Download Financial Management November 2016 Past Paper
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Financial Management November 2016 Past Paper
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QUESTION ONE
(a) Explain four disadvantages of public private partnerships (PPPs). (8 marks)
(b) Describe six steps involved in personal financial planning. (6 marks)
(c) The following data was extracted from the financial statements of XYZ Limited for the year ended 30 September 2016.
| Total assets | Sh.7,000,000 |
| Total liabilities | Sh.4,000,000 |
| Preference share capital | Sh.500,000 |
| Earnings per share (EPS) | Sh. 1.10 |
| Price-earnings (P/E) ratio | 15 |
| Outstanding number of ordinary shares | 400,000 |
Required:
(i) Book value per share. (2 marks)
(ii) Market price per share. (2 marks)
(iii) Market value to book value ratio. (2 marks) (Total: 20 marks)
QUESTION TWO
(a) Discuss three possible solutions to adverse selection. (6 marks)
(b) Sandy Ltd presented the following extracts of the statement of financial position as at 31 October 2016:
| Sh.”000” | Sh.”000” | |
| Equity | ||
| Ordinary shares (Sh5 nominal value) | 800,000 | |
| Reserves | 3,600,000 | 4,400,000 |
| Long term liabilities | ||
| 4% preference shares (Sh. 1 nominal value) | 600,000 | |
| 7% bonds (redeemable after 6 years) | 600,000 | |
| Long term bank loan | 200,000 | 1,400,000 |
Additional information:
- Ordinary shares of Sandy Ltd ex-div market value of sh.47.00 per share and an ordinary dividend of Sh.3.63 per share has just been paid.
- The following dividends have been paid over the past four years:
| Year | 2013 | 2014 | 2015 | 2016 |
| Dividend per share (Sh.) | 3.09 | 3.22 | 3.36 | 3.50 |
- The preference shares are not redeemable and have an ex-div market value of 40 cents per share.
- The 7% bond is redeemable at 5% premium to their nominal value of sh. 100 per bond and have an ex-interest market value of Sh. 104.50.
- The bank loan has a variable interest rate that has averaged 4% per year in recent years.
- The corporate tax rate is 30%
Required:
(i) The weighted average cost of capital (WACC). (4 marks)
(ii) Explain four reasons why the cost of equity could be greater than the cost of debt. (4 marks) (Total: 20 marks)
QUESTION THREE
(a) The management of Georgina Ltd wishes to establish the amount of ext financial needs for the year ending 31 December 2016. The statement of financial position of the company as at 31 December 2015 was as follows:
| Sh.”000” | ||
| Plant and machinery | 31,200 | |
| Furniture and fittings | 18,720 | |
| Motor Vehicles | 12,480 | |
| Inventory | 19,200 | |
| Account receivables | 14,400 | |
| Cash and bank | 3,600 | |
| 99,600 | ||
| Financed by: | ||
| Ordinary share capital | 42,000 | |
| Retained profit | 17,600 | |
| 14% debenture capital | 10,000 | |
| Account payables | 18,000 | |
| Accrued expenses | 12,000 | |
| 99,600 | ||
Additional information:
- The sales for the year ended 31 December 2015 amounted to Sh. 120, 000,000.
- The company forecasts that sales will increase 10% for the year ending 31 December 2016.
- For the year ended 31 December 2015,the after tax profit of the company amounted to sh. 18,000,000
- The company adopts 80% payout ratio as its dividend policy. The payout ratio is expected to remain constant each year in perpetuity.
- The after-tax profit margin is also expected to remain constant each year.
- Assets are expected to vary directly with sales while account payables and accrued expenses form the spontaneous sources of financing.
- Any external financing will be affected through long term debt financing.
