KASNEB Advanced Financial Management - Question 1a

Highlight FOUR reasons for soft capital rationing in a firm. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 1b

Ushindi Ltd. is considering the following projects: ProjectInitial outlay Sh.“million” Annual revenue Sh.“million” Annual fixed costs Sh.“million” Projec... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 3c

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August 2025

1a

Advanced capital budgeting decision

Highlight FOUR reasons for soft capital rationing in a firm.

1b

Advanced capital budgeting decision

Ushindi Ltd. is considering the following projects:

Project	Initial outlay Sh.“million”	Annual revenue Sh.“million”	Annual fixed costs Sh.“million”	Project life (Years)
A	100	200	50	3
B	300	300	100	5
C	150	180	60	4
D	120	170	80	10
E	180	80	20	15

Additional information:

1. Variable costs are 40% of annual revenue.

2. Each project is divisible.

3. Projects D and E are mutually exclusive.

4. Cash flows are confined within the lifetime of each project.

5. Cost of capital is 10%.

6. Ignore taxation and depreciation.

7. The company has a capital limitation of Sh.400 million for investment.

8. All cash flows occur at anniversary dates.

Required:

(i) Optional allocation of the available capital to the projects.

(ii) Maximum resultant Net Present Value (NPV) from the optimal allocation.

1c

Advanced financing decision

Describe FOUR advantages Eurobond market offer over a domestic bond market that makes it an attractive way for companies to raise capital.

2a

Advanced financing decision

Modigliani and Miller contended that in a perfect capital market, the value of a company depended simply on its income stream and the degree of business risk attached to this regardless of the way in which its income was split between the owners and lenders.

Required:

With reference to the above statement, explain FIVE assumptions of Modigliani and Miller hypothesis.

2b

Real estate finance Contemporary issues and emerging trends

Securitisation has become an important tool in modern financial markets, enabling financial institutions to transform illiquid assets into tradeable assets.

Required:

In relation to the above statement, evaluate FIVE advantages of securitisation as a vehicle of financing real estate development in your country.

2c

Portfolio theory and analysis

Prime Actual Investors Limited have the following portfolio of four risky assets and have deposited in a risk free asset. The table shows portfolio weightings and the current asset returns together with their beta coefficients:

Asset	Weightings (%)	Current return (%)	Beta
A	30	18	1.8
B	15	20	2.2
C	20	16	1.5
D	35	10	1.2
Risk free asset	30	8	0

The overall return on the market portfolio of risky assets is 12% and this is expected to continue for the foreseeable future.

Required:

(i) Compute the current return on the portfolio.

(ii) Ascertain the beta value of the portfolio.

(iii) Identify out of the four risky assets, the one(s) that are inefficient/efficient and super-efficient.

(iv) Based on the findings in (c) (iii) above, state the predictions that you would make regarding future asset values and their rates of return.

(v) Compute the equilibrium return on this portfolio assuming the weightings remain unchanged.

3a

International financial management

Explain FOUR factors leading to differences in cost of capital of domestic firms and multinational corporations (MNCs).

3b

Contemporary issues and emerging trends

Discuss FOUR challenges facing developing countries in establishing and operating derivatives market.

3c

International financial management

3d

Advanced financing decision

Reno Limited is engaged in plastics manufacture. It is now considering a new investment that would involve diversification into chemical manufacturing, where the business risk is very different from the plastic manufacturing industry.

Research has produced the following information about three companies currently engaged in chemicals manufacturing, in the same part of the industry that Reno Limited is planning to invest.

Company	Equity beta	Financed by:
X	1.33	40% equity capital, 60% debt capital
Y	0.78	75% equity capital, 25% debt capital
Z	0.725	80% equity capital, 20% debt capital

Additional information:

1. Reno Limited is financed by 60% equity capital and 40% debt capital and would intend to maintain this same capital structure if the new capital investment is undertaken.

2. The risk free rate of return is 5% and the return on the market portfolio is 9%.

3. The corporation tax is at the rate of 30%.

4. Assume that the debt capital of Reno Limited and companies X, Y and Z is risk free.

Required:

(i) Calculate a suitable cost of equity for the proposed investment by Reno Limited in chemicals manufacturing.

(ii) Suggest a weighted average cost of capital (WACC) that should be used to carryout an investment appraisal (Net Present Value calculation) of the proposed project.

4a

Contemporary issues and emerging trends

Assess THREE ways in which block chain technology as an emerging issue in finance could contribute to financial inclusion in your country.

