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CPA Financial Management – May 2017 Past Paper & Answers

Unit: Financial Management

15 Questions

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Download CPA Financial Management May 2017 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
Introduction to capital structure decisions
​ ​​Highlight four limitations of long-term debt finance to an organisation.
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1b
Introduction to capital structure decisions
​​Discuss the relevance of cost of capital to a business enterprise.
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1c
Introduction to capital structure decisions
Upendo Ltd.'s existing capital structure is given as follows:


Ordinary share capital (Sh.20 par)
Reserves
10% Debenture (Sh.100 par)
8% Preference shares (Sh.20 par)

Sh."000"
20,000
5,000
10,000
15,000
50,000

Additional information:

1.The most recent earnings per share (EPS) of the company is Sh.5
2.The firm adopts 40% pay-out ratio as its dividend policy.
3.Ordinary shares of the company are currently selling for Sh.50 each
4.The existing 10% debenture is currently trading at 110% of par at the securities exchange
5.Existing 8% preference shares are currently trading at Sh.25 each
6.Corporate tax rate applicable is 30%.

Required:

(i) The annual dividend growth rate using Gordon's growth model

(ii) Cost of ordinary share capital

(iii) Cost of 10% debenture capital

(iv) Cost of 8% preference share capital

(v) The weighted average cost of capitat (WACC) of the firm.
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2a
Business/Financial asset Valuation models
The following information was extracted from the financial statements of Mwaka Limited

Earnings per share (EPS)
Capitalisation rate
Retention ratio
Internal rate of return		Sh.15
12%
40%
16%

Required:

The price per share under:

(i) Gordon's growth model.

(ii) Walter's model.
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2b
Introduction to capital structure decisions
​​Nyadzua Limited is making a 1 for 4 rights issue costing Sh.6.40. The company has 4 million shares in issue with a market price of Sh.10.80 per share. The new shares are expected to yield 5% earnings and price to earnings (P/E) ratio of 10.

Required:

(i) The theoretical ex-right price.
(ii) The value per share after the rights issue.
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2c
Business/Financial asset Valuation models
​​The 10% Sh.100 par value convertible bond of Kurawa Limited is quoted at 142% of par.

The earliest date for conversion is in 4 years' time, at the rate of 30 ordinary shares per Sh. 100 nominal bond. The share is currently trading at a price of Sh.4.15. The annual coupon on the bond has just been paid

Required:

(i) Conversion premium.
(ii) Interpret the answer obtained in (c) (i) above.
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3a
Working capital management
​​ The following information relates to Tsuma Enterprises Ltd. for the four months given below:

Sh."Million"
Sales:September
60
October
60
November
70
December
90

All sales will be made on credit.

Half of the debtors are expected to pay within the month of sale and are also expected to claim a 2% cash discount. The remaining debtors are expected to pay by the beginning of the following month.

Raw materials purchases
Sh."Million"
September
20
October
40
November
40
December
30

The firm plans to pay its creditors in full in the month following that of purchase.

Wages and salaries:
Sh."Million"
September
12
October
15
November
17
December
13

Additional information: 
1.    All employees are paid in the month in which the wage or salary is earned. 
2.    Rent of Sh.10 million for each quarter is paid in March, June, September and December. 
3.    Other cash overheads of Sh.2 million per month are payable. 
4.    A new plant due for delivery in September will be paid in November at a cost of Sh.25 million. 
5.    On 1 October, the firm plans to have Sh.10 million in the bank. 

Required: 
A cash budget for the three months ending in December.
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3b
Introduction to capital budgeting decisions
​Roka Limited has two mutually exclusive projects namely, project A and project B with initial cash outlay of Sh.50,000 each. The projects have a useful life of 5 years. The company's cost of capital is 12% with a corporate tax rate of 30%

The expected cash flows for the projects before depreciation and tax are given below:

Year

1
2
3
4
5		Project A
"Sh.000"
42
42
42
42
42		Project B
"Sh.000"
62
32
22
52
52

The company uses straight line method of depreciation

Required:

Using the profitability index approach, advise the management of Roka Limited on the project to consider
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4a
Financial statements analysis and forecasting
​​The following are the summarised financial statements for Bokasa Limited.

Bokasa Limited statement of financial position as at 31 December:

Sh."000"
2015
Sh."000"

Sh."000"
2016
Sh."000"
Non-current assets
4,995
12,700
Current assets:
Inventory
40,145
50,455
Accounts receivable
40,210
43,370
Cash at bank
12,090
92,447
5,790
99,615
Total assets
97,442
112,315
Current liabilities:
Accounts payable
34,389
39,250
Taxation
2,473
3,260
36,862
42,475
Long-term liabilities:
10% loan notes
19,840
19,480
Total liabilities
(56,702)
(62,315)
Net assets
40,740
50,000
Equity:
Called-up share capital Sh.0.25 per share
9,920
9,920
Retained earnings
30,820
40,080
Shareholders' funds
40,740
50,000

Bokasa Limited income statement for the year ended 31 December:
2015
Sh."000"
2016
Sh."000"
Revenue
486,300
583,900
Operating profit
17,233
20,670
Interest payable
1,984
1,986
Profit before taxation
15,254
18,686
Taxation
5,734
7,026
Profit for the year
9,520
11,660

Notes:

31 December 2015
Sh."000"
31 December 2016
Sh."000"
1
Retained profit brought forward
23,540
30,820
2
Dividends paid during the year
2,240
2,400

Required: 
For each of the two years, calculate: 

(i) Earnings per share (EPS). 
(ii) Dividend cover. 
(iii) Current ratio. 
(iv) Acid test ratio. 
(v) Return on capital employed (ROCE).
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4b
Business/Financial asset Valuation models
​​Luri Limited has a bond that has 3 years to maturity. The bond's par value is Sh.1.000. Coupon payment for the bond is made annually. The current market value of the bond is 120% of par with a coupon of 12%

Required:
The yield to maturity (YTM).
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4c
Islamic finance
​ ​​(i). Highlight four objectives of the core principles for islamic finance regulation (CPIFR) as set out in Islamic Financial Services Board (IFSD).

(ii). Differentiate between Salam contract" and "Istina contract as used in Islamic finance.
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5a
Dividend decision
​​Highlight four factors that might influence a company when establishing a dividend policy
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5b
Financial institutions and markets
​​Summarise four assumptions of the efficient market hypothesis (EMH)
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5c
Overview of financial management
​​The goal of profit maximisation is considered to be a short-term objective with long-term survival. The firm's growth cannot be achieved without continuous profitability.

Required:
In relation to the above statement, summarise four arguments in favour of and four arguments against profit maximisation as a business goal
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5d
Dividend decision
​​Downtop Ltd. has achieved earnings of Sh.6 million this year and the company intends to pursue a policy of financing all its investment projects from retained earnings. There are a number of investment opportunities available for Downtop Ltd., although if it does not undertake any of the projects, its annual retained earnings are expected to remain at Sh.6 million in perpetuity.

The following information is available for Downtop Ltd.:

Proportion of retained
earnings
(%)
0
30
45
Growth rate in
earnings
(%)
0
6
9
Required return on all
investments by shareholders
(%)
16
17
19

Required: 
Using dividend growth model, determine the optimum retention policy for Downtop Ltd.
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