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The document outlines the examination structure for FIN 2102: Financial Management for the Bachelor of Commerce degree, including instructions and questions covering topics such as capital budgeting, cash management, dividend theories, and leverage calculations. It consists of four main questions, each with sub-questions requiring analysis and calculations related to financial management concepts. The exam is scheduled for August 2024 and is designed to assess students' understanding of financial principles and their application in real-world scenarios.

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3 views3 pages

PP9

The document outlines the examination structure for FIN 2102: Financial Management for the Bachelor of Commerce degree, including instructions and questions covering topics such as capital budgeting, cash management, dividend theories, and leverage calculations. It consists of four main questions, each with sub-questions requiring analysis and calculations related to financial management concepts. The exam is scheduled for August 2024 and is designed to assess students' understanding of financial principles and their application in real-world scenarios.

Uploaded by

alfredrunz7
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

UNIVERSITY EXAMINATIONS: 2024/2025

SCHOOL OF BUSINESS
ORDINARY EXAMINATION FOR DEGREE IN BACHELOR OF
COMMERCE
FIN 2102: FINANCIAL MANAGEMENT
FULL TIME
DATE: AUGUST 2024 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions

QUESTION ONE (20 MARKS)

(a) Outline five benefits of capital budgeting and business valuation. (10 marks)

(b) XYZ Limited a debt collection agent has estimated that the standard deviation of its daily
net cash flows is Sh.22,750. The company pays Sh.120 in transaction cost every time it
transfers fund into and out of the money market. The rate of interest in the money market is
9.465%. The company uses Miller-Orr model to set its target cash balance. The minimum
cash balance has been set at Sh.87,500.

Required:

(i) The return pint. (3 marks)


(ii) The upper cash limit. (2 marks)
(iii) The company’s decision rule. (3 marks)
(c) Discuss any three theories why companies pay dividends. (9 marks)
(d) Explain any three components of working capital management. (3 marks)

QUESTION TWO (15 MARKS)


Page 1 of 3
(a) Discuss five assumptions of the capital structure theories. (5 marks)

(b) Assume that you are given the following information concerning 2 companies A and B:

A B
EBIT 10,000 10,000
5% debt interest 1,500
EBT 10,000 8,500
Ke 10% 8%

(i) Determine the value of the two firms. (4 marks)


(ii) How will an investor practice the arbitrage process assuming that the investor owns
10% in any of the two companies? (4 marks)

(c)Outline two specific assumptions of the net operating income approach. (2 marks)

QUESTION THREE (15 MARKS)

a) Outline any five sources of conflict between the shareholders (principal) and management
(agent). (5 marks)

b) Discuss any five solutions to the agency problem between bondholders (principal) and the
shareholders (agents). (5 marks)

c) Explain five different dividend policies which influence the amount of dividend per share a
company can pay. (5 marks)

d) Outline any five dividend theories which attempt to explain how the payment of dividends
affects the value of the firm. (5 marks)

Page 2 of 3
QUESTION FOUR (15 MARKS)

a) The following information is available for xyz company for the year

- Sales for the year 3,000,000


- Variable cost 500,000

- Fixed cost for the year 1,000,000

- Number of units sold during the year 1,000

Ordinary share capital 200,000

- 5% Preference share capital 300,000

- 5% debenture capital 1,000,000


Corporate tax rate is provided at 30% of the net profit.

Operating profit for the year was reported at Sh. 5 Million


Required:

(i) Determine the operating leverage for the company (5 Marks)

(ii) Determine the financial leverage for the company (5 Marks)

(iii) Determine the combined leverage for the company (5 Marks)

Page 3 of 3

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