WEDNESDAY: 6 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. Outline FOUR roles of a finance manager in an organisation. (4 marks)
2. Explain THREE ways in which goals of a firm may complement one another. (6 marks)
3. The following is the capital structure of Hekima Ltd.:
Additional information:
1. The shareholders of Hekima Ltd. expect earnings and dividends to grow at a constant rate of 10% in the future. The company has just paid a dividend of Sh.2.50 per share.
2. The current market price of one ordinary share of Hekima Ltd. is Sh.120.
3. New preference shares can be sold at Sh.120 per share with a dividend of Sh.10 per share and floatation cost of Sh.5 per share.
4. The company will sell 14% debentures with a maturity of 10 years at Sh.1,200 per debenture.
5. The corporation tax rate is 30%.
Required:
The cost of ordinary share capital. (2 marks)
The cost of preference share capital. (2 marks)
The cost of 14% debenture capital. (2 marks)
The weighted average cost of capital (WACC) using the market values. (4 marks)
(Total: 20 marks)
QUESTION TWO
1. Highlight FOUR characteristics of a well functioning financial system. (4 marks)
2. Explain THREE sources of finance in Islamic financing. (6 marks)
3. Juhudi Ltd., a manufacturing company, intends to invest in a new product line. This requires an investment of Sh.10 million in plant and machinery. The production is expected to last for five years and will have a salvage value of Sh.2 million.
Additional information:
1. The annual contribution margin from the product will be Sh.6,900,000.
2. Fixed production cost excluding depreciation would amount to Sh.1,425,000 per annum.
3. As a result of the expansion of the product line, working capital is expected to increase by Sh.1,600,000 at the start of production and will be released at the end of economic life of the project.
4. The company employs a straight line depreciation policy.
5. The corporate tax rate is 30% per annum.
6. The company’s cost of capital is 10% per annum.
Required:
The total initial cost. (2 marks)
The total terminal cash flow. (2 marks)
The annual net operating cash flows. (3 marks)
The net present value (NPV). (3 marks)
(Total: 20 marks)
QUESTION THREE
1. Summarise FOUR functions of the foreign exchange market. (4 marks)
2. Explain THREE differences between alternative investments and traditional investments. (6 marks)
3. The following information was extracted from the financial statements of Maziwa Ltd.:
Net profit after tax Sh.20 million
Number of ordinary shares 2 million
Cost of capital 12%
Payout ratio 60%
Internal rate of return 16%
Required:
The earnings per share (EPS). (2 marks)
The dividend per share (DPS). (2 marks)
The price of a share using Gordon’s growth model. (3 marks)
The price of a share using Walter’s model. (3 marks)
(Total: 20 marks)
QUESTION FOUR
1. Describe TWO uncontrollable factors that could influence the cost of capital of a firm. (4 marks)
2. Explain FOUR benefits of globalisation in an economy. (8 marks)
3. Peter Wafula invested Sh.1 million with XYZ bank at an annual interest rate of 8% compounded quarterly for a period of 5 years.
Required:
Determine the total amount at the end of five years. (1 mark)
4. A Certified Investments and Financial Analyst graduate has forecasted that the market returns in News Securities Exchange in the next seven years will be as follows:
Required:
Compute the expected rate of market return. (3 marks)
Determine the standard deviation of market return. (4 marks)
(Total: 20 marks)
QUESTION FIVE
1. Enumerate FOUR reasons why venture capital markets are not well developed in most developing countries. (4 marks)
2. Explain THREE factors to consider when selecting a source of finance. (6 marks)
3. Highrise Ltd. issued a 10 year bond two years ago. The bond has a coupon rate of 13% per annum payable semi-annually. Upon maturity, it will be redeemed at Sh.102 for every Sh.100 par.
Required:
Compute the highest amount you can pay to acquire the bond today if the required rate of return is 14%.
(4 marks)
4. Peter Makazi borrowed Sh.2,000,000 from a local bank repayable semi-annually for a three year period. The interest on the loan is 14% per annum.
Required:
Determine the semi-annual instalment. (2 marks)
Prepare a loan repayment schedule over the three year period. (4 marks)
(Total: 20 marks)
