CPA › Financial Management › April 2023

CPA Financial Management – April 2023 Past Paper & Answers

Unit: Financial Management

15 Questions

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Questions

Download CPA Financial Management April 2023 past paper with detailed answers and marking scheme. This paper is based on KASNEB examination standards and is ideal for revision and exam preparation.

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Other Financial Management Past Papers

1a
Overview of financial management
​​Management of a limited liability company is appointed to promote and protect shareholders’ interest in the performance of their functions. The aim is to maximise shareholders’value. The management, however, could have interest that might be in conflict with shareholders’ interest. 

Required: 
In reference to the above statement: 

(i) Identify this type of conflict in modern day financial management of a firm.

(ii) Explain THREE factors that could contribute to the conflict identified in (a) (i) above. 

(iii) As a financial management professional, explain FOUR strategies that could be used to manage or mitigate this conflict to protect shareholders.
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1b
Introduction to capital budgeting decisions
​ ​ ​​Cipo Ltd. is evaluating an investment project which requires the importation of a new machine at a cost of Sh.3,700,000. The machine has a useful life of six years and a salvage value of sh.1,000,000. 

Additional information:
1.
The following additional costs would be incurred in relation to the machine: 
1.
Sh.
Modification cost
1,000,000
Import duty 
900,000
Installation cost 
375,000
Freight charges 
225,000
2.
The machine is expected to increase the company’s annual cash flow (before tax) as shown below: 
2.
Year
1
Sh.“000”
2
Sh.“000”
3
Sh.“000”
4
Sh.“000”
5
Sh.“000”
6
Sh.“000”
Increase in cash flow 
1,760
1,360
1,050
900
840
750
3.
The machine is to be fully depreciated over its useful life using the straight-line method.
4.
The corporate rate of tax is 30% while the cost of capital is 10%.
5.
The maximum acceptable payback period for the company for all capital project is four years.

Required: 
(i) Total initial cost.

(ii) Annual net cash flow. 

(iii) Payback period of the machine. 

(iv) Net present value (NPV) of the machine.

(v) Advise the company’s management on whether to import the machine based on your results in (b) (iii) and (b) (iv) above. 
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2a
The financing decision
​​Summarise FIVE factors that firms should consider when making financing decisions.
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2b
Introduction to capital structure decisions
​ ​ ​ ​​The following information was extracted from the financial statements of Rembo Ltd. for the year ended 31 December 2022:
 
Capital structure
Amount Sh.“000”
Ordinary shares: 750,000 shares of Sh.20 each
15,000
Retained earnings 
48,900
8% preference shares (Sh.100 par value) 
5,000
10% debentures 
7,500
76,400

Additional information: 
  1. The preference shares were originally sold in 2014 at Sh.104 per share. The current price is Sh.94 although a similar issue can be made at Sh.89 net. 
  2. Ordinary shares are currently selling at Sh.38.40 on the securities exchange. 
  3. The debentures were sold in 2015 and realised Sh.96 per unit. The current price is Sh.80 and it is anticipated that a similar issue would also sell at Sh.80 per unit. Corporate tax rate is 30%. 
  4. Last year’s dividend amounted to Sh.3,000,000 which was 70% of the net earnings. The company expects these dividends to grow at a rate of 6% per annum and the dividend payout ratio to remain the same. 
  5. New ordinary shares can be sold at Sh.40 but in order to guarantee success, they would have to be sold at Sh.35 per share. 
Required: 
(i) Cost of preference shares. 

(ii) Cost of ordinary shares. 

(iii) Cost of debentures. 

(iv) Market weighted average cost of capital (WACC) of the firm. 
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2c
Business/Financial asset Valuation models
​ ​ ​​Umi Limited is contemplating to issue 8% bonds redeemable at Sh.100 par value in three years time. Alternatively, each bond may be converted on that date into 30 ordinary shares of the company. The current market price per share is Sh.3.30 and this is expected to grow at a rate of 5% per annum. The company’s cost of debt is 6% per annum. 

