CPA › Financial Management › August 2026

CPA Financial Management – August 2026 Past Paper & Answers

Unit: Financial Management

18 Questions

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Questions

Download CPA Financial Management August 2026 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.

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1a

Overview of financial management

Finance managers are required to balance shareholder wealth maximisation with the expectations of other stakeholders while observing ethical standards.

Required:

(i) Distinguish between “financial objectives” and “non-financial objectives” of a firm.

(ii) Explain FOUR ethical issues that may arise in financial management decisions.

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1b

Financial institutions and markets

The following information relates to the Nairobi Securities market for the month of July 2026:

Security	Opening price (Sh.)	Closing price (Sh.)	Number of shares in issue (million)
Amani Bank Ltd.	28	31	600
Kwetu Cement Ltd.	42	39	400
Maji Utilities Ltd.	18	21	800

Required:

(i) Explain THREE functions of a securities exchange in a financial system.

(ii) Calculate the market capitalisation of each security at the end of July 2026.

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1c

The financing decision

Explain FOUR circumstances under which a firm may prefer lease finance to outright purchase of an asset.

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1d

The financing decision

Tazama Ltd. intends to acquire specialised production equipment with a cash price of Sh.36,000,000. The company is considering financing the acquisition through a five-year hire purchase arrangement. The supplier requires an immediate deposit of Sh.6,000,000, with the balance payable in five equal annual instalments at the end of each year. The hire purchase arrangement carries an effective interest rate of 11% per annum.

Required:

Calculate the annual hire purchase instalment payable by Tazama Ltd.

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2a

Personal financial management

Micha Chemuto, a salaried employee, plans to purchase a residential house using a long-term mortgage loan. The proposed loan will require monthly repayments over 20 years. The lending institution has offered either a fixed-rate mortgage or a variable-rate mortgage.

Required:

Explain FOUR personal financial management factors that should be considered before taking the loan.

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2b

Financial statements analysis and forecasting

Describe THREE limitations of ratio analysis as a tool for evaluating financial performance of a firm.

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2c

Financial statements analysis and forecasting

The management of Vitabu Publishers Ltd. is preparing financial forecasts for the year ending 31 December 2027 using the percentage-of-sales method. The following information relates to the year ended 31 December 2026:

Item	2026 actual (Sh.“000”)
Sales revenue	150,000
Cost of sales	90,000
Operating expenses	30,000
Current assets	45,000
Current liabilities	24,000
Non-current assets	80,000

Additional information:

1. Sales are expected to increase by 20% in 2027.

2. Cost of sales and operating expenses vary directly with sales revenue.

3. Current assets and current liabilities vary directly with sales revenue.

4. Non-current assets will remain unchanged.

Required:

(i) Prepare a forecast statement of profit or loss extract for 2027 showing gross profit and operating profit.

(ii) Determine the forecast current assets and current liabilities as at 31 December 2027.

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2d

Introduction to capital structure decisions

Babito Logistics Ltd. has the following capital structure as at 31 July 2026:

Source of finance	Book value (Sh.“000”)
Ordinary share capital	60,000
11% Preference shares	15,000
9% Debentures	45,000
Retained earnings	30,000

Additional information:

1. Ordinary shares have a market price of Sh.60 per share.

2. Dividend paid during the previous year was Sh.4.20 per share.

3. Dividends are expected to grow at the rate of 6% per annum indefinitely.

4. Preference shares currently trade at Sh.112 per share.

5. Debentures are redeemable at par after eight years and currently trade at Sh.960 per Sh.1,000 debenture.

6. Corporation tax rate is 30%.

Required:

Determine the market value weighted average cost of capital (WACC) of Babito Logistics Ltd.

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3a

The financing decision

Biafra Electronics Ltd. plans to raise Sh.300 million through a rights issue in order to reduce expensive short-term debt. The company currently has 120 million ordinary shares in issue, trading at a cum-rights market price of Sh.18 per share. The subscription price of each new ordinary share is Sh.15.

Assume that the rights issue is fully subscribed and that transaction costs are ignored.

Required:

(i) Determine the number of new ordinary shares to be issued.

(ii) Compute the theoretical ex-rights price per of the company.

(iii) Determine the value of one right.