Required:
- The amount of external 12% long term debt financing that would be required for the year ending 31 December 2016. (4 marks)
- A forecast statement of financial position as at 31 December 2016 (6 marks)
- Comment on two weakness of the method of forecasting applied in (a) (i) and (a)(ii) above. (2 marks)
(b) The following information was extracted from the financial statements of a manufacturing company:
| Sh. | |
| Average total debtors outstanding | 48,000 |
| Raw materials consumption | 440,000 |
| Total production cost | 1,000,000 |
| Total cost of sales | 1,050,000 |
| Sales for the year | 1,600,000 |
| Value of average stock maintained: | |
| Raw material | 32,000 |
| Work in progress | 35,000 |
| Finished goods | 26,000 |
| Number of days in a year | 365 |
| Average period of credit allowed to suppliers | 16 days |
Required:
(i) The operating cycle in days (6 marks)
(ii) The amount of working capital required. (2 marks) (Total: 20 marks)
QUESTION FOUR
(a) Bundacho Ltd generated Sh.50 million profits after-tax in the previous financial year. The firm adopts 40% payout ratio as its dividend policy. The total numbers of issued ordinary shares are 10,000,000.
The company has a potential investment opportunity. If undertaken, dividends are expected to grow at the rate of 10% each year for the first 3 years and then stabilize at the rate of 5% each year thereafter in perpetuity.
The investor’s minimum required rate is 18%
Required;-
The current intrinsic value of the share . (6 marks)
(b) A firm issued 10% preference shares to raise funds. The shares have a par value of Sh. 100 each and are currently selling at Sh. 110 each.
The minimum rate of return the investor is 8%.
Required;-
Explain whether the share is overvalued or undervalued the market. (4 marks)
(c) Mwarakaya Ltd. is considering the acquisition of a new machine to replace the existing machine currently being used in production processes. The existing machine was acquired 2 years ago at a cost of Sh.2,000,000. It was originally estimated to have a useful life of 5 years with no salvage value.
A critical evaluation of the machine now shows that the machine is usable for another 5 years with a salvage value of Sh.250,000 at the end of this period. The disposal value of the existing machine is currently estimated at Sh. 1,250,000.
The new machine is estimated to cost Sh.3,140,000 and its estimated salvage value is Sh. 1,000,000 at the end of its useful life of 5 years. The new machine will also require an additional investment in working capital of Sh.650,000 at the start of the asset’s useful life.
The investment in working capital will however be recovered at the end of the 5 years useful life.
The following information relates to the estimated earnings before depreciation and tax (EBDT) over the coming five-year period for the two machines.
| Year | New machine | Existing machine |
| Sh. | Sh. | |
| 1 | 1,400,000 | 800,000 |
| 2 | 1,350,000 | 700,000 |
| 3 | 1,300,000 | 750,000 |
| 4 | 1,450,000 | 650,000 |
| 5 | 1,200,000 | 600,000 |
The cost of capital is 10% and the firm applies the straight line method of depreciation.
The corporate tax rate is 30%.
Required:
Using the net present value (NPV) technique, advise the company’s management on whether to replace the existing machine. (10 marks) (Total: 20 marks)
QUESTION FIVE
(a) Explain the following terms as used in the bond market:
(i) Yield-to-maturity (YTM). (2 marks)
(ii) Yield-to-call (YTC). (2 marks)
(b) Kaoyeni Limited has issued a Sh. 10,000 par value 10-year bond with a coupon rate of 12% per annum. The bond is currently trading at Sh.8,830 and is callable at Sh. 10,500 after 5 years.
The company pays interest on its bonds semi-annually.
Required:
(i) Yield-to-maturity of the bond. (3 marks)
(ii) Yield-to-call of the bond. (3 marks)
(c) The following data was extracted from Mwakuhenga Limited’s financial statements for the year ended 30 June 2016:
| Sh. | |
| Total sales
Variable costs Contribution Fixed costs Earnings before interest and tax (EBIT) Interest Profit before tax |
3,000,000
(900,000) 2,100,000 (1,500,000) 600,000 (75,000) 525,000 |
Required:
Using the concept of leverage, determine:
(i) The percentage taxable income if EBIT increases b (3 marks)
(ii) The percentage EBIT if there is a 10% increase in sales. (3 marks)
(iii) The percentage taxable income if sales increase 8%. (4 marks) (Total: 20 marks)