TUESDAY: 6 December 2022. Morning 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 THREE limitations of retained earnings as a source of finance. (3 marks)
2. Explain THREE non-financial goals of a firm. (6 marks)
3. Heko Ltd. has the following capital structure which is considered optimal:
Sh.“000”
Debt (par value Sh.1,000) 300,000
Preference shares (par value Sh.100) 180,000
Ordinary shares (par value Sh.100) 720,000
Additional information:
1. The investors of Heko Ltd. expect earnings and dividends to grow at a constant rate of 9% in the future.
2. The company has just paid ordinary shareholders dividend of Sh.4.2 per share.
3. The current market price of ordinary shares of Heko Ltd. is Sh.80 each.
4. The firm will incur a floatation cost of Sh.4 per share to issue new shares.
5. New preference shares can be sold at Sh.105 per share with a dividend of Sh.11 per share and floatation cost of Sh.10 per share.
6. The company will issue debenture under the following terms:
• The coupon rate 12% per annum
• Discount Sh.30 per debenture
• Floatation cost Sh.20 per debenture
• The par value is Sh.1,000
• Maturity period of ten years
7. The corporate tax rate is 30%.
Required:
1. The cost of ordinary share capital. (2 marks)
2. The cost of preference share capital. (2 marks)
3. The cost of debenture capital. (3 marks)
4. The weighted average cost of capital (WACC) using market value weights. (4 marks)
(Total: 20 marks)
QUESTION TWO
1. Explain the term “venture capitalist” as used in finance. (2 marks)
2. Identify THREE differences between “factoring” and “invoice discounting”. (6 marks)
3. Erick Nandwa borrowed Sh.250,000 from Pritt Sacco at a monthly interest rate of 3%. The loan is to be amortised using the reducing balance method and be repaid in 6 equal monthly instalments, payable at the end of each month.
Required:
Prepare a loan amortisation schedule. (6 marks)
4. Paul Kalama is considering investing in a five-year Sh.1,000 par value bond bearing a coupon rate of 7%. Paul Kalama’s required rate of return is 8%. The bond is quoted at Sh.950 in the bond market. The bond will be redeemed at par value.
Required:
1. Compute the intrinsic value of the bond. (4 marks)
2. Advise Paul Kalama on whether he should purchase the bond based on your computation in 4 (i) above. (2 marks)
(Total: 20 marks)
QUESTION THREE
1. Outline FOUR functions of a finance manager. (4 marks)
2. Explain FOUR chronological steps of dividend payment process. (4 marks)
3. Makupa Limited intends to invest Sh.32,000,000 in a project which is expected to generate the following cash
flows:
Required:
1. Calculate the internal rate of return of the project. (8 marks)
2. Advise the management on whether to invest in the project or not based on your results in (c) (i) above. (2 marks)
3. Highlight TWO advantages of using internal rate of return (IRR) to appraise investment projects. (2 marks)
(Total: 20 marks)
QUESTION FOUR
1. Identify FOUR benefits that may accrue to a firm from business crowdfunding. (4 marks)
2. Citing THREE reasons, justify why a company should endeavour to maintain a stable dividend payment policy. (6 marks)
3. The following balances were extracted from the books of Eaglite Manufacturing Company for the year 2021:
Additional information:
1. Annual sales amounted to Sh.4,748 million.
2. Cost of production during the year amounted to Sh.2,320 million.
3. Raw materials purchased during the year amounted to Sh.1,526 million.
4. Annual cost of sales amounted to Sh.2,862 million.
5. All sales and purchases made during the year were on credit terms.
Assume that a year has 365 days.
Required:
1. Compute the working capital cycle for Eaglite Manufacturing Company. (8 marks)
2. The directors of Eaglite Manufacturing Company intend to negotiate for longer credit periods from suppliers of raw materials.
Explain the effect of this action on the working capital cycle. (2 marks)
(Total: 20 marks)
QUESTION FIVE
1. Highlight TWO benefits and TWO limitations of Islamic finance. (4 marks)
2. Identify FOUR ways in which technological risk may affect the operations of a business negatively. (4 marks)
3. James mambo intends to purchase either security AX or security BY.
The following information relates to the two securities:
Required:
1. Compute the expected return of securities AX and BY. (4 marks)
2. Compute the standard deviation of each of the securities AX and BY. (6 marks)
3. Advise James Mambo on the security to purchase based on the results obtained in (ii) above. (2 marks)
(Total: 20 marks)