NATIONAL OPEN UNIVERSITY OF NIGERIA

UNIVERSITY VILLAGE, PLOT 91, CASDASTRAL ZONE, NNAMDI AZIKIWE EXPRESS WAY, JABI, ABUJA.
FACULTY OF MANAGEMENT SCIENCES
NOVEMBER 2018 EXAMINATION

COURSE CODE: BFN732                                                        CREDIT UNIT: 2

COURSE TITLE: BUSINESS FINANCE                                  

INSTRUCTIONS:   1. Attempt question number One (1) and any other Two (2)  questions.

2. Question number 1 carries 30 marks, while the other questions carry 20 marks each.

                                    3. Present your work in coherent and orderly manner.

1(a) The following are the details of a production factory

Delivery period for suppliers:

                  Maximum              4 months

                  Average                3 months

                  Minimum              2 months

                  Re-order quantity 4,000 units

Required to: Calculate the followings (Show all workings)

I. Re-order level

II. Maximum Stock Level

III. Minimum Stock Level

IV. Average Stock Level

1(b) Differentiate between Undercapitalization and Overcapitalization of working capital  (30 Marks)

2. Quotex Nigeria Plc. is to undertake a project requiring an investment of N100,000 on essential plant and machinery. The project is to last for 5 years at the rate of which the plant and machinery will have net book value of N20,000. Profits before depreciation are as follows:

     Year                                   Cash flows (N)

1.                                     40,000

       2                                       44,000

       3                                       48,000

4.                                     52,000

5                                        58,000

You are required to calculate the ARR of the project.  (20 Marks)

3. (a) A company’s total investment in assets is N10,000,000. It has 100,000 shares of N100 each. Its expected rate of return on investment is 30% and the cost of capital is 18%. The company has a policy of retaining 25% of its profits. Determine the value of the firm using Gordon’s model.     (10 marks)

(b) Explain any five (5) factors to be considered while planning for capital structure.     (10 Marks)

4. A project requires an initial investment of N243,000 and it is expected to generate a cash flow of N50,000 each month for 12 months. Assuming that the salvage value of the project is zero, and the target rate of return is 12% per annum. Determine the Net Present Value (NPV) of the project.          (20 Marks)

5. (a) Discuss briefly the advantages and disadvantages of Profitability index techniques in   Capital budgeting.   (10 marks)

(b) Discuss briefly (i) Capital rationing, and (ii) Forms of capital rationing. (10 Marks)