CPA › Advanced Financial Management › November 2015

CPA Advanced Financial Management – November 2015 Past Paper & Answers

Unit: Advanced Financial Management

16 Questions

Download Complete Period

Get all questions and answers for "November 2015" in a single PDF file

Join the community! 550+ students upgraded in the last 24 hours. Limited Discount Seats Available

Questions

Download CPA Advanced Financial Management November 2015 past paper with detailed answers and marking scheme. This paper is based on KASNEB examination standards and is ideal for revision and exam preparation.

Access the full paper online, download the PDF, or study offline. Each question includes step-by-step solutions to help you understand key concepts in Advanced Financial Management.

Other Advanced Financial Management Past Papers

1a
Contemporary issues and emerging trends
​​In the context of financial management, explain what is meant by "stakeholder theory".
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
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.
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
1c
Mergers and acquisitions
​​Evaluate four advantages of employing organic growth strategies.
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
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.
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
2b
Portfolio theory and analysis
​​In the context of portfolio theory, explain the meaning of "beta coefficient".
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
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.

Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
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. 
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
3a
Advanced financing decision
​​Comment on the assertion that capital structure is strongly influenced by managerial behaviour.
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
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.

Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
3c
Advanced financing decision
​​Comment on the accuracy of the estimates produced in (b) (i) and (ii) above.
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
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.
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
4b
Contemporary issues and emerging trends
​​Discuss two advantages and two disadvantages of economic value added (EVA).
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
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: 
  1. Jasho Ltd. had non-capitalised leases valued at Sh.10 million in each year from 2012 to 2014.
  2. Capital employed as per the year 2012 financial statements was Sh.223 million. 
  3. The pre-tax cost of debt was estimated to be 9% in year 2013 and 10% in year 2014. 
  4. Jasho Ltd.'s cost of equity was estimated to be 15% in year 2013 and 17% in year 2014.
  5. 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.
  6. The target capital structure for Jasho Ltd. is 60% equity and 40% debt.
  7. The effective tax rate was 30% in both year 2013 and year 2014.
  8. Economic depreciation was Sh.30 million in year 2013 and Sh.35 million in year 2014.
  9. Other non-cash expenses were Sh.10 million per year in both 2013 and 2014.
  10. 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.
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
5a
Financial risk management
​​The main driver of option valuation is the volatility of returns of the associated asset. 

Support the above statement.
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
5b
International financial management
​​
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
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: ​\(S$2.78:£1. S$2.82:£1.\)​
Want to join the discussion?

Log in to post comments and interact with tutors.

Login to Comment
All Periods
April 2026
December 2025
August 2025
April 2025
December 2024
August 2024
April 2024
December 2023
August 2023
April 2023
December 2022
August 2022
April 2022
December 2021
Pilot December 2021
September 2021
May 2021
November 2020
November 2019
May 2019
November 2018
May 2018
November 2017
May 2017
November 2016
May 2016
November 2015
Pilot September 2015
Success!

Comment posted! We'll give you feedback soon.