KASNEB Advanced Financial Management - Question 1a

Summarise four assumptions of Modigliani and Miller (MM) hypothesis. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 2a

Imelda Nasimiyu holds the following portfolio of four risky assets and a deposit in a risk free asset: AssetPortfolio weight (%)Current return (%)BetaA... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 2b

Kubwa Ltd. is considering acquiring Ndogo Ltd. The selected financial data for the two companies is as follows: Kubwa Ltd.Ndogo Ltd.Annual sales (Sh.mill... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 4b

Explain three differences between traditional finance and behavioural finance. ... [Click to view full question and step-by-step solution]

December 2021

1a

Advanced financing decision

Summarise four assumptions of Modigliani and Miller (MM) hypothesis.

1b

Advanced financing decision

Zeka Ltd. has a cost of equity of 20%. The company currently has in issue 500,000 shares outstanding and selling on the Securities Exchange at Sh.200 each. The firm's earnings per share (EPS) at the end of the current year is estimated at Sh.15 and it intends to maintain a constant dividend payout ratio of 60%. The company's expected net income is Sh.6 million and the available investment proposals are estimated to require Sh.12 million.

Required:

Using Modigliani and Miller's proposition on dividend irrelevance, show that the payment or non-payment of dividend does not affect the current value of the firm.

1c

Financial risk management

XYZ Limited's share is currently selling at Sh.10. The share price will increase by 5% or reduce by 5% six months from now. The risk free rate of return is 6% and the strike price is Sh.10. The option will be exercised after six months.

Required:

Using the risk neutral approach, determine the value of a put option at the initial node of the binomial tree.

2a

Portfolio theory and analysis

Imelda Nasimiyu holds the following portfolio of four risky assets and a deposit in a risk free asset:

Asset	Portfolio weight (%)	Current return (%)	Beta
A	20	12	1.5
B	10	18	2.0
C	15	14	1.2
D	25	8	0.9
Risk free asset	30	5	0

The overall return on the market portfolio of risky assets is 11%.

Required;

(i). Determine the assets that are inefficient, efficient or super efficient using the capital asset pricing model (CAPM).

(ii) Highlight four weaknesses of using CAPM in (a) (i) above.

2b

Mergers and acquisitions

Kubwa Ltd. is considering acquiring Ndogo Ltd. The selected financial data for the two companies is as follows:

	Kubwa Ltd.	Ndogo Ltd.
Annual sales (Sh.million)	500	150
Net income (Sh.million)	40	5
Number of ordinary shares (millions)	10	2.5
Earnings per share (Sh.)	4.0	2.0
Market price per share (Sh.)	30	10

Both companies are in the 30% tax bracket.

Required:

(i) Kubwa Ltd.'s post acquisition earnings per share (EPS) assuming the two companies settle on an offer price of Sh.20 on a share for share exchange.

(ii) Kubwa Ltd.'s post acquisition earnings per share (EPS) assuming Ndogo Ltd.'s shareholders accept one 10% debenture (par value of Sh.1,000 each) for every 50 ordinary shares held.

(iii) The level of combined operating profit (EBIT) that Kubwa Ltd. will be indifferent between financing options in (b) (i) and (b) (ii) above.

3a

Mergers and acquisitions

Different companies have varied aims and timings for undertaking corporate restructuring. However, the single common objective in every restructuring exercise is to minimise the disadvantages and maximise on the advantages.

Comment on the above statement highlighting five reasons for undertaking corporate restructuring.

3b

Mergers and acquisitions

Distinguish between the following terms in relation to corporate restructuring and reorganisation:

(i) "Demerger" and "spin-off".

(ii) "Management buyout" and "management buy-in".

(iii) "Unbundling" and "capital re-organisation".

3c

Mergers and acquisitions Advanced financing decision

The following data relates to Kaban Ltd., a company that operates in the manufacturing sector for the year ended 31 December 2020:

	Sh. "000"
Sales	25,678
Total assets	49,579
Total liabilities	5,044
Retained earnings	1,770
Net working capital	(1,777)
Earnings before interest and taxes	2,605
Market value of equity	10,098
Book value of total liabilities	5,044

The company is currently paying interest on a long term debt instrument amounting to Sh.905.000 per year and that the company's total liabilities is constituted in the ratio of 2:5 between current and non-current components.

Required:

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

Note: The Springate model takes the following form:

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

Where:

$A =$$\displaystyle \frac{\text{Net Working Capital}}{\text{Total Assets}}$

$В =$ $\displaystyle \frac{\text{Operating Profit}}{\text{Total Assets}}$

$C =$$\displaystyle \frac{\text{Net Profit Before Taxes}}{\text{Current Liabilities}}$

$D =$$\displaystyle \frac{\text{Sales}}{\text{Total Assets}}$

4a

Mergers and acquisitions

Discuss four defense tactics available to target companies facing hostile takeover by predators.

4b

Contemporary issues and emerging trends

Explain three differences between traditional finance and behavioural finance.

4c

Financial risk management

Jaram Ltd., a United Kingdom (UK) based firm bought goods on credit worth 365.000 United States Dollars (USD) from a firm in the United States of America (USA) payable in six months time from now. The company is considering various choices in order to hedge the transactions exposure and has collected the following data:

Exchange rate (USS/1£):
Spot rate	1.3648-1.3722
Six months forward rate	1.3515-1.3655

The annual money market rates are given as follows:

	Borrowing rate (%)	Deposit rate (%)
US Dollars ($)	12	9
Sterling Pounds (£)	14	11

The foreign currency option prices (cents per Sterling Pound) for a contract size of £15,000 are as follows:

Exercise price	6-month call option	6-month put option
$1.40	4.7	9.5

Required:

Determine the amount payable using:

(i) Forward market cover.

(ii) Money market cover.

(iii) Currency options.

5a

Advanced capital budgeting decision

An investor is considering introducing new classic pens into the market. The firm is contemplating investing in purchase of a new plant costing Sh.250 million. The plant has a useful life of five years and is to be depreciated to zero on a straight line basis.

Due to market uncertainties, selling price per unit, unit variable cost and annual sales volume of the new classic pens have been estimated stochastically as follows:

Unit selling price		Unit variable cost		Annual sales volume
Value	Probability	Value	Probability	Volume	Probability
25	0.30	10	0.20	4.5 million	0.30
35	0.50	15	0.40	6 million	0.40
45	0.20	30	0.40	7.5 million	0.30

The firm will incur annual fixed operating costs excluding depreciation of Sh.20 million. The company's cost of capital is 10% and corporation tax rate applicable is 30%.

Required:

(i)	The expected net present value (NPV) of the project.
(ii)	Simulate the net present value (NPV) using the following random numbers: (752560 658055 957530 869950 544025) and hence determine the expected Net Present Value of the project.
(iii)	Determine the probability that the product will be a success.

5b

Advanced capital budgeting decision

Due to restrictions in the capital markets, Rahim Ltd.'s financial manager is able to provide only Sh.900 million for investments in the next financial year.

An analysis of the project's allowable for investment during the next financial year shows the following expected net present values (ENPV) for each project:

Project	Initial investment Sh. (millions)	Net present value Sh. (millions)
P	300	120
Q	300	90
R	600	150
S	300	30
T	150	12

Project Q and R are mutually exclusive.

Required:

Advise the management on the project(s) to undertake.

December 2021

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