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Business Finance Cat 1 Question Paper

Business Finance Cat 1

Course:Bachelor Of Economics And Finance

Institution: Kenyatta University question papers

Exam Year:2012

KENYATTA UNIVERSITY
DEPARTMENT OF BUSINESS ACCOUNTING
BAC 203: BUSINESS FINANCE 1
SEMESTER 3 2011/2012 Time: 1 Hour 30 Min
________________________________________________________________________________________________
Answer all questions

QUESTION ONE
The following is the existing capital structure of Company XYZ Ltd.
Ordinary shares at Shs.10 par 1,000,000
Retained 800,000
12% preference shares Shs.10 par 400,000
16% loan Shs.100 par 300,000
Total capital employed Shs. 2,500,000
The company’s ordinary shares have a dividend cover of 3 times and pays a dividend of 10% on its ordinary share capital.
Ordinary shares sells at Shs.18
Preference shares sell at Shs.15
Debentures are selling at par. The tax rate is 30%
Compute:
a)Growth in Equity. (7 marks)
b)W.A.C.C. (8 marks)

QUESTION TWO
Distinguish between
•Capital structure and financial structure.
•Distinguish between Business risk and Financial risk.
•What is the effect of introduction of debt capital on weighted average cost of capital (WACC)
•Differentiate between marginal weighted cost of capital (MWCC) and WACC

QUESTION THREE
a)How can the action of shareholders reduce the value of the bond held by debenture holders? (5 marks)

b)State and explain the mechanism of resolving the agency problem between shareholders and debenture holders. (5 marks)

QUESTION FOUR
Assume that on 31 December 2001 you are provided with the following capital structure of Hatilcure Ltd which is optimal.

Sh.’000’
Long term debt (16%) 135,000
Ordinary share capital (Sh.10 par) 90,000
Retained earnings 75,000
Total 300,000

The company has total assets amounting to sh.360 million but this figure is expected to rise to Sh.500 million by he end of 2002. You are also informed that:
1.Any new equity shares sold will net 90% after flotation costs.
2.For the year just ended the company paid Sh.3.00 in dividends per share.
3.New 16% debt can be raised at par through the stock exchange.
4.The past and expected earnings growth rate is 10%
5.The current dividend yield is 12%
6.The company’s dividend payout ratio of 50% shall be maintained in 2002.
7.Assume marginal at rate of 40%
8.The company’s capital structure is optimal
Required
a)Company’s net amount to the capital budget to be financial with equity if 85% of the asset expansion is included in the 2002 capital budget. (2 marks)

b)How many shares must be sold to raise the required equity capital? Round your figure o the nearest thousand. (8 marks)

c)What is the firm’s marginal cost of capital? Show full workings. (10 marks)

Business Finance Cat 1 Question Paper

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