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Bac 605: Corporate Finance 2010 Question Paper

Bac 605: Corporate Finance 2010

Course:Master Of Business Administration

Institution: Kenyatta University question papers

Exam Year:2010

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2010/2011
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF MASTER OF BUSINESS
ADMINISTRATION
BAC 605: CORPORATE FINANCE

DATE: Friday 26th November, 2010

TIME: 2.00 p.m. – 5.00 p.m.
_________________________________________________________________________________
INSTRUCTIONS
1.
Time allowed – 3 hours.
2.
Answer ALL questions.
3.
All necessary workings must be shown clearly.

QUESTION ONE
Shareholders can take actions that are at variance with the interests of corporate lenders such as banks.
Likewise managers can take actions that are at variance with interests of shareholders.
Required
a)
Describe actions that shareholders can take that are at variance with interests of corporate lenders. (Assume that management and shareholders are the same party. [9 marks]
b)
Describe actions that management can take that are at variance with the Interests of the Shareholders. [8 marks]
c)
What forces or mechanisms might serve to reduce potential conflicts between?
(i)
shareholders and corporate lenders and
(ii)
management and shareholders
[8 marks]

QUESTION TWO
The risk free rate on a riskless asset is 10%. The expected return on the market portfolio is 20% and the standard deviation of returns in the markets portfolio is 20%.

Required
(a)
Calculate the equilibrium price of risk. [5 marks]
(b)
Compute the percentage of your wealth you would have to put into the riskless asset and into the market portfolio in order to have a 25% expected rate of return. [10 marks]
(c)
What would be the variance of the portfolio in part (b) above? [5 marks]
(d)
What is the correlation between the portfolio in part (b) and the market portfolio? [5 marks]
QUESTION THREE
Mrs. Camile is seeking your advice about her shares portfolio. The following information about share x and share y is provided;

Share x
Share y
Current price
Shs 2.20
Shs 3.80
Expected price
Shs 2.60
Shs 4.20
Expected dividend
Shs 020
Shs 0.40
Standard deviation of share returns
0.2
0.1
Covariance between share returns of x and y
0.003
Mrs. Camile would like to know
(i)
The expected return for Share x and Share y. [6 marks]
(ii)
The expected return and standard deviation of returns of a portfolio with 60% of wealth invested in share x and the balance invested in share y. [9 marks]
(iii)
Calculate the correlation coefficient between the returns on x and y and explain the relationship between risk reduction and the correlation between individual financial security returns. [10 marks]

QUESTION FOUR
(a)
“The paradox of the efficient market hypothesis is that large numbers of investors have to disbelieve the hypothesis in order to maintain efficiency”

Required

Write an essay explaining the EMH and explain this statement. [15 marks]
(b)
Merger fail to produce value for the shareholders of acquired in many cases.

Required

Describe and explain some reasons for merger failure. [10 marks]

Bac 605: Corporate Finance 2010 Question Paper

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