JOMO KENYATTA UNIVERSITY
AGRICULTURE AND TECHNOLOGY
University Examinations 2014/2015
END OF SEMESTER EXAMINATION FOR THE DEGREE
OF BACHELOR OF COMMERCE
HBF 2305: FINANCIAL MANAGEMENT IN PUBLIC SECTOR
DATE: AUGUST 2014 TIME: 2 HOURS
INSTRUCTIONS: ANSWER QUESTION ONE (COMPULSORY) AND ANY OTHER TWO QUESTIONS
Question One (30 Marks)
Zedland Ltd is considering the launch of a new product, Quago, for which an investment of Kshs. 6,000, 000 in plant and machinery will be required. The production of Quago is expected to last 5 years after which the plant and machinery would be sold for Kshs. 1,500,000.
1) Quago would be sold at Kshs. 600 per unit with a variable cost of Kshs. 240 per unit.
2) Fixed production costs (excluding depreciation) would amount to Kshs. 600,000 per annum.
3) The company applies the straight line method of depreciation.
4) The cost of capital is 10% per annum.
5) The units of Quago expected to be sold per annum for the next 5 years are shown below:
Year Units expected to be sold
6) The corporation tax is 30%.
a) Calculate the net present value of the project and advise the management on the appropriate course of action. (10 Marks)
b) Calculate the internal rate of return (IRR) of the project and advise the management on the appropriate course of action. (10 Marks)
c) What cashflows are considered as relevant in capital budgeting? (10 Marks)
Question Two (20 Marks)
a) Financial management is government departments is different from financial management is an industrial or commercial company for some obvious reasons. Highlight and explain these reasons. (10 Marks)
b) Highlight the benefits of capital budgeting in the public sector. (10 Marks)
Question Three (20 Marks)
a) What is the role and function of the National Treasury according to the (PFMA 2012) Public Finance Management Act 2012? (12 Marks)
b) What is the role of the Auditor General in public finance management? (8 Marks)
Question Four (20 Marks)
Explain three different budget setting styles in public finance management. Highlight the advantages of disadvantages of the three. (20 Marks)
Question Five (20 Marks)
a) What are the rules of the Capital Market Authorities? (5 Marks)
b) Explain the following terms used in the trading of shares and stocks in public finance management:
(i) Bull and bear markets. (2 Marks)
(ii) Short selling (2 Marks)
(iii) Brokers and market dealers (2 Marks)
(iv) Underwriters (2 Marks)
(v) Stock market index (2 Marks)
c) Explain over the counter markets in public finance management when dealing with capital markets. (5 Marks)