MAKERERE UNIVERSITY BUSINESS

SCHOOL
JINJA CAMPUS
FINANCE MANAGEMENT WORKSHOP
BY
MAKERERE UNIVERSITY BUSINESS SCHOOL FINANCE
STUDENTS ASSOCIATION
(MUFISA)
DATE: Monday 10th January 2022
Venue: Narambhai Room H
Time: 10.00am-
Instructions:

1. All participants must have a copy of this question booklet before the workshop starts to
facilitate smooth running of the program.
2. Please carry along your working tools i.e., books,pens,calculators
3. ALL PARTICIPATING PROGRAMS MUST HAVE REPRESENTATIVES THAT WILL
PRESENT ON PARTICULAR QUESTIONS DURING THE WORKSHOP FOR LEARNING
PURPOSES.
The participants must call or reach out to the Guild Speaker Jonathan Mukama
(0704229572) to inform him about the questions they have chosen to present.
4. Participants must carry out adequate research on the questions. And in order to facilitate the
smooth running of this workshop a copy of the answer booklet is attached to help in the
research.

Page 1 of 2
MAKERERE UNIVERSITY BUSINESS SCHOOL
COURSE WORK EXAMINATION FOR THE

OF MAKERERE UNIVERSITY
ACADEMIC YEAR 20 /

COURSE NAME: FINANCIAL MANAGEMENT

COURSE CODE: YEAR OF STUDY:
SEMESTER/MODULE: DATE: / / TIME: - pm
INSTRUCTIONS:
i. All question(s) in both sections are compulsory.
ii. Present only tidy answers, relevant examples and models.
iii. Use own financial/mathematical tables and scientific calculator.
iv. Do not write on the question paper.

SECTION A
QUESTION ONE
MBA 2016 (U) Ltd is planning a new capital expenditure in a steel mill with minimum required discount rate of
return (WACC) of 22% with 4 years to recover initial outlay.

The investment terminal scrap market value is expected at $ 7m after tax.

*Initial working capital (start up current assets items before operations) is recoverable as terminal cash inflows.

Initial total costs of Research and development, Consultancy and Feasibility/Business Incubation plan are 900 billion dollars
before investment decision on project implemention.

A hired financial analyst has determined ONLY relevant project cash flows below:

Initial Outlay (Io) for the New Investment decision (Year 0) All in ($ 106)
Invoice Price Value from Supplier Quotation 30
Add: Capitalised Incidental Costs
Carriage, Insurance, Freight/Forwarding 10
Customs Clearing, Transport, Warehouse Storage, Installation/Construction/Assembling 10
Building Re-Structure, Land acre/Excavation/Landscaping/Access roads/Utilities 05 ?
Depreciable/Capitalised Historical Cost ?
Add: Increase in Net Working Capital (no spontaneous finance e.g payables) 04
Opportunity Cost/Implicit Cost 05
Short Term Training (below 1 year) 06
Sub-Total ?
Less: Decrease in Net Working Capital (1)
New Investment Allowances/Tax Incentives relief on capital cost (9)
Initial Outlay=Net Ca$h Outflow=Io ?

Page 2 of 2
Capital Budget-Forecast of intermediate (Year 1-4) and terminal cash flows Year 5. All in ($ 103)
Account\Year 1 2 3 4 5
Incremental/Marginal Sales Revenue=(PXQ) 50,000 100,000 195,000 200,000 90,000
+ Cash/Cost Savings 10,000 10,000 10,000 10,000 10,000
- Increm Operating Cost=(CXQ)=(FC/VC/OHs Exp) (20,000) (40,000) (78,000) (80,000) (36,000)
Earning Before Depreciation and Tax ? ? ? ? ?
- Straight Line Depreciation ? ? ? ? ?
Earning Before Tax ? ? ? ? ?
- Tax (30%) ? ? ? ? ?
Earning After Tax ? ? ? ? ?
+ Depreciation ? ? ? ? ?
Net Cash Flow1 ? ? ? ? ?
+ Net Salvage Value=SV(1-t) - - - - ?
+ Cannibalised CFs/+ve Externality Investt - - - - -
+ *Dispose Marginal Net Working Capital-Year 0 - - - - ?
Net Cash Flow2 ? ? ? ? ?
Required:
(i) Complete the above capital budget and advise management IRR and ARR. (2 mark)
(ii) State any four irrelevant/sunk costs ignored during capital budgeting. using (2 marks)
(iii) Explain five risk control techniques in investment project risk management. (2 marks)
(iv) Compute expected return and standardised risk of project net cash flow.
(Use probabilites of: 0.5, 1.0, 0.7, 0.3 & 0.6 from year 1 to 5 respectively) (2 marks)
(v) How does depreciation and inflated costs affect NPV in sensitivity analysis. (2 marks)
QUESTION TWO
(a) With recent examples, distinguish between primary and secondary securities market. (1 mark)
(b) “Despite the large investment and the roles of the stock exchange and the various government incentives,
only a few companies are listed at the stock exchange of the three East African countries.”
This was the opening remark by the guest speaker in a seminar theme-“Developing our capital market.”
Required:
(i) The advantages of being listed at the Uganda stock exchange as a financial market. (3 marks)
(ii) State six financial sources/product facilities traded in the money market/capital markets to enable
medium term and long term investment projects in East African economies. (3 marks)
(iii) Highlight six factor requirements that hinder corporate listing at the stock exchange. (3 marks)

SECTION B
QUESTION THREE
(a) Explain the purpose of the following to a firm`s financial evaluation and industrial economic analysis:
(i) Operating efficiency ratios. (2 marks)
(ii) Common size ratios. (2 marks)
(iii) Market investment ratios. (2 marks)
(iv) James Torbin Q and Edward Altman Z score models for financial soundness. (1 mark)
(b) State any six investment ratios and six asset efficiency ratios as used in financial analysis. (3 marks)
QUESTION FOUR
Write short notes on the following:
 (i) Systematic and unsystematic risk. (1 mark)
(ii) Conservative, moderate and restrictive investment policy of working capital. (3 marks)
(iii) Assumptions and limitations of inventory models: EOQ, JIT and ABC. (3 marks)
(iv) Relevancy and limitations of accounting ratios application in business firms. (3 marks)
End of Question Paper
………………………………………………………………………………………………………………
Semester/Module CW Guide

SECTION A

QUESTION ONE

(i) Completed Capital Budget.

Initial Outlay (Io) for the New Investment decision (Year 0) ($ 106)
Invoice Price Value from Supplier Quotation 30
Add: Capitalised Incidental Costs
Carriage, Insurance, Freight/Forwarding 10
Customs Clearing, Transport, Warehouse Storage, Installation/Construction/Assembling 10
Building Re-Structure, Land acre/Excavation/Landscaping/Access roads/Utilities 05 25
Depreciable/Capitalised Historical Cost 55
Add: Increase in Net Working Capital (no spontaneous finance e.g payables) 04
Opportunity Cost/Implicit Cost 05
Short Term Training (below 1 year) 06
Sub-Total 70
Less: Decrease in Net Working Capital (1)
New Investment Allowances/Tax Incentives relief on capital cost (9)
Initial Outlay=Net Ca$h Outflow=Io 60
Forecast of intermediate (Year 1-4) &terminal cash flows Year 5. ($ 103)
Account\Year 1 2 3 4 5
Incremental/Marginal Sales Revenue=(PXQ) 50,000 100,000 195,000 200,000 90,000
+ Cash/Cost Savings 10,000 10,000 10,000 10,000 10,000
- IncremOperating Cost=(CXQ)=(FC/VC/Ohs Exp) (20,000) (40,000) (78,000) (80,000) (36,000)
Earning Before Depreciation and Tax 40,000 70,000 127,000 130,000 64,000
- Straight Line Depreciation=(Cap HC-SV)/n - 9,000 - 9,000 - 9,000 - 9,000 - 9,000
Earning Before Tax 31,000 61,000 118,000 121,000 55,000
- Tax (30%) - 9,300 - 18,300 - 35,400 - 36,300 - 16,500
Earning After Tax 21,700 42,700 82,600 84,700 38,500
+ Depreciation 9,000 9,000 9,000 9,000 9,000
Net Cash Flow1 30,700 51,700 91,600 93,700 47,500
+ Net Salvage Value=SV(1-t) - - - - 7,000
+ *Dispose Marginal Net Working Capital-Year 0 - - - - 4,000
Net Cash Flow2 30,700 51,700 91,600 93,700 58,500

N NCF DF/PVF (22%) PV (22%) PVF (10%) PV (10%)

0 -60,000 1 - 60,000.0 1 - 60,000.0
1 30,700 0.82 25,174.0 0.909 27,906.3
2 52,700 0.672 35,414.4 0.826 43,530.2
3 91,600 0.551 50,471.6 0.751 68,791.6
4 93,700 0.451 42,258.7 0.683 63,997.1
5 58,500 0.37 21,645.0 0.621 36,328.5
NPV (22%) 114,963.7 NPV (10%) 180,553.7

Page 1 of 3
IRR = IRRvar NCFs=A+ a (B-A)= Ba  bA 100=43.033%, Accept. (1 mark)
a b a b
ARR= Average EAT X100
=166.3%, Accept (1 mark)
Average Investment
(ii) 4 irrelevant/sunk costs before
investment decision:
Research and development, Consultancy and Feasibility/Business
Incubation plan
(iii) Risk control techniques in
investment project risk management:
Certainity Equivalent Factor, Risk Adjustment
Discount Rate, Sensitivity analysis, Scenario
analysis, Monte carlo analysis, Prob decision
tree, adjusted discounted PBP/finite horizon &
portfolio diversification.
(iv) Compute expected return and
standardised risk of project net cash
flow in millions.
(Use probabilites of: 0.5, 1.0, 0.7, 0.3 & 0.6 from year 1
to 5 respectively)
P NCF (x) Px
0.5 30.7 15.35
1.0 52.7 52.7
0.7 91.6 64.12
0.3 93.7 28.11
0.6 58.5 35.1
Mean Er 195.3

(v) Depreciation allowance increases NPV

and inflated costs reduces NPV in
sensitivity analysis.
(2 marks)

QUESTION TWO
(a) A primary market (new issue market) is a market
forum where new securities are traded e.g
rights issue, investment bank(er) or ipo and
secondary market is a market forum where
existing (used) securities are traded among
investors e.g after ipo at formal centralised
location (stock exchange) or informal market
(otc).
(1 mark)

(b) (i) Any six advantages of listing on the

Uganda stock exchange:
Page 2 of 3
Liquid financial system for greater wealth/fund raising
transactions, market of securities for public-private
partnership/participation/profile, broad ownership of
security e.g bonds & equity, easy diversification, investor
confidence, functional intermediary/savings from surplus
to deficit sector/real investment (financial source), M&E,
investment advice/corporate governance, equilibrium price
discovery/price mechanism ( σisk mngt), low transactn
cost of advert/information asymmetry (market efficiency)
& international investment platform for exposure/cross
border transfers.
(ii) Six medium/long term financial sources
are: Preferencial,ordinary shares, bonds,
debentures, term loans and convertibles.
(3 marks)
(iii) Six factor requirements that hinder corporate
listing/stock exchange:
 Undervalued shares, stringent listing
requirement, compliance measures:
continued scrutiny and surveillance
of the quoted companies, lack of
privacy: disclosed information/public
scrutiny, limited and public company
requirement and cost of risking
Or
 Corporate listing requirements:
Minimum market cap, public
floatation maximum 49% stake/Govt
minimum 51% stake, limited liability
nature of companies, operating
experience, duly audited financial
reports, profitability records and
management character. (3 marks)

Page 3 of 3
SECTION B

QUESTION THREE
(a) Purpose of the following to a firm`s financial evaluation and industrial economic analysis:
(i) Operating efficiency ratios for usage of asset to generate income. (2 marks)
(ii) Common size ratios for financial growth in performance. (2 marks)
(iii) Market investment ratios-performance in external stock market/shareholders. (2 marks)
(iv) James Torbin Q for price decision to buy or sell/market valuation. (0.5 mark)
Edward Altman Z score models for financial soundness. (0.5 mark)
(b) Any six investment ratios are: EPS, DPS, PER, Torbin Q, ROCE, ROFA and ROI/ROA. (1.5 marks)
Any six asset efficiency ratios are: DTO, STO, PTO, ATO, DTOP, STOP, PTOP. (1.5 marks)

