Hello tutors. Help me with the following questions.
1. (a) Agency theory presents the firm as a combination of competing interest groups, two of which are shareholders and management. REQUIRED Discuss how the firm's attitude to risk might vary depending on whether shareholders objectives or management oriented goals predominate in the firm's planning. (10 marks) (b) The directors of Gatimu Led are in the process of establishing shareholders utility function. They have approached Mr. Kilo, the principle shareholder and given him the following lotteries:- 1. 0.5 chance of receiving Sh. 0 and 0.5 chance of receiving Sh. 100,000. He is willing to pay a maximum of Sh. 45,000 for this lottery. 2. 0.4 chance of receiving Sh.45,000 and 0.6 chance of receiving Sh.100,000. He is willing to pay a maximum of Sh. 85,000 for this lottery. 3. 0.3 chance of receiving Sh. 0 and 0.7 chance of receiving Sh. 45,000. He is willing to pay a maximum of Sh. 30,000 for this lottery. Assume that utile values of 0 and 1 are assigned to a pair of wealth representing the two extremes (Sh 0 and sh. 100,000 respectively). REQUIRED Compute the utile value of Sh. 45,000, Sh. 85,000 and Sh 30,000. Construct the utility function of Mr. Kilo and state his risk attitude. (10 marks) (Total: 20 marks) 2. (a) What is meant by separability theorem? How does this contradict the "interior decorator" school ofthought? (10 marks) (b ) An investor is evaluating six portfolio with the following characteristics: Portfolio Portfolio Portfolio Expected Standard Return (%) Deviation (%%) 19 25 12 16 6 autoNe 32 16 22.5 10 8 2The expected return on the market portfolio is 12% with an accompanying standard deviation of 4%. The risk free rate of interest is 5%. REQUIRED:- i. Using the capital market line, advise the investor on which of the above portfolios are efficient and inefficient (7 marks) ii. In the case of an inefficient portfolio in () above state what the standard deviation should be for efficiency to be achieved with the given expected return. (3 marks) (Total: 20 marks) 3 The following information relates to the operations and capital structure of Kagocho Company Lid. Installed capacity 1200 units Actual production 800 units Selling price/ unit Sh. 15 Variable cost/ unit Sh.10 Fixed cost Sh. Situation A 1000 Situation B 2013 Situation C 3000 Capital Structure Financial Plan 1 2 3 Sh. Sh. Sh. Equity 5,000 7,500 2,500 Debt 5,000 2,500 2,500 Cost of debt (For all plans) 12% REQUIRED:- (a) (1) Determine operating leverage under situations A,B and C respectively (6 marks) (i) Determine financial leverage under financial plans 1, 2 and 3 respectively (6 marks) (iii) Determine the highest and lowest value of combined leverage (6 marks) (b) How are the above calculations useful to the financial manager of a company? (2 marks) (Total: 20 marks) 4. (a) Identify the methods that a financial manager can use to manage risk (8 marks) (b) Mr. Mambo the financial manager of Littlerock Led is considering investing in a risky project which would be added to an existing portfolio. He foresees five possible states of the economy as follows:- State of economy Probability existing Return on Return on Portfolio proposed Investment 0.2 16% 12% 0.4 18% 11% 0.2 20% 10% 0.1 22% 9% 0.1 24% 8% The risk free market of interest is 9% per annum. Is the proposed project acceptable (12 marks) (Total: 20 marks)
