KASNEB Advanced Financial Management - Question 1a

Summarise FIVE benefits of restructuring in the public sector. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 2a

Describe FOUR assumptions of the capital asset pricing model (CAPM). ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 3a

Examine THREE instruments that could be used in financing real estate. ... [Click to view full question and step-by-step solution]

December 2024

1a

Corporate restructuring and re-organisation

Summarise FIVE benefits of restructuring in the public sector.

1b

Contemporary issues and emerging trends

Highlight FOUR key European Union achievements and tangible benefits in the context of international financial systems.

1c

Advanced capital budgeting decision

The directors of Jasiri Ltd. wishes to identify the optimum replacement cycle that will minimise the cost of operating its fleet of vehicles.

The relevant data is as follows:

Age of vehicles (years)	0	1	2	3	4
	Sh.“000”	Sh.“000”	Sh.“000”	Sh.“000”	Sh.“000”
Replacement cost	7,000	-	-	-	-
Annual operating and maintenance cost		500	750	1,000	2,000
Residual value at the end of the year		4,750	3,500	3,000	2,250

Additional information:

The company’s cost of capital is 10%.
Ignore taxation.

Required:

Using the annual equivalent cost (AEC) technique, advise Jasiri Ltd. on the best time to replace the vehicles.

2a

Portfolio theory and analysis

Describe FOUR assumptions of the capital asset pricing model (CAPM).

2b

Portfolio theory and analysis

Peter Mwangangi, an investor at the securities exchange intends to construct a minimum variance portfolio comprising the shares of two companies; Simba Ltd. and Nyati Ltd. The projected returns on the shares of the two companies under three different states of the economy are as follows:

State of economy	Probability	Simba Ltd. (%)	Nyati Ltd. (%)
Boom	0.30	18	10
Normal	0.45	16	14
Recession	0.25	9	16

Required:

(i) The weights of the two company’s shares in the minimum variance portfolio.

(ii) The expected return for the minimum variance portfolio.

(iii) The standard deviation for the minimum variance portfolio.

2c

Advanced financing decision

Jamla Ltd. is considering undertaking a financial reconstruction during which it would repurchase its outstanding ordinary shares using debt. This will raise its debt to equity ratio to 1.80. The following information was available for the company:

Existing debt to equity ratio is 1.20.
The asset beta is 0.60.
The risk-free rate of return is 6%.
The return of market portfolio is 12%.
Debt finance is considered to be risk free.
The corporate tax rate is 30%.

Required:

(i) The firm’s levered equity beta before and after the financial reconstruction.

(ii) The firm’s cost of equity before and after the financial reconstruction using the capital asset pricing model (CAPM).

(iii) The firm’s weighted average cost of capital (WACC) before and after the financial reconstruction.

3a

Real estate finance

Examine THREE instruments that could be used in financing real estate.

3b

Advanced financing decision

The following extract of statement of financial position of Varma Ltd. shows the capital structure of the company as at 31 March 2024 which the management of the company considers optimal:

	Sh.“000”
Ordinary share capital (Par value Sh.375)	187,500
Reserves	364,500
Shareholder’s equity	552,000
Long-term liability:
14% debenture stock (Par value Sh.1,500)	355,500
Capital employed	907,500

Additional information:

1. The company’s earnings before interest and tax (EBIT) averages Sh.150,000,000 per annum. These earnings are expected to be maintained in the foreseeable future.

2. The ordinary shares are currently trading at Sh.800 per share.

3. The market price of the debenture is Sh.1,575 per debenture.

4. The corporate tax rate for the company is 30% per annum.

Required:

Using the net income approach (incorporating taxes), calculate the company’s:

(i) Cost of equity.

(ii) After tax cost of debt (market weighted).

(iii) Weighted average cost of capital (WACC).

3c

Advanced financing decision

Outline two assumptions of the net income approach used in determining the capital structure of a firm.

4a

Financial risk management

Assess THREE differences between “exchange traded options (ETO)” and “over the counter (OTC)” options in relation to derivatives markets.

4b

Contemporary issues and emerging trends

Financial Technology (FinTech) startups have had a profound and disruptive impact on traditional banking and payment systems in the global context. This disruption has been driven by several key factors.

In relation to the above statement, explain FOUR key factors that Financial Technology (FinTech) startups may have contributed to disruption on traditional banking and payment systems in the global context.

4c

Advanced financing decision

ABA Ltd. has a 20-year, 14% debenture worth Sh.250 million which has been in operation for the last 10 years. ABA Ltd. still has in its books issue costs amounting to Sh.900,000 being half the total amount originally capitalised. This debenture can be paid off at any time but the financiers will charge a penalty amounting to 9% of face value.

The directors of the company are considering replacing this debenture with a new 10-year, 12% debenture with a face value of Sh.250 million. The issue costs will amount to 10% of gross proceeds. The company is in the 30% tax bracket and there will be interest overlap for 3 months.

Required:

(i) The net cash investment that will be required to replace the existing debenture.

(ii) The annual cash benefits to be derived from refinancing the current debenture.

(iii) Using the Net Present Value (NPV) method, advise ABA Ltd. on whether or not to refund the existing debenture.

5a

Mergers and acquisitions

Discuss FOUR potential pitfalls that a merger analyst should consider when reviewing acquisition transactions.

5b

Financial risk management

Kopa Ltd., a United Kingdom (UK) firm sold goods on credit to Belfast Ltd., a firm in the United States of America (USA). This firm expects to receive United States Dollars (USD) 365,000 in six months’ time from now. The firm is considering various choices in order to hedge the transactions exposure and has collected the following data:

The following exchange rates are provided:

Spot rate USD($)/UK(£):	1.5617 – 1.5773
Six months forward rate (USD($)/UK(£):	1.5510 – 1.5625

The money market annual rates are as follows:

	Borrowing (%)	Deposit(%)
United States Dollars ($)	12	9
Sterling pounds (£)	14	11

Foreign currency option prices in cents per sterling pound for a contract size of £12,500 in six months are as follows:

Exercise price	Call option (six months)	Put option (six months)
USD($) 1.70/1 UK(£)	3.7	9.6

Required:

Using appropriate computations, advise Kopa Ltd. on the most suitable hedging strategy to use among the following:

(i) Forward market hedge.

(ii) Money market hedge.

(iii) Currency options.

December 2024

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