QUESTION FOUR
(i) Systematic risk-Variation in Co`s investment return due to external market changes (PESTEL) and
Unsystematic risk are due to internal Co`s factors. (1 mark)
(ii) Conservative-high CA investment load for liquidity, restrictive-low CA investment load for
liquidity and moderate working capital investment policy is a trade off between the two.(3 marks)
(iii) Assumptions and limitations of inventory models:
EOQ-Constant total annual DD over planned period, instant replacement of inventory i.e. no lead-time, constant
ordering cost per order, constant carrying costs per unit, constant unit price (no bulk discounts) and known
delivery time. Limitations are unrealities of assumptions.
(1 mark)
JIT-known production schedules for timely inventory demand, efficient organization structures for target
schedule/prompt purchase, reliable supplier chain mngt/guaranteed relatnships, geographic concentration for
shorter vendor transit to plant, controlled transpt system i.e. owned/contracted trucks and standardised
productionn system/fast production on order/low work-in-progress/lean management. Limitations are unrealities
of assumptions. (1 mark)

ABC-Complimentary goods, steady supply, Pareto rule. Limitations are unrealities of assumptions.
(1 mark)
(iv) Relevancy of accounting ratios:
Evaluate relationships among annual closing net Balance of items in a multiple fin statements, identify trends
over time for a firm and compare firms at a time by liquidity (solvency), efficiency, profitability, gearing
(leverage) and investment (market) decision making by internal/external stakeholders. (1.5 marks)
Limitations/Weaknesses/Disadvatanges:
Inaccurate estimates, basis of past figures/data, differential accounting policies, too quantitative, different fiscal
years/diversified Cos`, window dressing, cross sectional, no specific standard/definition, exposure to personal
bias, historical cost principle, limited basis of comparison. (1.5 marks)
MAKERERE UNIVERSITY BUSINESS SCHOOL
COURSE WORK EXAMINATION FOR THE

OF MAKERERE UNIVERSITY
ACADEMIC YEAR 20 /

COURSE NAME: FINANCIAL MANAGEMENT

COURSE CODE: YEAR OF STUDY:
SEMESTER/MODULE: DATE: / / TIME: - pm
INSTRUCTIONS:
v. All question(s) in both sections are compulsory.
vi. Present only tidy answers, relevant examples and models.
vii. Use own financial/mathematical tables and scientific calculator.
viii. Do not write on the question paper.

SECTION A
QUESTION ONE
CAC Ltd is planning to introduce a new exclusive product-Ray Energy Drink to be sold at no stiff market
competition due to its distinguishing features. Currently, annual operating capacity is 6 million bottles. Sales
could reach 6.75 million bottles next year if the production capacity of the company is enhanced. An
investigation by marketing/sales department has forecasted sales figures of 6.75 million bottles, 7.65 million
bottles and 8.85 million bottles over the next three years, if CAC Ltd spent an extra ¥487,500, per annum on
advertising in each of these years.
Expected sales will continue at the rate of 8.85 million bottles in year four onwards
(indefinitely/constantly/continuosly). Management has agreed that the company's capacity should be enhanced
and this will require the acquisition of new machinery that would cost ¥1,237,500, ¥112,500 of capitalised
installation costs and ¥60,000 of expensed installation costs. The machinery would be depreciated using straight
line to zero over four years. The after tax salvage value of the equipment at the end of four years is expected to be
¥67,500. The selling price is ¥2.1 per bottle and there are variable costs of ¥1.38 per bottle excluding advertising
costs. Further investment in working capital would be needed at the start of the expansion project. This would
amount to ¥135,000 and working capital would be maintained at ¥135,000 through until project end. Annual
machinery running cost is ¥49,500 and machinery removal costs at the end of the project of ¥ 45,000. The tax
rate is 25% and the RRR is 14%.

Required
(a) Determine the viability of the project using Net Present Value Method. (06 Marks)
Page 1 of 3
(b) Explain how to generate relevant cash flows for an NPV analysis. (04 Marks)

Page 2 of 3
QUESTION TWO
MBA Ltd intends to start up a business using £22,500. MBA Ltd asks you for advice upon provision of the
following information:
(a) Arrangements have been made to purchase non-current assets costing £12,000. These will be paid
at the end of September and will have a residual value at the end of the 5th year.

(b) Inventories costing £7,000 will be acquired on 28th September and subsequently monthly
purchases will be at a level sufficient to replace the forecast sales for the month.

(c) Forecasted monthly sales are £4,500 for October, £9,000 for November and December and £15,000
from January onwards.

(d) Selling price is fixed at the cost of inventory plus 50%.

(e) Two months credit will be received but only one month credit will be received from the suppliers of
inventory.

(f) Running expenses are expected to be £2,400 per month.

(g) MBA Ltd is expected to make monthly withdrawals of £1,500.
Required
Prepare a month by month cash budget for the six months ending on 31 March and append such brief
comments as you consider helpful to management. (10 Marks)

QUESTION THREE
The following capital structure belongs to Kamu Kamu (U)Ltd:
Ordinary shares (60,000 in number) 600m
Retained earnings 260m
13% irredeemable preference shares @ shs 100,000 400m
16% coupon rate debentures (irredeemable)@ shs 30,000 250m
20% Bank loan@ shs 25,000 150m

The ordinary shares are traded at shs 12,000 each and its dividend expected to grow at rate of 7% perpetually.
Dividends are likely to be paid at shs 15% but underwriting costs per share are at shs 2,000. The current
trading price per debenture is shs 30,000. The preference shares are currently trading at shs 110,000 per
share, expected issue costs shs 12,000 and corporation tax of 25% is chargeable.

Required
(a) Compute the Weighted Average Cost of Capital. (05 Marks)
(b) Describe the significance of cost of capital. (05 Marks)
QUESTION FOUR
The following are the financial statements of Ratios Ltd. for the year ended 31/3/15:
Balance Sheet as at 31/3/15.
Shs. Shs.
Cash 480,000 Trade creditors 860,000
Debtors 640,000 Notes Payable (9%) 840,000
Stock 2,080,000 Long term debt (10%) 1,600,000
Equipment 1,600,000 Ordinary Share @Shs 10 par 1,500,000
4,800,000 4,800,000

Income Statement for the year ended 31/3/15

Shs. Shs.
Sales(on credit) 6,000,000
Less: Cost of sales 3,600,000
Gross profit 2,400,000
Deduct:
Selling expenses 600,000
Administrative and general expenses 1,120,000
Interest 235,600 1,955,600
Profit before taxation 444,400
Taxation 177,760
Net profit (Earning After Tax) 266,640

Note:
 Retained Earnings are 40%, Market Share Price is Shs 2.
 Ratios Ltd to compare with Industry Peer or Ratios as at 31/3/16 below:
Current ratio 2.5 times
Acid test ratio 1.1 times
Stock turnover ratio 2.4 times
Total assets turnover ratio 1.4 times
Times interest earned ratio 3.5 times
Net profit margin 4.0 percent
Return on investment 5.6 percent
Total asset to shareholders equity 3.0 times
Return on shareholders equity 16.8 percent

Required
(a) Calculate all ratios for Ratios Ltd and report to relevant stakeholders. (05 marks)
(b) Comment on the following about Ratios Ltd in relation to 31/3/16 analysis:
(i) Liquidity position (01 mark)
(ii) Profitability position (01 mark)
(iii) Activity/Efficiency position (01 mark)
(iv) Leverage position/financial risk performance (01 mark)
 (v) Market investment performance (01 mark)

End of Question Paper

………………………………………………………………………………………………………………
Semester/Module CW Guide

SECTION A

QUESTION ONE (Compulsory)

a) Determine the viability of the project using Net Present Value Method
CAC Ltd Initial Outlay (000)
Invoice value of the machine 1,237.5
Add Incidental Costs
Installation (capitalised) 112.5
Historical Cost of the Machine for DEPRECIATION Calc 1,350
Add expense installation 60
Add working capital 135
Total Initial Outlay 1,545
01 Mark
CAC Ltd intermediate cash flows (000)
Item Year One Year Two Year Three Year Four
Revenues 1,575 3,465 5,985 5,985
LessVar. Cost 1,035 2,277 3,933 3,933
Less advert 487.5 487.5 487.5 0
Removal cost 45
Running cost 49.5 49.5 49.5 49.5
EBT&D 3 651 1,515 1,957.5
Less depre 315 315 315 315
EBT (312) 336 1,200 1,642.5
Less tax 25% 0 84 300 410.63
EAT (312) 252 900 1,231.87
Add dep 315 315 315 315
ANCF 3 567 1,215 1,546.87
Add WCR 135
Add NSV 67.5
ATCF 3 567 1,215 1,749.37
Any 4X1 = 04 Marks
Using NPV Method
N NCF PVIF/DF12 PV
FVn 1/(1+r)n
0 (1,545) 1 (1,545)
1 3 0.877 2.63
2 567 0.769 436.02
3 1,215 0.675 820.13
4 1,749.37 0.592 1,035.63
NPV 749.41
The project is viable since the firm’s value and shareholder value will increase
01 Mark
b) Relevant cash flows necessary for an NPV analysis: Initial outlay, intermediate and
terminal cash flow generation
 Sunk costs
 Side effects
 Opportunity costs
 Salvage value
 Depreciation

Page 1 of 3
  Changes in working capital
Any 4X1=04 Marks

Page 2 of 3
QUESTION TWO
Item October November December January February March
Receipts 4,500 9,000 9,000 15,000
Total receipts 0 0 4,500 9,000 9,000 15,000
Payments(supplies) 7,000 3,000 6,000 6,000 10,000 10,000
Running expenses 2,400 2,400 2,400 2,400 2,400 2,400
Withdrawals 1,500 1,500 1,500 1,500 1,500 1,500
Total payments 10,900 6,900 9,900 9,900 13,900 13,900
Net cash balance (10,900) (6,900) (5,400) (900) (4,900) 1,100
Opening balance 10,500 (400) (7,300) (12,700) (13,600) (18,500)
Closing balance (400) (7,300) (12,700) (13,600) (18,500) (17,400)
Any 5X1=05 Marks
Comments to management
 Delay payments to suppliers
 Reduce on the frequency of withdrawals
 Delay capital expenditure
 The company can also negotiate overdraft facility with the bank Any 5X1=05 Marks
 Reduce purchases or volume of inventory

QUESTION THREE
i) Compute WACC
Ordinary shares
Ke=Div +g=1,500 +0.07=0.15+0.07=.22 Dividend=0.15X10,000=1,500
Po–f 12,000-2,000
Retained earnings
Kre=Div+g=1,500 +0.07=0.15+0.07=.195
Po 12,000
Preference shares
Kp=Div =13,000 =.133
Po–f 110,000-12,000
Debentures
Kd=Int(1-t)=4,800(1-0.25)=.12
Po 30,000
Bank loan
Kd=Int (1-t)=0.20X0.75=.15

WACC
Source Specific Cost Weight Weighted Cost
Ordinary shares 22% 0.361 7.942 01 Mark
Retained earnings 19.5% 0.157 3.062 01 Mark
Pref shares 13.3% 0.241 3.205 01 Mark
Debentures 12% 0.151 1.812 01 Mark
Bank loan 15% 0.090 1.350 01 Mark
WACC 16.27%
ii) Significance of cost of capital:
Appraisal of projects, Management performance, Designing capital structure
Any 2X2.5=05 Marks
QUESTION FOUR
(a) All amounts (Shs 103)
Ratios Ltd Ratios Compared to Industry Peer
or as at 31/3/16
Current ratio = CA CL 480+640+2080 = 1.88 2.5 times
860+840
Acid test= CA – Stock CL 3200–2080 = 0.65 1.1 times
1700
Stock turnover = C.O.S _ 3600 = 1.73 2.4 times
Av Closing stock 2080
Total assets turnover = Sales TA 6000 = 1.25 1.4 times
4800
Times interest earning ratio = EBIT 444.4+23516 = 2.89 3.5 times
Int charges 235.6
Net profit margin = NPx100 266.64 x 100 = 4.44% 4.0%
Sales 6,000
Return on investment = NPx100 TA 266.64 x 100 = 5.60% 5.6%
4800
Total assets to equity = TA 4800 = 3.2 3.0 times
Equity 1500
Return on equity = NPx100 266.64 x 100 = 17.8% 16.8%
Equity 1500
Any 5X1=05 Marks
(b) (i) Liquidity position
- This is shown by current and acid test ratios
- Both ratios are lower than industrial peer
- This could indicate a poor working capital policy with high liquidity
risk
(ii) Financial risk
- This is shown by gearing ratios in particular times interest earned ratio
- The ratio is lower than industrial peer indicating high interest charges
(high gearing) or low gearing profits.
The gearing (debt – equity ratio) is 1600 =1.07 times which is
1500
relatively high.
- The firm is financing most of its assets using borrowed debt capital.
(iii) Overall performance
- The performance is shown by profitability ratios which include net
profit margin, return on equity and return on investment. The ratios
are higher than industrial peer.
- The firm is therefore able to generate high returns on its capital and
sales. The firm has high profitability yet its financial risk and gearing
are high. It is therefore a high risk, high return investment.

