Business Finance Ii Question Paper

Business Finance Ii

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2008

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2007/2008
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR
OF COMMERCE
BAC 204: BUSINESS FINANCE II

DATE: Monday 23rd June, 2008

TIME: 8.00 a.m. – 10.00 a.m.

INSTRUCTIONS:
Answer ALL questions.
Q1.
The management of Kenyatta Packers Ltd is planning to carry out two activities at
the same time:
(i)
Determine the best credit policy for its customers.
(ii)
Find out the optimal level of ordering orange juice from its suppliers.
The following data have been collected to assist in making the decision:
(1)
Annual requirement of orange juice are 4,200,000 litres
(2)
The carrying cost of the juice is sh 8 per litre per year.
(3)
The cost of placing an order is sh 1,400 per litre per year.
(4)
The required rate of return for this type of investment is 18% after
tax.
(5)
Debtors currently are running at sh 120 million and have an
average collection period of 40 days.
(6)
Sales are expected to increase by 20% if the credit terms are
relaxed and to result in an average collection period of 60 days.
(7)
60% of sales are on credit
(8)
The gross margin on sale is 30% to be maintained in future.
Required:
(i)
Use the Baumol model to determine Economic order quantity and the
ordering and holding costs at these level per annum.
[8 marks]

2

(ii)
Determine if the company should switch to the new credit policy.

[4 marks]
Q2.
(a)
Discuss the main factors which a company should consider when
determining the appropriate mix of long-term and short-term debt in its
capital structure.

[6 marks]
(b)
In relation to the Financing of a firm, differentiate the following terms:
(i)
Financial structure from capital structure

[4 marks]
(ii)
Business Risk from Financial Risk

[4 marks]
(c)
(i)
What is meant by gearing as used in the capital structure of limited
liability company?

[2 marks]

(ii)
The following information is on a Company’s power generation
business

Sh
10% preference share (sh 10 par)

400,000
Ordinary share capital (sh 10 par)

400,000
800,000
Retained profits

700,000

1,500,000
15% debentures

1,200,000

2,700,000

If the Company’s net profit (before Interest and Tax) is 2,000,000 and
assuming Dividend pay-out of 60% of the earnings, compute the dividend
per share (DPS).

[6 marks]

Q3.
The KU Company Ltd has been considering the criteria that must be met before a
capital expenditure proposal can be included in capital expenditure programme.
The screening criteria by management is as follows:
(i)
No project should involve net commitment of funds for more than 4 years.
(ii)
Accepted proposals should average the lifetime, an unadjusted Rate of
Return on Assets employed.
(iii)
Accepted project should be at least equal to cost of capital which is 15%.

3

A proposal to purchase a new machine is to be subjected to these Initial Screening
processes. The machine will cost sh.2,200,000 and has estimated life of 5 years
and zero disposal value. Sales Revenue generated by the New machine is
estimated as follows:

Year
Revenue (“000”)
1
1,320
2
1,440
3
1,560
4
1,600
5
1,500
Additional operating costs are estimated to be sh 700,000 per annum. Tax rates is
at 35%. For tax purposes the machine is written off at a fixed rate of 20% on cost.
The financial statements indicate the profit after tax in recent years is 18%.
Required
Present a report which will indicate to management whether or not the proposal to
purchase the lathe machine meets each of the selection criteria.
[20 marks]

Q4.
Makanyaga Company Limited has hired you as a policy adviser regarding
dividend policy. Explain eight Factors that you will consider in coming up with
the Dividend policy.

[16 marks]

…………………..

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