Questions on sources of capital:

1. Illustrate how a corporate finance manager may use securitization to meet the challenges of expanding
company- 8 marks- June 2006 q.3.a
2. Evaluate factors to be considered by a company when deciding between equity and debt capital to finance
huge projects- June 2008 qn.1.
3. Discuss the considerations that must be considered in deciding the appropriate mix of capital- June 2007).
4. Odaa ltd is a company un-geared and pays tax- evaluate whether corporate bonds are or not an appropriate
source of finance –June 2007 q.4.c)
5. According to one proposition made by Modigliani and miller” the total value of any company is independent
of its capital structure”. To what extent would you agree with this proposition in the real world situation ( 5
marks)- June 2008 qn .2
6. They are several competing views of the capital structure and its importance to a firm. These views starting
with the traditional to the MM propositions argue for different ways of looking at debt which has caused a lot
of confusion in the mind of the CEO. Write a memo explaining the underlying the different points of view
presented in these models and advise the CEO as to how these different views can be reconciled for the
benefit of the firm – 15 marks – June 20051.c
7. Explain the risks a company faces if the proportion of debt increased and whether capital structure matters –
5 marks dec1.j)
8. In the sense of the world capital markets, explain why dividends are a cost to the company: why it is important
for dividends to keep on growing and whether dividends policy matters- 8 marks- dec 2007 1.h)
9. Discuss the advantages to a company and the investor of issuing convertibles bonds as opposed to other
forms of debt- dec 2010- q.1.d
10. Discuss any 3 factors that influence the dividend decision and any 3 circumstances when a scrip dividend may
be desirable- 2010 dec –q.1.a ( 7 marks)
11. The company is also due to declare 1.2 billion as dividends for the recently ended year being the usual 40% of
the profits after tax. It is considering missing this and the extra retained earnings put in an investment yielding
200 million in cash flows indefinitely. The company’s cost of capita is 14%. How does the extra earnings
retention mentioned affect the market value of company- Dec 2006: q.1.i
12. Discuss the advantages that a company accrues if they financed the projects by means of a lease agreement,
compared to the use of mezzanine finance ( 6 marks)- dec 2007 q.3)
13. Assuming GFU wanted to raise more funds, explain what they could do to raise venture capital if it was the
most viable option- 8 marks
14. If the required capital was to be raised by 50% thru internally generated funds and the rest through leasing,
assess the issues that might arise. Dec 5005 q.1.e

3. Markets and efficient market hypothesis

1. One of the arguments presented for a possible improvement in the price of the company’s share is the fact
that the market index is expected to improve. Using your knowledge of market efficiency, write a memo a
memo to the CEO why this is a fallacious assumption ( 15 marks –dec 2002: q.1.b)
2. Describe the efficient market hypothesis and ex plain how relevant the hypothesis is to the Uganda situation (
8 marks dec 2007 q.4.b)( this question is same as above)
3. Explain the meaning and relevance of market efficiency in financial management- June 2008
(This question is similar to – explain the implications of the efficient market hypotheses for the managers of a
company that is listed on the USE.
4. Explain the role of financial markets in corporate financial management: June 2008: q.5
5. Discuss the relevance of capital markets to a corporate finance manger- 8 marks –dec 2007 q.4a( same as 7
and 8))

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 6. Explain whether or not the money markets are more developed than capital markets in Uganda and the
reasons why (4 marks dec 2007 4.c).
7. Explain the type of finance that is available via the USE and the advantages and disadvantages of each q.1.e (6
marks).