Ratios (1 mark @) Comment

Current ratio=CA/CL=1.88 Low/bad
Acid test ratio=CA-Stock/CL=0.65 Low/bad
Stock turnover ratio=COS/Average inventory=1.7 Low/bad
Total assets turnover ratio=Sale/Total assets=1.2 Fair/Good
 Times interest earned ratio=EBIT/Interest=2.89 Net High/Good
profit margin=Net profit/Sales=0.04=4% Return on Good
investment=EAT/Total assets=0.06=6% Total asset High/Good
to shareholders equity=TA/Equity=3.2 High/Good
Return on shareholders equity=EAT/Equity=0.18=18% High/Good
Any 5X1=05 Marks
MAKERERE UNIVERSITY BUSINESS SCHOOL
COURSE WORK EXAMINATION FOR THE

OF MAKERERE UNIVERSITY ACADEMIC YEAR 20

/

COURSE NAME:FINANCIAL MANAGEMENT

COURSE CODE: YEAR OF STUDY:
SEMESTER/MODULE: DATE: / / TIME: - pm
INSTRUCTIONS:
i. All question(s)in both sections are compulsory.
ii. Present only tidy answers, relevant examples and models.
iii. Use own financial/mathematical tables and scientific calculator.
iv. Do not write on the question paper.

SECTION A
QUESTIONONE
PEMF Capital BudgetingLtdplans to undertake afinancial investment project in afixed asset. Below
is related information about the project. All cashflows in million shillings.
Cost of equipment Sh.760
Economic life 5 years Sh.145
Installation costs Straight-line basis
Depreciation Sh.185 Sh.520
Working capital requirement(Year 1 but recoverable in year 5) Sh.115
Projected revenue (Year 1: Price=Sh.5.2 and Quantity=100) 5%
Projected operating costs (Year 1) 7%
Annual revenue growth rate Annual 40%
operating costs growth rate Marginal 22% Sh.120
tax rate
Capital Asset Pricing Model (r) = Risk free rate (10%) + Risk premium(12%)
Equipment disposal value after tax
Management standard minimum pay back period is 3 years.
The minimum required rate of return (CAPM discount rate) is 22%.
Required:
(a) Calculate the project’s net initial outlay. (02 marks)
(b) Using discounting and non-discounting methods, show whether or not the project should
be undertaken by the company. (08 marks)
Page 1 of 4
 QUESTIONTWO
(a) WACC Ltd is currently using the following sources of funds (Capital Business Finance):
 Redeemable bond/redeemable preference share at initial par/face/accounting value of $
10,000,000. Coupon int/dividendrate at par=18%for 10 years maturity. It now trades
at 15,000,000onmkt.

 Irredeemable (Perpetual) Bonds/Debentures worth 400,000,000 at 25%interest rate on

nominal/face value of 200,000 each and the going market value is 280,000 each.

 Irredeemable preferenceshares are worth 300,000,000 with denominations of 20,000 per

share andpreset dividend per shareof 2,500 (i.e 2,500/20,000=12.5%)

 Ordinary Shares worth 500,000,000 are issued at face value of 80,000 per share and
initial dividend was estimated at 16%. The shares are trading for 110,000 in the
marketand anticipated growth rate is 12% p.a. Floatation costs of shares are 2,000 per
share and the business tax bracket is 30%. Reserves are 300,000,000. All currencies are
in $.

Required: Determine the Weighted Average Cost of Capital. (05 marks)

(b) Additional 400m is needful in total to finance a recent viable project. It is a desired assumption
not to change its existing percent capital structure for additional 400m.

 Redeemable bond/redeemable preference share at initial par/face/accounting value of $

10,000,000. Coupon int/dividend rate at par=18%for 10 years maturity. It now trades
at 15,000,000 onmkt.

 50m will come from retained earnings.

 New debentures/bonds of face value 150,000 will be issued at coupon interest rate of
10%. It is expected they will sell for 170,000.

 Because additional ordinary shares will be issued, the ordinary share price will reduce to
90,000. New ordinary shares will have face value of 100,000.

 Particulars of floatation and dividends remain the same.

 A new irredeemable preference share will be issued at face value of 70,000. Dividend
rates of these shares will be 15% and the business remains in a 30% tax bracket.

Required:
Determine the Marginal Cost of Capital for the new fund raised. (05 marks)
SECTION B
QUESTIONTHREE
 Cash Budget Co. Ltd is planning for its next financial year (January-December 2010) and
statistics have been collected by the planning unit at 31st December 2009 with closing
cash and bank balance of 20 million.

 The current turnover of $ 800 million (PriceXQuantity) is expected to rise at 10% per
month for the first six months and then stabilise thereafter.

 According to the company’s credit policy, 60% of the turnover is ca$h, 50% of
receivables (credit customers/debtors) are expected to pay after one month, while the
other 40% will pay after 2 months. The remaining 10% is for default/bad debt,
depreciation/amortisation, discount received/allowed.

 Bonds/Grants of 1 million and Equity shares worth 1 million will be issued in September.
 Both interest earned and dividend earned will each be 1 million in December 2010.
 Monthly fixed costs will be incurred at $ 100 million and are paid one month in arrears
while variable costs and overheads are both anticipated at 20% of monthly sales and paid
two months in arrears. An outstanding account payable balance of $ 5 million (December
2009) will be 50% cleared in January 2010, 40% in February and 10% in March.

 The company is negotiating a loan of $ 1.8 billion in January at 10% annual interest
payable every December per annum. Front Page Bank expects to disburse the full loan by
2nd of January to acquire in 2 equal installments in August and November.

 Meanwhile the old equipment will be disposed for 4 million in December 2010 as
subsidies will be 1 million in the same month. Treasury billsand shares worth 3 million
will be bought in August 2010.

 An overhaul of the excavation equipment is planned for April 2010 at expected to cost of
$ 4 billion.
 In January, a Barclays bank loan of $ 430 million at 10% monthly interest will be
amortised in 12 monthly equal installments starting February.

Required:-
(a) Prepare an annual and quarterly ca$h budget for October-December 2010. (06 marks)
(b) Comment on challenges of the monthly financial plan. (02 marks)
(c) Advise any management actions/improvements for both surplus or deficit ca$h balance.
(02 marks)
QUESTIONFOUR
The following are the financial statements of Ratios Ltd. for the year ended 31 March 2015:
Balance Sheet as at 31 March 2015
Shs. Shs.
Cash 480,000 Trade creditors 860,000
Debtors 640,000 Notes Payable (9%) 840,000
Stock 2,080,000 Long term debt (10%) 1,600,000
Equipment 1,600,000 Ordinary Share @Shs 10 par 1,500,000
4,800,000 4,800,000

Income Statement for the year ended 31 March 1995

Shs. Shs.
Sales(on credit) 6,000,000
Less: Cost of sales 3,600,000
Gross profit 2,400,000
Deduct:
Selling expenses 600,000
Administrative and general expenses 1,120,000
Interest 235,600 1,955,600
Profit before taxation 444,400
Taxation 177,760
Net profit (Earning After Tax) 266,640

Note: Retained Earnings are 40%, Market Share Price is Shs 2.

Industry standard averages
Current ratio 2.6 times
Acid test ratio 1.1 times
Stock turnover ratio 2.4 times
Total assets turnover ratio 1.4 times
Times interest earned ratio 3.5 times
Net profit margin 4.0 percent
Return on investment 5.6 percent
Total asset to shareholders equity 3.0 times
Return on shareholders equity 16.8 percent

Required
(a) Calculate all ratios for Ratios Ltd and report to relevant stakeholders. (05 marks)
(b) Comment on the following about Ratios Ltd in relation to industry standard averages:
(i) Liquidity position (01 mark)
(ii) Profitability position (01 mark)
(iii) Activity/Efficiency position (01 mark)
(iv) Leverage position/financial risk performance (01 mark)
(v) Market investment performance (01 mark)
End of Question Paper
………………………………………………………………………………………………………
Semester/Module CW Guide

SECTION A
QUESTION ONE
(a) Projects Initial outlay = Purchase Cost + Install Cost + Working Capital
= 760+ 145 (initial cost) + 185
= 905+ 185 = 1,090 (2 marks)
(b)

Year 0 1 2 3 4 5
Annual revenue (5%) 520 546 573 602 632
Operating costs (7%) (115.00) (123) (132) (141) (151)
905200
Depreciation=
5 (141) (141) (141) (141) (141)
Earning Before Tax 264 282 300 320 340
Less taxation (40%) (106) (113) (120) (128) (136)
Earning After Tax 158 169 180 192 204
Add depreciation 141 141 141 141 141
Net Cash Flow1 299 310 321 333 345
*Net Salvage value 120.0
*Release working Capital 185.0
Net Cash Flow2 299 310 321 333 650
Discount factor @ 22% 1 0.820 0.672 0.551 0.451 0.370 NPV
Present Values @ 22% (1,090) 245 208 177 150 241 ≈ (69)
Discount factor @ 10% 1 0.909 0.826 0.751 0.683 0.621
Present Values @ 10% (1,090) 272 256 241 227 404 ≈ 310

Discounting Methods/Decision:
 NPV=(Sh.69)<1 Ignore/Don`t Accept / Don`t Implement the project.
 PI=0.94<1  Ignore the project.

(B-A)= Ba b A 100=
(22* 310)(69*10)
 IRRvar NCFs=A+ a =19.8%≈20%
a b a b 31367
IRR<WACC Discount Rate (22%)  Reject the project.

Non-Discounting Methods/Decision:
 PBP= 3160 years < 5 year management standard  Accept the project.
333
_____
 ARR= EAT X100 181 X100 ≈28%>@22%  Accept the project.
_____ 645
Investment
. (2 marks for any 4 methods with decision)

Page 1 of 5
QUESTION TWO
Overall WACC=Min Rate of Return (Cost of K) from combined long term capital in a Co.

