KENYA METHODIST UNIV ERSITY

DEPARTMENT OF BUSINE SS ADMINISTRATION

COURSE CODE: FINA 213/BUSS 321/FINA 201
COURSE TITLE: FINANCIAL MANAGEMENT
INSTRUCTO R: SAM MULI

Instructions
1. Assignment – Due date: Friday 10th March 2023 by 11:59pm
2. Assignment must submitted in hardcopy (Class or Office) or softcopy to Samuel.muli@kemu.ac.ke
3. Copy/paste will earn no points.

Question 1

a) Describe the agency problem between shareholders of a company and each of the following
groups, and for each, identify two ways the problem can be mitigated. (2 marks each)

i) Debtholders
ii) Employees
iii) Society

b) You have been approached for professional advice on what sources of finance are available
for a Startup small business. Briefly describe at least THREE sources you would advise. For
each give at least TWO advantages and TWO disadvantages of the sources mentioned. (14
marks)

Question 2

KK limited has the following capital structure.

Ordinary shares @ sh. 10 each 100,000

10% preference shares of sh. 20 each 50,000
12% debentures of Ksh. 1000 each 50,000

Additional Information:

1) Last year the company had paid a dividend of Ksh. 3.5 per share. Earnings

and dividends are expected to grow at 8% P.a into the future.

Shares are currently trading at Ksh. 25 each.

2) Preference shares are trading at par value.

3) Debentures have a market value of Ksh. 1250 each.

4) Corporation tax rate is 30%

Required:

Calculate:

a) Cost of equity. (5marks)

b) Cost of preference shares. (5marks)
c) Cost of debt. (5marks)
d) Weighted Average Cost of Capital. (5marks)

Question 3
In order to automate its operations, Bima Ltd is proposing to purchasing a packing machine for
Ksh. 950,000/=. Installation costs for the machine will amount to Ksh. 50,000/=. The machine is
expected to have a life of 8 years after which it will have a scrap value of Ksh. 100,000/=. The 8
years are expected to have the following cash flows:
Year Net Cash flows
1 50,000
2 160,000
3 300,000
4 400,000
5 400,000
6 250,000
7 200,000
8 150,000

The cost of capital for Bima is 15% p.a.

Required:
Use the NPV method to advice the company on whether it should proceed to implement the
proposal. (20 marks)