Business Finance July 2015 Past Paper – KNEC Certificate

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This Past Paper examination was examined by the Kenya National Examination Council (KNEC) and it applies to the following courses:

• Craft Certificate in Supply Chain Management – Module II
  

• Craft Certificate in Business Management – Module II

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THE KENYA NATIONAL EXAMINATIONS COUNCIL
CRAFT CERTIEICATE IN SUPPLY CHAIN MANAGEMENT
CRAFT CERTIFICATE IN BUSINESS MANAGEMENT
MODULE II
BUSINESS FINANCE
July 2015
Time: 3 hours

Answer ALL Questions in section A and section B in the spaces provided in this question paper.
Candidates should answer the questions in English.

SECTION A (32 marks)

Answer ALL the questions in this section.
1. Explain four differences between ordinary shares and preference shares, as sources of business finance. (4 marks)
2. Highlight three factors which affect the share prices of companies at the securities exchange market.            (3 marks)
3. Malaba Limited intends to invest in a project which costs Ksh 2,000,000. The expected incomes are as follows:
Year      Income(Ksh)
1         450,000
2         500,000
3         550,000
Calculate the accounting rate of return for Malaba Limited.      (3 marks)
4. Explain three differences between ‘jobbers’ and ‘brokers’ in a securities exchange market. (3 marks)
5. List three factors which determine the capital structure of a company.  (3 marks)
6. A company uses 40,000 units of a product per annum which costs Ksh 2,800 each. The ordering costs are Ksh 10,500 per order while the carrying costs are 10% per annum.
Calculate the economie order quantity for the company.         (4 marks)
7. Benard intends to invest in a project which costs Ksh 800,000. The expected cash inflows from the project are shown in the table below:

Year       Cash Inflows (Ksh)
1              250,000
2              270,000
3              460,000
4              305,000
5              295,000
He expects to recover the capital after four years. Using the Pay-Back Period approach, advise him whether he should invest in the project or not.         (4 marks)
8. Lilian plans to buy a car, the value of which would be Ksh 950,000 in two years time. She intends to save some money in a bank that offers compound interest at the rate of 159» per annum on savings. Calculate the amount she should save now in order to buy the car. (4 marks)
9. List two goals of a business organization.           (2 marks)
10. State two roles of micro finance institutions in an economy.

SECTION B (68 marks)

Answer ALL questions in this section
11.a)Explain four monetary policies which the Central Bank of Kenya may apply to control inflation in the economy.        (8 marks)
(b)          Mechatronics Limited has an option to choose between project X or project Y. Project X will cost Ksh 1,200,000 while project Y will cost Ksh 1,600,000. The expected
cash inflows from the projects are as shown in the table below:
Expected cash in flows (Ksh)
Year       Project X              Project Y
1              900,000 850,000
2              800,000 920,000
3              600,000 740,000
The cost of capital is 15% per annum. Using the Profitability Index method, advise the company on which project to undertake.         (9 marks)

12. (a) Explain three advantages of using preference shares as a source of finance.  (6 marks)

(b)         Chawal Enterprises Limited had the following capital structure at the end of a certain period
40,000 ordinary shares at Ksh 5 par value                       Kshs 200,000
18% Longterm loan                                                              Kshs 250,000

20,000 8%  preference shares at Kshs 10 par value      Kshs 200,000
16% Debentures at Ksh 100 par value                              Kshs  40,000
Kshs 1,100,000
The company paid ordinary dividends of Ksh 3 per share. The current market price per ordinary share is Ksh 15. The preference shares and debentures are currently selling at Ksh 18 and Kshs 115, respectively.
If the tax rate is 30%, calculate the weighted average cost of capital for the company. (11 marks)

13. (a) Using a relevant diagram, explain the concept of ‘working capital cycle’.     (11 marks)

b)The following are the projected cash in8ows from a project:
Yr            Cash – inflows
kshs
1                     900,000
2                    800,000
3                    750,000
4                    760,000
5                    940,000
Determine the total present value of the project if the cost of capital is 12%           (6 marks)
14.(a)The following are the financial statements of Pemba Limited for the year ended 31 December, 2012:

PEMBA LIMITED
STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER, 2012
1906/203              14
Sales
Less: Cost of sales Gross profit
INCOME STATEMENT
Ksh’000                Ksh’000
390,000
240,000
Less: Wages & salaries Rent payable Stationery Carriage outwards
Net profit before tax & interest
Interest charges Net profit before tax Less: Tax (309»)
Net profit after tan
46 700
193,300
189,300
132JI0
Calculate the following ratios:
Current ratio; Acid test ratio; Net proht margin; Gearing ratio. (8 marks)
(b) Outline six functions of the Nairobi Securities Exchange,(9 marks)