WACC= D *[K (1t)] E *K  D .[Int(1t)] E .DPS

A D A D A A

Specific Cost of Capital is a key input into WACC Calc:

 K Red P/S & Bond=IRR? ~ Redeemable Mkt Px Value 0=A(PVAIFn,irr)+MV(PVFn,irr)
Annuity Dividend/interest of red Pref Shares & Bonds=C=Dvd interest % X Maturity Value
=18%X10,000=1,800

Discount Matrix for IRR: All in (103$)

n NCF DF/PVF (B=10%) PV(B=10%) DF/PVF (A= 5%) PV(A=5%)
0 (15,000) 1.000 (15,000) 1.000 (15,000)
1-10 1,800 6.145 11,061 7.722 13,900
10 10,000 0.386 3,860 0.614 6,140
NPV: b=(79) a=5,040

 
 K Red Pref S/Bond=IRR=A+  a  (B-A)= 5+  5,040 
 5= 9.92%≈0.099
a-b  5,04079 
 
  
 K Irred Bond Debt (*after tax%)= Int%XPar Value (1t)  0.25X200k (0.7) = 0.125
Mkt Px 280k
 K Irred Pref/S = DPS  2,500 = 0.125
Mkt Px 20k
 K Irred O/S (*after Flotatn Cost/Px)= DPS g  0.16X80K .12 = 0.240
Mkt Px(1f / Px) 110K(1-2k/110k)
 K REserves (0 Flotatn Cost)= DPS g  0.16X80k .12 = 0.236
Mkt Px 110k

All in (106$)
4 Steps of WACC:
Source (i) (ii) (iii) Specific (ii) X (iii)
Amount Prob Cost After t & WACC
(K Structure) f
Red Bond 15 0.01 0.099 0.00099
Irred Bonds 400 0.26 0.125 0.03250
Irred Pref Shares 300 0.20 0.125 0.02500
Irred Ord Shares 500 0.33 0.240 0.07920
Reserves 300 0.20 0.236 0.04720
Mkt Valuatn (Io) 1,515 1.00 Overall WACC ≈0.185=18.5%
Or 2 Steps of WACC= (Amt* Sp Cost of K) X10018.5%
 Amt
The above K structure mix is only optimal at 18.5% to maximise firm value/owner`s wealth
(Asset) (1 mark per source WACC)
 (b)
MACC=Cost of capital for additional capital in a firm. **Same calc as WACC**

 K red P/S & Bond=IRR? ~ Redeemable Mkt Px Value 0=A(PVAIFn,irr)+MV(PVFn,irr)

Annuity Dividend/interest of red Pref Shares & Bonds=C=Dvd interest % X Maturity Value
=18%X10,000=1,800
Discount Matrix for IRR: All in (103$)
n NCF DF/PVF (B=10%) PV(B=10%) DF/PVF (A= 5%) PV(A=5%)
0 (15,000) 1.000 (15,000) 1.000 (15,000)
1-10 1,800 6.145 11,061 7.722 13,900
10 10,000 0.386 3,860 0.614 6,140
NPV: b=(79) a=5,040
  K red Pref S/Bond=IRR=A+  a  (B-A)= 5+  5,040  5= 9.92%≈0.099
a-b  5,04079 
 
  

 K REserves (0 Flotatn Cost)= DPS g  0.16X100k .12 = 0.298

Mkt Px 90k
 K Irred O/S (*after Flotatn Cost/Px)= DPS g  0.16X100K .12 = 0.3
Mkt Px(1f / Px) 90K(1-2k/90k)
 K Irred Pref/S = DPS  15 = 0.15
Mkt Px 100
 K Irred Bond Debt (*after tax%)= Int%XPar Value (1t)  0.1X150k (0.7) = 0.0617
Mkt Px 170k

4 Steps of MACC:
Source (i) (ii) (iii) Specific (ii) X (iii)
Amount Prob Cost After t & MACC
(K Structure) f
Red Bond 15 0.0375 0.099 0.00371
Reserves 50 0.125 0.298 0.03725
Irred Bonds 104 0.26 0.0617 0.01604
Irred Pref Shares 80 0.20 0.15 0.03000
Irred Ord Shares 151 0.3775 0.3 0.11325
Mkt Valuatn (Io) 400 1.00 Overall WACC 20%
The K structure mix is only optimal at 20% to maximise firm value/owner`s wealth.
(1 mark per source MACC)
SECTION B
QUESTION THREE
(d) Annual and quarterly ca$h budget for October-December 2010.

Working Assumptions:
 All in Approx 106$ except *

 Dec `09 Closing Bal=Jan `10 Opening Bal=20

 Current Dec 09 T/O=800 for 10% Increase for first 6 mths (Jan-June and then stabilise).

 Cash Sale T/O=60% and Cr Sale (Debtor Bal)=40%

Sales Projection 880 968 1,065 1,171 1,288 1,417 1,417 1,417 1,417 1,417 1,417 1,417
Annual Cash Budget-2010
Oct-Dec 2010
Cash Inflow/Receipts Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Cash Sales=.6S 528 581 639 703 773 850 850 850 850 850 850 850
Collectn1=.5X.4S - 176 194 213 234 258 283 283 283 283 283 283
Collectn2=.4X.4S - - 141 155 170 187 206 227 227 227 227 227
Bond/Grant - - - - - - - - 1 - - -
Equity Issued & Paid - - - - - - - - 1 - - -
Interest earning - - - - - - - - - - - 1
Dividend earning - - - - - - - - - - - 1
LT Bank Loan 1,800 - - - - - - - - - - -
Equipment disposal - - - - - - - - - - - 4
Subsidies - - - - - - - - - - - 1
Amortised Loan 430 - - - - - - - - - - -
∑Cash Inflows A 2,758 757 973 1,071 1,178 1,295 1,340 1,360 1,362 1,360 1360 1367
Cash Outflow/Pyts
FC 1 mth arrears - (100) (100) (100) (100) (100) (100) (100) (100) (100) (100) (100)
VC/O/Hs 2mths arrears- - (176) (194) (213) (234) (258) (283) (283) (283) (283) (283)
*Payable reduction (2.5) (2.0) (0.5) - - - - - - - -
Loan Interest - - - - - - - - - - - (180)
Capital Expenditure - - - - - - - (900) - - (900) -
TBs & Shares - - - - - - - (3) - - - -
Equipment overhaul - - - (4,000) - - - - - - - -
Amortised Loan Pyts - (63) (63) (63) (63) (63) (63) (63) (63) (63) (63) (63)
∑Cash Outflows B *(2.5) *(165.0) *(339.5) (4,357) (376) (397) (421) (1,349) (446) (446) (1346) (626)
NCF1 C=A-B 2,756 592 634 (3,286) 802 898 919 11 916 914 14 741
Open Bal b/f D 20 2,776 3,367 4,001 715 1,517 2,415 3,334 3,345 4,261 5,175 5,189
NCF2 E=C+D 2,776 3,367 4,001 715 1,517 2,415 3,334 3,345 4,261 5,175 5,189 5,930
(0.5 mark @ Net Cash Flow)
(e) Comment on challenges of monthly financial plan. Excess cash surpluses (02 marks)
(f) Managerial remedies actions/improvements for:
Idle Ca$h Surplus:
Surplus Investment/ST securities (Cheap, Accessible, P∏ble, Mktble, ST Maturity, Secure return/
default risk), K budgeting, debt servicing, share repurchase, dividend payout, Matching, prepyt to
suppliers and receivables. (0.5 mark for any 2 remedies)

Cash Deficit Problems/Shortages:

Deficit Financing i.e. cheap ST loan e.g. overdraft, sale & lease back, fundraising effort, ca$h
budget cuts, matching concept towards ideal zero bal, speedy debtor collectns, delay outflows/K
expenditure/dvds/payables, extension schemes/amortisatn schedule, dispose unproductive/idle assets
& deposit banking/EFT/Imprest system and se/deffer trade payables/dividends.
(0.5 mark for any 2 remedies)
QUESTION FOUR
(a) All amounts (Shs 103)
Ratios Ltd Ratios Compared to  Industrial Standard Average
Current ratio = Current Asset Current 480 + 640 + 2080 = 1.88 2.5 times
Liabilities 860 + 840

Acid test= Current.Assets – stock 3200 – 2080 = 0.65 1.1 times

Current liabilities 1700

Stock turnover = Cost of sales 3600 = 1.73 2.4 times

Average/closing stock 2080

Total assets turnover = Sales 6000 = 1.25 1.4 times

Total Assets 4800

Times interest earning ratio = EBIT 444.4 + 23516 = 2.89 3.5 times
Interest charges 235.6

Net profit margin = Net profit x 100 266.64 x 100 = 4.44% 4.0%
Sales 6,000

Return on investment = Net profits x 100 266.64 x 100 = 5.60% 5.6%

Total Assets 4800

Total assets to equity = Total Assets 4800 = 3.2 times 3.0 times
Equity 1500

Return on equity = Net profits 266.64 x 100 = 17.8% 16.8%

Equity 1500
(1 mark X any 5 ratios)
(b) (i) Liquidity position
- This is shown by current and acid test ratios
- Both ratios are lower than industrial average
- This could indicate a poor working capital policy with high liquidity risk
(ii) Financial risk
- This is shown by gearing ratios in particular times interest earned ratio
- The ratio is lower than industrial average indicating high interest charges (high
gearing) or low gearing profits.

The gearing (debt – equity ratio) is 1600 =1.07 times which is relatively high.
1500
- The firm is financing most of its assets using borrowed debt capital.
(iii) Overall performance
- The performance is shown by profitability ratios which include net profit margin,
return on equity and return on investment. The ratios are higher than industrial
average.
- The firm is therefore able to generate high returns on its capital and sales. The
firm has high profitability yet its financial risk and gearing are high. It is therefore a
high risk, high return investment.
(1 mark X any 5 Comments)
Ratios (1 mark @) Comment
 Current ratio=CA/CL=1.88 Low/bad
Acid test ratio=CA-Stock/CL=0.65 Low/bad
Stock turnover ratio=COS/Average inventory=1.7 Low/bad
Total assets turnover ratio=Sale/Total assets=1.2 Fair/Good
Times interest earned ratio=EBIT/Interest=2.89 Net High/Good
profit margin=Net profit/Sales=0.04=4% Return on Good
investment=EAT/Total assets=0.06=6% Total asset High/Good
to shareholders equity=TA/Equity=3.2 High/Good
Return on shareholders equity=EAT/Equity=0.18=18% High/Good
GROUP RECITE PRESENTATION
A. KNOWLEDGE CW1
Introductn:
 FM definitn
 Conflicting/overlapping firm objectives Vs Overall goal (Net Wealth=NPV)
 Debate: Why CFs Vs Criticisms of ∏.
 Views of Wealth (Firm Valuatn models)
 Roles of FM & Scope of FM=4 finance descns.
 Duties of fin Manager with Corporate Governance.
 Agency Problem: Causes & +ve/-ve solutns.
 Reasons, Importance of Knowledge & Applications of TVM.
 PV/Discounting, FV/Compounding, Nominal Rate, Real Discount Rate & Effective Rate.
 FV & PV of perpetuity, annuity due & regular annuity.

 PVA & Loan Amortizatn- A=Principal ValueA/PVAFr,n.

Capital Budgeting:
 Importance, Procedure steps, Approaches & Appraisal Techniques/descns.
 Advges & Disadges of each technique.
 Special Consideratns in Capital Budgeting Assumptns:
- Mutual Exclusive Project: WhyNPV-IRR conflict? Why prefer NPV over IRR?
- Capital ratning: Types, Internal & external causes.
- σisk control adjustment techniques: Return Vs σisk, σisk measures.
Working Capital/CA Mngt = Ca$h mngt + Debtors mngt + Stock mngt.
 Accelerate CIs & Decelerate COs. Adges & Disadges of ↕ WC.
 Why Cr Sale/Debtor Invstmnt? Costs/disadvges? Cr Policy. Info sources for Cr risk/Cr analysis.
Factors/Consideratns influencing each finance descn (K Bdgting, Financing, WC & Dvdnd descn).
Sources of Finance: Remember Matching Principle/Budgeting
Financing DebateTopic: Financing/leverage descn ↑ses firm wealth value? Y/N.
Dividend Debate Topic: Dividend descn ↑ses firm wealth value? Y/N. Why /No Dividend payout?
- Theories: Relevancy reasons/Irrelevancy perfect market conditions assumptns &Criticisms.

Financial Distress Types:

 - Causes & Solutns for: Mild ST financial distress &Severe LT business failure.
B. SKILL CW 2

Cost of Capital:
 Specific Cost of K, WACC, WMCC & CAPM, Asset Valuatn.
Capital budgeting:OnlyRelevant/Incremental CF ***Assumptns in CF estimatns.
 Initial yr/Outlay=IV+Inc Cap C=CE;+T+OC+WC-Inc –WC=(Io)
 Intermediate yrs/NCFs=IncreS-Incre C=EBDT-D=EBT-T=EAT+D=NCFs(FV)
 Terminal yr/CF=EAT+D+*NSVn+*Rec ↑se WC=NCF(FV)XDF(1+r)n=PV for NPV, PI & IRR calcs.
Ca$h budgeting: Only Expected Ca$h Entries.*Ignore Crs/non ca$h entries.
 CI-CO=NCF+Open Ca$h Bal=Close Baln=Open Ca$h Baln+1 for next period.
 **Consider debtor collectns/supplier pyts originating from past into budget era.
 Surplus Investing/Deficit financing, Factor Consideratns for ST/Surplus Invstmnt.
Financial Ratios:
 K Market Invstmnt/Investors` ratios.
 LT Gearing/Leverage/Solvency ratios=[NCL/(NCL+E)] OR (NCL/E)Times.
 Efficiency/Utilisatn/Usage/Productivity/Asset Activity ratios (T/O Times&period/days)
 ST Liquidity ratios=(X/CL) Times &∏ability Margin ratios=(X/NS)%.
Purpose/Roles, Interpretations & Weaknesses of financial ratios.

