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Financial Management Analysis and Techniques

The document outlines a financial management course (DCM 221) covering investment analysis for two projects, areas of conflict between shareholders and managers, and debt holders and shareholders. It includes calculations for net present value, internal rate of return, payback period, and profitability index, as well as discussions on long-term finance sources and capital structure. Additionally, it addresses the capital asset pricing model, dividend policy factors, and financial planning barriers.

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Augustus Kimanzi
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6 views4 pages

Financial Management Analysis and Techniques

The document outlines a financial management course (DCM 221) covering investment analysis for two projects, areas of conflict between shareholders and managers, and debt holders and shareholders. It includes calculations for net present value, internal rate of return, payback period, and profitability index, as well as discussions on long-term finance sources and capital structure. Additionally, it addresses the capital asset pricing model, dividend policy factors, and financial planning barriers.

Uploaded by

Augustus Kimanzi
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

FINANCIAL MANAGEMENT: DCM 221

1. a) Kitutu Five Limited has Sh.1 000 000 for investment. The Finance Manager proposed
two mutually exclusive projects A and B respectively each requiring an outlay of
sh.1, 000, [Link] cash flow of projects are as follows:

CASH FLOWS (in shillings)


YEAR PROJECT A PROJECT B
1 550 000 120 000
2 210 000 400 000
3 315 000 450 000
4 190 000 350 000
5 300 000 210 000
Salvage value 40 000 80 000

The required rate of returns is 10% p.a.

Required
For each project, calculate;
i. Net Present Value (4 marks)
ii. Internal Rate of Return (4 marks)
iii. Pay Back Period (4 marks)
iv. Profitability Index (4 marks)

b) Outline four advantages of payback period. (4 marks)

2. a) Identify possible areas of conflict which may occur between:

i. Shareholders and Managers (3 marks)


ii. Debt holders and Shareholders (3 marks)
iii. Suggest ways of solving the problems noted above in (i) and (ii). (4 marks)

b) Describe any five long-term sources of finance. (10 marks)

3. a) Write short notes on;


i. Finance lease (2 marks)
ii. Derivatives (2 marks)
iii. Swaps (2 marks)
iv. Forward contracts (2 marks)
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v. Future contracts (2 marks)

b) The following is the capital structure of KAKA limited.


2 000 000 ordinary shares @10 20, 000, 000
12% 500 000 preference shares @10 5, 000, 000
15% 200 000 debentures @ 20 4, 000, 000
Share premium 6, 000, 000
35, 000, 000

Expected dividend per ordinary share is Shs 3 and growth in equity is 6% p.a.
Corporation tax rate is 30%.

Required:
i. Average cost of equity (2 marks)
ii. Average cost of preference shares (2 marks)
iii. Average cost of debentures (2 marks)
iv. Weighted average cost of capital (W.A.C.C) (4 marks)

4. a) Explain three assumptions of capital assets pricing model (C.A.P.M). (6 marks)

b) Discuss the factors that influence dividend policy. (8 marks)

c) Given that the risk free rate is 8%, the required rate of return on the market is 15% and
beta is 1.1. Find the security’s required rate of return using C.A.P.M model. (6 marks)

5. a) The following information belongs to two companies; J and K. Company J is


considering acquisition of K.

COMPANY J COMPANY K
Present earnings Sh. 40 000 000 Sh.15 000 000
Common shares 5 000 000 2 000 000
Price of shares Sh. 128 Sh.60

Company K has agreed to an offer of Sh.64 a share to be paid in company J’s shares.

Required:
i. Earnings per share of the two companies(E.P.S) (3 marks)
ii. Price earnings ratio for the two companies (3 marks)
iii. Combined Earnings Per Share (4 marks)
iv. Market price exchange ratio (4 marks)

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b) Explain three factors that determine the amount of working capital in a firm.
(6 marks)

6. a) Describe five barriers to financial planning (10 marks)

b) Explain five limitations of using financial ratios in decision-making. (10 marks)

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