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This document contains information about the Fourth Year Second Semester Examination for the Degree of Bachelor of Business Administration in Project Financial Management at Meru University of Science and Technology. It includes 5 questions related to topics such as sources of debt capital, project appraisal techniques, weighted average cost of capital, portfolio analysis, and inventory management. Students are instructed to answer question one and any other two questions within the 2 hour time period allotted for the exam.

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55 views

Untitled

This document contains information about the Fourth Year Second Semester Examination for the Degree of Bachelor of Business Administration in Project Financial Management at Meru University of Science and Technology. It includes 5 questions related to topics such as sources of debt capital, project appraisal techniques, weighted average cost of capital, portfolio analysis, and inventory management. Students are instructed to answer question one and any other two questions within the 2 hour time period allotted for the exam.

Uploaded by

betty Kem
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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MERU UNIVERSITY OF SCIENCE AND TECHNOLOGY

P.O. Box 972-60200 – Meru-Kenya


Tel: +254(0) 799 529 958, +254(0) 799 529 959, + 254 (0) 712 524 293,
Website: [email protected] Email: [email protected]

University Examinations 2019/2020

FOURTH YEAR SECOND SEMESTER EXAMINATION FOR THE DEGREE OF


BACHELOR OF BUSINESS ADMINISTRATION

BFB 3464: PROJECT FINANCIAL MANAGEMENT

DATE: OCTOBER 2020 TIME: 2 HOURS

INSTRUCTIONS: Answer question one and any other two questions

QUESTION ONE (30 MARKS)

a) Describe four sources of debt capital available to a publicly listed company (8 marks)

b) Rwambogo limited wishes to expand its output by purchasing a new machine worth ksh
170,000 and installation costs are estimated at ksh 40,000. In the 4th year, this machine
will call for an overhaul to cost ksh 80,000. Its expected inflows are:

Shs.

Year 1 60,000

Year 2 72,000

Year 3 35,720

Year 4 48,510

Year 5 91,630

Year 6 83,715

This company can raise finance to purchase machine at 12% interest rate.

Compute NPV,P1 and payback period and advise management accordingly (12 marks)

Meru University of Science & Technology is ISO 9001:2015 Certified


Foundation of Innovations Page 1
c) Discuss the reasons why a business will take keen interest in the management of their
current assets (10 marks)

QUESTION TWO (20 MARKS)

a) Maua Investments company ltd wishes to raise funds amounting to sh.10 million to
finance a project in the following manner:

Sh.6 million from debt; and

Sh.4 million from floating new ordinary shares

The present capital structure of the company is made up s follows

1. 600,000 fully paid ordinary shares of sh.10 each

2. Retained earnings of sh.4 million

3. 200,000, 10% preference shares of sh.20 each

4. 40,000 6% long term debentures of sh.150 each

The current market value of the company’s ordinary shares is sh.60 per share. The
expected ordinary share dividends in a year’s time is sh.2.40 per share. The average
growth rate in both dividends and earnings has been 10% over the past ten years and
this growth rate is expected to be maintained in the foreseeable future

The company’s long term debentures currently change hands for sh.100 each. The
debentures will mature in 100 years. The preference shares were issued four years ago
and still change hands at face value

Required:

i. Compute the component cost of:

- Ordinary share capital (3 marks)

- Debt capital (3 marks)

- Preference share capital (3 marks)

ii. Compute the company’s current weighted average cost of capital (3 marks)

b) Discuss the limitations of using WACC as a discounting rate (8 marks)

Meru University of Science & Technology is ISO 9001:2015 Certified


Foundation of Innovations Page 2
QUESTION THREE (20 MARKS)
a) Gacigoru ltd. wishes to make a choice between two mutually exclusive projects. Each
of these projects requires sh.400,000,000 in initial cash outlay. The details of the two
projects are as follows;
Project A
This project is made up of two projects. The first sub-project will require an initial
outlay of sh. 100,000,000 and will generate sh.25,600,000 per annum in perpetuity.
The second sub-project will require an initial outlay of sh.300,000,000 and will
generate sh.85,200,000 per annum for the 8 years of its useful life. This sub-project
does not have a residual value at the end of the 8 years. Both sub-projects are to
commence immediately
Project B
This project will generate sh.87,000,000 per annum in perpetuity.
The company has a cost of capital of 16%
Required:
i. Determine the net present value (NPV) of each project (8 marks)
ii. Compute the internal rate of return (IRR) for each project (8 marks)
iii. Advise Gakoromone ltd on which project to invest in, and justify your choice
(4 marks)

QUESTION FOUR (20 MARKS)


a) Exactly 20 years from now, Gicagua a former guard will start receiving a pension of sh
150,000 per year. The payments will continue for 10 years. How much is the pension
worth now assuming a cost of capital of 12% (6 marks)
b) Suppose we have to ask to analyze two portfolios having the following characteristics
Portfolio Observed R Beta Residual Variance
1 0.18 1.8 0.04
2 0.12 0.7 0.00
Additional information:
- The return on the market portfolio is 0.14
- The risk free rate is 0.07
- The standard deviation of the market portfolio is 0.02

Meru University of Science & Technology is ISO 9001:2015 Certified


Foundation of Innovations Page 3
Compute:
i. The Jensen Index for portfolios 1 and 2
ii. The Treynor Index for portfolios 1 and 2 and the market portfolio
iii. The sharp index portfolios 1 and 2 and the market portfolio (14 marks)

QUESTION FIVE (20 MARKS)


Mwenyeri co. ltd requires 20,000 units of a component in its manufacturing process in the
coming year which costs sh.500 each. The items are available locally and the leadtime in
one week. Each order costs sh.500 to prepare and process while the holding cost is shs.150
per unit per year for storage plus 10% opportunity cost of capital
Required:
a) How many units should be ordered each time an order is placed to minimize inventory
costs?
b) What is the recorder level?
c) How many orders will be placed per year?
d) Determine the total relevant costs (12 marks)
e) Discuss the main assumptions of the Baumol’s model of inventory management
(8 marks)

Meru University of Science & Technology is ISO 9001:2015 Certified


Foundation of Innovations Page 4
Meru University of Science & Technology is ISO 9001:2015 Certified
Foundation of Innovations Page 5

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