SCHOOL OF BUSINESS AND ECONOMICS
		DEPARTMENT OF COMMERCE
END SEMESTER EXAMINATION
SEMESTER: AUGUST – DECEMBER 2011
 CODE: BUS 309X				UNIT – BUSINESS FINANCE
INSTRUCTIONS
Answer ALL questions
Time 2½ hours
Question one
a)	Describe five factors that influence the working capital needs of a business. 	(10 marks) 

b)	PDA Company uses 2,500 units of component X per year. The company has calculated that the cost of placing and processing a purchase order for component X is sh 185. The cost of holding one unit of component X for a year is sh 25.

Required
i.	What is the economic order quantity (EOQ) of component X per year?		(3 marks)
ii.	Determine the number of orders per year.					(2 marks)
iii.	Calculate the total cost of obtaining and holding component X.			(5 marks)

c)	The dividend policy acts as a signal for investors for gauging the future earning possibilities as expected by the management of the company. Discuss how the following changes in dividends may be interpreted by the market and investors;
i.	Dividends increases.								(2½ marks)
ii.	Dividends decreases. 								(2½ marks)

Question two

a)	As the financial manager at Best Investments Ltd, you have been requested to evaluate potential ventures that the company can invest in. Explain the approach/investment decision making process that you will use when evaluating the ventures.				(10 marks)

b)	Describe the various sources of fixed/long term capital that business entities in Kenya can use, highlighting their advantages and disadvantages.					(15 marks)

Question three

a)	The management of Mvumilivu Ltd is contemplating raising debt finance totaling sh 1,000,000. It will be required to pay an annual interest of 10%. This money can be invested in one of the two projects below which have the following expected cash flows;

Period	project A
Sh	Project B
Sh	
1	300,000	600,000	
2	100,000	500,000	
3	400,000	400,000	
4	500,000	300,000	
5	600,000	100,000	

Required
i.	Using Pay Back Period (PBP) method, which of the two projects should the company invest in?               
(6marks)                                                                                                                                                                                                                                                                                                                                                                                                                                                      
ii.	Using the Net Present Value (NPV) method, advise the management accordingly as to which of the two projects would be viable and why.		 				(9 marks)                                                                                                                                                                                                                                                                   
b)	Shares in K & P Co. have a beta of 0.9. The expected return to the market is 10% and risk free rate of return is 4%. What is the cost of capital for the company?			(5 marks)

c)	Using appropriate examples, discuss the concept of agency theory.			(5 marks)

Question four
The information below has been extracted from the recently published accounts of Priority ltd;

Extracts from the income statement to 30th June 2011;
2011 		2010
(000) 		(000)
Sales 								11,200 	9,750
Cost of sales 							8,460 		6,825
Net profit before tax 						465 		320

The following expenses had been charged when calculating the net profit;
Depreciation 							360 		280
Loan note interest 						80 		60
Interest on bank overdraft 					15 		9
Audit fees 							12 		10

Balance sheet as at 30th June;
2011 				2010
(000) 		(000) 		000) 		(000)
Assets
Fixed assets 								1,850 				1,430
Current assets
Inventory 						640 				490
Receivables 						1,230 				1,080
Cash 							80 		1,950 		120 		1,690
Total assets 								3,800 				3,120

Equity and liabilities
Ordinary share capital 				800 				800
Retained earnings 					1,310 		2,110 		930 		1,730

Non current liabilities
10% loan stock 							800 				600

Current liabilities
Bank overdraft 					110 				80
Payables 						750 				690
Taxation 						30 		890 		20 		790
3,800 				3,120

The following ratios were calculated by Priority ltd based on its published financial statements for 2009 and also the latest industry average ratios;

Priority ltd (2009) 			Industry average
Gross profit margin 				30% 					35.23%
Net profit margin 				3.9% 					4.73%
Asset turnover 				4.29x 					3.91x
Current ratio 					2 					1.9
Quick ratio 					1.42 					1.27
Accounts receivable collection period 	40 days 				52 days
Accounts payable payment period 		30 days 				49 days
ROCE 						16.7% 					18.5%

Required
a.	Calculate comparable ratios for Priority ltd.					(16 marks)
b.	Compare your results against the previous year’s and the industrial average.
(9 marks)