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    Baf 2104

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    Manu Kt
    This document provides information and questions related to financial management. It discusses: 1) The relationship between risk and return in financial decisions, noting that higher risk investments provide potential for higher returns or losses. 2) Four sources of business finance - owners' capital, retained profits, selling assets, and bank loans. Advantages of each are described. 3) The agency relationship that exists between owners and managers of a manufacturing firm, where owners delegate decision making authority to managers to act in the owners' best interests.

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    Baf 2104

    Uploaded by

    Manu Kt
    16 views3 pages
    This document provides information and questions related to financial management. It discusses: 1) The relationship between risk and return in financial decisions, noting that higher risk investments provide potential for higher returns or losses. 2) Four sources of business finance - owners' capital, retained profits, selling assets, and bank loans. Advantages of each are described. 3) The agency relationship that exists between owners and managers of a manufacturing firm, where owners delegate decision making authority to managers to act in the owners' best interests.

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    BAF 2104 (1)

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    This document provides information and questions related to financial management. It discusses: 1) The relationship between risk and return in financial decisions, noting that higher risk investments provide potential for higher returns or losses. 2) Four sources of business finance - owners' capital, retained profits, selling assets, and bank loans. Advantages of each are described. 3) The agency relationship that exists between owners and managers of a manufacturing firm, where owners delegate decision making authority to managers to act in the owners' best interests.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    16 views3 pages

    Baf 2104

    Uploaded by

    Manu Kt
    This document provides information and questions related to financial management. It discusses: 1) The relationship between risk and return in financial decisions, noting that higher risk investments provide potential for higher returns or losses. 2) Four sources of business finance - owners' capital, retained profits, selling assets, and bank loans. Advantages of each are described. 3) The agency relationship that exists between owners and managers of a manufacturing firm, where owners delegate decision making authority to managers to act in the owners' best interests.

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    Download as docx, pdf, or txt
    of 3

    `BAF 2104: FINANCIAL MANAGEMENT 1

    CAT
    INSTRUCTIONS TIME 1 HOUR

    QUESTION ONE
    a) With the aid of a diagram explain the risk-return relationship in financial decisions (4
    marks).

    High high risk high return


    Return

    Low risk low return

    Risk High

    There is a positive correlation between risk and return, the greater the risk, the higher the
    potential for profit or loss. This helps investors balance risk and possible money made. it
    helps them pick investments that match the level of risk they are willing to take

    b) Describe any FOUR sources of finance and show clearly why they are advantageous
    (8 marks)
    i. Owner’s capital- this is the investment that the entrepreneur brings into the
    business mostly from personal savings. This is the least expensive as there are
    no interest
    ii. Retained profits- this occurs when a business makes a profit so it can reinvest
    it into the business if it decides to expand. It is advantageous since no interest
    charges, it is also quick and convenient
    iii. Selling of assets – thus is money raised from sale of fixed assets in the
    business which may not be required anymore. This can lead to creation of
    space for more profitable uses and also has a quick access
    iv. Bank loan – its sum of money borrowed by a customer from a bank often for a
    specific use, its advantageous in that you can get a significant amount of
    money at one time.
    c) Describe the agency relationship that may exist between the owners of a manufacturing
    firm in Kenya and the managers of the business (4
    marks).
    Here agency relationship exists as a contract between owners and managers of the firm where
    the owners appoint agents (managers) to manage the firm on their behalf. As part of the
    agreement owners delegate decision making authority to the management.
    Owners expect their managers to act in the best interest of the owners

    QUESTION TWO
    (7 marks)
    a) You are provided with the following information relating to V ltd
    Equity and liabilities
    12% debentures (shs1000 at par) 16,000
    10% preferences share 6,250
    Ordinary shares (Shs 10 par) 12,500
    Retained earnings 28,125
    Additional information
    i. The debentures are currently selling at Shs 950 in the market
    ii. Company paid a dividend of Shs 5.00 per ordinary share and they are expected to grow at
    a rate of 10% per annum.
    iv. The corporation tax is 40%
    Required
    Effective Cost of debt (4 marks)
    Interest on debentures= 1000*12% =Shs 120
    Tax rate = 40%
    Current price = 950
    CoD= interest * (1-tax)Price
    =120*(1-40%)/950
    =7.58%
    Cost of equity (3 marks)
    D1 = Dividend in year 1 = 5*(1+10%) = 5.50
    P0 = Price at year 0 = 100
    g = Growth Rate = 10%
    Cost of Equity = (D1/P0) + g
    = (5.50/100) +10% = 15.50%

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