Code of the

Module Name of the Module Date of Exam Time of Set

Exam
BBA311 Financial Management 26/11/2018 09:00HRS 1

You are advised to read the following before answering the examination question.
1. Read each of the questions carefully before you answer.
2. Number the answers to the questions clearly before answering.
3. Answer all parts of a question at one place in continuous manner.
4. Please write as clearly as possible as illegible handwriting cannot be marked

This paper contains two parts; Section A and Section B. Section A is compulsory and
comprises two questions; Q.1 having four sub questions of five marks each is based on a
case study and Q.2 having four sub questions of five marks each is based on either the case
study as Q.1 or based on a core topic of the module/syllabus. Section B contains five
questions having two sub questions of ten marks each. Answer any three questions from
section B.
 Section A
Answer Both Questions
Stormy CO introduced a new product, DV, to its range last year. The machine used to mould
each item is a bottleneck in the production process meaning that a maximum of 5,000 units per
annum can be manufactured.
The DV product has been a huge success in the market place and as a result, all items
manufactured are sold. The marketing department has prepared the following demand
forecast for future years as a result of feedback from customers.
Year 1 2 3 4 5
Demand (units) 7,000 9,000 11,000 8,000 4,000
The directors are now considering investing in a second machine that will allow the company
to satisfy the excess demand. The following information relating to this investment proposal
has now been prepared .
Initial investment K 20,000
Maximum additional output 5,000 units
Current selling price K50 per unit
Variable operating costs K28 per unit
Fixed operating costs K15, 000 per year
If production remained at 5,, 000 units , the current selling price would be expected to
continue throughout the remainder of the life of the product.
However, if production is increased, it is expected that the selling price will fall to K45 per
unit for all units sold. Again, this will last for the remainder of the life of the product.
No nominal value or machinery scrap value is expected. For investment appraisal purposes,
Stormy CO uses a nominal (money) discount rate of 10 % per year.

Q. 1

Required:

(a) Explain briefly the key steps that should be included in a company’s capital budgeting
process.
 (b) Discuss other none financial factors that Stormy CO should take into account when
appraising this project.
(c) Using the information in the case study above, calculate the relevant cash flows for this
project.
(d) Using the information in the case study above, calculate the NPV of the project.

Q. 2

a) Discuss the key features of payback period.

b) Using the information in the case study above, calculate the payback period.

c) Using the information in the case study above, calculate the IRR of the project

d) Discuss the main benefits and limitations of discounted cash flow methods (DCM)

Q.3

The following information relates to KAINGO PLC.

Income statement for the year ended - 30th September
2015 2014
K , 000 K ,000
Revenue 4, 330 3, 562
Cost of Sales (3, 702) (2, 810)
Gross Profit 628 752
Other Operating Expenses (465) (580)
Finance costs ( 13) ( 2)
Profit before tax 150 170
Corporation tax ( 42) ( 45)
Net Profit 108 125

Statement of Financial Position as at 30th September.

 2015 2014
Assets
Non-Current Assets
- Property, Plant and Equipment 52 78
- Intangibles 89 38
Current assets
- Stock 125 72
- Trade receivables 1, 091 587
- Cash and Cash equivalents 58 318
- Total Assets 1, 415 1, 093
Equity and Liabilities
Current Liabilities
- Trade and other payables 687 485
- Short – term borrowings 123
Total Current Liabilities 810 485
Provisions 62 173
Share Capital (K1) 4 4
Retained Earnings 539 431
Total equity and Liabilities 1, 415 1, 093
Required:
(a) Using the data in the case study above calculate the following ratios for each of the two
years:
i) Gross profit ratio
ii) ROCE
iii) Liquidity ratios
iv) Inventory days
v) Trade accounts receivable days
vi) Trade accounts payable days
vii) EPS
viii) Gearing ratio
ix) Interest cover
 (b) Using your calculations in ( a) above prepare a report for the attention of KAINGO
PLC’s management on the performance of the company.

