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CPA Financial Management – August 2025 Past Paper & Answers

Unit: Financial Management

16 Questions

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Questions

Download CPA Financial Management August 2025 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 Financial Management.

Other Financial Management Past Papers

1a
Overview of financial management The financing decision Introduction to capital structure decisions
​​(i) Explain FOUR functions of a finance manager in an organisation. 

(ii) Highlight FOUR mechanisms that might be used to ensure that managers act in the best interest of the shareholders.
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1b
Business/Financial asset Valuation models Introduction to capital structure decisions
​ ​ ​ ​​Shabana Ltd. is intending to raise additional capital to finance a new project. The current market price per share (MPS) of the company is Sh.44 Cum-Div of the year 2024 declared but not yet paid. For the past six years, the company paid the following stream of dividends:

Year
2019
2020
2021
2022
2023
2024
Dividend per share (Sh.) 
3.0 
3.2
3.4
3.6
3.8
4.0

The existing capital structure of the firm is as follows:
 
Sh."000"
Ordinary share capital (Sh.20 par value) 
60,000
Reserves
20,000
14% debenture (Sh.100 par value) 
30,000
10% preference share capital (Sh.30 each) 
20,000
130,000

Additional information: 
1. The existing 14% debentures are currently selling at Sh.124 cum-interest. 
2. The existing 10% preference shares are currently trading at Sh.25 each. 
3. Corporation tax rate is 30%. 

Required: 
Compute the company’s existing overall weighted average cost of capital (WACC). 
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1c
Business/Financial asset Valuation models Introduction to capital structure decisions
​ ​ ​​Suppose the company in (b) above wants to raise additional Sh.50 million to finance an expansion programme as follows: 

  • 30% from retained earnings. 
  • 30% from the issue of new ordinary shares at Sh.40 each. A floatation cost of 2% of the issue price will be incurred and discount cost of Sh.3 per share issued will also be incurred. 
  • 40% of the additional funds will be raised from the issue of new 12% irredeemable debentures at current market value of Sh.110 each. The firm will incur Sh.10 floatation cost per unit issued. 
Required: 
(i) Compute the firm’s weighted marginal cost of capital (WMCC). 

(ii) Compute the number of ordinary shares to be issued to raise the desired external equity capital.
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2a
Working capital management
​​(i) Explain the term “overtrading” in relation to working capital management. 

(ii) Identify THREE signs that could indicate that a firm is overtrading.
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2b
Working capital management
Elimika Limited maintains a minimum cash balance of Sh.500,000. The firm’s standard deviation of its daily cash changes is Sh.200,000. In the current financial year, the annual interest rate is 14% and the transaction cost of buying and selling securities in the money market is Sh.150 per transaction. 

Assume 365 days in a year. 

Required: 
Using Miller-Orr cash management model, determine: . 

(i) The upper cash limit (H). 

(ii) The average cash balance. 

(iii) The return point (Z). 
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2c
Time-value of money
     
Assume that you have just won a competition prize with the following options:

Option A:
Lumpsum payment of Sh.25.8 million in 5 years time.
Option B:
A sum of Sh.16 million paid as follows:
  • Sh.5 million payable today.
  • Sh.5.5 million to be paid after one year
  • Sh.5.5 million to be paid after 2 years.
Option C:
Annual payment of Sh.1.4 million for 30 years, the first payment being made at the end of the year.
Option D:
A perpetual payment of Sh.1.38 million.

Required:
Assuming a required rate of return of 8%, advise on the payment option that you would select.
 
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3a
Contemporary issues and emerging trends
​​Distinguish between “cryptocurrency” and “block-chain technology”.
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3b
Financial institutions and markets
​​Describe FOUR roles of financial intermediation in an economy.
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3c
Financial statements analysis and forecasting
​ ​ ​​The following financial statement information relates to Kame Ltd. as at 30 June:

2023
2024
2025
Sh.“000”
Sh.“000”
Sh.“000”
Inventory
195,000
360,000
195,000
Trade receivables 
367,500
468,000
600,000
Cash
150,000
81,000
34,500
Current assets 
​\(\overline{712,500}\)​
​\(\overline{909,000}\)​
​\(\overline{972,000}\)​
Current liabilities
300,000
450,000
675,000
​\(\overline{\underline{412,500}}\)​
​\(\overline{\underline{459,000}}\)​
​\(\overline{\underline{297,000}}\)​

Additional information:
     Sh.
Sh. 
1

2024
2025
Credit sales 
2,250,000
2,295,000
Cost of goods sold 
1,680,000
1,800,000
2.
Assume 365 days in a year. 

