REVIEW QUESTIONS

QUESTION ONE

An investment has an initial outlay of Tshs800m/= and it is estimated that it will generate the
following cash inflows over the 10years of its useful life
YEAR 1 2 3 4 5 6 7 8 9 10
CASH INFLOWS 40 50 100 240 200 60 120 90 300 150
(000,000)

Required

Evaluate the project using PBP and advise the investor.

QUESTION TWO

AK limited is proposing to expand its business by adding another product line. The investment
will cost Tshs200m/= and expected to realize the following cash inflows over a period of 5years.

YEAR 1 2 3 4 5
Cash Flows 40,000,000 60,000,000 80,000,000 50,000,000 70,000,000
(Tsh.)

Required

Given that, the company’s required rate of return (RRR) is 10%. Evaluate the project using the
NPV method.
QUESTION THREE

In a certain undertaking the initial investment is $1000. Expected additional investment of $800
and $600 are in the 2nd and 3rd years of the investment respectively. Expected cash inflows at the
end of each of the 4years of the operation are as follows.

YEAR 1 2 3 4
CASH FLOWS $ 600 800 1,000 2,000

Required

Given that, the required rate of return is 6%, evaluate the project using the NPV method.
QUESTION FOUR

YEAR 1 2 3 4
CASH INFLOWS 40 30 50 20
(Tshs 000,000)

The initial investment is Tshs80m/= and in the second year of investment an additional 40m/=
will be injected. Given that the RRR is 6%.

Required

Evaluate the project using the PI method and advise the investor.

QUESTION FIVE

EFG Ltd is considering two possible projects but can only raise enough funds to proceed
with one of them. Investment appraisal techniques have been used and the following
results found:
Project W Project X

Payback Period 3.8 Years 2.8 Years

Accounting Rate of Return 16% 14%

Net Present Value Rs. 880,000 Rs. 610,000

Required
i. Based on the results of appraisal techniques indicated in the table above, explain
and select the most appropriate project to invest as evaluated by each method
ii. From the appraisal methods indicated in the table above, which one is
considered to be superior and why?
QUESTION SIX
The director of the company has suggested that the dividend payment may create value for
a firm. With references from different books explain whether or not you agree with the
director. (Minimum of two pages)

QUESTION SEVEN
Explain the major decisions to be taken in financial management and show how the failure
to take any of these decisions correctly would affect the firm.

QUESTION EIGHT
a. Why a shilling tomorrow is wealth less than a shilling today (3marks)
b. Differentiate discounting from compounding (3marks)
c. An individual acquired a loan of Tsh100,000 from Barclays Bank at an interest rate of 9%
per annum to be repaid into three equal annual installments.
 Required
Prepare amortization schedule and determine the total amount of interest paid on the loan.

QUESTION NINE
An active dividend policy requires a company to know the forms of dividend and dividend
patterns. Explain the forms of dividend payment patterns and evaluate the desirability of
each pattern.

QUESTION TEN
JB Ltd has 100,000 ordinary shares of Tshs8,000/= each and has made the following
earnings over the last five years

YEAR 1 2 3 4 5
EARNINGS AFTER TAX 500 20 300 600 80
TSHS(000,000)

The management of JB Ltd has recommended the following proposals as dividend that
could be paid for a year:
Proposal 1: Pay 15% of available earnings as dividends.
Proposal 2: Pay 10% of the total share capital available as dividend per year.
Proposal 3: Pay 500/= as dividend for each share and 10% of any surplus earnings
REQUIRED
I. Determine the level of annual dividends for each of the five years under each policy
II. Evaluate the strength and weaknesses of each of the dividend policies used in (i) above
and recommend the best policy for the firm.
III. Explain why it is important for the management of JB Ltd to implement a stable
dividend policy in the firm.

QUESTION ELEVEN

A. What is agency problem? Reveal the ways of mitigating agency problem

B. Why wealth maximization is considered as a goal of the firm and not profit
maximization?

QUESTION TWELVE
Senda Ltd currently has the following equity section on its balance sheet.
Paid up ordinary share capital (Tshs800)……………………….…200m
Share premium……………………………………………………….160m
Reserve and surpluses………………………………………………840m
1,200m
REQUIRED
i. Show how a 2 for 1 stock split and 1 for 2 reverse split would affect the above equity
section of the business.
ii. Given that the current market price of the shares is Tshs6000/= per share, what will
happen to the equity section if a 20% stock dividend is declared?
iii. Comment on the usefulness of stock dividends, reverse and stock splits and these
schemes remain popular despite the apparent indication that they have no impact on
the wealth of the investor?

QUESTION 13

MUKO Ltd considers dividend payment as a residual decision and has a high degree of
confidence that the following conditions will prevail over the next five years
The business has 10,000 shares of Tshs10,000/= each
Year Net Earnings Capital projects
Tshs(000,000) to be financed
Tshs(000,000)
1 200 100
2 150 150
3 250 200
4 230 150
5 180 200

REQUIRED
i. Determine the dividends per share and the external funds needed to cover the capital
budgets in each of the years under review.
ii. What are the advantages and disadvantages of this approach in determining the level of
dividends that should be paid per year?