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CPA Financial Management – December 2025 Past Paper & Answers

Unit: Financial Management

14 Questions

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Questions

Download CPA Financial Management December 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.

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1a

Overview of financial management

The relationship between shareholders and management is one of the agency relationships widely studied in finance because the actions of managers more often than not conflict with those of shareholders.

With reference to the above statement, evaluate FOUR causes of these conflict.

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1b

Financial institutions and markets

A financial market is a market where financial instruments are traded.

In light of the above statement, discuss THREE economic functions of financial markets.

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1c

Introduction to capital structure decisions

Mapema Ltd. and Tabaka Ltd. Manufacture affordable T500 phones. The selling price of each phone is Sh.10,000 with a variable cost of Sh.7,000. Each of the company realises average annual sales of Sh.700 million and incur average fixed costs of Sh.17 million per annum. However, the two companies differ in their capital structures as stated below:

Mapema Ltd. Is an all-equity financial company having issued close to 400,000 ordinary shares of Sh. 10 par value.
Tabaka Ltd. is financed with 200,000 ordinary shares of Sh. 10 par value and a loan of Sh. 16 million at an interest rate of 10% par annu

The corporation tax rate is 30%.

Required:

(i) The degree of operating leverage.

(ii) The degree of financial leverage.

(iii) The break-even point (in units).

(iv) The earnings per share (EPS)

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2a

Introduction to capital budgeting decisions

Mbolozi Ltd. is considering an investment in a project which requires an immediate payment of Sh.34,500,000 followed by a further investment of Sh. 12,420,000 at the end of the first year.

The subsequent return phase cash imflows are expected to arise at the end of the following years as follows

Year	1	2	3	4	5
Year Net cash inflows ( Sh."000")	14,950	17,825	13,225	10,925	8,625

Required:

Calculate the modified internal Rate of Return (MIRR) of this project assoming a te-investmest rate equals to the company's cost of capital of 8%.

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2b

The financing decision

Lease financing is a popular medium and long-term financing option in which the owner of the asset, lessor, grants another person, lessee the right to use the asset in exchange for a periodic payment.

Required:

Explain FOUR advantages of lease financing to the lessee.

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2c

Introduction to capital budgeting decisions

Thomas Atego borrowed Sh.5,000,000 from Axim Bank at an interest rate of 14% per annum. The loan is to be repaid semi-annually over a period of 3 years. The interest on the loan is to be repaid on a reducing balance basis.

Required:

(i) The amount of each semi-annual instalment payable for the loan.

(ii) A loan amortisation schedule

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2d

Financial institutions and markets

Highlight THREE advantages of having in place a central Depository (CDS) capital or financial markets

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3a

Islamic finance

In the context of Islamic finance, national regulators such as the Islamic Financial Services Board (IFSB) or equivalent authorities perform crucial roles to ensure the smooth and shariah-Compliant operations of Islamic financial institutions.

Required:

In light of the above statement, summarise FIVE functions of the Islamic Financial Services Board or its equivalent in your country

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3b

Financial statements analysis and forecasting

b) ABC Ltd. achieved revenue of Sh.24,000,000 in the year that has just ended and expecta revenue growth of 9% in the next year. Cost of sales in the year that has just ended was Sh.16,320,000 and other expenses were Sh.2,160,000.

The financial statements of ABC Ltd. for the year that has just ended contains the following:

Statement of financial position:

	Sh."000"	Sh."000"
Non-current assets:
Current assets:
Inventory	3,600
Trade receivables	3,300	6,900
Total assets		39,900
Equity finance:
Ordinary shares	7,500
Reserves	11,250	18,750
Long-term bank loan
Current liabilities:
Trade payables	2,850
Overdraft	3,300	6,150
Total capital and liabilities		39,900

Additional information:

1

The long-term bank loan has a fixed annual interest rate of 8% per annum.

2

The company corporate tax is at an annual rate of 30% per annum.

3

Overdraft interest in the next year is forecast to be Sh.210,000. No change is expected in the level of non-current assets and depreciation should be ignored. Assume 365 daya in a year

4

The following accounting ratios have been forecast for the next year

Gross profit margin:	30%
Operating profit margin:	20%
Dividend payout ratio:	50%
Inventory turnover period:	110 days
Trade receivables period:	65 days
Trade payables period:	75 days

Required:

Prepare the following forecast financial statements of ABC Ltd. using the information provided:

(i) A statement of profit or loss for the next year.

(ii) A statement of financial position at the end of next year.

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4a

Dividend decision

Modigliani and Miller's dividends irrelevance theory suggests that the value of the firm is not affected by its dividend policy.

Required:

Explain each of the following points as expounded by Modigliani and Miller's (MM) dividends irrelevance theory:

(i) Dividend irrelevance.

(ii) Homemade dividends,

(iii) Tax implications.

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4b

Hamza Ltd. issued a bond worth Sh.2,500,000. The company established a sinking fund to retire this debt in three years and made deposits into it at the end of every six months.

Required:

Assuming the fund is earnings interest at the rate of 7% per annum compounded semi-annually, determine the periodic amounts deposited

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4c

Business/Financial asset Valuation models

Sharon Nekesa, the managing director of Pine Ltd. has attended a meeting with an investment analyst whe suggested that the company's shares are overvalued by 10%. The data used by the investment analyst is shown below:

Year	Net profit after tax (Sh. "000")	Total dividend (Sh. "000")	Number of issued shares ("000")
2020	18,260	8,260	25,000
2021	1,320	9,320	25,500
2022	23,00	10,000	26,500
2023	26,000	12,000	30,000
2024	29,000	14,000	32,000

Pine Ltd.'s current market price per share (MPS) is Sh.6.45 and the cost of equity is 12.5%.

Required:

(i) The historical annual dividend growth rate

(ii) The current intrinsic value of the firm's share.

(iii) Explain whether the share of company is overvalued or undervalued by the market based on your result in (c) (i) above.

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5a

Working capital management

The new credit controller of Shining Rock plans to liberalise the firm's credit policy. The company currently generates credit sales amounting Sh.650,000,000 each year. Adoption of the more lenient policy is expected to raise the company's annual credit sales to Sh.800,000,000. The firm projects that bad debt losses on additional sales will be 6%. Additional debt collection expenditure of Sh.20,000,000 will be incurred each year. The new credit controller anticipates that production and selling costs other than additional bad debt and collection expenses will remain at 80% level. The firm pays 30% corporation tax after deductible expenses.

Required:

(i) The firm maintains a debtor's turnover of 15 times, compute the incremental debtor's balance.

(ii) Debentüre the firm's incremental return on investment.

(iii) Assuming additional inventory of Sh.25,000,000 are required and additional creditors of Sh. 10,000,000 will arise in order to support the additional sales, compute the after tax return on additional investment.

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5b

Introduction to portfolio analysis

An investor has atrinvestment fund of Sh. 18,000,000, He intends to apportion this fund to two securities: Alpha and Beta putting Sh.4,500,000 and Sh. 13,500,000 in security Alpha and Beta respectively. The return on each security is dependent on the state of the economy as shown below:

State of the economy	Probability	Return on security Alpha (%)	Return on security Beta (%)
Boom	0.40	18	24
Average	0.50	14	22
Recession	0.10	12	21

Required:

(i) The expected return of the portfolio.

(ii) Standard deviation for each security.

(iii) Correlation coefficient between security Alpha and security Beta.

(iv) Portfolio risk.

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Unlock Solution

CPA: Financial Management — December 2025

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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