KIGALI INSTITUTE OF SCIENCE AND TECHNOLOGY INSTITUT DES SCIENCES ET TECHNOLOGIE DE KIGALI Avenue de larme, B.P.

3900 Kigali, Rwanda Website: www.kist.ac.rw ENGINEERING FACULTY COURSE: FIN 3420 ENGINEERING ECONOMICS AND FINANCE: Year 4 CEIT, Year 4 MEE CAT MARKING SCHEME - /50 marks Date: 12/03/2013 ======================================================== INSTRUCTIONS 1. This paper contains FOUR questions. All questions in this section carry different marks. ANSWER ALL QUESTIONS. 2. Read questions carefully before answering 3. No written materials allowed in examination room. 4. Clean and smart work is a must ======================================================== QUESTION ONE / 20 MARKS A- Define a- the 'Gross Domestic Product - GDP'/5marks b- How is it calculated? /5marks B- What do you have to consider: a- When Starting a new business /5marks b- When investing in cash /5marks Response Aa. 'Gross Domestic Product - GDP' is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. /3 marks b. GDP = C + G + I + NX /3 marks Where: "C" is equal to all private consumption, or consumer spending, in a nation's economy /0.5mark "G" is the sum of government spending /0.5mark "I" is the sum of all the country's businesses spending on capital /0.5mark "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports) /0.5mark B a) Starting a new business /4 Marks You need to consider How much the equipments will cost
Page 1 of 5

 How much money should be tied to working capital cash on hand, inventory etc What cash flows do you expect cash expected in from sales and cash expected out in form of expenses Difference between expected future cash flow and actual future cash flows How much credit to extend to customers and for how long? What else you can do with the money opportunity cost b) Investing in cash /4 Marks You have to consider How large a cash balance is needed How much cash is needed in future Where the cash balance will be held in bank, under the mattress, in treasury bills, in stocks Should cash balance be constant throughout the year What else can you do with the money Opportunity cost QUESTION TWO / 15 MARKS A- What are the goals of the firms? /10marks B- In a chart: a- Show an Overview of financial management /2.5marks b- Categorize stakeholders that are affected by and/or have an interest in the operations and objectives of the business /2.5marks A Goals of the firms: I. Profit Maximization II. Maximization of the Shareholders Wealth I. Profit Maximization: Profit maximization stresses the efficient use of capital resources, but it is not specific (or ignore) with respect to the time frame over which the profits are to be measured. In short- term executives may used different assets to sell-off and turn the cash to increase liquidity on corporate balance sheets and then could easily increase profits. But this short run profit taking strategy is not in the best long-term objective and interest of the owners of the public corporation. In microeconomics, profit maximization functions largely as a theoretical goal, with economist using different models, charts and tables to prove the case that in free market economy firms behave rationally if they increase or maximize profit based on information. In this world of economics two (2) distinctive elements of business are ignored: 1. Uncertainty 2. Timing In reality, different investment projects differ a great deal with respect to risk characteristics, and to ignore these differences in the practice of corporate financing can result in poor management decisions. In business life there is a very definite relationship between risk and expected return - that is, private investors demand a higher expected return for taking on the
Page 2 of 5

investment projects additional risk. To ignore this relationship leads to improper decision making to allocate the capital which could lead to long-term conflict between existing investors and management. II. Maximization of Shareholders Wealth Means maximization of the market value of the existing shareholders common stock price because the effects of all financial decisions are included. -Private Investors react to poor investment or dividend decisions by selling stocks and causing the total market value of the public shares to fall. -Investors can react to good decisions by pushing up the price of stocks and create wealth for the shareholder. If the owners of the corporation are to base financial decisions on a single goal, that goal must be precise, not allow for misinterpretation, and deal with all the complexities of the real business world, including but not limited to: 1. legal issues 2. environmental standards 3. ethical and cultural considerations 4. international dimensions 5. labor demand and rights 6. tax The market price of the public corporation reflects the value of the public corporations seen by its owners (investors = shareholders = equity holders) and takes into account the complexity and complications of the real-business risks. The unifying objective in corporate finance is to maximize the share value of the public firm. Investment projects, financing structure and dividend decisions must be directed by management toward share value maximization objective. The objective is narrowed from maximizing firm value to maximizing stockholder value or stockholder wealth. Ba- Overview of financial management /3.5marks

Page 3 of 5

b- Stakeholders that are affected by and/or have an interest in the operations and objectives

of the business /3.5marks

QUESTION THREE / 5 MARKS Assume that you want to buy a house five years from now and estimate that an initial down payment of 20,000 will be required. You want to make equal end of year deposits into an account paying annual interest of 6%. You must decide what size of annuity results to a lumpsum of 20,000 at the end of 5 years. /5marks R You use the equation of finding the future value of an ordinary annuity PMT = FV/{ (1+r)n 1} = 20,000/{(1+0.06)5 1} = 3547.93
r 0.06

Alternatively read from the FV table the amount in brackets FV (n = 5; r = 6%) = 5.637x20,000/5.637 = 3547.93 QUESTION FOUR / 10 MARKS A- What must be the content of a cash flow statement? /2.5marks B- What is hire purchase? /2.5 marks C- Differentiate an equity capital from a loan capital /5marks R/ A-The cash flow statement should show amounts of cash flow from the following in the given order: 1. Operational cash flows: Cash received or expended as a result of the company's internal business activities. It includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent. 2. Investment cash flows: Cash received from the sale of long-life assets, or spent on capital expenditure (investments, acquisitions and long-life assets). 3. Financing cash flows: Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments. 4. Reconciliation with cash movement B-Hire purchase (abbreviated HP) is the legal term for a contract, in which persons usually agree to pay for goods in parts or a percentage at a time.
Page 4 of 5

It is buying on credit, without paying the full amount straight away. It is often used to buy household appliances, furniture and cars. You take the goods home and pay for them over time but the finance company has a security interest in them until you have made the final payment. /3.5 Marks C- Equity capital is money that is invested into a company in exchange for an ownership interest in that company. Traditionally, equity capital unlike debt is not intended to be repaid according to a specific schedule and is not secured (or guaranteed) by the company's assets. Instead, an equity investor (i.e., the individual or entity that supplies the company with the money) expects that, within a certain time frame, the ownership percentage she holds will be worth more than the original amount she invested. Whereas a loan capital is the money that a business borrows from banks and other organizations for an agreed period and on which it pays interest. It is the money that people borrow to help them to start a business. /3.5 Marks ======================================================== GOOD LUCK!

Page 5 of 5