KASNEB Financial Management - Question 1b

Highlight SIX functions of financial intermediaries in an economy. ... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 1c

The following information relates to two potential investments namely; investment M and investment K: Investment M Investment KProbabilityReturnPro... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 2a

Differentiate between a “unit trust” and a “mutual fund”. ... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 3a

In relation to emerging trends in finance, explain the term “cryptocurrency”. ... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 4b

The following information has been extracted from the books of Bidii Ltd. for the year ended 31 December 2023: Earnings after taxesSh.3.75 millionTotal d... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 5b

The managing directors of three profitable listed companies summarised their companies dividend policies as follows: Company A has deliberately paid no divid... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 5c

(C)You are presented with the following information in relation to Furaha Ltd. for the year ending 31 December 2024: Sh.Net sales3,000,000 Current liabilit... [Click to view full question and step-by-step solution]

FM April 2024 Past Paper & PDF Solutions

1a

Contemporary issues and emerging trends

In relation to agency theory:

(i) Highlight THREE types of conflicts between shareholders and government.

(ii) Propose THREE solutions to the conflicts identified in (a) (i) above.

1b

Financial institutions and markets

Highlight SIX functions of financial intermediaries in an economy.

1c

Introduction to portfolio analysis

The following information relates to two potential investments namely; investment M and investment K:

Investment M		Investment K
Probability	Return	Probability	Return
0.30	20%	0.20	20%
0.40	8%	0.60	8%
0.30	-4%	0.20	-4%

Required:

(i) Compute the expected return for each investment.

(ii) Determine the standard deviation of investment M and investment K.

(iii) Compute the portfolio return assuming that 30% of the total wealth is invested in investment M and 70% in investment K.

2a

Financial institutions and markets

Differentiate between a “unit trust” and a “mutual fund”.

2b

Business/Financial asset Valuation models

Sophia Wambia intends to invest Sh.2,000,000 in a 12% debenture for 3 years. The current market value of the debenture is Sh.80 per debenture. The required rate of return on the debenture is 10% and the par value is Sh.100.

Required:

Advise the investor on whether or not to invest in the debenture.

2c

Working capital management

Madarax Ltd. is an e-business company that trades solely over the internet. In the year 2023, the company made sales worth Sh.15,000,000.

All sales were on 30 day’s credit to commercial customers.

Extracts from the company’s most recent statement of financial position relating to working capital are as follows:

	Sh."000"
Trade receivables	2,466
Trade payables	2,220
Bank overdraft	3,000

Additional information:

In order to encourage customers to pay on time, Madarax Ltd. proposes introducing an early settlement discount of 1% for payment within 30 days while increasing its normal credit period to 45 days.
It is expected that on average, 50% of customers will take the discount and pay within 30 days, 30% of customers will pay within 45 days and 20% of customers will not change their current paying behaviour and will pay within 60 days.
Madarax Ltd. currently orders 15,000 units per month of product P, demand for which is constant. There is only one supplier of product P. The cost of product P purchases over the last year was Sh.540,000.
The supplier has offered a 2% discount for orders of product P of 30,000 units or more. Each order costs Madrax Ltd. Sh.150 to place and the holding cost is Sh.0.24 per unit per year.
Madrax Ltd. has an overdraft bank facility charging interest at the rate of 6% per year.

Assume a 365 days-year.

Required:

(i) Calculate the net benefit or cost of the proposed changes in trade receivables policy and comment on your findings.

(ii) Using suitable computation, determine whether the bulk purchase discount offered by the supplier is financially acceptable. Comment on the assumptions made in your computation.

3a

Contemporary issues and emerging trends

In relation to emerging trends in finance, explain the term “cryptocurrency”.

3b

Introduction to capital budgeting decisions

The directors of Bandala Ltd. are reviewing the options relating to a machine that is a key part of the company’s production process.

Option 1: Replace the machine:

The cost of the new machine would be Sh.1,000 million payable immediately.

Maintenance cost would be payable at the end of each year of the project.

The first maintenance payment for the new machine is Sh.51 million although this is expected to rise by 8% per year.

Option 2: Overhaul the existing machine:

The alternative to replacement is a complete overhaul of an existing machine, the cost of which would be Sh.650 million also payable immediately. This would be classified as capital expenditure.

However, under this option, the annual maintenance cost will be higher at Sh.81 million in year 1, with expected annual increase of 11%.

As the new machine is likely to reduce the variable costs, the contribution will be different depending on which machine is used.

The contribution from each machine (excluding maintenance costs) is tabulated as follows, with the inflows of funds assumed to be at the end of each year:

Year	1	2	3	4	5
Contribution of new machine (Sh.“000”)	310,000	330,000	380,000	420,000	440,000
Contribution of overhauled machine (Sh.“000”)	260,000	300,000	310,000	320,000	320,000

The cost of capital is 12%. Ignore taxation.

Required:

(i) Calculate the net present value (NPV) of each option.

(ii) Estimate the internal rate of return (IRR) of each option.

(iii) Interpret the result that you have obtained in (b) (i) and (b) (ii) above and recommend which alternative should be chosen.

4a

The financing decision

Ploughing back profits of a company is an internal source of funds for an organisation.

Required:

(i) Identify FOUR merits of ploughing back profits by a company.

(ii) Outline FOUR demerits of ploughing back profits by a company.

4b

Dividend decision

The following information has been extracted from the books of Bidii Ltd. for the year ended 31 December 2023:

Earnings after taxes	Sh.3.75 million
Total dividends	Sh.2.25 million
Number of shares outstanding	500,000 shares
Cost of capital	10%
Rate of return on investments	12.5%

Required:

The theoretical market value of the company’s shares using the Walter’s model.

4c

Time-value of money

A company negotiates a Sh.30 million loan for eight years from a financial institution. The interest rate is 14% per annum on the outstanding balance of the loan. The principal and interest will be repaid in eight equal year-end instalments.

Required:

(i) Prepare a loan repayment schedule.

(ii) Determine the amount of interest payable at the end of the 8th year.

5a

Islamic finance

Examine TWO ethical issues that need to be adhered to in the marketing of Islamic products and services.

5b

Dividend decision

The managing directors of three profitable listed companies summarised their companies dividend policies as follows:

Company A has deliberately paid no dividends for the last five years.
Company B always pays a low dividend per share (after adjusting for the general price index) and offer regular bonus issues.
Company C always pays a dividend of 5% of earnings after taxation.

Each managing director is convinced that his company dividend policy is maximising shareholders wealth.

Required:

Identify the dividend theory applied by each of the three companies.

5c

Financial statements analysis and forecasting

(C)You are presented with the following information in relation to Furaha Ltd. for the year ending 31 December 2024:

	Sh.
Net sales	3,000,000
Current liabilities	1,500,000
Debt-assets ratio	0.6
Debtors turnover based on net sales	2
Net profit margin	5%
Gross profit margin	25%
Inventory turnover ratio	1.25
Return on total assets	2%
Fixed asset turnover	0.8
Corporation tax rates	50%

Required:

Compute the following:

(i) Cost of sales.

(ii) Receivables.

(iii) Net profit.

(iv) Closing inventory.

(v) Total assets.

(vi) Non-current assets.

(vii) Long-term debt.

5d

Financial statements analysis and forecasting

Prepare a forecasted statement of profit or loss and statement of financial position for the year ending 31 December 2024 based on your results in (c) (i) to (c) (vii) above.

April 2024

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