4b

Mergers and acquisitions

KK Ltd. and JP Ltd. are companies operating in the same line of business. In the recent past, KK Ltd. has experienced very stiff competition from JP Ltd. such that KK Ltd., is considering acquiring JP Ltd. in order to consolidate its market share.

The following financial data is available about the two firms:

	KK Ltd.	JP Ltd.
Annual sales (Sh.“million”)	1,200	300
Net income (Sh.“million”)	450	60
Outstanding number of ordinary shares (million)	150	30
Earnings per share (Sh.)	3.0	2.0
Market price per share (Sh.)	60	30

Both companies are in the 30% income tax bracket

Required:

(i) Maximum exchange ratio that KK Ltd. should agree to if it expects no dilution in its post acquisition earnings per share (EPS).

(ii) KK Ltd.’s post acquisition EPS assuming the companies agree an offer price of Sh.45.

(iii) KK Ltd.’s post acquisition EPS assuming that for every 600 ordinary shares of JP Ltd.’s are exchanged for 10 units of 10% debentures of Sh.1,000 par value each.

(iv) The operating profit, Earnings Before Interest and Tax (EBIT) at point of indifference between earnings of the firm under the financing plans in (b) (ii) and (b) (iii) above.

(v) The EPS at the point of indifference between earnings of the firm under the financing plans in (b) (ii) and (b) (iii) above.

5a

Corporate restructuring and re-organisation

The following statement of financial position and statement of profit or loss relate to Tola Ltd. for the year ended 31 December 2024:

Tola Ltd.

Statement of financial position as at 31 December 2024:

Assets:	Sh.“000”	Liabilities and equity	Sh.“000”
Cash	40,000	Accounts payable	500,000
Receivables	300,000	Notes payable	100,000
Inventory	400,000	Total current liabilities	600,000
Total current assets	740,000	Mortgage	400,000
Land and buildings	100,000	Debentures	600,000
Plant (Net book value)	500,000	Total long term liabilities	1,000,000
Equipment (Net book value)	800,000	Preference share capital (10,000 shares)	100,000
Total fixed assets	1,400,000	Ordinary share capital (50,000 shares)	100,000
		Paid in capital	200,000
		Retained earnings	140,000
		Total shareholders equity	540,000
Total assets	2,140,000	Total liabilities and equity	2,140,000

Tola Ltd.

Statement of profit or loss for the year ended 31 December 2024:

	Sh.“000”
Sales	600,000
Cost of goods sold	(350,000)
Selling and administration expenses	(100,000)
Earnings before interest and taxes (EBIT)	\(\overline{150,000}\)
Interest	(110,000)
Earnings before tax (EBT)	\(\overline{40,000}\)
Corporation taxes at 30%	(12,000)
Net income	\(\overline{\underline{28,000}}\)

The company’s ordinary shares are currently priced at Sh.4 per share.

Required:

(i)

Using the Springate Model, assess the financial health of the company.

(ii)

Other than the Springate Model, evaluate TWO other models of predicting corporate failure.

Note: The Springate model takes the following form:

Z = 1.03A + 3.07B + 0.66C + 0.4D

Where;

\(\text{A} = \displaystyle \frac{\text{Net working capital}}{\text{Total assets}}\)

\(\text{B} = \displaystyle \frac{\text{Operating profit}}{\text{Total assets}}\)

\(\text{C} = \displaystyle \frac{\text{Net profit before tax}}{\text{Current liabilities}}\)

\(\text{D} = \displaystyle \frac{\text{Sales}}{\text{Total assets}}\)

5b

Financial risk management

Mark Otieno who trades in shares at the Securities Exchange in the spot market follows the rule “When prices are rising - Buy; when prices are falling - Sell”. He ensures that his portfolio is intact at the end of every three months. He has a basic understanding that buy equates to call option and sell equates to put option. For a three-month period, he carried out trade in five listed companies as follows:

Company	Spot price Sh.	Three months expected price	Exercise price Sh.
Safariland	445	Increase by 20%	470
Absaland	415	Increase by 15%	450
CICD	395	Decrease by 10%	370
Jubila	380	Increase by 5%	390
KCIQ	405	Decrease by 15%	395

Additional information:

1. Assume that Mark Otieno only deals with 100 shares at a time.

2. Assume that Mark Otieno exercises his option.

Required:

(i) Compute the price of the shares and indicate the option chosen in each of the five companies.

(ii) Using appropriate computations, determine the gain or loss in each of the tradings in the above companies after three months.

August 2025

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