Business Finance I Question Paper

Business Finance I

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2008/2009
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR
OF COMMERCE

BAC 203 :
BUSINESS FINANCE I

DATE:
FRIDAY 21ST AUGUST 2009
TIME: 11.00 A.M. – 1.00 P.M.
=================================================================

INSTRUCTIONS
Answer ALL the questions.

1.
A summarized income statement and Balance sheet of A company for the year ended

December 31 2008 are shown here below.

Income
statement
2007
2008

Shs(millions) shs(millions)
Turnover
4200
4905

Cost
of
sales
2970
3225
Gross
profit
1430
1680
Operating
expenses

930
1070
Profit
before
interest

500

610

Interest

30

75

Profit on ordinary activities before taxation
470

535
Taxation

225

260

Profit on Ordinary activities after taxation
245

275
Dividends

120

120
Page 1 of 3

Retained Profit for the year

125

155

Fixed
Assets
1060
1230
Current
assets
1970
2510
Current
liabilities

665

900
Long
term
loan

370

690
Ordinary
shareholder
Equity
1995
2150

REQUIRED

a)
For the two years compute the following ratios: Gross Profit Margin, ROCE,

Profit Margin, Assets turnover, Gearing ratio, Debt/Equity, interest cover,
current
ratio,
Inventory
turnover.
(10
marks)

b)
Based on your computations in (a) above, write a report to the finance
Director
on

i)
Profitability

ii)
Trading
levels

iii)
Working Capital and
iv)
Capital structure of the company.

(15 marks)

2.
Fresha Dairy is considering two possible expansion plans. Proposal A involves

opening ten (10) stores in the coast region at a total cost of Ksh. 157,500,000.

Proposal B focuses on the Rift Valley where the company would open six (6) stores

for a total cost of shs. 125, 000,000. Selected data for the two proposals in shown
here
below:

A shs

B shs

Initial Investment

157,500,000
125,000,000

Estimated life of store locations
7 years

7 years
Estimated
salvage
value
0 20,000,000

Estimated annual net cash flow
37,500,000

28,500,000
Page 2 of 3
Depreciation
of
equipment
22,500,000
15,000,000

REQUIRED
a)
For each proposal. Compute

i)
Payback
period (4
marks)

ii)
NPV

(6 marks)

iii)
MIRR

(10 marks)

given that managements required rate of return is 15%.

b)
Based on your computations in (a) above, which proposal should be

chosen
and
why?
(5
marks)

3.
a)
Investors of KenGen shares require a 15 percent rate of return on the

company’s shares. Imagine that it is now January 1 2009 and the last

dividend that has just been paid is Ksh 5. If investors expect that dividends

will grow at a constant rate of 8 percent for the first 3 years and the stabilize

to grow at 5 percent thereafter. Calculate the price of the stock today.

(8 marks)

b)
What will the stock price be on January 1 2010.

(8 marks)

c)
Calculate the capital gain as at Jan 1 2010.

(4 marks)

Page 3 of 3

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