Business Finance I Question Paper

Business Finance I

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
BAC 203: BUSINESS FINANCE I

DATE: TUESDAY, 24TH NOVEMBER 2009
TIME: 11.00 A.M. - 1.00 P.M.

INSTRUCTIONS: answer ALL questions.

QUESTION ONE

(a)
With reference to agency theory:

(i)
Define the term ‘agency relationship’ in the context of corporate management.

(2 marks)

(ii)
Discuss five possible area of conflict between shareholders and management.

(10 marks)
(b)
XYZ Ltd intends to raise additional capital through an issue of ordinary

shares of Sh.80 par value. The company promises to pay dividend at the rate

of Sh.8 per annum and the expected market price of the shares after six years

is Sh.120. An investor whose required rate of return is 10% intends to hold the

shares for six years.

Required:
The
intrinsic
value
of
the
shares.
(3
marks)

QUESTION TWO
Makongeni Limited presented the following financial statements on 30 June 2007:
Income statement for the year ended 30 June 2007
Sh.
Sales (all on credit)
4,000,000
Operating profit
440,000
Less: debenture interest
40,000

400,000
Corporation tax
176,000
Net profit
224,000
Ordinary dividends proposed
107,200
Retained earnings
116,800
Page 1 of 4

Balance sheet as at 30 June 2007

Sh Sh Sh
Fixed assets

480,000
Freehold property (net book values)

800,000
Plant and machinery (net book value)

200,000
Furniture & Fittings

200,000

1,680,000
Current
assets

Stock
1,000,000

Debtors

400,000

Investments

120,000

1,520,000

Current
liabilities

Trade creditors
238,400

Bank overdraft
878,400

Corporation tax
176,000

Dividend payable
107,200 (1,4000,000)
120,000

1,800,000
Financed by:

Authorised share capital: 800,000 Sh.1 ordinary shares
800,000
Issued and fully paid: 400,000 Sh.1 ordinary shares
400,000
Capital reserve

200,000
Revenue reserve

800,000
Loan capital: 400,000 Sh.1, 10% debentures
400,000

1,800,000

Additional information:
1.
An analysis in which the company operates reveals the following industrial averages:

Current ratio 1.5:1

Quick ratio 0.8:1
2.
The market price of the company’s shares as at 30th June 2007 was Sh.5.
3.
The purchases for the year were Sh2,160,000 while the cost of sales was Sh.3 million.

Page 2 of 4

Required:
(a)
Compute the following ratios for Makongeni Limited:
(i)
Operating
expenses
ratio
(2
marks)
(ii)
Dividend
yield
(2
marks)
(iii)
Price
earnings
ratio
(2
marks)
(iv)
Current
ratio
(2
marks)
(v)
Return
on
capital
employed
(2
marks)
(vi)
Accounts
receivable
turnover
in
days
(2
marks)
(vii)
Turnover
of
capital
(2
marks)

(viii) Market value to book value
ratio
(2
marks)

(b)
Compare the company’s liquidity performance with that of the industry. (4
marks)

(Total 20 marks)

QUESTION THREE
Mambo Leo Limited is considering the purchase of a new machine. Two alternative
machines, A and B, which cost KSh.6 million and KSh.7 million respectively are
available in the market. The cash flows after taxation of each machine are as follows:

Cash flows
Year
A B
Sh. Sh.
1
600,000
1,800,000
2 1,800,000
2,400,000
3 2,000,000
3,000,000
4 3,000,000
1,800,000
5 2,400,000
1,600,000

The company’s cost of capital is 12% per annum.
Required:
(i)
Compute the net present value of each machine

(7 marks)
(ii)
Compute the return Mambo Leo Ltd. expects to earn from each of the

two machines.

(6 marks)
(iii)
Base on the results obtained in (i) above which of the two machines should

be selected.

(2 marks)
Page 3 of 4

QUESTION FOUR
(a)
The following information was extracted from the books of Bombululu Limited

as at 31st December 2008:

Shs.

Ordinary share capital (par
value
Sh.25)
800,000

8% preference share capital (par value Sh.24)

600,000

10% preference share capital (par value Sh.20)

400,000
10%
debentures 400,000

2,200,000

Additional
information:

1.
The market value of the 10% debentures on 31 December 2008 was
Sh.500,000

2.
The share prices as at 31 December 2008 were as follows:

Market price per share (sh)
8%
preference
shares
20
10%
preference
shares 25
Ordinary
shares 30

3.
The company has maintained payment of an ordinary dividend per share of

Sh.3.80 over the past five years.

4.
The corporation tax rate is 30%
Required:

(i)
Cost of 8% preference share capital

(2 marks)

(ii)
Cost of 10% preference share
capital
(2
marks)
(iii)
Cost
of
10%
debentures
(2
marks)
(iv)
Cost
of
ordinary
share
capital
(2
marks)
(v)
Market-weighted
average
cost (4
marks)
(b)
Explain four factors that influence the type of finance sought by a
manufacturing
company.
(8
marks)

(Total 20 marks)
****************
Page 4 of 4

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