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Bac 203: Business Finance 1 Question Paper

Bac 203: Business Finance 1

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2015

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2015/2016
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF COMMERCE
BAC 203: BUSINESS FINANCE 1
DATE: FRIDAY 27TH NOVEMBER 2015 TIME: 2.00 P.M- 4.00 P.M
INSTRUCTIONS:
Attempt ALL questions
QUESTION ONE (20 MARKS)
a) Mr Simba borrowed sh. 800,000 for a musical system at an annual rate of 15 per cent. The loan is to be repaid on a monthly basis, payable at the end of each month for five years.
i. What will be the periodic installment? (2 marks)
ii. Prepare a loan amortization schedule for the first five months. (4marks)
iii. Compute the total amount of interest paid by Mr. Simba for the five month period. (2 marks)
b) XYZ bank pays 12% p.a interest quarterly. If sh. 10,000 is deposited initially, how much shall it accumulate to at the end of 43 years? (2 marks)
c) Discuss the conflicts that can arise between management and shareholders. (5 marks)
d) Explain the remedies that be taken by the shareholders to overcome the above conflicts. (5 marks)
QUESTION TWO (20 MARKS)
a) Differentiate between systematic risk and unsystematic risk. (2 marks)
b) Jaribu Tena ltd is a firm that deals with county projects and for the last three years, it has been excelling in identifying the most viable projects for its clients as compared to its competitors. To make their project department more effective the CEO of the firm hired you as their financial management consultant and of the challenging task that was handed over to you is to advice on the best project to be selected. the following are the details of the projects for the three years
PROJECT A
Yr 1 Yr 2 Yr 3
Returns (%) 8 8 8
probability 0.3 0.5 0.2

PROJECT B
Yr 1 Yr 2 Yr 3
Returns (%) 6 11 31
probability 0.3 0.5 0.2

PROJECT C
Yr 1 Yr 2 Yr 3
Returns (%) 22 14 -4
Probability 0.3 0.5 0.2

Required
i. Determine the expected rate of return, standard deviation and coefficient of variation for each project. (9 marks)
ii. Select the most appropriate project to be selected by Tena ltd. (2 marks)
c) A 10 year government bond with a face value of sh 1,000,000 is offering a coupon rate of 8% p.a coupons are paid semi annually. What is the market price of this bond if the current market yield is 12% (7 marks)
QUESTION THREE (20 MARKS)
The following information was obtained from the books of Wanton ltd for the year ended 31st December 2014.

Ksh
Ordinary share capital (par value ksh 30) 3,600,000
8% preference shares (par value ksh 25) 2,400,000
15% debenture stock (issue price ksh 100) 800,000
20% bank loan 1,200,000
8,000,000

Additional information;
i. The market price is as follows
• Ordinary shares ksh 40
• 8% preference shares ksh 32
• 15% debentures ksh 90
ii. The company has maintained a dividend per share of ksh 5.50 per annum and it is expected to grow in perpetuity at 2%
iii. Corporation task is at 30%
Required
a) Compute the cost of each source of capital (12 marks)
b) Calculate the Weighted average cost of capital (8 marks)

QUESTION FOUR (10 MARKS)
Sonko hardware tools company limited sells plumbing fixtures on terms of 2/10 net 30. Its financial statement for the last three years are as follows:
2012 2013 2014
Sh ‘000’ Sh ‘000’ Sh ‘000’
Cash 30,000 20,000 5,000
Accounts receivable 200,000 260,000 290,000
Inventory 400,000 480,000 600,000
Net fixed assets 800,000 800,000 800,000
1,430,000 1,560,000 1,695,000
Accounts payable 230,000 300,000 380,000
Accruals 200,000 210,000 225,000
Bank,loan, short term 100,000 100,000 140,000
Long term debt 300,000 300,000 300,000
Common stock 100,000 100,000 100,000
Retained earnings 500,000 550,000 550,000
1,430,000 1,560,000 1,695,000
Additional information:
Sales 4,000,000 4,300,000 3,800,000
Cost of goods sold 3,200,000 3,600,000 3,300,000
Net profit 300,000 200,000 100,000

Required
i. For each of the three years, calculate the following ratios: Acid test ratio, Average collection period, Inventory turnover, Total debt/ equity and net profit margin (6 marks)
ii. From the ratios calculated above, comment on the liquidity, efficiency, profitability and gearing positions of the company. (4 marks)

Bac 203: Business Finance 1 Question Paper

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