Required: 
 Assess Kame Limited’s liquidity position for the years ended 30 June 2024 and 30 June 2025: 

(i) Inventory turnover time. 

(ii) Average collection time. 

(iii) Liquidity ratios (current ratio and Quick ratios). 
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4a
Dividend decision
​​Dividends can affect the price of the underlying securities in different ways. While dividend history of given shares plays a general role in its popularity, the declaration and payment of dividends also has a specific and predictable effect on share market prices. 

Required: 
Examine FOUR impacts of dividend payout on share prices.
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4b
Business/Financial asset Valuation models
​ ​​Mara Limited is a company quoted at the Securities Exchange and is experiencing a period of rapid growth. Due to this, a momentous growth of 15% per annum is anticipated during the next 5 years. Thereafter, a normal growth rate of 5% per annum is expected indefinitely. The shareholders of the company require a rate of return of 10% per annum on their investments. During the previous year, the company paid Sh.4 per share as dividends. 

Required: 
Advise an investor interested in Mara Limited on the maximum price to pay per share.
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4c
Introduction to capital budgeting decisions
​ ​ ​Talino Developers Ltd. is a manufacturer of bricks and concrete blocks. The company is considering replacing part of the current manual labour force by purchasing a small tractor with a forklift for use in loading bricks and concrete blocks. The purchase price of the tractor would be Sh.6,500,000. The tractor will have an economic useful life of 5 years but would require Sh.250,000 overhaul cost at the end of the third year. After 5 years, the tractor would be sold for Sh.1,500,000. 

The company estimates that it will cost Sh.2,000,000 per year to operate the tractor. However, the company will save Sh.1,500,000 annually on labour cost. Due to increase in handling efficiency, losses caused by breakages will be cut by Sh.2,500,000 per year. Sales will also go up by Sh.5,000,000 per year. The increase in sales level is expected to be maintained throughout the tractor’s useful life. 

The firm’s gross margin ratio is 40%, corporate tax rate is 30% and cost of capital is 12%. The firm provides for depreciation on a straight line basis. 

Required: 
Compute the net present value (NPV) of the project and advise on whether the tractor should be purchased.
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5a
Islamic finance
​​Summarise FOUR principles of Takaful as used in Islamic Finance.
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5b
Financial institutions and markets
​​Describe FOUR disadvantages of listing a company at the securities exchange of your country.
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5c
Introduction to portfolio analysis
​​Discuss THREE forms of market efficiency in relation to efficient market hypothesis (EMH).
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5d
Introduction to portfolio analysis
​ ​ ​ ​ ​ ​​The Alliance Fund is a mutual fund that holds long-term positions in a small number of non-dividend paying stocks. The holdings at the end of two recent years are as follows:

Year 2023 
                       Year 2024 
Stocks
Number of shares 
Price (Sh.) 
Number of shares 
Price (Sh.) 
A
20,000
45.25
20,000
48.75
B
45,000 
25.38 
45,000 
24.75 
C
75,000
14.50
75,000
12.38
D
23,000
87.13
23,000
98.50
E
30,800
56.50 
30,800 
62.50 
F
35,000 
63.00
35,000
77.00
G
42,400
32.00
42,400
38.63 
H
55,000
15.25
55,000
8.75
I
90,000
9.63
90,000
27.45
J
18,000 
71.25
18,000
75.38 
K
17,400
42.13 
17,400
49.63
L
27,400
19.88
0
27.88
M
0
17.75
30,000
19.75 

2023 Sh.

2024 Sh.
Cash  
708,400
574,600
Expenses 
146,000
166,000

At the end of each year, the Alliance Fund had 1,086,000 shares outstanding. 

Required: 
(i) The Net Asset Value (NAV) of a share of Alliance Fund at the end of year 2023 and year 2024 (including cash position in the total portfolio value). 

(ii) The growth rate in the net asset value (NAV).

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