 respectively
2000 2001
Shs Shs
Non Current assets (cost) 1,000,000 1,400,000
Less: Depreciation 200,000 250,000
Net book value 800,000 1,150,000
Current assets
Stock 400,000 550,000
Debtors 250,000 350,000
Cash 80,000 0
730,000 900,000
Less: Current liabilities
Creditors 145,000 200,000
Taxation 160,000 320,000
Proposed Dividend 125,000 175,000
Bank Overdraft 0 65,000
(430,000) (760,000)
1,100,000 1,290,000
Ordinary Share Capital-authorised and issued (sh l share) 500,000 500,000
Undistributed profits 350,000 680,000
10% Debentures 250,000 110,000
1,100,000 1,290,000
Required:
a) Calculate the following accounting ratios for both year 2000 and 2001. (11marks)
i. Return on capital employed
ii. Asset turnover
iii. Debt/Equity ratio
iv. Gearing Ratio
v. Current ratio
b) Comment on the financial position of Mombasa limited. (1 Mark)
Question 6
a) In point form highlight the Practical difficulties in capitals budgeting decisions
(3marks).
b) Elucidate on any NINE Factors that influence the working capital needs for a company.
(9marks).
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