CPA › Financial Management › May 2016

CPA Financial Management – May 2016 Past Paper & Answers

Unit: Financial Management

16 Questions

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Questions

Download CPA Financial Management May 2016 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.

1a

Introduction to capital budgeting decisions

Explain four principles of capital budgeting.

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1b

Introduction to capital budgeting decisions

A firm is considering the following investment projects:


Project	Year 0	Year 1	Year 2	Year 3
A	1,000,000	500,000	500,000	-
B	1,000,000	-	650,000	850,000
C	1,000,000	300,000	500,000	1,000,000
D	1,000,000	800,000	400,000	400,000

The firm's opportunity cost of capital is 15%.

Required:

(i) Rank the projects using payback period method.

(ii) Rank the projects using net present value (NPV) method.

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1c

Business/Financial asset Valuation models

Chigiri Ltd. is a private company which intends to be listed in the securities exchange. The company has recently made a dividend issue of Sh.3.20 per share. This dividend is expected to grow at the rate of 15% per annum for 2 years and then drop to 12% per annum for the next 3 years. Thereafter, the dividend will grow at 6% per annum indefinitely. The required rate of return is 11%.

Required:
The intrinsic value of the share.

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2a

Introduction to capital structure decisions

The existing capital structure of Mwarakaya Limited is given as follows:

	Sh. "000"
Ordinary share capital (Sh.100 par value)	40,000
Reserves	15,000
12% debentures (Sh.100 par value)	25,000
10% preference share capital (Sh.20 par value)	20,000
	100,000

Additional information:

1. Ordinary shares of Mwarakaya Limited are currently selling at Sh.80 each.

2. The 12% debentures and 10% preference shares are currently selling at Sh.90 and Sh.30 respectively.

3. The most recent ordinary dividend paid by the company is Sh.2.00. This is expected to grow at the rate of 10% each year in perpetuity.

4. The corporate tax rate is 30%.

Required:

The weighted average cost of capital (WACC).

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2b

Dividend decision

The following information relates to the dividend per share (DPS) for Zomollo Ltd.:

Earnings per share (EPS) for year 2016
Dividend per share (DPS) for year 2015
Target payout ratio
Adjustment rate

Sh.6.00
Sh.2.40
0.60
0.70

Required:
Using the Lintner model, predict the dividend per share for the year ended 31 December 2016.

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2c

Business/Financial asset Valuation models

James Chiwende is considering the purchase of a 4-year Sh.1,200,000 par value bond. The bond has a coupon interest. rate of 10% per annum..

The investor's required rate of return is 8%.

Required:
The current value of the bond

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2d

Working capital management

Mwatata Ltd. currently operates with terms of net 80 days. The firm's average investment in accounts receivable amount to Sh.4,400,000 per annum. Eighty per cent of the firm's sales are always on credit. The company is considering introducing terms of 2 / 20 net 90 days.

The relaxation of terms of sale will increase the firm's total sales bv 60%. All cash customers and 40% of the credit customers will take advantage of the cash discount. The average collection period will increase to 80 days up from the current average collection period of 72 days. Bad debts are expected to remain at 3% of credit sales.

Inventory levels are estimated to be 5% of the firm's turnover and creditors will increase by Sh. 1,000,000.

Gross margin on sales is 40%. The cost of capital is 16%. Corporate tax rate is 30%.

Assume 360 days in a year.

Required:
Advise the management of Mwatata Ltd. on whether to switch to the new credit policy.

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3a

Financial statements analysis and forecasting

The following data was extracted from the financial statements of Jaribuni Limited for the year ended 31 December 2015:

Cash and cash equivalents
Fixed assets
Sales (credit)
Net income
Current liabilities
Notes payable to bank
Current ratio
Debtors collection period
Return on equity

Sh."millions"
200
567
2,000
100
211
40
3:1
40.55 days
12%

Assume 365 days in a year.

Required:
(i) Accounts receivable.

(ii) Current assets.

(iii) Return on total assets

(iv) Equity.

(v) Quick ratio.

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3b

Working capital management

Manjewa Limited maintains a minimum cash balance of Sh.2,000,000. The standard deviation of its daily net cash flow is estimated at Sh.22.000. The transaction cost of buying and selling of marketable securities is Sh.60 per transaction. The rate of interest for the marketable securities is 5% per annum.

Assume 365 days in a year.

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

(i) The spread.

(ii) The upper cash limit.

(iii) The return point.

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4a

Contemporary issues and emerging trends

Highlight four shortcomings of financial deepening.

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4b

Contemporary issues and emerging trends

(i) Define the term "franchising".
(ii) Suggest four reasons why franchising could be considered as an alternative source of finance to a company.

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4c

Dividend decision

Ngoba Ltd. has just paid an annual dividend of Sh.38 per share. The management of the company has a target to increase the market share value to Sh.800 per share by considering appropriate investment policies. Shareholders expect a return on investiment of 12%.

Required:
The annual expected growth rate.

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4d

Introduction to capital budgeting decisions

Laika Ltd has identified five investment projects with the following details:

Investment
project
A
B
C
D
E

Initial outlay
(Sh. "millions")
120
160
100
90
110

Net present value of investment
(Sh. "millions")
24.0
43.2
17.0
21.6
19.8

Additional information:
1. None of the investment projects could be delayed.

2. Amount available for investment is limited to Sh.300 million. therefore, the company canno undertake the investment projects.

3. All the five projects are divisible.

Required:
Advise the management of Laika Ltd. on the most appropriate investment projects to undertake.

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5a

Islamic finance

Discuss four principles of Islamic financing.

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5b

Dividend decision

Highlight four factors that could be taken into account when making dividend decisions.

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5c

The financing decision

(i) The agency problem could be resolved using goal congruence.

Explain the term "goal congruence".

(ii) One of the ways creditors could protect themselves against the inherent risk that might arise from agency conflict is through adopting restrictive covenants.

With reference to the above statement, describe three restrictive covenants in a debt contract.

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