KASNEB Financial Management - Question 4a

In relation to dividend decision of a firm, highlight FIVE advantages of scrip dividend. ... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 4c

The following data relates to Emaro Ltd., a manufacturing company, for the year ended 31 December 2024: TurnoverSh.3,000,000Costs as percentages of sales... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 5c

Globex Ltd. had the following statement of financial position and income statement over the last three years as follows: 2022Sh.“000” 2023Sh.“000” 2024Sh... [Click to view full question and step-by-step solution]

FM April 2025 Past Paper & PDF Solutions

1a

Overview of financial management

Examine THREE overlaps and THREE conflicts that could arise as firms strive to achieve various financial and non-financial objectives.

1b

The financing decision Business/Financial asset Valuation models Introduction to capital structure decisions Introduction to capital budgeting decisions Time-value of money

Pivot Ltd. is considering raising an additional Sh.20 million to finance an expansion programme. The firm’s existing capital structure which is considered to be optimal is as follows:

	Sh.“000”
Ordinary share capital	100,000
Reserves	50,000
16% debentures (Sh.1,000 par value)	62,500
14% preference shares capital (Sh.20 per value)	37,500
	250,000

Additional information:

The firm expects to generate Sh.4 million from retained earnings for this expansion programme.
Additional new ordinary shares will be issued at Sh.90 each subject to a floatation cost of Sh.10 per share. The most recent dividend paid by the company is Sh.4 per share. The firm’s dividends are expected to grow at the rate of 5% per annum in perpetuity.
The company will issue new 16% debentures at a price of Sh.1,100 with a floatation cost of Sh.5 per debenture.
New 14% preference shares will be issued at Sh.30 with a floatation cost of Sh.2 per share.
Corporation tax rate applicable is 30%.

Required:

(i) The cost of retained earnings.

(ii) The cost of new ordinary share capital.

(iii) The cost of new 16% debentures.

(iv) The cost of new preference shares.

(v) The company’s weighted marginal cost of capital (WMCC).

2a

The financing decision Dividend decision

Distinguish between the following terms as used in finance:

(i) “Finance lease” and “Operating lease”.

(ii) “Capital structure” and “Financial structure”.

(iii) “Scrip issue” and “rights issue”.

2b

The financing decision Business/Financial asset Valuation models

Montage Limited’s ordinary shares are currently trading at the securities exchange at Sh.30 each. The firm is considering raising additional capital to finance an expansion programme. The board of directors has proposed to raise the funds using a rights issue.

The expansion programme is expected to cost Sh.5,000,000. This investment will generate additional net operating cash flows of Sh.1,700,000 each year for a period of 5 years.

This information has not been released but shall be released upon announcement of the rights issue. The firm has in issue 2,000,000 ordinary shares. The cost of capital is 12%.

Required:

Calculate the cum-right market price per share of the company.

2c

Introduction to portfolio analysis

The following information relates to two securities; security X and security Y where an investor has a capital of Sh.1,500,000 in which Sh.900,000 is to be invested in Security X while Sh.600,000 is to be invested in Security Y.

The returns and associated probabilities for the various economic states are as shown below:

Economic States	Probability	Returns (%)
		Security X	Security Y
A	0.20	10	18
B	0.30	15	24
C	0.50	17	26

Required:

(i) Expected portfolio return.

(ii) Using the mathematical model, compute the portfolio risk.

3

Introduction to capital budgeting decisions

The management of Talatibu Industries Ltd. is reviewing the company’s capital investments. There are six projects under consideration as follows:

Project A:

Initial outlay: Sh.29 million.

Projected returns are as follows:

Year	Project returns
	(Sh.“million”)
1	8
2	12
3	10
4	6

The capital equipment purchased at the start of the project could be resold for Sh.5 million at the start of the fifth year.

Project B:

It would involve a current cash outlay of Sh.44 million on capital equipment and Sh.20 million on working capital.

Projected returns are as follows:

Year	Sales	Variable costs	Contribution	Fixed cost	Profit
	Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”	Sh.“million”
1	75	50	25	10	15
2	90	60	20	10	20
3	42	28	14	8	6

Fixed costs include an annual charge of Sh.4 million for depreciation. At the end of the third year, the working capital investment would be recovered and the equipment would be sold for Sh.5 million.

