KABARAK UNIVERSITY

UNIVERSITY EXAMINATIONS
MAIN CAMPUS

FIRST SEMESTER, 2016/2017 ACADEMIC YEAR

EXAMINATION FOR THE DEGREE OF MASTER OF BUSINESS

ADMINISTRATION

FIRST SEMESTER, 2016/2017 ACADEMIC YEAR

FNCE 511: CORPORATE FINANCIAL MANAGEMENT

STREAM: SEM 1 TIME: 3 HRS

EXAMINATION SESSION: JANUARY DATE: 5/01/ 2017

INSTRUCTIONS

• Attempt question ONE and any other THREE questions.

As members of Kabarak University family, we purpose at all times and in all places, to set apart in
one’s heart, Jesus as Lord. (1 Peter 3:15)
QUESTION ONE

a) The following is the balance sheet of Naivasha Holdings Limited as at 31st December 2012:

Sh.’000’
Net fixed asset 300
Current assets 100
400
Financed by:
Ordinary share capital 100
Retained earnings 70
10% debentures 150
Trade creditors 50
Accrued expenses 30
400

Additional Information
1. The sales for year 2012 amounted to Sh.500,000. The sales will increase by 15% during
year 2013 and 15% during year 2014.
2. The after tax return on sales is 12% which shall be maintained in future.
3. The company’s dividend payout ratio is 80%. This will be maintained during forecasting
period.
4. Any additional financing from external sources will be effected through the issue of
commercial paper by company.
Required
i. Determine the amount of external finance for 2 years upto 31st December 2014. (3mks)
ii. Prepare a proforma balance as at 31 December 2014. (2 mks)

b) Nakuru Holdings Limited pays a dividend of 10% on its Sh.60 par value ordinary shares.
This company uses a discount rate of 15%.

i. Assuming no growth, compute the value of its ordinary share. (1mk)

ii. If there’s growth of 5%, what would be the value of this company’s ordinary shares?
(1mk)

As members of Kabarak University family, we purpose at all times and in all places, to set apart in
one’s heart, Jesus as Lord. (1 Peter 3:15)
c) K is contemplating purchasing a 3 year bond worth 40,000/= carrying a nominal coupon rate
of interest of 10%. K required rate of return is 6%.What should he be willing to pay now to
purchase the bond if it matures at par? (2mks)

d) Explain the various reasons for investing by companies. (4mks)

e) Describe the managerial finance functions undertaken by corporate financial managers.(8mks)

f) Describe the various parties interested in a firm’s financial statement analysis. (4mks)

g) Explain the advantages of stock repurchase. (5mks)

QUESTION TWO

a) ‘A firm’s decision to invest its current funds in the long term assets in anticipation of an
expected flow of benefits over a series of years should be carefully considered’.
Required ;

Discuss the major characteristics of a sound investment evaluation criteria (6mks)

b) A company is considering two mutually exclusive projects requiring an initial cash outlay of Sh
10,000 each and with a useful life of 5 years. The company required rate of return is 10% and the
appropriate corporate tax rate is 50%. The projects will be depreciated on a straight line basis.
The before depreciation and taxes cashflows expected to be generated by the projects are as
follows.

YEAR 1 2 3 4 5

Project A Shs 4,000 4,000 4,000 4,000 4,000

Project B Shs 6,000 3,000 2,000 5,000 5,000

As members of Kabarak University family, we purpose at all times and in all places, to set apart in
one’s heart, Jesus as Lord. (1 Peter 3:15)
Required:

Calculate for each project

i. The payback period (2mks)

ii. The net present value (4mks)

iii. Profitability index (2 mks)

iv. The internal rate of return (4 mks)

Which project should be accepted? Why? (2 mks)

QUESTION THREE

a) Explain the factors that influence the cost of finance. ( 6 mks

b) Explain the application of the cost of finance concept in corporate financial management.
(6mks)
c) Describe the factors that affect the capital structure of a firm (4 mks)

d) A comparative study of the records of two oil companies, A Ltd and B Ltd., in terms of their
asset composition, capital structure and profitability shows that they have been very similar
for the past five years. The only significant difference between the two firms is their
dividend policy. A Ltd. maintains a constant dividend per share while B Ltd maintains a
constant dividend pay-out ratio. Relevant data is as follows:

As members of Kabarak University family, we purpose at all times and in all places, to set apart in
one’s heart, Jesus as Lord. (1 Peter 3:15)
 A LTD B LTD
Year Earnings Dividend Price range Earnings Dividend Price range
per share per share in stock per share per share in stock
Shs. exchange exchange
Shs. Shs. Shs. Shs. Shs.
2009 1.89 0.45 16 – 18 2.05 0.35 11 – 15

2010 1.50 0.45 12 – 15 1.45 0.25 6 – 14

2011 2.00 0.45 14 – 20 2.07 0.36 7 – 16

2012 2.60 0.45 21 – 26 2.55 0.45 15 – 23

2012 3.90 0.45 26 – 40 4.08 0.69 21 – 44

Required
For each company, determine the dividend pay-out ratio for each of the five years. (4 mks)

QUESTION FOUR

a) ‘Successful mergers and acquisitions are the result of well thought out and well executed plans’.
Required ;
Explain the major phases of the merger and acquisition process. 6 mks

b) Explain the reasons behind failed mergers (4 mks)

c) Company A is considering the acquisition by shares of Company B. The following information

is also available.

As members of Kabarak University family, we purpose at all times and in all places, to set apart in
one’s heart, Jesus as Lord. (1 Peter 3:15)
 Company A Company B

Present earnings Shs 20,000,000 Shs 5,000,000

Shares 5,000,000 2,000,000

Earnings per share Shs 4 Shs 2.50

Price/earning ratio 16 12

Price of shares Sh 64 Sh 30

Company B has agreed to an offer of Shs 35 a share to be paid in Company A shares.

Required:

Consider the effect of the acquisition to the earnings per share. (5mks)

d) X Ltd intends to take-over Y Ltd by offering two of its share for every five shares in Y
Company Ltd. Relevant financial data is as follows:

X Ltd Y Ltd

EPS Shs 2 Shs 2

Market price per share Shs 100 Shs 40

Price earnings ratio 50 20

No. of shares 100,000 250,000

Total earnings Shs 200,000 Shs 500,000

Total market value Shs 10,000,000 Shs 10,000,000

As members of Kabarak University family, we purpose at all times and in all places, to set apart in
one’s heart, Jesus as Lord. (1 Peter 3:15)
Required:

i.Compute the combined market price per share. (4mks)

ii.Has wealth been created for shareholders? (1mk)

QUESTION FIVE
a) Explain the benefits of an initial public offering to a previously private company (6mks)
b) Describe the factors that influence dividends paid by companies (8mks)
c) Explain the following dividend theories
i. Clientele theory. (2mks)
ii. Agency theory. (2mks)
iii. Signalling theory. (2mks)

As members of Kabarak University family, we purpose at all times and in all places, to set apart in
one’s heart, Jesus as Lord. (1 Peter 3:15)