UNIVERSITY EXAMINATIONS: 2016/2017
EXAMINATION FOR THE DIPLOMA IN BUSINESS
INFORMATION TECHNOLOGY
SPECIAL/SUPPLEMENTARY EXAMINATION
DBIT 504 BUSINESS FINANCE
DATE: JULY, 2017 TIME: 1½HOURS
INSTRUCTIONS: Answer Any THREE Questions.
QUESTION ONE
(a) XYZ Ltd wants to raise new capital to finance a new project. The firm will issue
200,000 ordinary shares (Sh.10 par value) at Sh.16 with Sh.1 floatation costs per share,
75,000 12% preference shares (Sh.20 par value) at Sh.18 with sh.150,000 total floatation
costs, 50,000 18% debentures (sh.100 par) at Sh.80 and raised a Sh.5,000,000 18% loan
paying total floatation costs of Sh.200,000. Assume 30% corporate tax rate. The company
paid 28% ordinary dividends which is expected to grow at 4% p.a.
Required
i. Determine the total capital to raise net of floatation costs
ii. Compute the marginal cost of capital (12 Marks)
(b) Describe the main factors that may limit access of financial facilities by small and
medium enterprises in Kenya. (4 Marks)
(c) Discuss five main factors that determine the capital structure of business
organizations. (4 Marks)
QUESTION TWO
(a) Briefly explain four agency relationships in financial management between
i. Shareholders and managers
ii. Shareholders and creditors. (12 Marks)
(b) A project with initial outlay of Sh200,000 promises the following cash flows
If cost of capital is 10%, calculate NPV of the project. (8 Marks)
QUESTION THREE
a) Distinguish between compounding and discounting of cash flows. (4 Marks)
b) State and explain any four actions by management that may be harmful to the interest
of debt holders (8 Marks)
c) Given a principal of Sh. 1 million at 8% p.a for 5 years, its future value when the
principal is compounded:
i) Annually
ii) Semiannually
iii) Quarterly
iv) Monthly (8 Marks)
QUESTION FOUR
a) The following is the capital structure of XYZ Ltd as at 31/12/2002.
Ordinary share capital Sh.10 par value
Additional information
1. Corporate tax rate is 30%
2. Preference shares were issued 10 years ago and are still selling at par value MPS = Par
value
3. The debenture has a 10 year maturity period. It is currently selling at Sh.90 in the
market.
4. Currently the firm has been paying dividend per share of Sh.5. The DPS is expected
to grow at 5% p.a. in future. The current MPS is Sh.40.
Required
i. Determine the cost of each source of capital. (8 Marks)
ii. Determine the WACC of the firm. (4 Marks)
b) State and explain any four actions by management that may be harmful to the interest
of debt holders (8 Marks)
QUESTION FIVE
a) Find the present value of sh.300,000 to be paid 6 years from now when the prevailing
interest rate is 12% if interest is compounded
i. Annually
ii. Quarterly
iii. Monthly
iv. Daily (12 Marks)
b) Giving examples, differentiate between non discounted cash flow techniques and
discounted cash flow techniques in capital budgeting. (4 Marks)
c) A project with an initial outlay of Sh200, 000 promises the following cash flow.
Calculate the payback period of the project. (4 Marks)
