Project Financing July 2017 Past Examination Question Paper – KNEC
This Past Paper examination was examined by the Kenya National Examination Council (KNEC) and it applies to the following courses:
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Diploma in Project Management – Module I
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THE KENYA NATIONAL EXAMINATIONS COUNCIL
DIPLOMA IN PROJECT MANAGEMENT
MODULE I
PROJECT FINANCING
July 2017
Time: 3 hours
1. a) Explain five features of project financing. (10 marks)
b) Explain five benefits that a country may derive from public private partnerships in project financing. (10 marks)
2. a) Describe the stages followed during project financing. (10 marks)
b) Kreta Limited intends to invest Ksh 1,500,000 in either project A or project B. The expected cash inflows from each of the projects are as follow:
| Cash inflows | ||
| Year | ||
| 1
2 3 4 5 6 |
200,000
50,000 100,000 600,000 800,000 600,000 |
800,000
400,000 800,000 600,000 – – |
The cost of capital is 12% per annum.
i) Determine the Net Present Value of each project.
ii) Using the results in (i) above, advise the management on which project to invest in. (10 marks)
3.) a) Explain five differences between project financing arid project finance management. (10 marks)
b) Totty Limited intends to raise additions capital for a project from the following sources.
| Amount (Ksh) | |
| 300,000 ordinary shares at Ksh 10 par value | 3,000,000 |
| 10% Preference shares at Ksh 50 par value | 5,000,000 |
| 15% Debentures at Ksh 100 each | 4,000,000 |
| 18% Bank loan | 8,000,000 |
| 20,000,000 |
The market prices of the securities are as follows:
Ordinary shares ksh.20
10% Preference shares ksh.80
15% Debentures Ksh.120
The expected dividends per share from ordinary shares is Ksh 2. The dividends are expected to grow at the rate of 6% per year.
The corporation tax rate is 30%.
i) Determine the cost of each component of capital.
ii) Determine the Weighted Average Cost of Capital (WACC). (10 marks)
4. a) Explain five ways in which a lender can minimize the risk of lender liability. (10 marks)
b) Explain five disadvantages of bonds as a source of project finance. (10 marks)
5. a) Two companies; A and B, have approached Bank T to finance their projects. Each of the companies has provided the following information to the bank:
| Company A
(Ksh) |
Company B
(Ksh) |
|
| Net operating profit
Interest expenses Principal payment Sinking fund obligations |
150,000
55,000 35,000 25,000 |
200,000
100,000 70,000 40,000 |
i) Determine the Debt Service Coverage Ratio (DSCR) for each company.
ii) Interpret the ratios determined in (i) above.
iii) Using the results in (i) above, advise Bank T on which company is safer to
b) Explain five roles of financial advisors in project financing. (10 marks)
6. (a) Explain five ways in which the local community may contribute towards financing of a project. (10 marks)
(b) A company requires Ksh 100,000,000 to finance a project. The management is considering two options; A and B, to raise the funds.
Option A – To raise a 10% ten year bond, with semi-annual interest payments.
Option B – Take a 10 year bank loan at a compound interest rate of 10% per annum.
(i) Determine the total interest payable in each option.
(ii) Using the results in (i) above, advise the management which options to choose.
(10 marks)
7. (a) Explain five objectives of carrying out financial appraisal of a project. (10 marks)
(b) Explain five factors that may influence the cost of financing of project. (10 marks)