KASNEB Advanced Financial Management - Question 1a

In the context of financial management, explain what is meant by 'stakeholder theory'. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 1c

Evaluate four advantages of employing organic growth strategies. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 2b

In the context of portfolio theory, explain the meaning of 'beta coefficient'. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 2c

The following data have been provided with respect to three shares traded on the Nairobi Securities Exchange (NSE): Share AShare BShare CRisk-free rate... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 2d

The following information relates to portfolios P and N: Portfolio PPortfolio NAverage return35%28%Beta1.251.00Standard deviation42%30%Non-systematic risk1... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 3a

Comment on the assertion that capital structure is strongly influenced by managerial behaviour. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 3c

Comment on the accuracy of the estimates produced in (b) (i) and (ii) above. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 4b

Discuss two advantages and two disadvantages of economic value added (EVA). ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 4c

The following information relates to Jasho Ltd.: Statement of profit or loss extracts for the year:20132014Sh.'million'Sh.'million'Revenue326380Pre-tax ... [Click to view full question and step-by-step solution]

KASNEB Advanced Financial Management - Question 5b

... [Click to view full question and step-by-step solution]

November 2015

1a

Contemporary issues and emerging trends

In the context of financial management, explain what is meant by "stakeholder theory".

1b

A company is considering whether to purchase equipment to increase its production and sales volumes. The equipment costs Sh.500,000,000 and has a useful life of three years after which it can be sold as scrap for Sh.80,000,000. For each of the three years of usage, the equipment is expected to increase both sales revenue and operating costs by Sh.600,000,000 and Sh.390,000.000 respectively. The company's cost of capital is 10%.

Required:

Compute the percentage change required in each ofthe following factors for the project to be rejected:

(i) Initial cost of the equipment.

(ii) Scrap value of the equipment.

(iii) Sales revenue.

1c

Mergers and acquisitions

Evaluate four advantages of employing organic growth strategies.

2a

Portfolio theory and analysis

In most cases. the assumption is that investors are risk-averse, that is, they like returns and dislike risk.

With reference to the above statement, explain why it is argued that only systematic risk and not total risk is important.

2b

Portfolio theory and analysis

In the context of portfolio theory, explain the meaning of "beta coefficient".

2c

Portfolio theory and analysis

The following data have been provided with respect to three shares traded on the Nairobi Securities Exchange (NSE):

	Share A	Share B	Share C
Risk-free rate of return	12%	12%	12%
Beta coefficient	1.340	1.000	0.750
Return on the NSE index	0.185	0.185	0.185

Required:

(i) Interpret the beta coefficients of shares A, B and C.

(ii) Using the capital asset pricing model (CAPM), compute the expected return on shares A, B and C.

2d

Portfolio theory and analysis

The following information relates to portfolios P and N:

	Portfolio P	Portfolio N
Average return	35%	28%
Beta	1.25	1.00
Standard deviation	42%	30%
Non-systematic risk	18%	10%

Assume that the risk free rate is 6% and the average market return is 15%.

Required:

(i) Sharpe's performance measure for portfolios P and N.

(ii) Treynor's performance measure for portfolios P and N.

(iii) Jensen's performance measure for portfolios P and N.

(iv) The appraisal ratio for portfolios P and N.

3a

Advanced financing decision

Comment on the assertion that capital structure is strongly influenced by managerial behaviour.

3b

Advanced financing decision

The finance director of Nyuki Ltd. wishes to estimate what impact the introduction of debt finance is likely to have on the company's overall cost of capital. The company is currently financed by equity only.

Nyuki Ltd.- Summarised capital structure

	Sh."000"
Ordinary shares (Sh.2.5 par value)	5,000
Reserves	11,000
	16,000

The company's current share price is Sh.4.20 and up to Sh.4 million of fixed rate five-year debt could be raised at an interest rate of 10% per year. The corporate tax rate is 30%.

