Business Finance 2014 July Knec Past Paper

SECTION A (32 marks)
Answer ALL the questions in this section.
1. Pazuri Limited is considering raising Ksh 2 billion through a rights issue.
Outline the advantages of raising finance through a rights issue as opposed to a public issue. (4 marks)
2. Outline three costs that are associated with the management of trade credit given. (3 marks)
3. Explain how the following items could be used to maximise the profits of a company.
(i) Bank overdraft;
(ii) Taxation (4 marks)
4. State three reasons why money has time value. (3 marks)
5. Explain the following tenns as used at the stock exchange:
(i) Cum-right;
(ii) Ex-right.
(2 marks)
6. State three merits of investing in government bonds. (3 marks)
7. The reported financial results of Majo Enterprises for the year 2011 have the following highlights:
Net profit before interest and tax
Tax rate
Profit after tax
Ksh 100 million
Ksh 60 million
Ksh 28 million
Advise the following stakeholders on the performance of the company:
(i) Government;
(ii) lenders;
(iii) Shareholders.

8. Highlight three characteristics of long-term investment projects. (3 marks)
9. The current market price of an equity share of Simba Limited is Ksh.80. The current dividend per share is Ksh.4. The dividends are expected to grow at the rate of 10%.
Calculate the cost of equity capital. (4 marks)
10. Identify three housing finance institutions operating in Kenya. (3 marks)
SECTION B (68 marks)
11. (a) (i) Define ‘Sale – Lease Back’ as a source of short term finance.
(ii) Using four points, explain the aspects or characteristics of the source of finance
in (i) above. (9 marks)
(b) Explain four reasons why few companies are listed at the Nairobi Securities Exchange market.

12. (a) The following information relates to Bamazi International Limited as at 30 June, 2010.
Profit after tax 50%
Ordinary dividend paid
Market price of each ordinary share
Issued Capital:
– 12% Preference shares of Ksh 20 each Ksh 3,600,000
– Ordinary shares of Ksh 20 each Ksh 4,800,000

(i) Calculate:
(I) the dividend yield on the ordinary share;
(II) the price earnings (P/E) ratio.
(2 marks)
(2 marks)
(ii) Comment on the shortcomings of the ratio in (II) above, in evaluating stocks.
(5 marks)
(b) Explain four services rendered by the Central Bank to commercial banks.
(8 marks)

14. (a) (i) In calculating the weighted average cost of capital, market value weights or book value weights, may be used. Explain the advantages of using market
value weights over the book value weights. (6 marks)
(ii) Nafuu and Sons Private Limited has decided to go public by issuing shares to raise funds for its expansion programmes.
Highlight three flotation costs that the company may incur. (3 marks)
(b) Njambi had a plan to start a business after 3 years. The initial capital required for this business was Ksh.880,000. To accumulate this amount, he deposited Ksh.320,000 in the bank at the beginning of the first year. He deposited Ksh.l 60,0(X) at the beginning of the second year.
Compound interest was paid at the rate of 10% per annum.
Calculate the amount Njambi was to deposit at the beginning of the third year to enable him get the required capital at the end of the third year.

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