THE CATHOLIC UNIVERSITY OF EASTERN AFRICA

A. M. E. C. E. A P.O. Box 62157

00200 Nairobi - KENYA
Telephone: 891601-6
GABA CAMPUS – ELDORET Ext 1022/23/25
Fax: 254-20-891084
MAIN EXAMINATION email:exams@cuea.edu
directorofexams@cuea.edu

JANUARY – APRIL 2023 TRIMESTER

SCHOOL OF BUSINESS

BACHELOR OF COMMERCE

DEPARTMENT OF ACCOUNTING AND FINANCE

CFI 221: BUSINESS FINANCE

Date: April 2023 Duration: 2 Hours
Instructions: Answer Question ONE and any other TWO Questions

Q1.
a) Jeremy limited wishes to expand its output by purchasing a new machine worth 170,000
and installation costs are estimated at 40,000/=. In the 4th year, this machine will call for
an overhaul to cost 80,000/=. Its expected inflows are:
Kshs.
Year 1 60,000
Year 2 72,650
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.
Required;
Compute NPV and advise management accordingly (12 Marks)
b) Discuss the limitations of ratio analysis when measuring business performance.
(8 Marks)

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 c) Outline the functions of a financial manager in a contemporary corporate set-up.
(10 Marks)
Q2.
a) What are the practical difficulties of a small scale enterprise wishing to obtain credit to
expand production? (8 Marks)
b) The following is the capital structure of XYZ Ltd as at 31/12/2002.
Shs.M
Ordinary share capital Sh.10 par value 400
Retained earnings 200
10% preference share capital Sh.20 par 100
value 200
12% debenture Sh.100 par value 900

Additional information

i) Corporate tax rate is 30%

ii) Preference shares were issued 10 years ago and are still selling at par value MPS = Par
value
iii) The debenture has a 10 year maturity period. It is currently selling at Sh.90 in the
market.
iv) Currently the firm has been paying dividend per share of Sh.5. The DPS is expected to
grow at 5% p.a. in future. The current MPS is Sh.40.
Required;

Determine the WACC of the firm. (12 Marks)

Q3.
The following information has been extracted from the published accounts of Apex Corporation
Limited, a company quoted on the Nairobi Securities Exchange.
Kshs.
Net profit after tax and interest 990,000
Less: dividends for the period 740,000
Transfer to reserves 250,000
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 Accumulated reserves brought forward 810,000
Reserves carried forward 1,060,000
Share capital (Sh.10 par value) Sh.8,000,000
Market price per share now 12%

Required;

a) What is meant by a company quoted on the Nairobi Securities Exchange?

(4 Marks)
b) Calculate for Apex Corporation Limited the following ratios and indicate the importance
of each to Miss Jellico, a Shareholder:

i) Earnings per share. (4 Marks)

ii) Price earnings ratio (4 Marks)
iii) Dividend yield (4 Marks)
iv) Dividend cover (4 Marks)

Q4.
a) What practical problems are faced by finance managers in capital budgeting decisions?
(10 Marks)
b) What are the weaknesses associated with profit maximization goal?
(10 Marks)

*END*

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ISO 9001:2015 Certified by the Kenya Bureau of Standards.