MAKERERE UNIVERSITY BUSINESS SCHOOL

COURSE WORK EXAMINATION FOR THE

OF MAKERERE UNIVERSITY
ACADEMIC YEAR 20 /

COURSE NAME: FINANCIAL MANAGEMENT

COURSE CODE: YEAR OF STUDY:
SEMESTER/MODULE: DATE: / / TIME: - pm
INSTRUCTIONS:
ix. All question(s) in both sections are compulsory.
x. Present only tidy answers, relevant examples and models.
xi. Use own financial/mathematical tables and scientific calculator.
xii. Do not write on the question paper.

SECTION A
QUESTION
ONE
MBA 2016 (U) Ltd is planning a new capital expenditure in a steel mill with minimum required discount rate
of return (WACC) of 22% with 4 years to recover initial outlay.

The investment terminal scrap market value is expected at $ 7m after tax.

*Initial working capital (start up current assets items before operations) is recoverable as terminal cash inflows.

Initial total costs of Research and development, Consultancy and Feasibility/Business Incubation plan are 900
billion dollars before investment decision on project implemention.

A hired financial analyst has determined ONLY relevant project cash flows below:

Initial Outlay (Io) for the New Investment decision (Year 0) All in ($ 106)
Invoice Price Value from Supplier Quotation 30
Add: Capitalised Incidental Costs
Carriage, Insurance, Freight/Forwarding 10
Customs Clearing, Transport, Warehouse Storage, Installation/Construction/Assembling 10
Building Re-Structure, Land acre/Excavation/Landscaping/Access roads/Utilities 05 ?
Depreciable/Capitalised Historical Cost ?
Add: Increase in Net Working Capital (no spontaneous finance e.g payables) 04
Opportunity Cost/Implicit Cost 05
Short Term Training (below 1 year) 06
Sub-Total ?
Less: Decrease in Net Working Capital (1)
New Investment Allowances/Tax Incentives relief on capital cost (9)
Initial Outlay=Net Ca$h Outflow=Io ?
 Capital Budget-Forecast of intermediate (Year 1-4) and terminal cash flows Year 5. All in ($ 103)
Account\Year 1 2 3 4 5
Incremental/Marginal Sales Revenue=(PXQ) 50,000 100,000 195,000 200,000 90,000
+ Cash/Cost Savings 10,000 10,000 10,000 10,000 10,000
- Increm Operating Cost=(CXQ)=(FC/VC/OHs Exp) (20,000) (40,000) (78,000) (80,000) (36,000)
Earning Before Depreciation and Tax ? ? ? ? ?
- Straight Line Depreciation ? ? ? ? ?
Earning Before Tax ? ? ? ? ?
- Tax (30%) ? ? ? ? ?
Earning After Tax ? ? ? ? ?
+ Depreciation ? ? ? ? ?
Net Cash Flow1 ? ? ? ? ?
+ Net Salvage Value=SV(1-t) - - - - ?
+ Cannibalised CFs/+ve Externality Investt - - - - -
+ *Dispose Marginal Net Working Capital-Year 0 - - - - ?
Net Cash Flow2 ? ? ? ? ?
Required:
(i) Complete the above capital budget and advise management using IRR and ARR. (2 mark)
(ii) State any four irrelevant/sunk costs ignored during capital budgeting. (2 marks)
(iii) Explain five risk control techniques in investment project risk management. (2 marks)
(iv) Compute expected return and standardised risk of project net cash flow.
(Use probabilites of: 0.5, 1.0, 0.7, 0.3 & 0.6 from year 1 to 5 respectively) (2 marks)
(v) How does depreciation and inflated costs affect NPV in sensitivity analysis. (2 marks)
QUESTION TWO
(c) With recent examples, distinguish between primary and secondary securities market. (1 mark)
(d) “Despite the large investment and the roles of the stock exchange and the various government incentives,
only a few companies are listed at the stock exchange of the three East African countries.”
This was the opening remark by the guest speaker in a seminar theme-“Developing our capital market.”
Required:
(i) The advantages of being listed at the Uganda stock exchange as a financial market. (3 marks)
(ii) State six financial sources/product facilities traded in the money market/capital markets to enable
medium term and long term investment projects in East African economies. (3 marks)
(iii) Highlight six factor requirements that hinder corporate listing at the stock exchange. (3 marks)
SECTION B
QUESTION THREE
(c) Explain the purpose of the following to a firm`s financial evaluation and industrial economic analysis:
(i) Operating efficiency ratios. (2 marks)
(ii) Common size ratios. (2 marks)
(iii) Market investment ratios. (2 marks)
(iv) James Torbin Q and Edward Altman Z score models for financial soundness. (1 mark)
(d) State any six investment ratios and six asset efficiency ratios as used in financial analysis. (3 marks)
QUESTION FOUR
Write short notes on the following:
(i) Systematic and unsystematic risk. (1 mark)
(ii) Conservative, moderate and restrictive investment policy of working capital. (3 marks)
(iii) Assumptions and limitations of inventory models: EOQ, JIT and ABC. (3 marks)
(iv) Relevancy and limitations of accounting ratios application in business firms. (3 marks)
End of Question Paper
………………………………………………………………………………………………………………
Semester/Module CW Guide

SECTION A

QUESTION ONE

(vi) Completed Capital Budget.

Initial Outlay (Io) for the New Investment decision (Year 0) ($ 106)
Invoice Price Value from Supplier Quotation 30
Add: Capitalised Incidental Costs
Carriage, Insurance, Freight/Forwarding 10
Customs Clearing, Transport, Warehouse Storage, Installation/Construction/Assembling 10
Building Re-Structure, Land acre/Excavation/Landscaping/Access roads/Utilities 05 25
Depreciable/Capitalised Historical Cost 55
Add: Increase in Net Working Capital (no spontaneous finance e.g payables) 04
Opportunity Cost/Implicit Cost 05
Short Term Training (below 1 year) 06
Sub-Total 70
Less: Decrease in Net Working Capital (1)
New Investment Allowances/Tax Incentives relief on capital cost (9)
Initial Outlay=Net Ca$h Outflow=Io 60
Forecast of intermediate (Year 1-4) &terminal cash flows Year 5. ($ 103)
Account\Year 1 2 3 4 5
Incremental/Marginal Sales Revenue=(PXQ) 50,000 100,000 195,000 200,000 90,000
+ Cash/Cost Savings 10,000 10,000 10,000 10,000 10,000
- IncremOperating Cost=(CXQ)=(FC/VC/Ohs Exp) (20,000) (40,000) (78,000) (80,000) (36,000)
Earning Before Depreciation and Tax 40,000 70,000 127,000 130,000 64,000
- Straight Line Depreciation=(Cap HC-SV)/n - 9,000 - 9,000 - 9,000 - 9,000 - 9,000
Earning Before Tax 31,000 61,000 118,000 121,000 55,000
- Tax (30%) - 9,300 - 18,300 - 35,400 - 36,300 - 16,500
Earning After Tax 21,700 42,700 82,600 84,700 38,500
+ Depreciation 9,000 9,000 9,000 9,000 9,000
Net Cash Flow1 30,700 51,700 91,600 93,700 47,500
+ Net Salvage Value=SV(1-t) - - - - 7,000
+ *Dispose Marginal Net Working Capital-Year 0 - - - - 4,000
Net Cash Flow2 30,700 51,700 91,600 93,700 58,500

n NCF DF/PVF (22%) PV (22%) PVF (10%) PV (10%)

0 -60,000 1 - 60,000.0 1 - 60,000.0
1 30,700 0.82 25,174.0 0.909 27,906.3
2 52,700 0.672 35,414.4 0.826 43,530.2
3 91,600 0.551 50,471.6 0.751 68,791.6
4 93,700 0.451 42,258.7 0.683 63,997.1
5 58,500 0.37 21,645.0 0.621 36,328.5
NPV (22%) 114,963.7 NPV (10%) 180,553.7

Page 1 of 3
IRR = IRRvar NCFs=A+ a (B-A)= Ba  100=43.033%, Accept. (1 mark)
bA
a b a b
ARR= Average EAT X100
=166.3%, Accept (1
mark)
Average Investment
(vii) 4 irrelevant/sunk costs before
investment decision:
Research and development, Consultancy
and Feasibility/Business Incubation plan
marks)
(viii) Risk control techniques in
investment project risk management:
Certainity Equivalent Factor,
Risk Adjustment Discount
Rate, Sensitivity analysis,
Scenario analysis, Monte
carlo analysis, Prob decision
tree, adjusted discounted
PBP/finite horizon & portfolio
diversification.
(ix) Compute expected return and
standardised risk of project net cash
flow in millions.
(Use probabilites of: 0.5, 1.0, 0.7, 0.3
& 0.6 from year 1 to 5 respectively)

P NCF (x) Px
0.5 30.7 15.35
1.0 52.7 52.7
0.7 91.6 64.12
0.3 93.7 28.11
0.6 58.5 35.1
Mean Er 195.3

(x) Depreciation allowance increases NPV

and inflated costs reduces NPV in
sensitivity analysis.
(2

QUESTION TWO
(c) A primary market (new issue market)
is a market forum where new securities are
traded e.g rights issue, invstmnt bank(er) or
ipo and secondary market is a market forum
where existing (used) securities are traded
among investors e.g after ipo at formal
centralised location (stock exchange) or
informal market (otc).
(1

Page 2 of 3
(d) (i) Any six advantages of listing on the Uganda
stock exchange:
Liquid financial system for greater
wealth/fund raising transactns, market of
securities for public-private
partnership/participation/profile, broad
ownership of security e.g bonds &
equity, easy diversification, investor
confidence, functional
intermediary/savings from surplus to
deficit sector/real investment (financial
source), M&E, investment
advice/corporate governance,
equilibrium price discovery/price
mechanism ( σisk mngt), low transactn
cost of advert/information assymetry
(market efficiency) & international
investment platform for exposure/cross
border transfers.
(iv) Six medium/long term financial sources
are: Preferencial,ordinary shares, bonds,
debentures, term loans and convertibles.
(3 marks)
(v) Six factor requirements that hinder corporate
listing/stock exchange:
 Undervalued shares, stringent listing
requirement, compliance measures:
continued scrutiny and surveillance
of the quoted companies, lack of
privacy: disclosed information/public
scrutiny, limited and public company
requirement and cost of risking
Or
 Corporate listing requirements:
Minimum market cap, public
floatation maximum 49% stake/Govt
minimum 51% stake, limited liability
nature of companies, operating
experience, duly audited financial
reports, profitability records and
management character. (3 marks)

Page 3 of 3
 SECTION B

QUESTION THREE
(c) Purpose of the following to a firm`s financial evaluation and industrial economic analysis:
(i) Operating efficiency ratios for usage of asset to generate income. (2 marks)
(ii) Common size ratios for financial growth in performance. (2 marks)
(iii) Market investment ratios-performance in external stock market/shareholders. (2 marks)
(iv) James Torbin Q for price decision to buy or sell/market valuation. (0.5 mark)
Edward Altman Z score models for financial soundness. (0.5 mark)
(d) Any six investment ratios are: EPS, DPS, PER, Torbin Q, ROCE, ROFA and ROI/ROA. (1.5 marks)
Any six asset efficiency ratios are: DTO, STO, PTO, ATO, DTOP, STOP, PTOP. (1.5 marks)

