UNIVERSITY OF NAIROBI

DEPARTMENT OF AGRICULTURAL ECONOMICS

3RD YEAR BSC AGRIBUSINESS MANAGEMENT
AEB301: FINANCIAL MANAGEMENT (2021/2022)

SEMESTER I EXAMINATION
DATE: 27 JANUARY, 2022 TIME: 2.00 – 5.00 PM

INSTRUCTIONS
1. Answer ALL questions.
2. Upload your working as an image.
3. Any evidence of copying will earn you a zero mark.

QUESTION 1
(a) You are given the following information about a portfolio consisting of stocks X, Y, and Z:
Stock Investment (KShs) Expected Return (%)
X 10,000 8
Y 15,000 12
Z 25,000 16

Calculate the expected return of the portfolio. (2Marks)

(b) XYZ Ltd’s common stock has a beta of 1.6. If the risk-free rate is 4.5 percent and the expected return
on the market is 11 percent, what is the company's cost of equity capital? (3Marks)

(c) Your client has received KShs 15 million from her pension fund and has decided to invest it in shares
of companies listed in the NSE. She has approached you for financial advice. You have gathered the
following financial data for two companies (A and B) that show the greatest potential for investment:

Economic state Probability of the state Rate of return Rate of return

company A (%) company B (%)
Boom 0.10 20 18
Growth 0.20 12 15
Normal 0.45 17 12
Recession 0.25 -15 -12

(i) Determine the standard deviation for the two companies. (2Marks)
(ii) From (i) above, which of the two shares carry the most nonsystematic risk? (1Mark)
Why? (1Mark)
(iii) Determine the coefficient of variation for the two companies. (2Marks)
(iv) Based on (iii) above, advise your client the best investment (assuming she is a risk-averse investor)
(1Mark)
(v) Determine the expected return on this portfolio assuming your client is to invest 40% and 60% in
companies A and B respectively, and that she only has these two investments. (3Marks)
(vi) Explain why investors are more concerned with systematic risk than nonsystematic risk. (3Marks)

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QUESTION 2
Use the graph below to answer the questions that follow:

(a) Describe the trends depicted by the graph. (4Marks)

(b) Explain what led to the phenomenon depicted in Region A for: (2Marks
(i) KShs vs TShs
(ii) KShs vs UShs
(c) What could have led to the phenomenon depicted in Region B? (2Marks)
(i) KShs vs TShs
(ii) KShs vs UShs

(d) Indicate how Kenya’s importers and exporters are likely to be affected by the phenomena in Regions A
& B in the graph above: (4Marks)
(i) Region A: Importers
(ii) Region A: Exporters
(iii) Region B: Importers
(iv) Region B: Exporters

(e) What do you think explains the general deterioration of the Kenyan shilling against those of Uganda
and Tanzania in the graph above? (3Marks)

(f) Is strengthening the Kenyan shilling a good solution to the general deterioration of the Kenyan shilling
against those of Uganda and Tanzania in the graph above? (1Mark)
Explain your answer in (f) above and stick to ONE opinion. (3Marks)

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QUESTION 3
A group of youth has approached you for advice on how to start a new business. They want to tap into the
Youth Development Fund (YDF). As an advisor, describe to them:
(a) the type of firm they should form, citing the pros and cons of the choice. (5Marks)
(b) the steps they should take to formally register their business. (5Marks)
(c) the key ways they can raise capital in case they fail to get the YDF. (5Marks
(d) the kind of risks they should bear in mind as they start their business. (5Marks)

QUESTION 4
(a) A plaintiff has sued the City Council for injuries sustained after falling down an uncovered manhole.
In the trial, doctors have determined that it will take 2 years before the plaintiff is able to return to work.
You are a member of the jury and you have proposed to the court that the plaintiff be awarded the
following as compensation for his injuries:
(i) The present value of 2 years of back-pay ($34,000 in 2019 and $36,000 in 2020). Assume it is 1st
January 2021 and that all salary is received at the end of the year.
(ii) The present value of 2 years of future salary (2021 & 2022). Assume that the plaintiff’s salary would
increase at 3% per year.
(iii) $100,000 for pain and suffering.
(iv) $20,000 court costs.
Assuming an interest rate of 7% per annum, what would be the size of the settlement? (10Marks)

(b) Your company is planning to borrow KShs 2 million on a 6-year, 14%, annual payment, fully
amortized term loan.
(i) What fraction of the payment made at the end of the second year will represent repayment of
principal? (Hint: Enter your numbers in an Amortization Table) (8Marks)
(ii) How much interest will you end up paying? (2Marks)

END