Entrepreneurial Finance Question Paper

Entrepreneurial Finance

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2008/2009
INSTITUTE OF OPEN LEARNING PROGRAMME
EXAMINATION FOR THE DEGREE OF MASTER OF SCIENCE (FINANCE)
BAC 604: ENTREPRENEURIAL FINANCE

DATE: Wednesday 12th August, 2009 TIME: 9.00 a.m. – 12.00 noon

INSTRUCTIONS
Answer ALL questions.

Q1.
An entrepreneur plans to buy a sh 10,000 machine. The life of the machinery is 5 years (no salvage; straight line depreciation). The variable cost ratio is 60 percent.

Required
(a)
How much added annual revenue must the new machinery generate so that the entrepreneur can maintain the same annual profit as before the purchase? [11 marks]
(b)
What effect on the degree of operating leverage has the purchase of the new machine? [4 marks]

Q2.
A small business has the following inventory system structure:
Year demand = 120 units
Ordering cost = sh 45
Price of a unit of product = sh 200
Annual holding cost = 24% of value stored.

Required
(a)
The economic order quantity [5 marks]
(b)
The supplier offered a 5 percent discount on the unit price if the items are purchased in lots of 100 units at a time: should the entrepreneur accept the offer?[5 marks]
(c)
Determine the minimum percentage discount that will make the offer attractive. [5 marks]

Q3.
In order to increase sales from their present level of sh 240,000 per year, an entrepreneur is considering a more libel credit policy. Currently the average collection period is 30 days. However, the entrepreneur believes that as the collection period is lengthened by 15 days, sales will increase by sh 20,000. Current bad-debt loss which is 2 percent now will increase by 2 percent after this change.
The entrepreneur has the following cost pattern Selling price/unit sh 100

Variable cost/Unit 60

Cost of borrowing money 20 percent
1 year = 360 days

Required: Should the entrepreneur instigate the change?
[15 marks]

Q4.
By maintaining liquidity, the entrepreneur lowers bankruptcy possibilities. With bankruptcy suppliers of capital face a shortfall of sh 100,00 in the book value of assets. Liquidity levels and bankruptcy risk are related as follows: Level of Liquidity (000’s) 25 50 75 100
Probability of bankruptcy 0.60 0.20 0.11 0.09
Liquidity is increased by borrowing and it is held in form of treasury bills. For
each sh 25,000 borrowed the entrepreneur pays sh 3,000

Required:
Determine the optimal level of liquidity.
[15 marks]

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