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3b

Introduction to portfolio analysis

An investor is comparing two assets whose expected returns and standard deviations are shown below:

Item	Asset K	Asset L
Expected return	13%	19%
Standard deviation	10%	22%

Additional information:

1. The coefficient of correlation between the returns of the two assets is 0.15.

2. The investor will invest 70% of the funds in Asset K and 30% in Asset L.

Required:

(i) Explain the effect of a low positive correlation on portfolio risk.

(ii) Calculate the expected return of the portfolio.

(iii) Calculate the standard deviation of the portfolio.

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3c

Introduction to capital structure decisions

Timau Engineering Ltd. intends to raise Sh.80 million to finance a new production facility in Lodwar. The directors are considering the following financing alternatives:

Plan A: Finance entirely by issuing ordinary shares.

Plan B: Finance using 40% ordinary shares and 60% 10% debentures.

Additional information:

1. Expected earnings before interest and tax (EBIT) is Sh.24 million.

2. Existing ordinary shares are 5 million.

3. Market price per share is Sh.20.

4. Corporation tax is 30%.

Required:

(i) Calculate the earnings per share (EPS) under each financing plan.

(ii) Determine the EBIT indifference point.

(iii) Recommend the most appropriate financing plan if management expects EBIT to increase substantially over the next five years, giving supporting reasons.

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4a

Islamic finance

Islamic finance has continued to grow in globally as well as locally.

Required:

(i) Explain the term "Sukuk" as used in Islamic Finance.

(ii) Evaluate THREE circumstances under which an organisation would prefer Sukuk financing to conventional corporate bonds.

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4b

Working capital management

The treasury department of Tunu Chemicals Ltd. maintains high levels of inventories to avoid production interruptions. The annual demand for a key raw material is 90,000 units, ordering cost is Sh.1,200 per order and annual holding cost is Sh.80 per unit.

Additional information:

1. The supplier takes 10 days to deliver an order.

2. Daily usage is 250 units.

3. The company maintains a safety stock of 1,000 units.

Required:

(i) Explain TWO benefits of applying just-in-time inventory management.

(ii) Determine the economic order quantity (EOQ).

(iii) Calculate the reorder level.

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4c

Introduction to capital budgeting decisions

Nuru Packaging Ltd. is considering replacing its packaging machine due to technological advances. The proposed new machine will cost Sh.22,000,000 and will replace an existing machine that could be sold immediately for Sh.4,000,000. The new machine is expected to reduce operating costs by Sh.7,200,000 per year for five years.

At the end of year five, the new machine will have a residual value of Sh.3,000,000.

Additional information:

1. If retained, the existing machine will have no residual value at the end of five years.

2. Depreciation is on a straight-line basis for accounting purposes only.

3. Corporation tax rate is 30% and is payable in the year in which taxable profit arises.

4. The required rate of return is 12% per annum.

5. Ignore capital allowances.

Required:

(i) Calculate the annual after-tax cash savings.

(ii) Compute the net present value (NPV) of the replacement project.

(iii) Advise management on whether to replace the existing machine.

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5a

Contemporary issues and emerging trends

Finance managers are increasingly making financing decisions in an environment characterised by digitisation, blockchain technology and artificial intelligence.

Required:

Evaluate THREE ways in which emerging financial technologies could influence future of financing and investment decisions of listed companies.

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5b

Personal financial management

Explain TWO financial problems commonly encountered in managing individual financial affairs.

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5c

Dividend decision

The board of Marigold Express Ltd. is reviewing dividend alternatives after reporting earnings available to ordinary shareholders of Sh.45,000,000 for the year ended 30 June 2026. The company has 9,000,000 ordinary shares in issue and requires Sh.30,000,000 for acceptable investment projects. The target capital structure is 60% equity and

40% debt.

Required:

(i) Explain THREE factors that could influence the dividend policy of Marigold Express Ltd.

(ii) Determine the dividend per share under a residual dividend policy.

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5d

Business/Financial asset Valuation models

The following information relates to a company whose ordinary shares are currently under valuation:

Item	Amount
Expected dividend per share in one year	Sh.3.20
Expected constant growth rate	6%
Required rate of return	14%

Required:

(i) State TWO limitations of using the Gordon dividend growth model in share valuation.

(ii) Determine the intrinsic value per ordinary share using Gordon's dividend growth model.

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Unlock Solution

CPA: Financial Management — August 2026

The computation for this specific sitting involves adjusting the net profit for non-allowable expenses...

Step-by-Step Workings:

Net Profit1,800

Add: Non-Deductible13,000

Adjusted Profit14,800

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