Required: 
Compute the following: 

(i) Market value of the bond assuming conversion occur after 3 years. 

(ii) The floor value of the bond assuming redemptions occur at par. 

(iii) The conversion premium per share.
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3a
Islamic finance
​​Highlight FIVE reasons for the increased popularity of Islamic Finance in the recent past.
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3b
Dividend decision
​​Bright Moon Ltd. currently owns 100,000 outstanding ordinary shares with a market price of Sh.10 per share. The firm has Sh.1 million earnings after tax and intends to invest Sh.2 million during the year 2023. The firm is also considering declaring a dividend of Sh.5 per share at the end of the year. The firm’s opportunity cost of capital is 10%. 

Required: 
(i) The price of the share at the end of the year 2023 assuming dividend is not declared. 

(ii) The price of the share at the end of the year 2023 assuming dividend is declared. 

(iii) The number of new shares to be issued in (b) (i) and (b) (ii) above.
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3c
Introduction to portfolio analysis
​​The Maji Group portfolio comprises of Maji A shares with an expected return of 10% and a standard deviation of 20% and Maji B shares with an expected return of 16% and a standard deviation of 40%. The correlation between Maji A shares and Maji B shares is 0.4. The portfolio is comprised of 30% Maji A and 70% Maji B. 
 
Required: 
(i) The expected return of the portfolio.
 
(ii) The standard deviation of the portfolio. 
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4a
Financial institutions and markets
​​Distinguish between the following terms as used in financial institutions and markets: 

(i) “Disintermediation” and “intermediation”. 

(ii) “Call markets” and “continuous markets”.
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4b
Introduction to portfolio analysis
​​Outline FOUR roles of mutual funds as investment avenues.
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4c
Financial statements analysis and forecasting
​ ​ ​​The following statement of profit or loss relates to Memuko Ltd. for the year ended 31 December 2022 and 31 December 2021: 

Memuko Ltd 
Statement of profit or loss for the years ended 31 December:

2022
2021
Sh.“000”
Sh.“000”
Net sales 
52,678.5 
46,485 
Cost of goods sold 
(19,039.5)
(16,632)
Gross margin 
33,639 
29,853
Selling and administrative expenses
(19,737) 
(17,037)
Other operating expenses 
(1,228.5) 
(469.5) 
Operating income
12,673.5 
12,346.5 
Interest expense 
(1,099.5) 
(532.5) 
Other income (net expenses) 
 9,715.5 
 1,482 
Income before taxes 
21,289.5 
13,296 
Income tax expense 
(3,576) 
(3,060) 
Net income 
17,713.5 
10,236 

Required: 
(i) Present the common size analysis for Memuko Ltd. income statement. 

(ii) Analyse the changes in cost of goods sold, selling and administrative expenses, operating income and income before taxes for the year ended 31 December 2022 compared to 31 December 2021.

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5a
Contemporary issues and emerging trends
​​Distinguish between “herd behaviour” and “anchoring bias” as used in behavioural finance.
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5b
Personal financial management
​​Outline SIX steps involved in personal financial management.
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5c
Working capital management
​ ​​The following financial statement data relates to Bamaco Ltd. for the year ended 31 December 2022:

Sh.“000”
Inventory  - Opening balance
4,000
Inventory  - Ending balance 
4,600
Trade receivables 
5,000
Trade payables 
3,400
Credit sales 
50,000
Cost of goods sold 
40,000

Number of days in a year is 365 days.

Required: 
Compute the net operating cycle of Bamaco Ltd.
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5d
Time-value of money
​​John Osoro has deposited Sh.700,000 into a savings account at an annual interest rate of 5% compounded monthly with additional deposits of Sh.10,000 per month (made at the end of each month). 

Required: 
Determine the value of the investment after 10 years.
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