4. Cost of debt and value of debt

1. Explain possible reasons that make financial institutions charge different rates of interest- June 2007 q.4.b
2. Explain why gento ltd bonds should have a higher coupon rate than those of the bank of Uganda( dec 2006
1.g)
3. A yield curve can take any shape ranging from normal to abnormal. Explain any 3 theories to explain the shape
of the yield curve- dec 2006 q.4.b
4. Different financial assets have different interest rates attached to them. Explain why this is so- 5 marks: dec
2006 q.4.c
5. A company’s debentures have a market value of 75.5. They are redeemable at par in 10 years time and the
coupon rate is 8%. Other funds are available at a cost of 12%. Should the debentures be redeemed?- 5 marks-
dec 2006
6. Explain why yield curve is normally upward sloping: June 2008 q.5.
5. Cost of equity and value of equity
1. Evaluate the underlying assumptions of CAPM.
2. Define specific risk, systematic risk and beta attached to a stock and portfolio diversification.
3. Different forms of risk affect the evaluation and monitoring of capital markets. Discuss the relevance of business
risk, financial risk and market risk to a firm – dec 2006 q.4.a
4. What are the weaknesses of using CAPM to estimate the firm’s cost of capital- June 2009: q.2.
5. You have been given a question to compute the value of the share and you find out that the calculated value is
different from the market price and now you are asked to explain why.

WACC

1. Outline steps / strategies a company should take to reduce its weighted average cost of capital- dec 2010
q.1.d.
2. “The financial controller has indicated that the company intends to continue to issue more debt in future as a
way of maintaining their WACC. Evaluate the financial controller’s statement based on financial management
theory: dec 2011, q.5.c.( 10 marks).
3. Give the circumstances under which the CAPM other than the WACC should be used in investment appraisal
process.( June 2009 q.2)
6. Portfolio management
1. Explain any five key considerations an investor should make in building a portfolio of investments: dec 2010
q.4.
2. Explain the concept of an efficient portfolio and the relevance of the efficient frontier to finance managers.
3. Discuss the relevance of arbitrage pricing theory (APT) in modern portfolio management.
4. Explain any 3 advantages and at least one limitation to RR-trust of diversifying their investment portfolio:
2010. Q.4
7. Define the terms active portfolio management and passive active portfolio management and their
applications.
8. Investment appraisal
1) Explain why sensitivity analysis should always be undertaken.
2) Explain sensitivity analysis and how it may be used to incorporate risk in investment appraisal ( June 2009 q.4)
3) Differentiate between hard capital rationing and soft capital rationing. Why may capital rationing lead to less
than optimal investment decisions ( june 2009 ;q.d- 3 marks).
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 4) Explain the procedure the firm should follow before undertaking a large capital expenditure project and justify
each step-dec 2003 q.1.a
5) Identify and explain any 4 strategic reasons why corporations undertake foreign direct investment ( 6 marks-
June 2008 q.3).
This question is same as dec 2004 q.1.e: outline the likely motives of establishing subsidiaries in Tanzania or
elsewhere in the region.
6) Explain why multi-national corporations set up subsidiaries abroad ( 5marks June 2007 1.a)
7) M/S gento is a company in Uganda and wants to invest in project code named GUL- prep with a five year life
span, assuming the project GUL- prep was to be situated in say Tanzania, analyze the strategic considerations
management should make.
8) Discuss the barriers that tend to reduce international portfolio diversification and outline how company
should go about them if it was to go regional- 8 marks. June 2006 q.1 g
9) Following the research commissioned by the MD , he is now focused on opening up a fully pledged subsidiary
in Tanzania and is concerned about what might affect the success of their new MNC. Explain to the MD
internal and external factors likely to affect their new MNC once created: dec 2004b q.1.d- 11 marks.
10) Similar to the above question is dec 2011 q.1.c- PUL an electrical appliances dealer located in eastern pimpa
republic (EPR) and is planning to diversify into Uganda: question (a) and (b) and (c) are about NPV AND
QUESTION (D) evaluate other factors that the management of PUL needs to take into account when deciding
whether or not undertake this project ( 6 marks)
11) Explain the circumstances when APV rather than NPV should be used to evaluate the viability of an investment
project – dec 2011 q.1.e)
12) Explain any 4 approaches that a company should use to mitigate the risk associated with long term projects (
dec 2007 q.3).
13) Assess the political risks of foreign direct investment and show how a destination country could reduce such
risks).- June 2007 2.c
14) Explain why company prefers the NPV approach to the ARR and the IRR.- DEC 2004.Q.4
15) Briefly explain what would happen to a project IRR if the company’s cost of capital increases and outline the
key issues that would cause such an increase in the company’s cost of capital - 2004
16) Discuss the advantages and disadvantages of establishing international operations by means of joint ventures:
2005 dec 1.a
17) Transcom is a company in Uganda and wants to engage in a joint venture with a company in Rwanda to
manufacture kits in Rwanda. Evaluate whether transcom should participate in the joint venture in Rwanda:
(this question is asking for NPV): 10 marks- dec 2005 q.1.b what other factors would influence the decision
above.
9. Restructurings e.g. Mergers and acquisition, going private, spinoff etc.
a. Discuss reasons why company should pay a premium above the market price in order to acquire a another
company: June 2008 q.4)
b. June 2009 q.1: required the computation of the share value using the replacement cost method and then
q.1.b requires you to give reasons why the amount the acquirer MFS is paying is different from the one
obtained from the valuation in (a) and then in (d) it also goes ahead to ask you to explain why the
shareholders of both MFS and PSL the acquired company might expect to benefit from the merger.
c. Give any 4 reasons why shares rather than cash may be used as bid considerations in takeovers- June 2008
q.4).
d. Explain why a takeover bid in cash form may be preferable to debt or share offers.
e. Discuss the main factors that a company should consider before it takes over the target company- June 1.e- 6
marks.
f. Assuming company was to finance the acquisition by either a cash or a paper offer, what factors must the
directors consider before opting for either- June 2006 1.f- 8 marks.

