MAASAI MARA UNIVERSITY
REGULAR UNIVERSITY EXAMINATIONS
2018/2019 ACADEMIC YEAR
FIRST YEAR SECOND SEMESTER
SCHOOL OF BUSINESS AND ECONOMICS
MASTERS IN BUSINESS ADMINISTRATION
COURSE CODE: MBA 8101
COURSE TITLE: FINANCI AL MANAGEMENT
DATE: 7TH MAY, 2019 TIME: 1430 – 1730 HRS
INSTRUCTIONS TO CANDIDATES
Question ONE is compulsory
Answer any other THREE Questions
MBA 8101: Financial Management Page 2
QUESTION ONE
(a) Define agency relationship from the context of a public limited company and
briefly explain how this arises. (5 marks)
(b) Highlight the various measures that would minimize agency problems between
the owners and the management. (10 marks)
(c) In a company, an agency problem may exist between management and
shareholders on one hand and the debt holders (creditors and lenders) on the
other because management and shareholders, who own and control the
company, have the incentive to enter into transactions that may transfer wealth
from debt holders to shareholders. Hence the need for agreements by debt
holders in lending contracts. State and explain any four actions or transactions by
management and shareholders that could be harmful to the interests of debt
holders (sources of conflict). (10 marks)
QUESTION TWO
Although profit maximization has long been considered as the main goal of a firm,
shareholder wealth maximization is gaining acceptance amongst most companies as
the key goal of a firm.
Required:
(i) Distinguish between the goals of profit maximization and shareholder wealth
maximization. (4 marks)
(ii) Explain three limitations of the goal of profit maximization. (6 marks)
(iii) Describe four non-financial objectives that a company might pursue that have
the effect of limiting the achievement of the financial objectives. (5 marks)
MBA 8101: Financial Management Page 3
QUESTION THREE
(a) Briefly explain the importance of capital budgeting in a business organization.
(4 marks)
(c) Several methods exist for evaluating investment projects under capital budgeting.
Identify and explain three features of an ideal investment appraisal method.
(6 marks)
(d) In evaluating investment decisions, cash flows are considered to be more
relevant than profitability associated with the project. Explain why this is the case.
(5 marks)
QUESTION FOUR
Pwani ltd is planning advertising campaigns in three different markets. The
estimates of probability associated profits in each of the three markets are
provided bellow;
Required;
(i)Compute the expected value and standard deviation of profits resulting
from advertising campaigns in each of the market areas. (10 marks)
(ii)Rank the three markets according to riskiness using the coefficient of
variations. (5 marks)
QUESTION FIVE
A proposal to purchase a new lathe machine is to be subjected to these initial screening
processes. The machine will cost Sh.2,200,000 and has an estimated useful life of five
years at the end of which the disposal value will be zero. Sales revenue to be
generated by the new machine is estimated as follows:
Additional operating costs are estimated to be Sh.700,000 per annum. Tax rates may
be assumed to be 35% payable in the year in which revenue is received. For taxation
purpose the machine is to be written off as a fixed annual rate of 20% on cost.
The financial accounting statements issued by the company in recent years shows that
profits after tax have averaged 18% on total assets.
Required:
Present a report which will indicate to management whether or not the proposal to
purchase the lathe machine meets each of the selection criteria. (15 marks)