QUESTION FOUR
(i) Systematic risk-Variation in Co`s investment return due to external market changes (PESTEL) and
Unsystematic risk are due to internal Co`s factors. (1 mark)
(ii) Conservative-high CA investment load for liquidity, restrictive-low CA investment load for
liquidity and moderate working capital investment policy is a trade off between the two.(3 marks)
(iii) Assumptions and limitations of inventory models:
EOQ-Constant total annual DD over planned period, instant replacement of inventory i.e. no
lead-time, constant ordering cost per order, constant carrying costs per unit, constant unit price
(no bulk discounts) and known delivery time. Limitations are unrealities of assumptions.
(1 mark)
JIT-known production schedules for timely inventory demand, efficient organization structures
for target schedule/prompt purchase, reliable supplier chain mngt/guaranteed relatnships,
geographic concentration for shorter vendor transit to plant, controlled transpt system i.e.
owned/contracted trucks and standardised productionn system/fast production on order/low
work-in-progress/lean management. Limitations are unrealities of assumptions. (1 mark)

ABC-Complimentary goods, steady supply, Pareto rule. Limitations are unrealities of assumptions.
(1 mark)
(iv) Relevancy of accounting ratios:
Evaluate relationships among annual closing net Balance of items in a multiple fin statements,
identify trends over time for a firm and compare firms at a time by liquidity (solvency),
efficiency, profitability, gearing (leverage) and investment (market) decision making by
internal/external stakeholders. (1.5 marks)
Limitations/Weaknesses/Disadvatanges:
Inaccurate estimates, basis of past figures/data, differential accounting policies, too
quantitative, different fiscal years/diversified Cos`, window dressing, cross sectional, no
specific standard/definition, exposure to personal bias, historical cost principle, limited basis of
comparison. (1.5 marks)
MAKERERE UNIVERSITY BUSINESS SCHOOL
COURSE WORK EXAMINATION FOR THE

OF MAKERERE UNIVERSITY
ACADEMIC YEAR 20 /

COURSE NAME: FINANCIAL MANAGEMENT

COURSE CODE: YEAR OF STUDY:
SEMESTER/MODULE: DATE: / / TIME: - pm
INSTRUCTIONS:
xiii. All question(s) in both sections are compulsory.
xiv. Present only tidy answers, relevant examples and models.
xv. Use own financial/mathematical tables and scientific calculator.
xvi. Do not write on the question paper.

SECTION A
QUESTION ONE
CAC Ltd is planning to introduce a new exclusive product-Ray Energy Drink to be sold at no stiff market
competition due to its distinguishing features. Currently, annual operating capacity is 6 million bottles. Sales
could reach 6.75 million bottles next year if the production capacity of the company is enhanced. An
investigation by marketing/sales department has forecasted sales figures of 6.75 million bottles, 7.65 million
bottles and 8.85 million bottles over the next three years, if CAC Ltd spent an extra ¥487,500, per annum on
advertising in each of these years.
Expected sales will continue at the rate of 8.85 million bottles in year four onwards
(indefinitely/constantly/continuosly). Management has agreed that the company's capacity should be enhanced
and this will require the acquisition of new machinery that would cost ¥1,237,500, ¥112,500 of capitalised
installation costs and ¥60,000 of expensed installation costs. The machinery would be depreciated using
straight line to zero over four years. The after tax salvage value of the equipment at the end of four years is
expected to be ¥67,500. The selling price is ¥2.1 per bottle and there are variable costs of ¥1.38 per bottle
excluding advertising costs. Further investment in working capital would be needed at the start of the
expansion project. This would amount to ¥135,000 and working capital would be maintained at ¥135,000
through until project end. Annual machinery running cost is ¥49,500 and machinery removal costs at the end
of the project of ¥ 45,000. The tax rate is 25% and the RRR is 14%.

Required
(c) Determine the viability of the project using Net Present Value Method. (06 Marks)
(d) Explain how to generate relevant cash flows for an NPV analysis. (04 Marks)

Page 1 of 3
QUESTION TWO
MBA Ltd intends to start up a business using £22,500. MBA Ltd asks you for advice upon provision of the
following information:
(h) Arrangements have been made to purchase non-current assets costing £12,000. These will be paid
at the end of September and will have a residual value at the end of the 5th year.
(i) Inventories costing £7,000 will be acquired on 28th September and subsequently monthly
purchases will be at a level sufficient to replace the forecast sales for the month.
(j) Forecasted monthly sales are £4,500 for October, £9,000 for November and December and £15,000
from January onwards.
(k) Selling price is fixed at the cost of inventory plus 50%.
(l) Two months credit will be received but only one month credit will be received from the suppliers of
inventory.
(m) Running expenses are expected to be £2,400 per month.
(n) MBA Ltd is expected to make monthly withdrawals of £1,500.
Required
Prepare a month by month cash budget for the six months ending on 31 March and append such brief
comments as you consider helpful to management. (10 Marks)

QUESTION THREE
The following capital structure belongs to Kamu Kamu (U)Ltd:
Ordinary shares (60,000 in number) 600m
Retained earnings 260m
13% irredeemable preference shares @ shs 100,000 400m
16% coupon rate debentures (irredeemable)@ shs 30,000 250m
20% Bank loan@ shs 25,000 150m

The ordinary shares are traded at shs 12,000 each and its dividend expected to grow at rate of 7%
perpetually. Dividends are likely to be paid at shs 15% but underwriting costs per share are at shs 2,000.
The current trading price per debenture is shs 30,000. The preference shares are currently trading at
shs 110,000 per share, expected issue costs shs 12,000 and corporation tax of 25% is chargeable.

Required
(c) Compute the Weighted Average Cost of Capital. (05 Marks)
(d) Describe the significance of cost of capital. (05 Marks)
 QUESTION FOUR
The following are the financial statements of Ratios Ltd. for the year ended 31/3/15:
Balance Sheet as at 31/3/15.
Shs. Shs.
Cash 480,000 Trade creditors 860,000
Debtors 640,000 Notes Payable (9%) 840,000
Stock 2,080,000 Long term debt (10%) 1,600,000
Equipment 1,600,000 Ordinary Share @Shs 10 par 1,500,000
4,800,000 4,800,000

Income Statement for the year ended 31/3/15

Shs. Shs.
Sales(on credit) 6,000,000
Less: Cost of sales 3,600,000
Gross profit 2,400,000
Deduct:
Selling expenses 600,000
Administrative and general expenses 1,120,000
Interest 235,600 1,955,600
Profit before taxation 444,400
Taxation 177,760
Net profit (Earning After Tax) 266,640

Note:
 Retained Earnings are 40%, Market Share Price is Shs 2.
 Ratios Ltd to compare with Industry Peer or Ratios as at 31/3/16 below:
Current ratio 2.5 times
Acid test ratio 1.1 times
Stock turnover ratio 2.4 times
Total assets turnover ratio 1.4 times
Times interest earned ratio 3.5 times
Net profit margin 4.0 percent
Return on investment 5.6 percent
Total asset to shareholders 3.0 times
equity Return on shareholders 16.8 percent
equity

Required
(c) Calculate all ratios for Ratios Ltd and report to relevant stakeholders. (05 marks)
(d) Comment on the following about Ratios Ltd in relation to 31/3/16 analysis:
(i) Liquidity position (01 mark)
(ii) Profitability position (01 mark)
(iii) Activity/Efficiency position (01 mark)
(iv) Leverage position/financial risk performance (01 mark)
(v) Market investment performance (01 mark)

End of Question Paper

………………………………………………………………………………………………………………
 Semester/Module CW Guide

SECTION A

QUESTION ONE (Compulsory)

a) Determine the viability of the project using Net Present Value Method
CAC Ltd Initial Outlay (000)
Invoice value of the machine 1,237.5
Add Incidental Costs
Installation (capitalised) 112.5
Historical Cost of the Machine for DEPRECIATION Calc 1,350
Add expense installation 60
Add working capital 135
Total Initial Outlay 1,545
01 Mark
CAC Ltd intermediate cash flows (000)
Item Year One Year Two Year Three Year Four
Revenues 1,575 3,465 5,985 5,985
LessVar. cost 1,035 2,277 3,933 3,933
Less advert 487.5 487.5 487.5 0
Removal cost 45
Running cost 49.5 49.5 49.5 49.5
EBT&D 3 651 1,515 1,957.5
Less depre 315 315 315 315
EBT (312) 336 1,200 1,642.5
Less tax 25% 0 84 300 410.63
EAT (312) 252 900 1,231.87
Add dep 315 315 315 315
ANCF 3 567 1,215 1,546.87
Add WCR 135
Add NSV 67.5
ATCF 3 567 1,215 1,749.37
Any 4X1 = 04 Marks
Using NPV Method
n NCF PVIF/DF12 PV
FVn 1/(1+r)n
0 (1,545) 1 (1,545)
1 3 0.877 2.63
2 567 0.769 436.02
3 1,215 0.675 820.13
4 1,749.37 0.592 1,035.63
NPV 749.41
The project is viable since the firm’s value and shareholder value will increase
01 Mark
c) Relevant cash flows necessary for an NPV analysis: Initial outlay, intermediate and
terminal cash flow generation
 Sunk costs
 Side effects
 Opportunity costs
 Salvage value
 Depreciation
 Changes in working capital
Any 4X1=04 Marks

Page 1 of 3
QUESTION TWO
Item October November December January February March
Receipts 4,500 9,000 9,000 15,000
Total receipts 0 0 4,500 9,000 9,000 15,000
Payments(supplies) 7,000 3,000 6,000 6,000 10,000 10,000
Running expenses 2,400 2,400 2,400 2,400 2,400 2,400
Withdrawals 1,500 1,500 1,500 1,500 1,500 1,500
Total payments 10,900 6,900 9,900 9,900 13,900 13,900
Net cash balance (10,900) (6,900) (5,400) (900) (4,900) 1,100
Opening balance 10,500 (400) (7,300) (12,700) (13,600) (18,500)
Closing balance (400) (7,300) (12,700) (13,600) (18,500) (17,400)
Any 5X1=05 Marks
Comments to management
 Delay payments to suppliers
 Reduce on the frequency of withdrawals
 Delay capital expenditure
 The company can also negotiate overdraft facility with the bank
 Reduce purchases or volume of inventory
Any 5X1=05 Marks

QUESTION THREE
iii) Compute WACC
Ordinary shares
Ke=Div +g=1,500 +0.07=0.15+0.07=.22 Dividend=0.15X10,000=1,500
Po–f 12,000-2,000
Retained earnings
Kre=Div+g=1,500 +0.07=0.15+0.07=.195
Po 12,000
Preference shares
Kp=Div =13,000 =.133
Po–f 110,000-12,000
Debentures
Kd=Int(1-t)=4,800(1-0.25)=.12
Po 30,000
Bank loan
Kd=Int (1-t)=0.20X0.75=.15

WACC
Source Specific Cost Weight Weighted Cost
Ordinary shares 22% 0.361 7.942 01 Mark
Retained earnings 19.5% 0.157 3.062 01 Mark
Pref shares 13.3% 0.241 3.205 01 Mark
Debentures 12% 0.151 1.812 01 Mark
Bank loan 15% 0.090 1.350 01 Mark
WACC 16.27%
iv) Significance of cost of capital:
Appraisal of projects, Management performance, Designing capital structure
Any 2X2.5=05 Marks
 QUESTION FOUR
(c) All amounts (Shs 103)
Ratios Ltd Ratios Compared to Industry Peer
or as at 31/3/16
Current ratio = CA 480+640+2080 = 1.88 2.5 times
CL 860+840
Acid test= CA – Stock 3200–2080 = 0.65 1.1 times
CL 1700
Stock turnover = C.O.S _ 3600 = 1.73 2.4 times
Av Closing stock 2080
Total assets turnover = Sales 6000 = 1.25 1.4 times
TA 4800
Times interest earning ratio = EBIT 444.4+23516 = 2.89 3.5 times
Int charges 235.6
Net profit margin = NPx100 266.64 x 100 = 4.44% 4.0%
Sales 6,000
Return on investment = NPx100 266.64 x 100 = 5.60% 5.6%
TA 4800
Total assets to equity = TA 4800 = 3.2 3.0 times
Equity 1500
Return on equity = NPx100 266.64 x 100 = 17.8% 16.8%
Equity 1500
Any 5X1=05 Marks
(d) (i) Liquidity position
- This is shown by current and acid test ratios
- Both ratios are lower than industrial peer
- This could indicate a poor working capital policy with high liquidity
risk
(iv) Financial risk
- This is shown by gearing ratios in particular times interest earned ratio
- The ratio is lower than industrial peer indicating high interest charges
(high gearing) or low gearing profits.
The gearing (debt – equity ratio) is 1600 =1.07 times which is
1500
relatively high.
- The firm is financing most of its assets using borrowed debt capital.
(v) Overall performance
- The performance is shown by profitability ratios which include net
profit margin, return on equity and return on investment. The ratios
are higher than industrial peer.
- The firm is therefore able to generate high returns on its capital and
sales. The firm has high profitability yet its financial risk and gearing
are high. It is therefore a high risk, high return investment.