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 g. Discuss the considerations that a company pursuing organic growth should take into account and the
circumstances under which growth by acquisition is most appropriate ( 8 marks- June 2007).
h. In paragraph 3, a lead consultant commented” SBL was a good target in my client’s expansion program. We
also made sure that all potential problems and risks were anticipated and addressed in time- elucidate
potential problems of an acquisition or merger that the consultant said were anticipated- June 2007 1.f)
i. Explain the term “corporate restructuring” and give 4 ways in which corporate restructuring can be done. (
q.1.g- 6 marks).
10. Business valuation
1) Discuss the limitations of the dividend valuation model when used to value a company: Dec 2009 q.5.c ( 6
marks).
11. Business planning
1) Briefly explain the focus and content of a strategic business planning process from a financial management
perspective ( dec 2007 q.1.a).
12. Hedging
1. Explain the terms and state the circumstances under which technique might be most relevant
 Leading and lagging
 Matching ( dec 2007 q.2)
2. Explain the 3 types of exchange risk and how each type could deplete shareholder value: dec 2003 q.a
3. The bank has quoted the following exchange rates
Spot rate: 2.5-3.05
I month: 2.45-2.93
Give 3 reasons as to why one month exchange rates are different from the spot rates dec 2003 q.e.iii
4. Explain how a cap, a floor and collar can be used to mitigate risks associated with corporate finance ( 6 marks-
June 2007 q.2.b)
5. Advise the management the 3 types of currency risk they face and for each one give one way of reducing its
impact- June 2006 q.2.a
6. Explain the theoretical relationship between inflation, interest and foreign exchange rates, restricting your
examples to Ush and USD: DEC 2010 q.3.d
7. Advise management the key factors they need to consider before deciding whether to hedge the risk using
forward currency markets ( June 2006q.2.b)
13. Business failures- financial distress and Restructuring
i. Explain the meaning and any 3 common causes of financial distress ( 4 marks- June 2008)
ii. Explain any 5 ways of overcoming financial distress- dec 2010 q.2.a and dec 2009 1.e.
14. Interpretation of financial statements:

Limitation of ratios-i.e. the treasons as to why the report may not be reliable dec 2010 q.5.a