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Accf 430Financial Management Ii Question Paper
Accf 430Financial Management Ii
Course:Financial Management Ii
Institution: Kenya Methodist University question papers
Exam Year:2011
KENYA METHODIST UNIVERSITY
END OF 3''RD ''TRIMESTER 2011 EXAMINATIONS
FACULTY : SCHOOL OF BUSINESS AND MANAGEMENT
DEPARTMENT : BUSINESS ADMINISTRATION
UNIT CODE : ACCF 430
UNIT TITLE : FINANCIAL MANAGEMENT ii
TIME: 2 HOURS
Instructions: Answer Question ONE and any other TWO Questions.
Question One
Explain each of the following dividend theories:
MM’s Dividend Irrelevance Theory. (2 Marks)
Bird-in-Hand Theory (2 Marks)
Signaling Hypothesis (2 Marks)
Describe FOUR reasons for the change in the value of money over time. (2 Marks)
John Meko obtained his BBA degree two years ago and landed a very good job with an international bank. He now plans to settle down and intends to buy a house. He has identified a house costing Shs. 4,500.000 in one of the better estates in Nairobi. The bank has agreed to finance him but he will raise a deposit of Sh. 500,000 from his own sources. The bank loan will be at a staff rate of 12% p.a reducing balance. Floating costs on the loan include: house inspection and valuation- Shs. 40,000; loan insurance – 0.5% of initial loan, and legal and conveyancing – Shs 140,000. These costs will be deducted from the loan. The mortgage term shall be 20 years, repaid every month at the end of the month.
Required:
Determine the size of the loan to be obtained by John to acquire the house. (1 Mark)
What is the monthly repayment amount. (2 Marks)
Prepare the loan amortization schedule for the first 12 months. (4 Marks)
Determine the total amount of interest and principal that will have been paid after 10 years. (3 Marks)
When will John clear 50% of the loan? (2 Marks
Briefly explain the following terms:
Trading on equity (2 Marks)
Capital gearing (2 Marks)
Financial leverage (2 Marks)
Capital Structure (2 Marks)
Floating cost of capital (2 Marks)
Question Two
Makena is considering investing in the stock market. She has collected the following data on the market and two securities Alpha (A) and Beta (B). Data on the state of the economy was obtained from the national statistics bureau.
State of Economy Probability Expected Returns
Alpha Beta Market
Boom 0.2 20% 20% 18%
Average 0.5 15% 15% 12%
Recession 0.3 20% 20% 10%
Required:
Showing your working clearly, calculate:
Security A’s expected return and risk. (3 Marks)
Security B’s expected return and risk. (3 Marks)
The expected Market return and risk. (3 Marks)
The betas for security A and B. (6 Marks)
Should Makena hold assets A and B together in a portfolio. Support your answer with computed measures of suitability. (1 Mark)
Calculate the portfolio return and risk (using the betas) if she hold 50% in A and 50% in B. (4 Marks)
Question Three
Leverage cuts both ways. Discuss. (4 Marks)
Pixel Ltd is a small family owned company. It has grown by relying on shareholder equity but now considering debt. Its balance sheet as well as the proposed capital structure are as follows:
Balance Sheet Proposed Structure
31.12.2010 31.12.2010
Assets: Shs 000 Shs.000
Good will 2,000 2,000
Fixed Assets 10,000 10,000
Current Assets 8,000 8,000
20,000 20,000
Financed by:
Ordinary Share Capital 16,000 8,000
Reserves 11,000 4,000
Debt (10%) - 8,000
20,000 20,000
The company believes it will be able to obtain court approval to refund the capital necessary to restructure its capital composition. Pre-tax profit on 21.12.2010 = Sh. 2,000,000 , tax rate is 30%.
Required:
Determine the cost of capital of the unlevered firm.
Determine the cost of equity if the firm is levered.
Calculate the cost of capital if the firm is levered.
Explain TWO possible dangers (risks) a firm should consider when using leverage to improve shareholder value.
Question Four
Describe the main differences between fundamental and technical analysis of the stock market.
Explain the following terms as used in the stock market.
Bear (1 Mark)
Bull (1 Mark)
Short selling (1 Mark)
Long selling (1 Mark)
The Nairobi stock exchange is currently attempting to demutualize. Briefly trace the history of the NSE and highlight potential benefits of demutualization. (8 Marks)
Briefly explain the THREE forms of market efficiency as proposed by Fama (1970, 1973). (3 Marks)
Question Five
Describe the main pillars of Kenya’s Financial System. (6 Marks)
Jamaa Ltd is a small technology company operating out of Nairobi. The company has been very successful. Now it is considering making an IPO for the first time, and is facing the problem of setting the selling price. It feels the proper procedure is to select similar firms with publicly traded stock and make relevant comparisons. It has identified two similar companies in terms of product mix, size, asset composition and debt/equity proportions. Data on the companies, A and B shows:
A B
EPS 2010 Sh. 5 Shs. 8
Average EPS (2006-2010) 4 5
Price per share (2010) 48 65
Dividend per share (2010) 3 4
Average DPS (2006-2010) 2.50 3.25
Book Value per Share 45 70
Market/Book ratio 107% 93%
Data for Jamaa Ltd shows:
Total earnings (2010) 1,500,000
Average earnings (2006-2010) 1,000,000
Total dividends paid (2010) 700,000
Average dividend (2006-2010 500,000
Net Book value (2010) 12,000,000
Required:
What price would you recommend if Jamaa (L) sells 500,000 shares (Show workings)? (14 Marks)
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