Project C:

It would involve a current cash outlay of Sh.50 million on equipment and Sh.15 million on working capital. The investment in working capital would be increased to Sh.21 million at the end of the first year. Annual cash profits would be Sh.18 million per year, at the end of which the investment in working capital would be recovered.

Project D:

It would involve an outlay of Sh.20 million immediately and a further outlay of Sh.20 million after one year. Cash profits thereafter would be as follows:

Year	Profits
	(Sh.“million”)
2	15
3	12
4-8	8 per annum

Project E:

This is a long-term project involving an immediate outlay of Sh.32 million and annual returns of Sh.4.5 million in perpetuity.

Project F:

This is a long-term project involving an immediate outlay of Sh.20 million and annual returns as follows:

Year	Profits
	(Sh.“million”)
1 - 5	5
6 - 10	4
11 to perpetuity	3

Additional information:

1. The company discounts all projects of ten years duration or less at a cost of capital of 12% and all the other projects at a cost of 15%.

2. Ignore taxation.

Required:

(a) Calculate the Net Present Value (NPV) of each project.

(b) Using calculations in (a) above, advise on the projects to be undertaken.

(c) Calculate the Internal Rate of Return (IRR) for Projects A, C and E.

4a

Dividend decision

In relation to dividend decision of a firm, highlight FIVE advantages of scrip dividend.

4b

Contemporary issues and emerging trends

Digitisation of financial transactions involves using technology to replace traditional paper-based on manual processes with electronic systems. The transformation includes the use of digital payments. This digitisation is driven by advancements in technology and the rise of Fintech.

Required:

In relation to the above statement, explain FIVE advantages of digitisation of financial transactions.

4c

Working capital management

The following data relates to Emaro Ltd., a manufacturing company, for the year ended 31 December 2024:

Turnover	Sh.3,000,000
Costs as percentages of sales	(%)
Direct materials	30
Direct labour	25
Variable overheads	10
Fixed overheads	15
Selling and distribution	5

Additional information:

On average:

1.	Accounts receivables take 2.5 months before payment.
2.	Raw materials are in inventory for 3 months.
3.	Work-in-progress represents two months of half produced goods.
4.	Finished goods represent one-month production.
5.	Credit is taken as follows: Direct materials 3 months Direct labour 1 week Variable overheads 1 month Fixed overheads 1 month Selling and distribution 0.5 months
Note:	Assume that all direct materials are allocated to work-in-progress when production starts, that is, work-in-progress and finished goods are valued at materials, labour and variable expense cost.

Required:

Compute the working capital requirement of Emaro Ltd. assuming that their labour force is paid for 50 working weeks a year.

5a

Financial institutions and markets

Distinguish between the “organised markets” and “over-the-counter markets” in the context of financial institutions and markets.

5b

Personal financial management

Explain THREE reasons why investment management is necessary in making personal financial management decisions.

5c

Financial statements analysis and forecasting

Globex Ltd. had the following statement of financial position and income statement over the last three years as follows:

	2022 Sh.“000”	2023 Sh.“000”	2024 Sh.“000”
Cash	1,683	1,161	606
Accounts receivable	5,889	8,610	12,153
Inventories	6,093	7,839	9,861
Current assets	13,665	17,610	22,620
Net fixed assets	7,743	13,290	13,092
Total assets	21,408	30,900	35,712
Accounts Payable	5,586	8,832	10,839
Accruals	903	1,548	1,761
Bank loan	750	2,700	3,150
Current liabilities	7,239	13,080	15,750
Long-term debt	1,500	3,000	2,850
Shareholder’s equity	12,669	14,820	17,112
Total liabilities and shareholders equity	21,408	30,900	35,712
Sales	35,589	44,856	49,047
Cost of goods sold	(25,611)	(33,372)	(36,048)
Selling, general and administrative expenses	(6,828)	(7,413)	(8,379)
Interest	(219)	(564)	(600)
Profit before taxes	2,931	3,507	4,020
Taxes	(1,170)	(1,356)	(1,728)
Profit after taxes	(1,761)	(2,151)	(2,292)

Required:

Using common-size analysis, evaluate trends in Globex Ltd. financial condition and performance.

April 2025

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