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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 3''RD ''TRIMESTER 2011 EXAMINATIONS
SCHOOL : BUSINESS AND ECONOMICS
DEPARTMENT : BUSINESS ADMINISTRATION
UNIT CODE : BUSS 321
UNIT TITLE : FINANCIAL MANAGEMENT
______________________________________________________________________________
Instructions: Answer Question ONE and any Other TWO Questions.
Question One
Suppose you deposit sh. 1,000 today in a bank which pays 10 percent in interest compounded annually, how much will the deposit grow to after 8 years and 12 years.
(5mks)
Explain FIVE roles/functions of a finance staff/manager in an company.
(10mks)
Explain circumstances when the actions of managers will be in conflict with the interest of the owners/shareholders.
(10mks)
Explain ways a limited company can raise finance for expansion. (5mks)
Question Two
Company XYZ has identified a project that will cost Shs. 80,000 and will generate the following returns.
Year Returns (shs)
1 20,000
2 30,000
3 10,000
4 15,000
5 15,000
6 0
Required:
Compute the pay-back period of this project. (8 Marks)
A company has identified a project which will cost shs. 15,000 and forecasts. Indicate that this project will generate the following returns:
Year Returns
1 8,000
2 7,000
3 6,000
This company will pay an interest rate of 15% per annum. Required: compute NPV for this project and advice the company accordingly. (6 Marks)
Safari Team Limited contemplates to raise debt finance to the tune of shs. 400,000 and this money can be invested in a project which will generate the following cash inflows:
Year CF shs
1 200,000
2 150,000
3 100,000
4 80,000
5 60,000
The company’s expected interest rate on these funds is 8% p.a. Using IRR advice the management of Safari Team if the project is viable. (6 Marks)
Question Three
Explain TWO factors that influence cost of finance.
(6 Marks)
Meghji Ltd has the following capital structure
Ordinary Share Capital 300,000
Retained Earnings 150,000
8% Preference share capital 100,000
10% debt finance 50,000
Total Capital employed 600,000
This company has been paying ordinary dividend of 10% per annum and expects equity to grow at 6% per annum. Tax = 50%. Calculate the weighted average cost of capital for this company. (14 Marks)
Question Four
Discuss factors that determine working capital needs. (8 Marks)
Kirochi Ltd requires 2,000 units of a component in its manufacturing process in the coming year which cost shs50 each. Each order costs shs50 to prepare, lead and process time is 7 days while holding cost is shs 20 per unit per year for storage.
Required:
How many units should be ordered each time an order is placed to minimize inventory cost.
(3 Marks)
What is the reorder level
(3 Marks)
How many orders will be placed per year
(3 Marks)
Determine the total relevant costs.
(3 Marks)
Question Five
Outline the assumptions of basic EOQ model.
(8 Marks)
Kilimo Ltd makes cash payments of shs10,000 per week. The interest rate on marketable securities is 12% p.a and every time the company sells marketable securities, it incurs a cost of shs. 20.
Required:
Determine the optimal amount of marketable securities to be converted into cost every time the company makes the transfer.
(3 Marks)
Determine the total number of transfers from marketable securities to cash per year
(3 Marks)
Determine the total cost of maintaining the cash balance per year.
(3 Marks)
Determine the firm’s average cash balance.
(3 Marks)
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