Ratios (1 mark @) Comment

Current ratio=CA/CL=1.88 Low/bad
Acid test ratio=CA-Stock/CL=0.65 Low/bad
Stock turnover ratio=COS/Average inventory=1.7 Low/bad
Total assets turnover ratio=Sale/Total assets=1.2 Fair/Good
Times interest earned ratio=EBIT/Interest=2.89 High/Good
Net profit margin=Net profit/Sales=0.04=4% Good
Return on investment=EAT/Total assets=0.06=6% High/Good
Total asset to shareholders equity=TA/Equity=3.2 High/Good
Return on shareholders equity=EAT/Equity=0.18=18% High/Good
Any 5X1=05 Marks
MAKERERE UNIVERSITY BUSINESS SCHOOL
COURSE WORK EXAMINATION FOR THE

OF MAKERERE UNIVERSITY
ACADEMIC YEAR 20 /

COURSE NAME:FINANCIAL MANAGEMENT

COURSE CODE: YEAR OF STUDY:
SEMESTER/MODULE: DATE: / / TIME: - pm
INSTRUCTIONS:
v. All question(s)in both sections are compulsory.
vi. Present only tidy answers, relevant examples and models.
vii. Use own financial/mathematical tables and scientific calculator.
viii. Do not write on the question paper.

SECTION A
QUESTIONONE
PEMF Capital BudgetingLtdplans to undertake afinancial investment project in afixed asset.
Below is related information about the project. All cashflows in million shillings.
Cost of equipment Sh.760
Economic life 5 years
Installation costs Sh.145
Depreciation Straight-line basis
Working capital requirement(Year 1 but recoverable in year 5) Sh.185
Projected revenue (Year 1: Price=Sh.5.2 and Quantity=100) Sh.520
Projected operating costs (Year 1) Sh.115
Annual revenue growth rate 5%
Annual operating costs growth rate 7%
Marginal tax rate 40%
Capital Asset Pricing Model (r) = Risk free rate (10%) + Risk premium(12%) 22%
Equipment disposal value after tax Sh.120
Management standard minimum pay back period is 3 years.
The minimum required rate of return (CAPM discount rate) is 22%.
Required:
(c) Calculate the project’s net initial outlay. (02 marks)
(d) Using discounting and non-discounting methods, show whether or not the project should
be undertaken by the company. (08 marks)

Page 1 of 4
QUESTIONTWO
(c) WACC Ltd is currently using the following sources of funds (Capital Business Finance):
 Redeemable bond/redeemable preference share at initial par/face/accounting value of $
10,000,000. Coupon int/dividendrate at par=18%for 10 years maturity. It now trades
at 15,000,000onmkt.
 Irredeemable (Perpetual) Bonds/Debentures worth 400,000,000 at 25%interest rate on
nominal/face value of 200,000 each and the going market value is 280,000 each.
 Irredeemable preferenceshares are worth 300,000,000 with denominations of 20,000 per
share andpreset dividend per shareof 2,500 (i.e 2,500/20,000=12.5%)
 Ordinary Shares worth 500,000,000 are issued at face value of 80,000 per share and
initial dividend was estimated at 16%. The shares are trading for 110,000 in the
marketand anticipated growth rate is 12% p.a. Floatation costs of shares are 2,000 per
share and the business tax bracket is 30%. Reserves are 300,000,000. All currencies are
in $.
Required: Determine the Weighted Average Cost of Capital. (05 marks)

(d) Additional 400m is needful in total to finance a recent viable project. It is a desired
assumption not to change its existing percent capital structure for additional 400m.
 Redeemable bond/redeemable preference share at initial par/face/accounting value of $
10,000,000. Coupon int/dividend rate at par=18%for 10 years maturity. It now trades
at 15,000,000 onmkt.
 50m will come from retained earnings.
 New debentures/bonds of face value 150,000 will be issued at coupon interest rate of
10%. It is expected they will sell for 170,000.
 Because additional ordinary shares will be issued, the ordinary share price will reduce to
90,000. New ordinary shares will have face value of 100,000.
 Particulars of floatation and dividends remain the same.
 A new irredeemable preference share will be issued at face value of 70,000. Dividend
rates of these shares will be 15% and the business remains in a 30% tax bracket.
Required:
Determine the Marginal Cost of Capital for the new fund raised. (05 marks)
 SECTION B
QUESTIONTHREE
 Cash Budget Co. Ltd is planning for its next financial year (January-December 2010) and
statistics have been collected by the planning unit at 31st December 2009 with closing
cash and bank balance of 20 million.
 The current turnover of $ 800 million (PriceXQuantity) is expected to rise at 10% per
month for the first six months and then stabilise thereafter.
 According to the company’s credit policy, 60% of the turnover is ca$h, 50% of
receivables (credit customers/debtors) are expected to pay after one month, while the
other 40% will pay after 2 months. The remaining 10% is for default/bad debt,
depreciation/amortisation, discount received/allowed.
 Bonds/Grants of 1 million and Equity shares worth 1 million will be issued in September.
 Both interest earned and dividend earned will each be 1 million in December 2010.
 Monthly fixed costswill be incurred at $ 100 million and are paid one month in arrears
while variable costs and overheads are both anticipated at 20% of monthly sales and paid
two months in arrears. An outstanding account payable balance of $ 5 million (December
2009) will be 50% cleared in January 2010, 40% in February and 10% in March.
 The companyis negotiating a loan of $ 1.8 billion in January at 10% annual interest
payable every December per annum. Front Page Bank expects to disburse the full loan by
2nd of January to acquire constructionequipment in 2 equal installments in Augustand
November.
 Meanwhile the old equipment will be disposed for 4 million in December 2010 as
subsidies will be 1 million in the same month. Treasury billsand shares worth 3 million
will be bought in August 2010.
 An overhaul of the excavation equipment is planned for April 2010 at expected to cost of
$ 4 billion.
 In January, a Barclays bank loan of $ 430 million at 10% monthly interest will be
amortised in 12 monthly equal installments starting February.
Required:-
(d) Prepare an annual and quarterly ca$h budget for October-December 2010. (06 marks)
(e) Comment on challenges of the monthly financial plan. (02 marks)
(f) Advise any management actions/improvements for both surplus or deficit ca$h balance.
(02 marks)
 QUESTIONFOUR
The following are the financial statements of Ratios Ltd. for the year ended 31 March 2015:
Balance Sheet as at 31 March 2015
Shs. Shs.
Cash 480,000 Trade creditors 860,000
Debtors 640,000 Notes Payable (9%) 840,000
Stock 2,080,000 Long term debt (10%) 1,600,000
Equipment 1,600,000 Ordinary Share @Shs 10 par 1,500,000
4,800,000 4,800,000

Income Statement for the year ended 31 March 1995

Shs. Shs.
Sales(on credit) 6,000,000
Less: Cost of sales 3,600,000
Gross profit 2,400,000
Deduct:
Selling expenses 600,000
Administrative and general expenses 1,120,000
Interest 235,600 1,955,600
Profit before taxation 444,400
Taxation 177,760
Net profit (Earning After Tax) 266,640

Note: Retained Earnings are 40%, Market Share Price is Shs 2.

Industry standard averages
Current ratio 2.6 times
Acid test ratio 1.1 times
Stock turnover ratio 2.4 times
Total assets turnover ratio 1.4 times
Times interest earned ratio 3.5 times
Net profit margin 4.0 percent
Return on investment 5.6 percent
Total asset to shareholders 3.0 times
equity Return on shareholders 16.8 percent
equity

Required
(c) Calculate all ratios for Ratios Ltd and report to relevant stakeholders. (05 marks)
(d) Comment on the following about Ratios Ltd in relation to industry standard averages:
(i) Liquidity position (01 mark)
(ii) Profitability position (01 mark)
(iii) Activity/Efficiency position (01 mark)
(iv) Leverage position/financial risk performance (01 mark)
(v) Market investment performance (01 mark)

End of Question Paper

………………………………………………………………………………………………………………
 Semester/Module CW Guide

SECTION A
QUESTION ONE
(c) Projects Initial outlay = Purchase Cost + Install Cost + Working Capital
= 760+ 145 (initial cost) + 185
= 905+ 185 = 1,090 (2 marks)
(b)

Year 0 1 2 3 4 5
Annual revenue (5%) 520 546 573 602 632
Operating costs (7%) (115.00) (123) (132) (141) (151)
905200
Depreciation=
5 (141) (141) (141) (141) (141)
Earning Before Tax 264 282 300 320 340
Less taxation (40%) (106) (113) (120) (128) (136)
Earning After Tax 158 169 180 192 204
Add depreciation 141 141 141 141 141
Net Cash Flow1 299 310 321 333 345
*Net Salvage value 120.0
*Release working Capital 185.0
Net Cash Flow2 299 310 321 333 650
Discount factor @ 22% 1 0.820 0.672 0.551 0.451 0.370 NPV
Present Values @ 22% (1,090) 245 208 177 150 241 ≈ (69)
Discount factor @ 10% 1 0.909 0.826 0.751 0.683 0.621
Present Values @ 10% (1,090) 272 256 241 227 404 ≈ 310

Discounting Methods/Decision:
 NPV=(Sh.69)<1 Ignore/Don`t Accept / Don`t Implement the project.
 PI=0.94<1  Ignore the project.
Ba  b A 100= (22* 310)(69*10) =19.8%≈20%
 IRRvar NCFs=A+ a (B-A)=
a b a b 31367
IRR<WACC Discount Rate (22%)  Reject the project.

Non-Discounting Methods/Decision:
 PBP= 3160 years < 5 year management standard  Accept the project.
333
_____
 ARR= EAT X100 181 X100 ≈28%>@22%  Accept the project.
_____ 645
Investment
. (2 marks for any 4 methods with decision)

Page 1 of 5
 QUESTION TWO
Overall WACC=Min Rate of Return (Cost of K) from combined long term capital in a Co.

WACC= D *[K (1t)] E *K  D .[Int(1t)] E .DPS

A D A D A A

Specific Cost of Capital is a key input into WACC Calc:

 K Red P/S & Bond=IRR? ~ Redeemable Mkt Px Value 0=A(PVAIFn,irr)+MV(PVFn,irr)
Annuity Dividend/interest of red Pref Shares & Bonds=C=Dvd interest % X Maturity Value
=18%X10,000=1,800

Discount Matrix for IRR: All in (103$)

n NCF DF/PVF (B=10%) PV(B=10%) DF/PVF (A= 5%) PV(A=5%)
0 (15,000) 1.000 (15,000) 1.000 (15,000)
1-10 1,800 6.145 11,061 7.722 13,900
10 10,000 0.386 3,860 0.614 6,140
NPV: b=(79) a=5,040

   K Red Pref S/Bond=IRR=A+  a  (B-A)= 5+  5,040 

 5= 9.92%≈0.099
a-b  5,04079 
   
  
 K Irred Bond Debt (*after tax%)= Int%XPar Value (1t)  0.25X200k (0.7) = 0.125
Mkt Px 280k
 K Irred Pref/S = DPS  2,500 = 0.125
Mkt Px 20k
 K Irred O/S (*after Flotatn Cost/Px)= DPS g  0.16X80K .12 = 0.240
Mkt Px(1f / 110K(1-2k/110k)
Px)
 K REserves (0 Flotatn Cost)= DPS g  0.16X80k .12 = 0.236
Mkt Px 110k

