MONDAY: 4 December 2023. Afternoon Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.
QUESTION ONE
1. Highlight FOUR advantages of the Net Present Value (NPV) technique in capital budgeting. (4 marks)
2. Discuss FOUR limitations of the profit maximisation goals of a firm. (4 marks)
3. The board of directors of Ukweli Ltd. is considering a review of the company’s dividend policy. The following information is provided.
1. The company paid Sh.3 million as dividend in the previous financial year.
2. The profit after tax for the last financial year was Sh.12 million.
3. The company has not issued any preference shares.
4. The company has been having a constant growth rate of 10% per annum for the past 10 years.
5. The expected profit after tax for the current year is Sh.18 million.
6. The company anticipates investment opportunities worth Sh.2 million in the current financial year.
7. The capital structure of the company consists of 60% equity and 40% debts.
Required:
The optimal total dividend for the current financial year if the company wishes to adopt the following independent dividend policies:
Constant payout ratio policy. (3 marks)
Stable predictable dividend policy. (3 marks)
Pure residual dividend policy. (3 marks)
Low dividend plus extra dividend policy. (3 marks)
(Total: 20 marks)
QUESTION TWO
1. Enumerate FOUR differences between factoring and pledging as sources of finance. (4 marks)
2. Describe THREE working capital financing policies. (6 marks)
3. The following is an extract from the financial position of MG Limited relating to its equity and liability as at 30 September 2023:
Additional information:
1. The profit after tax for the year ended 30 September 2023 was Sh.6,000,000.
2. The dividend pay-out ratio for the year ended 30 September 2022 was 60%.
3. The market price per share as at 30 September 2023 was Sh.36.
4. The corporation tax is 30%.
Required:
Debt to Equity ratio. (2 marks)
Dividend Yield (DY). (2 marks)
Return on Capital Employed (ROCE). (2 marks)
Earnings Per Share (EPS). (2 marks)
Times Interest Covered ratio. (2 marks)
(Total: 20 marks)
QUESTION THREE
1. Highlight FOUR assumptions of cost-volume-profit (CVP) analysis. (4 marks)
2. Describe THREE principles that govern the stakeholder’s theory. (6 marks)
3. Kings Limited is considering raising Sh.8,000,000 for its expansion.
The management estimates to use the following financing mix:
Additional information:
1. The market value of the ordinary shares is Sh.40.
2. The ordinary shareholders expect a dividend of Sh.4 per share with an expected growth rate of 6% per
annum to perpetuity.
3. Floatation costs are Sh.2 per share.
4. Corporation tax rate is 30%.
Required:
Calculate the weighted average cost of capital (WACC) of the company. (10 marks)
(Total: 20 marks)
QUESTION FOUR
1. Examine TWO reasons why money has time value. (4 marks)
2. Trade credit as a source of finance of a firm has distinct advantages for buyers and sellers.
Required:
In relation to the above statement and the management of creditors, summarise THREE costs to an organisation of:
Taking trade credit. (3 marks)
Not taking trade credit. (3 marks)
3. Demo Ltd. is evaluating an investment project which requires the importation of a new machine at a cost of Sh.4,400,000. The machine has a useful life of six years.
Additional information:
1. The following additional costs would be incurred in relation to the machine
3. The machine is to be fully depreciated over its useful life using the straight line method.
4. An investment in working capital amounting to Sh.1 million will be required on commencement of the
project.
5. The firm pays corporation tax at the rate of 30%.
6. Cost of capital is 12% per annum.
Required:
Total initial costs. (3 marks)
The annual net cash flow after tax. (4 marks)
The net present value (NPV). (3 marks)
(Total: 20 marks)
QUESTION FIVE
1. Distinguish between “a flexible budget” and a “static budget”. (4 marks)
2. Discuss THREE factors that influence the credit period extended by a company to its customers. (6 marks)
3. The shares of Maweni Ltd. are currently trading at Sh.60 each at the securities exchange. Maweni Ltd’s price earnings ratio is 10 times. The company adopts a constant 60% payout ratio as its dividend policy. It is predicted that the company’s dividend will grow at an annual rate of 15% for the first two years, 10% for the next two years and thereafter at a constant rate of 6% per annum in perpetuity. The investor’s minimum required rate of return is 10%.
Required:
The intrinsic value of the shares of Maweni Ltd. (10 marks)
(Total: 20 marks)
