ST.

PAUL’S UNIVERSITY
Private Bag - 00217 Limuru, Kenya
Tel. Office: 020-2020505/10; Mobile: 0728-669000
Website: www.spu.ac.ke

GO D

SCHOOL OF BUSINESS AND LEADERSHIP STUDIES

MASTER OF BUSINESS ADMINISTRATION
SEPTEMBER - DECEMBER 2023/2024
BFI 300: CORPORATE FINANCE
VIRTUAL LEARNING

DATE: DECEMBER 2023 TIME: 9.00am – 9.00pm (12 hours)

INSTRUCTIONS:
1. Answers ALL Questions.
2. Submit your answers in word format unless otherwise instructed. Type your answers in
a word document. Do not PDF your document.
3. Submit your answers via the Exam Portal.
4. For images (photographs, graphs, and calculations etc.), use legible writing. Take an
image (Photo) of all the answer sheets and submit via the Exam Portal. Remember to
number the answer sheet pages.
NOTE: No submissions will be accepted in any other mode e.g., emails, WhatsApp etc.

5. The examinations start at 9.00am and all the answer scripts MUST be posted on the
portal by 9.00Pm the following day (within 12 hours).
6. Submit your answer sheets as one document. Click the “SUBMIT” button to ensure
that your answer sheet is uploaded in the portal.
7. Allow yourself enough time to confirm that your submission has gone through. You
will receive an automated email receipt on successful submission.

NOTE: Submission deadlines must be observed.

8. On the front page of each answer script, you are required to observe the following
instructions:
 Write your student number in full.
 Write the unit code and title.
 Write the date of examination.
 Write the name of the lecturer.
  Write “SUPPLEMENTARY” or “DEFFERED EXAM” as the case may be, (if
you are taking a supplementary or deferred examination).

QUESTION ONE
Savanna Limited has a cost of equity of 20%. Currently it has 250,000 ordinary shares which are
quoted at the Stock Exchange of Sh. 160 per share. The company’s earnings per share is Sh. 10
and it intends to maintain a dividend payout ratio of 60% at the end of the current financial year.
The expected net income for the current year is Sh. 3 million and the available investment
proposals are estimated to cost Sh. 6 million.

Required:
(i) Using the Modigliani and Miller (MM) model, show that the payment of dividends
does not affect the value of the firm. (8 Marks)
(ii) What are the assumptions inherent in the MM model? (2 Marks)

QUESTION TWO
The management of Biashara Ltd. is in the process of evaluating two alternative machine
models, Alpha and Beta for possible purchase in order to increase the company’s
production level.
The following additional information is available:
1. Alpha costs Sh. 3,800,000 and will have a useful life of four years.
2. Beta costs Sh. 8,000,000 and will have a useful life of six years.
3. Both machines have no salvage value after their useful lives.
4. An investment in working capital amounting to Sh. 825,000 will have to be made at
the beginning of the first year of the machine’s life regardless of the model
purchased.
5. The estimated pre-tax cash inflows for each of the machines are shown below:
6. The cost of capital to the company is 12% and the corporation tax rate is 30%.

Year Machine
Alpha Beta
Sh.. Sh..
1. 2,590,000 4,300,000
2. 2,880,000 3,290,000
3. 3,050,000 3,200,000
4. 2,950,000 3,700,000
5. - 4,850,000
6. - 4,420,000
Required:
i) Calculate the undiscounted payback period for each machine model. (6Marks)
ii) Calculate the net present value (NPV) for each machine model. (8Marks)
iii) Using the net present values computed in (ii) above, advise the management on
which model to purchase. (2 Marks)
iv) The management of the company has received an alternative offer to lease Alpha
at an annual lease charge of Sh. 1,200,000 for four years, payable at the year
end. All other details remain unchanged.
v) Will this offer affect your selection in part (iii) above? Explain (4 Marks)