DBIT504  BUSINESS FINANCE.

UNIVERSITY EXAMINATIONS: 2015/2016
EXAMINATION FOR THE DIPLOMA IN INFORMATION
TECHNOLOGY
DBIT504 BUSINESS FINANCE
DATE: AUGUST 2016 TIME: 1½HOURS
INSTRUCTIONS: Answer Any THREE Questions.

QUESTION ONE
(a) Define agency relationship from the context of a public limited company and briefly
explain how this arises. (6 Marks)
(b) Highlight the various measures that would minimize agency problems between the
owners and the management. (6 Marks)
(c) Distinguish between the goals of profit maximization and shareholder wealth
maximization (4 Marks)
(d) Explain the limitations of the goal of profit maximization (4 Marks)
QUESTION TWO
(a) Discuss the main factors which a company should consider when determining the
appropriate mix of long-term and short-term debt in its capital structure. (6 Marks)
(b) Malindi Leisure Industries is already highly geared by industry standards, but wishes to
raise external capital to finance the development of a new beach resort.
Outline the arguments for and against a rights issue by Malindi Leisure Industries.
(6 Marks)
(c) Examine the relative merits of leasing versus hire purchase as a means of acquiring
capital assets. (8 Marks)
QUESTION THREE
(a) Outline four limitations of the use of ratios as a basis of financial analysis. (4 Marks)
(b) The following information represents the financial position and financial results of
AMETEX Limited for the year ended 31 December 2002.
AMETEX Limited
Trading, profit and loss account for the year ended 31 December 2002


Additional information:
1. The company’s ordinary shares are selling at Sh.20 in the stock market.
2. The company has a constant dividend pay out of 10%.
Required:
Determine the following financial ratios:
(i) Acid test ratio. (3 Marks)
(ii) Operating ratio (3 Marks)
(iii) Return on total capital employed (3 Marks)
(iv) Price earnings ratio. (3 Marks)
(v) Interest coverage ratio (2 Marks)
(vi) Total assets turnover (2 Marks)
QUESTION FOUR
a) Analyse the practical difficulties of a small scale enterprise wishing to obtain credit to
expand production (10 Marks)
b) Distinguish between internal and external sources of finance for a limited liability
company. (10 Marks)
QUESTION FIVE
a) Outline the functions of a financial manager in a contemporary corporate set-up.
(12 Marks)
b) Discuss the factors that a manager considers as he takes up the capital budgeting decisions
for the company (8 Marks)

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