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Aec 402: Public Finance & Fiscal Policy Question Paper
Aec 402: Public Finance & Fiscal Policy
Course:Bachelor Of Business Administration
Institution: Jaramogi Oginga Odinga University Of Science And Technology question papers
Exam Year:2014
JARAMOGI OGINGA ODINGA UNIVERSITY OF SCIENCE AND TECHNOLOGY
SCHOOL OF BUSINESS & ECONOMICS
UNIVERSITY EXAMINATION FOR THE DEGREE OF BACHELOR OF BUSINESS ADMINISTRATION WITH IT
4TH YEAR 1ST SEMESTER 2013/2014 ACADEMIC YEAR
BUSIA LC
COURSE CODE: AEC 402
COURSE TITLE: PUBLIC FINANCE & FISCAL POLICY
EXAM VENUE: STREAM : (BBA-HRM OPTION)
DATE: EXAM SESSION:
TIME: 2 HOURS
Instructions:
1. Answer Question ONE (COMPULSORY) and ANY other 2 questions
2. Candidates are advised not to write on the question paper.
3. Candidates must hand in their answer booklets to the invigilator while in the examination room.
Question One
(a) Explain any THREE arguments upon which the Modigliani-Miller Hypothesis is based.
(6 marks)
(b) Distinguish between long-term and short-term finance functions or decisions. (4 marks)
(c) Briefly highlight the differences between money markets and capital markets. (10 marks)
(d) Identify and explain any THREE limitations of ratio analysis in analyzing financial statements. (6 marks)
(e) Give TWO advantages of multiple regression analysis as financial forecasting method.
(4 marks)
(Total: 30 marks)
Question Two
Explain the following roles of the finance manager in any business organization;
(i) Raising of funds. (5 marks)
(ii) Allocation of funds. (5 marks)
(iii) Profit planning. (5 marks)
(iv) Understanding capital markets. (5 marks) (Total: 20 marks)
Question Three
A company is considering two mutually exclusive projects requiring an initial cash outlay of Sh. 10,000 each and with a useful life of 5 years. The company required rate of return is 10% and the appropriate corporate tax rate is 50%. The projects will be depreciated on a straight line basis. The before depreciation and taxes cashflows expected to be generated by the projects are as follows.
YEAR 1 2 3 4 5
Project A Shs 4,000 4,000 4,000 4,000 4,000
Project B Shs 6,000 3,000 2,000 5,000 5,000
Required:
Calculate for each project;
i. The payback period, (4 marks)
ii. The average rate of return, (4 marks)
iii. The net present value, (6 marks)
iv. The internal rate of return, (6 marks)
Which project should be accepted? Why?
(Total: 20 marks)
Question Four
(a) Explain fully the effect of the use of debt capital on the weighted average cost of capital of a company. (4 marks)
(b) Millennium Investments Ltd. wishes to raise funds amounting to Sh.10 million to finance a project in the following manner:
Sh.6 million from debt; and
Sh.4 million from floating new ordinary shares.
The present capital structure of the company is made up as follows:
1. 600,000 fully paid ordinary shares of Sh.10 each
2. Retained earnings of Sh.4 million
3. 200,000, 10% preference shares of Sh.20 each.
4. 40,000 6% long term debentures of Sh.150 each.
The current market value of the company’s ordinary shares is Sh.60 per share. The expected ordinary share dividends in a year’s time is Sh.2.40 per share. The average growth rate in both dividends and earnings has been 10% over the past ten years and this growth rate is expected to be maintained in the foreseeable future.
The company’s long term debentures currently change hands for Sh.100 each. The debentures will mature in 100 years. The preference shares were issued four years ago and still change hands at face value.
Required:
(i) Compute the component cost of:
- Ordinary share capital; (2 marks)
- Debt capital (2 marks)
- Preference share capital. (2 marks)
(ii) Compute the company’s current weighted average cost of capital. (5 marks)
(iii) Compute the company’s marginal cost of capital if it raised the additional Sh.10 million as envisaged. (Assume a tax rate of 30%). (5 marks)
(Total: 20 marks)
Question Five
a) What are the main duties of budget committee? (8 marks)
b) What is meant by the term “Key factor”? (2 marks)
c) Name and briefly explain five main key factors that affect budgeting process.
(10 marks)
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