MAASAI MARA UNIVERSITY
REGULAR UNIVERSITY EXAMINATION
2019/2020 ACADEMIC YEAR
FOURTH YEAR FIRST SEMESTER
SCHOOL OF BUSINESS AND ECONOMICS
BACHELOR OF COMMERCE
COURSE CODE: BCM 4113
COURSE TITLE: FINANCIAL MANAGEMENT
DATE: 10/12/2019 TIME: 11.00AM – 1.00 PM
INSTRUCTIONS TO CANDIDATES:
Answers question ONE and any other three questions.
BCM 4113: Financial Management Page 2
QUESTION ONE:
a) In reference to the provisions of agency theory in financial management
discuss clearly and precisely instances in which the interests of the
management of a corporate body may conflict with those of the
shareholders. (8 marks)
b) Suggest mechanisms that can be adopted to resolve the conflicts in 1(a)
above. (7 marks)
c) Write short notes on the following theories relating to capital structure of
firms; (6 marks)
i. Net income approach.
ii. Net operating income approach
iii. The Modigliani-Miller Approach
d) Before the introductionof interest rate caps in 2016 by the Kenyan
legislature, lending rates charged by commercial banks were very erratic.
Explain common factors attributable to such phenomenon. (4 marks)
QUESTION TWO
Handshake is contemplating to invest in a project on 1st January 2020 whose
initial cost is Sh. 30,000,000 and additional capital of Sh. 1,500,000 on 1st
January 2022. The project promises the following uncertain cash flows with
corresponding assigned certainty equivalent coefficients.
a) If the risk-free discount rate is 11% compute the NPV of the project and
advice the firm whether the project can be undertaken. (7 marks)
BCM 4113: Financial Management Page 3
b) Show whether your advice would change if certainty equivalent was not
taken into account in the decision-making process. (4 marks)
c) Outline the weaknesses and strengths of certainty equivalent as used in
project appraisals. (4 marks)
QUESTION THREE
TangaTanga Ltd is considering two possible capital projects for next year. Each
project has a 1-year life, and project returns depend on next year’s state of the
economy. The estimated rates of return are shown in the table below:
Required:
a. Compute each project’s expected rate of return (4 marks)
b. Compute the variance and standard deviation of each project.(6 marks)
c.Compute the co-efficient of variation for each project (2 marks)
d. Which project may be preferred and why? (3 marks)
QUESTION FOUR
a) Mwananchi is considering to invest in a project that require initial
capital of 40 million. Projected cash inflows over its useful life of two
years are as follows:
Required: Determine:
a. Expected monetary value of the project using decision tree approach.
(6 marks)
b. Assuming the cost of capital is 10% advice the investor whether the
project is viable using decision tree approach. (9 marks)
QUESTION FIVE
a) Explain precisely whether you agree or disagree with assertions of the
relevancy or irrelevancy dividend policy theorists. (4 marks)
b) Discuss any five factors that influence formulation of dividend policies by
corporate bodies. (5 marks)
c) Umash ltd is considering to invest in a certain project which promises the
following cash flows over its useful life of 3 years. The market value for the
asset has also been given after the end of each year.
Required:
If the project requires 4,810,000 and the discount rate is 10% advice Umash
limited whether the project should be undertaken for the entire useful life.
(6 marks)
