BBM 410 FINANCIAL MANAGEMENT Page 1

MAASAI MARA UNIVERSITY

REGULAR UNIVERSITY EXAMINATIONS

2014/2015 ACADEMIC YEAR

FOURTH YEAR FIRST SEMESTER

SCHOOL OF BUSINESS AND ECONOMICS

BACHELOR IN BUSINESS MANAGEMENT

COURSE CODE: BBM 410

COURSE TITLE: FINANCIAL MANAGEMENT

DATE: August 2015 TIME:

INSTRUCTIONS TO CANDIDATES
Question ONE is compulsory
Answer any other THREE questions
This paper consists of 3 printed pages. Please turn over
 QUESTION ONE
i) Clarify the 3 roles normally played by Financial Management in a corporate set
(6 Marks)
ii) Describe capital and give the importance of the term to a corporate entity.
(5Marks)
iii)During one of the management meeting of Kipwawich Enterprise Ltd, it appeared
that the enterprise is operating far much below it full capacity. As a result of that
one of the directors wanted to know the number of years it would take the
enterprise to sell 700 tonnes of its inventories, the maximum production capacity
of the available resources. The interest rate is 8 percent; current production
capacity is 300 tones. (6 Marks)
iv) Dividend payment may reduce the wealth of the shareholder. Elaborate using a
suitable example. (8 Marks)
QUESTION TWO
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
Required:

Calculate for each project

i. The payback period
ii. The average rate of return
iii. The net present value
iv. Profitability index
v. The internal rate of return
Which project should be accepted? Why? (15 Marks)
QUESTION THREE
i. Describe a bond as used to source for funds in the corporate sector.(3 marks)
ii. Kelelwa
enterprise Ltd sells a Kshs. 1000 bond that matures in 10 years. The annual
interest payments are Kshs. 100 and the net proceeds of the enterprise for the
sale of the bond are Kshs. 950. Use the above given data and the right model to
estimate the before-tax-cost of the bond. (12 Marks)
 QUESTION FOUR
i. Describe the phrase standard deviation. (5 Marks)
ii. Below is data from two projects meant for investment
Expected Cash flow Standard deviation
Project A Ksh.400, 000 Kshs. 95,000
Project B Kshs.980, 000 Kshs. 27,000
Use the above data to identify the more or less risky project between the two
by estimating the coefficient of variation for each project and then advise the
management accordingly. (10 Marks)
QUESTION FIVE
Assume that two firms the levered firm (L) and the unlevered firm (U) are identical in all
important respects except financial structure. Firm L has Sh 4 million of 7.5% debt, while
Firm U uses only equity. Both firms have EBIT of Sh 900,000 and the firms are in the
same business risk class. Initially assume that both firms have the same equity
capitalization rate Ke(u) = Ke(L) = 10%.
Determine the value of the two firms (15 Marks)

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