Business Finance 2018 November Knec Past Paper

SECTION A <32 marks)
Answer questions in this section
1. Explain the relationship between Business Finance and Economics, (2 marks)
2. A company intends to issue 200,000 15% debentures of Ksh. 110 each at Ksh. 90 each. The corporation tax rate Is 30%. Calculate rhe cost of the debt. (3 marks)
3. Outline four advantages of retained earnings as a source of business finance. <4 marks)
4. Jane deposited Ksh. 595,000 in a bank account paying interest rate at 15%, compounded half yearly, for a period of four years Calculate the total amount in the account al the end of the four years. (3 marks)
5. Highlight four ways of reducing the level of debt in a company. (4 marks)
6. The idle ma I rale of return lor a project is 1 B%, whereas the firm’s cost of capital is 7% Advise the management on whether or not to invest in the project. (2 marks)
7 Outline four factors that may have led to the increase in the growth of commercial banks in Kenya in the recent past. (4 marks)
8. Highlight three- limitations of Using average industry ratios in decision making. (3 marks)
9. Outline four differences between ordinary share capital and preference share capital, as sources of business finance (4 marks)
10 Outline three factors that may influence the level of debtors in a business

13) Explain five differences between commercial hanks and non-banking financial institutions. (10 marks)
Sarah received Ksh 4as insurance benefits. She intends to invest the money in any of the following options
A project paying compound interest at the rate of 15% per annum lor 4 years.
An account paying interest of 7%, compounded half yearly for 5 years-
A project that pays interest of 6.5%, compounded quarterly for 1 years Advise Sarah on the option io select. (7 marks)
Outline five advantages of trade credit as a source of business finance

(b) Theta Limited intends to raise capital as follows;
500,000 ordinary shares of Ksh. 20 par value at Ksh. 25 each.
200,000 10% preference shares of Ksh. 15 par value at Ksh 20 each.
100,000 20% debentures of Ksh. 150 par value at Ksh. 180 each.
the company intends to pay an annual dividend of 11%. The corporation tax rale is 30%. Calculate the component costs of capital for die company. (7 marks}
14.  Explain the importance o f ratio analysis to each of the folio win g stakeholders of u company;
fi) Shareholders;
(ii) Creditors;
(lit) Management;
(iv) Competitors;
(v) Potential investors. (10 marks)
(b) A company intends to borrow a loan of Ksh. 500,000 at an interest rate of 19% per annum. The loan will be repaid in six equal instalments at the end of each year for the next 6 years.
Prepare a loan amortization schedule



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