Section B
Answer Any Three Questions
Q. 4
D company uses component JJ in its construction process. The company has a demand of 45,000
components per annum. They cost K4.5 each. There is no lead time between order and
delivery, and ordering costs amount to K100 per order.
The annual cost of holding one component in inventory is estimated to be K0.65.
Required
(a) Calculate:
(i) The economic ordering quantity and the number of orders.
(ii) The average inventory period.
(b) (i) Calculate the total cost of ordering and carrying inventory.
(ii) What is Just – In – Time (JIT) Procurement? State the main benefits and
limitations of JIT
Q. 5
Discuss dividend policy under the following headings:
a) i) Residual theory
ii) Traditional view
iii)Irrelevancy theory
b) Scrip dividends and share repurchase
Q. 6 BP PLC has 9,000 shares of common stock outstanding, 5,000 shares of preferred stock
outstanding, and K120,000 8.5% bonds outstanding. The common stock currently sells for K34
per share and has a beta of 1.20 , the preferred stock currently sells for K83 per share and the
bonds have 5 years to maturity and sell for 93% of par value. The market rate of return is
currently 15% , T-bills are yielding 5% and BP PLC’s tax rate is 35% .

Required:
(a) i) Describe the factors to consider when using CAPM and dividend valuation model to
calculate the cost of equity.
ii) Discuss the main limitations of using CAPM and dividend valuation models to
calculate the cost of equity capital.
(b) Using the information in the case study above, calculate the Weighted Average Cost of
Capital (WACC).
Q. 7 Write notes on the importance of the following in the financial markets
a) i) Preference shares
ii) Ordinary shares
i) Rights issue
b) Benefits and limitations of stock market listing for a profit making entity.

Present Value Table

Present Value of 1 i.e. (1 +r)-n

Where r = discount rate

n = number of period until payment

Discount rate (r)

Periods

( n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 2
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 3
4 0.961 0.924 0.888 0.855 0.823 0.972 0.763 0.735 0.708 0.683 4
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 5

6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 6
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 7
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 8
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 9
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 10
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 11
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 12
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 13
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 14
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 15

( n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.910 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 2
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 3
4 0.659 0.636 0.613 0.592 0.572 0.552 0.0534 0.516 0.499 0.482 4
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.19 0.402 5

6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 6
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 7
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 8
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 9
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.919 0.176 0.162 10

11 0.317 0.287 0.261 0.237 0.215 0.915 0.178 0.162 0.148 0.135 11
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 12
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 13
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 14
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 15

Annuity Table

Present Value of an annuity of 1 i.e. 1 - (1 +r)-n

r

Where r = discount rate

n = number of periods

Discount rate (r)

Periods

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 2
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 3
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 4
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 5

6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 6
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 7
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 8
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 9
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 10

11 10.37 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 11
12 11.26 10.58 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 12
13 12.13 11.35 10.63 9.986 9.394 8.853 8.358 7.904 7.487 7.104 13
14 13.00 12.11 10.30 10.56 9.899 9.295 8.745 8.244 7.786 7.367 14
15 13.87 12.85 11.94 11.12 10,38 9.712 9.108 8.559 8.061 7.606 15

( n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 2
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.639 2.589 3
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 4
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 5

6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 6
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 7
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 8
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 9
10 5.889 5.650 5.426 5.126 5.019 4.833 4.659 4.494 4.339 4.192 10

11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 11
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 12
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 13
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 14
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 15
 Formular Sheet
Economic Order Quality

√ 2 CoD
cH
❑

Miller-Orr Model
1
Return point = Lower limit + (
x spread)
3
3
x transaction cost x variance of cas h flow
Spread = 3 4
interest rate
The Capital Asset Pricing Model

E(ri) = Rf (E (ri) – Rf)

The Asset Beta Formula

Ve Ve
βa = βe + βd
( Ve+Vd ( 1−T ) ) ( Ve+Vd ( 1−T ) )

The Growth Model

P0 = D0 (1+g).
Ke – g)
Gordon’s Growth approximation
g = br
The weighted average costs of capital

WACC = Ve Vd
KeV+ + V Kd (1 – T)
Ve + Vd e d

The Fisher Formula

(1 + i) = (1 + r) (1 +h)

Purchasing Power Parity and Interest Rate Parity

S1 = S0 x (1+hFc0)= S0 x (1+ic)
(1+hb) (1+ib)