All in (106$)
4 Steps of WACC:
Source (i) (ii) (iii) (ii) X (iii)
Amount Prob Specific Cost WACC
(K Structure) After t & f
Red Bond 15 0.01 0.099 0.00099
Irred Bonds 400 0.26 0.125 0.03250
Irred Pref Shares 300 0.20 0.125 0.02500
Irred Ord Shares 500 0.33 0.240 0.07920
REserves 300 0.20 0.236 0.04720
Mkt Valuatn (Io) 1,515 1.00 Overall WACC ≈0.185=18.5%
Or 2 Steps of K)
(Amt* Sp Cost X10018.5%
WACC= of
 Amt
The above K structure mix is only optimal at 18.5% to maximise firm value/owner`s
wealth (Asset) (1 mark per source WACC)
 (d)
MACC=Cost of capital for additional capital in a firm. **Same calc as WACC**

 K red P/S & Bond=IRR? ~ Redeemable Mkt Px Value 0=A(PVAIFn,irr)+MV(PVFn,irr)

Annuity Dividend/interest of red Pref Shares & Bonds=C=Dvd interest % X Maturity Value
=18%X10,000=1,800
Discount Matrix for IRR: All in (103$)
n NCF DF/PVF (B=10%) PV(B=10%) DF/PVF (A= 5%) PV(A=5%)
0 (15,000) 1.000 (15,000) 1.000 (15,000)
1-10 1,800 6.145 11,061 7.722 13,900
10 10,000 0.386 3,860 0.614 6,140
NPV: b=(79) a=5,040
   K red Pref S/Bond=IRR=A+  a  (B-A)= 5+  5,040  5= 9.92%≈0.099
a-b  5,04079 
   
  

 K REserves (0 Flotatn Cost)= DPS g  0.16X100k .12 = 0.298

Mkt Px 90k
 K Irred O/S (*after Flotatn Cost/Px)= DPS g  0.16X100K .12 = 0.3
Mkt Px(1f / Px) 90K(1-2k/90k)
 K Irred Pref/S = DPS  15 = 0.15
Mkt Px 100
 K Irred Bond Debt (*after tax%)= Int%XPar Value (1t)  0.1X150k (0.7) = 0.0617
Mkt Px 170k

4 Steps of MACC:
Source (i) (ii) (iii) (ii) X (iii)
Amount Prob Specific Cost MACC
(K Structure) After t & f
Red Bond 15 0.0375 0.099 0.00371
REserves 50 0.125 0.298 0.03725
Irred Bonds 104 0.26 0.0617 0.01604
Irred Pref Shares 80 0.20 0.15 0.03000
Irred Ord Shares 151 0.3775 0.3 0.11325
Mkt Valuatn (Io) 400 1.00 Overall WACC 20%
The K structure mix is only optimal at 20% to maximise firm value/owner`s wealth.
(1 mark per source MACC)
SECTION B
QUESTION THREE
(g) Annual and quarterly ca$h budget for October-December 2010.
Working Assumptions:
 All in Approx 106$ except *
 Dec `09 Closing Bal=Jan `10 Opening Bal=20
 Current Dec 09 T/O=800 for 10% Increase for first 6 mths (Jan-June and then stabilise).
 Cash Sale T/O=60% and Cr Sale (Debtor Bal)=40%
Sales Projection 880 968 1,065 1,171 1,288 1,417 1,417 1,417 1,417 1,417 1,417 1,417
Annual Cash Budget-2010
Oct-Dec 2010
Cash Inflow/Receipts Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Cash Sales=.6S 528 581 639 703 773 850 850 850 850 850 850 850
Collectn1=.5X.4S - 176 194 213 234 258 283 283 283 283 283 283
Collectn2=.4X.4S - - 141 155 170 187 206 227 227 227 227 227
Bond/Grant - - - - - - - - 1 - - -
Equity Issued & Paid - - - - - - - - 1 - - -
Interest earning - - - - - - - - - - - 1
Dividend earning - - - - - - - - - - - 1
LT Bank Loan 1,800 - - - - - - - - - - -
Equipment disposal - - - - - - - - - - - 4
Subsidies - - - - - - - - - - - 1
Amortised Loan 430 - - - - - - - - - - -
∑Cash Inflows A 2,758 757 973 1,071 1,178 1,295 1,340 1,360 1,362 1,360 1360 1367
Cash Outflow/Pyts
FC 1 mth arrears - (100) (100) (100) (100) (100) (100) (100) (100) (100) (100) (100)
-
VC/O/Hs 2mths arrears - (176) (194) (213) (234) (258) (283) (283) (283) (283) (283)
*Payable reduction (2.5) (2.0) (0.5) - - - - - - - -
Loan Interest - - - - - - - - - - - (180)
Capital Expenditure - - - - - - - (900) - - (900) -
TBs & Shares - - - - - - - (3) - - - -
Equipment overhaul - - - (4,000) - - - - - - - -
Amortised Loan Pyts - (63) (63) (63) (63) (63) (63) (63) (63) (63) (63) (63)
∑Cash Outflows B *(2.5) *(165.0) *(339.5) (4,357) (376) (397) (421) (1,349) (446) (446) (1346) (626)
NCF1 C=A-B 2,756 592 634 (3,286) 802 898 919 11 916 914 14 741
Open Bal b/f D 20 2,776 3,367 4,001 715 1,517 2,415 3,334 3,345 4,261 5,175 5,189
NCF2 E=C+D 2,776 3,367 4,001 715 1,517 2,415 3,334 3,345 4,261 5,175 5,189 5,930
(0.5 mark @ Net Cash Flow)
(h) Comment on challenges of monthly financial plan. Excess cash surpluses (02 marks)
(i) Managerial remedies actions/improvements for:
Idle Ca$h Surplus:
Surplus Invstmnt/ST securities (Cheap, Accessible, P∏ble, Mktble, ST Maturity, Secure
return/ default σisk), K budgeting, debt servicing, share repurchase, dvdnd payout,
Matching, prepyt to suppliers and receivables. (0.5 mark for any 2 remedies)

Ca$h Deficit Problems/Shortages:

Deficit Financing i.e cheap ST loan e.g overdraft, sale & lease back, fundraising effort, ca$h
budget cuts, matching concept towards ideal zero bal, speedy debtor collectns, delay outflows/K
expenditure/dvds/payables, extension schemes/amortisatn schedule, dispose unproductive/idle
assets & deposit banking/EFT/Imprest system and se/deffer trade payables/dividends.
(0.5 mark for any 2 remedies)
QUESTION FOUR
(c) All amounts (Shs 103)
Ratios Ltd Ratios Compared to  Industrial Standard Average
Current ratio = Current Asset Current 480 + 640 + 2080 = 1.88 2.5 times
Liabilities 860 + 840

Acid test= Current.Assets – stock 3200 – 2080 = 0.65 1.1 times

Current liabilities 1700

Stock turnover = Cost of sales 3600 = 1.73 2.4 times

Average/closing stock 2080

Total assets turnover = Sales 6000 = 1.25 1.4 times

Total Assets 4800

Times interest earning ratio = EBIT 444.4 + 23516 = 2.89 3.5 times
Interest charges 235.6

Net profit margin = Net profit x 100 266.64 x 100 = 4.44% 4.0%
Sales 6,000

Return on investment = Net profits x 100 266.64 x 100 = 5.60% 5.6%

Total Assets 4800

Total assets to equity = Total Assets 4800 = 3.2 times 3.0 times
Equity 1500

Return on equity = Net profits 266.64 x 100 = 17.8% 16.8%

Equity 1500
(1 mark X any 5 ratios)
(d) (i) Liquidity position
- This is shown by current and acid test ratios
- Both ratios are lower than industrial average
- This could indicate a poor working capital policy with high liquidity risk
(iv) Financial risk
- This is shown by gearing ratios in particular times interest earned ratio
- The ratio is lower than industrial average indicating high interest charges (high
gearing) or low gearing profits.
The gearing (debt – equity ratio) is 1600 =1.07 times which is relatively high.
1500
- The firm is financing most of its assets using borrowed debt capital.
(v) Overall performance
- The performance is shown by profitability ratios which include net profit margin,
return on equity and return on investment. The ratios are higher than industrial
average.
- The firm is therefore able to generate high returns on its capital and sales. The
firm has high profitability yet its financial risk and gearing are high. It is therefore a
high risk, high return investment.
(1 mark X any 5 Comments)
Ratios (1 mark @) Comment
Current ratio=CA/CL=1.88 Low/bad
Acid test ratio=CA-Stock/CL=0.65 Low/bad
Stock turnover ratio=COS/Average inventory=1.7 Low/bad
Total assets turnover ratio=Sale/Total assets=1.2 Fair/Good
Times interest earned ratio=EBIT/Interest=2.89 High/Good
Net profit margin=Net profit/Sales=0.04=4% Good
Return on investment=EAT/Total assets=0.06=6% High/Good
Total asset to shareholders equity=TA/Equity=3.2 High/Good
Return on shareholders equity=EAT/Equity=0.18=18% High/Good
GROUP RECITE PRESENTATION
A. KNOWLEDGE CW1
Introductn:
 FM definitn
 Conflicting/overlapping firm objectives Vs Overall goal (Net Wealth=NPV)
 Debate: Why CFs Vs Criticisms of ∏.
 Views of Wealth (Firm Valuatn models)
 Roles of FM & Scope of FM=4 finance descns.
 Duties of fin Manager with Corporate Governance.
 Agency Problem: Causes & +ve/-ve solutns.
 Reasons, Importance of Knowledge & Applications of TVM.
 PV/Discounting, FV/Compounding, Nominal Rate, Real Discount Rate & Effective Rate.
 FV & PV of perpetuity, annuity due & regular annuity.
 PVA & Loan Amortizatn- A=Principal ValueA/PVAFr,n.
Capital Budgeting:
 Importance, Procedure steps, Approaches & Appraisal Techniques/descns.
 Advges & Disadges of each technique.
 Special Consideratns in Capital Budgeting Assumptns:
- Mutual Exclusive Project: WhyNPV-IRR conflict? Why prefer NPV over IRR?
- Capital ratning: Types, Internal & external causes.
- σisk control adjustment techniques: Return Vs σisk, σisk measures.
Working Capital/CA Mngt = Ca$h mngt + Debtors mngt + Stock mngt.
 Accelerate CIs & Decelerate COs. Adges & Disadges of ↕ WC.
 Why Cr Sale/Debtor Invstmnt? Costs/disadvges? Cr Policy. Info sources for Cr risk/Cr analysis.
Factors/Consideratns influencing each finance descn (K Bdgting, Financing, WC & Dvdnd descn).
Sources of Finance: Remember Matching Principle/Budgeting
Financing DebateTopic: Financing/leverage descn ↑ses firm wealth value? Y/N.
Dividend Debate Topic: Dividend descn ↑ses firm wealth value? Y/N. Why /No Dividend payout?
- Theories: Relevancy reasons/Irrelevancy perfect market conditions assumptns &Criticisms.
Financial Distress Types:
- Causes & Solutns for: Mild ST financial distress &Severe LT business failure.
B. SKILL CW 2
Cost of Capital:
 Specific Cost of K, WACC, WMCC & CAPM, Asset Valuatn.
Capital budgeting:OnlyRelevant/Incremental CF ***Assumptns in CF estimatns.
 Initial yr/Outlay=IV+Inc Cap C=CE;+T+OC+WC-Inc –WC=(Io)
 Intermediate yrs/NCFs=IncreS-Incre C=EBDT-D=EBT-T=EAT+D=NCFs(FV)
 Terminal yr/CF=EAT+D+*NSVn+*Rec ↑se WC=NCF(FV)XDF(1+r)n=PV for NPV, PI & IRR calcs.
Ca$h budgeting: Only Expected Ca$h Entries.*Ignore Crs/non ca$h entries.
 CI-CO=NCF+Open Ca$h Bal=Close Baln=Open Ca$h Baln+1 for next period.
 **Consider debtor collectns/supplier pyts originating from past into budget era.
 Surplus Investing/Deficit financing, Factor Consideratns for ST/Surplus Invstmnt.
Financial Ratios:
 K Market Invstmnt/Investors` ratios.
 LT Gearing/Leverage/Solvency ratios=[NCL/(NCL+E)] OR (NCL/E)Times.
 Efficiency/Utilisatn/Usage/Productivity/Asset Activity ratios (T/O Times&period/days)
 ST Liquidity ratios=(X/CL) Times &∏ability Margin ratios=(X/NS)%.
Purpose/Roles, Interpretations & Weaknesses of financial ratios.