BAF 313 EXAM
BAF 313 EXAM
BAF 313 EXAM
UNIVERSITY EXAMINATIONS
2023/2024 ACADEMIC YEAR
DECEMBER 2023
THIRD YEAR, FIRST SEMESTER EXAMINATIONS
INSTRUCTIONS TO CANDIDATES:
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Required:
i. Determine the Net Benefit of acquiring the new machine. (7 Marks)
ii. Based on (i) above, advice the manager accordingly. (2 Marks)
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EXAMINATION CHEATING IS A CRIME
d) Explain THREE Differences between Debt capital and Equity capital
(6 Marks)
QUESTION TWO
a) You are provided with the following information that relates to Juran Corporation’s
capital structure.
1. The company issued 1,000,000 common stock. The share is currently selling at
Shs. 20 per share. The firm just paid a dividend of Sh.2 per share which is expe
cted to grow at a constant rate of 10% per annum over the foreseeable future.
3. The company also issued 100,000 debentures of Shs. 150 par value that pays 1
5% interest annually. The current market price is Shs. 120 and the maturity per
iod is 10 years.
Required:
ii. Compute the cost of preference shares (kp) for Juran limited (3 Marks)
iii. Compute the cost of debentures (kd) for the company (3 Marks)
iv. Determine the weighted average cost of capital (WACC) for the company
(3 marks)
b) Discuss three reasons why it’s important for a firm to compute the project’s cost of
capital and the firm’s cost of capital. (3 marks)
QUESTION THREE
b) The following data relates to predicted return for a financial security issued by a co
mpany subject to performance of the economy:
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EXAMINATION CHEATING IS A CRIME
State of economy Probability Rate of return
Expansion 0.3 17%
Normal 0.3 13%
recession 0.4 10%
Required:
i. Expected return for the security. (3 Marks)
ii. Variance of the returns for the security (3 Marks)
iii. Standard deviation for the security’s return. (3 Marks)
iv. Advice a potential investor on the decision to invest in the stock of the company.
(3 Marks)
QUESTION FOUR
All the techniques of capital budgeting appraise suitable investment proposals by esti
mating relevant future cash inflows and cash outflows. However, a more precise
appraisal should incorporate adjustment for risk.
Required:
a) Explain the importance of risk and uncertainty considerations in capital budgeting.
(3 Marks)
b) The following information relate to two proposed investment X and Y. The
investments are mutually exclusive and each require initial financial outlay of Sh. 4
0,000.
Year Investment X Investment Y
Cash inflows Certainty coefficient Cash inflows. Certainty coefficient
1 25, 000 0.8 20, 000 0.9
2 20, 000 0.7 30, 000 0.8
3 20, 000 0.9 20, 000 0.7
Risk free cut off rate is 10%
Required: Determine which of the two investment projects should be accepted
(12 Marks)
QUESTION FIVE
a) Investment decisions can be classified in different ways. Explain the following
types of investments as used in capital budgeting:
b) Investment decisions involve the exchange of current funds for future benefits. Stat
e and explain three reasons why investment decisions require special attention.
(3 marks)
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EXAMINATION CHEATING IS A CRIME
c) The following six projects are available for investment as follows:
Project Initial Cost “M’ NPV @ 15% cost of c
apital
1 60 21
2 15 9
3 20 9
4 55 15
5 30 20
6 40 -2
Required:
QUESTION SIX
a) Financial statement analysis is an essential task for the proper management of any
organization. With this in mind, identify two categories of users of financial statem
ent analysis information and explain the type of information that they are intereste
d in. (4 Marks)
b) Ratio analysis is an important type of financial statement analysis. Once the compa
ny determines the various ratios, it normally relates them to ratios of other years in
what is called trend analysis. With this in mind, the following information relates t
o ratios that have been calculated for a company for a number of years.
Use the above information to conduct trend analysis of the company. (6 Marks)
c) You have been presented with two securities: Security X with expected return of 1
0% and standard deviation of 0.08. Security Y with expected return of 16% and sta
ndard deviation of 0.06. Assuming you are a risk averse investor, which security w
ould you select based on the relative risk? (3 Marks)
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EXAMINATION CHEATING IS A CRIME
d) Consider a security with a Beta of 1.3 and an expected rate of return of 16%. Assu
me that the return on treasury bills is 9% and expected returns in the market is 10.5
%. Compute the RRR and advice that you would give an investor on whether to bu
y the security. (2 Marks)
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EXAMINATION CHEATING IS A CRIME