Nyuki Ltd.'s current earnings before interest and tax are Sh.2.5 million. These earnings are not expected to change significantly for the foreseeable future.

The company is considering raising either Sh.2 million in debt finance or Sh.4 million in debt finance. In either case, the debt finance will be used to repurchase ordinary shares.

Required:

Using Modigliani and Miller's model in a world with corporate tax, estimate the impact on Nyuki Ltd.'s weighte average cost of capital of raising:

(i) Sh.2 million in debt finance.

(ii) Sh.4 million in debt finance.

3c

Advanced financing decision

Comment on the accuracy of the estimates produced in (b) (i) and (ii) above.

4a

Advanced capital budgeting decision Mergers and acquisitions

(i). Define the term "free cash flow to equity".

(ii). Explain how free cash flow to equity could be used for valuation.

4b

Contemporary issues and emerging trends

Discuss two advantages and two disadvantages of economic value added (EVA).

4c

Contemporary issues and emerging trends

The following information relates to Jasho Ltd.:

Statement of profit or loss extracts for the year:
	2013	2014
	Sh."million"	Sh."million"
Revenue	326	380
Pre-tax accounting profit	67	84
Taxation	23	29
Profit after tax	44	55
Dividends	15	18
Retained earnings	29	37
Statement of financial position extracts for the year:
	2013	2014
	Sh."million"	Sh."million"
Non-current assets	120	156
Net current assets	130	160
	250	316
Financed by:
Shareholders' funds	195	236
Medium and long-term bank loans	55	80
	250	316

Additional information:

Jasho Ltd. had non-capitalised leases valued at Sh.10 million in each year from 2012 to 2014.
Capital employed as per the year 2012 financial statements was Sh.223 million.
The pre-tax cost of debt was estimated to be 9% in year 2013 and 10% in year 2014.
Jasho Ltd.'s cost of equity was estimated to be 15% in year 2013 and 17% in year 2014.
The pre-tax accounting profit is obtained after deducting the economic depreciation of the company's non-current assets. This is also the depreciation used for tax purposes.
The target capital structure for Jasho Ltd. is 60% equity and 40% debt.
The effective tax rate was 30% in both year 2013 and year 2014.
Economic depreciation was Sh.30 million in year 2013 and Sh.35 million in year 2014.
Other non-cash expenses were Sh.10 million per year in both 2013 and 2014.
Interest expense was Sh.4 million in year 2013 and Sh.6 million in year 2014.

Required:

(i) Stating any assumptions made, estimate the economic value added (EVA) of Jasho Ltd. for both year 2013 and year 2014.

(ii) Comment on the performance of Jasho Ltd.

5a

Financial risk management

The main driver of option valuation is the volatility of returns of the associated asset.

Support the above statement.

5b

International financial management

5c

Financial risk management

Granada Ltd., a UK-based company, imports computer components from the Far East. The trading currency is the Singapore dollar (SS) and the value of the deal is $S$28$ million. Three month's credit is given. The current spot exchange rate is $S$2.8$ to one sterling pound (£). Because of recent volatility in the foreign exchange markets, Granada Ltd.'s directors are worried that a rise in the value of the $S$$ could wipe out the profits on the deal. Three alternative hedging methods have been suggested as follows:

A forward market hedge.
A money market hedge.
An option hedge.

Granada Ltd.'s treasurer has provided the following information:

1. The three-month forward rate is $S$2.79:£1.$

2. Granada Ltd. can borrow Singapore dollars at 2% interest rate per annum and sterling pounds at 5% per annum.

3. Deposit rates are 1% per annum in Singapore and 3% per annum in the UK.

4. A three-month American call option to buy $S$28$ million at an exercise rate of $S$2.785:£1$ could be purchased at a premium of $£200,000$ on the London OTC option market.

Required:

(i) Indicate which would be a better hedge between the forward market hedge and the money market hedge.

(ii) Evaluate the option hedge if the following spot rates were applicable in three months' time: $S$2.78:£1. S$2.82:£1.$

November 2015

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