KASNEB Financial Management - Question 1a

Highlight three financial instruments that are traded in money markets. ... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 2a

Summarise four advantages of debentures over preference shares... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 5a

Distinguish between 'required rate of return' and 'expected rate of return... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 5b

Discuss three contracts that are made through Islamic financial instruments... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 5c

Summarise six benefits of the integrated financial management information system (IFMIS).... [Click to view full question and step-by-step solution]

November 2015

Q: KASNEB Financial Management - Question 2b

Wendy Limited has the following capital structure:DebtEquityPreference shares35%50%15%The management of the company has provided the data below:Bond yield to ma... [Click to view full question and step-by-step solution]

1a

Financial institutions and markets

Highlight three financial instruments that are traded in money markets.

1b

Business/Financial asset Valuation models

Explain the following theories in relation to valuation of financial assets:

(i) Fundamental theory.
(ii) Random walk theory.

1c

Business/Financial asset Valuation models

Ngatata Limited has issued a 20-year bond with a nominal value of Sh.1,000 and a coupon annual rate of 9%. Coupon payments are made semi-annually in arrears. The yield to maturity of the bond is 12% per annum.

Required:
(i) The value of the bond.
(ii) The new value of the bond, if yield to maturity goes down to 8% per annum.

1d

Business/Financial asset Valuation models

Rematex Limited's earnings have been growing at the rate of 18% per annum. This growth is expected to continue for 4 years, after which the growth rate will fall to 12% per annum for another 4 years.

Thereafter, the growth rate is expected to be 6% in perpetuity. The company's last dividend paid was Sh.2. The investors' required rate of return on the company's equity is 15%.

Required:
The intrinsic value of the share.

2a

The financing decision

Summarise four advantages of debentures over preference shares

2b

Introduction to capital structure decisions

Wendy Limited has the following capital structure:

Debt
Equity
Preference shares

35%
50%
15%

The management of the company has provided the data below:

Bond yield to maturity
Corporate tax rate
Growth rate of ordinary dividends
Market price of one ordinary share
Dividend for one ordinary share
Market price of one preference share
Floatation cost of one preference share
Dividend for one preference share

9%
30%
9%
Sh.30
Sh.1.20
Sh.100
Sh.2.00
Sh.8.50

The company's weighted average cost of capital (WACC)

2c

Working capital management

Cindy Ltd. currently gives credit terms of net 30 days. The company's average annual sales amount to Sh.120 million. The average collection period is 45 days. The management intends to increase the credit period to net 60 days. This plan is expected to increase sales by 15 per cent. After the change in credit terms, the average collection period is expected to be 75 days. Variable costs are 80% of sales. The company's required rate of return on receivables is 20%.

Corporate tax rate is 30%.

Assume a 360 days year.

Required:
Advise the management of Cindy Ltd. on whether to relax its credit terms.

2d

Dividend decision

The following data was extracted from the financial statements of Kapecha Limited as at 30 September 2015:

10% preference shares (Sh.10 par value)
Ordinary shares (Sh.10 par value)

Retained earnings

15% debentures

Sh."million"
16
16
32
28
60
48
108

The company's net profit before interest was Sh.80 million. The company's dividend pay-out ratio was 50%. Corporate tax rate is 30%.

Required:
Dividend per share (DPS).

3a

Financial statements analysis and forecasting

The following information relates to Mongwe Limited for the year ended 31 October 2015:

Earnings yield
Dividend for the year
Nominal value per share
Market price per share

25%
10% of share nominal value
Sh.40
Sh.150

Required:
(i) Earnings per share (EPS).

(ii) Dividend cover.

(iii) Price-earnings (P/E) ratio.

3b

Introduction to capital budgeting decisions

The following details relate to a capital project in XYZ Limited:

Project cost
Annual cash flows (after tax)
Project economic life
Required rate of return

Sh.65,000,000
Sh.21,000,000
5 years
12%

Required:
Assess the suitability of the capital project using the following methods:

(i) Internal rate of return (IRR).

(ii) Profitability index (PI).

3c

Introduction to capital budgeting decisions

Nile group of hotels is considering the acquisition of Victoria hotel at a cost of Sh.200 million. The group of hotels cost of capital is currently 16% due to its high gearing level. Victoria hotel has no debt.

As a result of this acquisition, the cost of capital for Nile group of hotels will drop to 12%. Total cash flows will also increase by Sh.25 million per annum in perpetuity.

Required:
(i) Using the net present value (NPV) approach, advise the management of Nile group of hotels on the acquisition of Victoria hotel.

(ii) If the acquisition was funded by borrowing so that there is no impact on gearing after acquisition and the cost of capital was not reduced, advise the management of Nile group of hotels whether to proceed with the acquisition of Victoria hotel.

4a

Introduction to capital structure decisions

Fila Ltd. intends to raise finance as follows:

Debenture: Raise Sh.100 million through a debenture issue. Each debenture will have a face value of Sh.1,000 and will be issued at 2% floatation cost and a discount of Sh.60. The coupon rate will be 10% with a maturity period of 10 years.

Equity: The firm will raise Sh.100 million from ordinary shares. The current level of dividend is Sh.5 per share and this has been growing at 10% per annum. The current market price per share is Sh.40 and floatation cost will be 5% of the market price.

Long term debt: Raise Sh.20 million long-term debt at par with an interest rate of 10% per annum.

Corporate tax rate is 30%.

Required:
The marginal cost of capital (MCC) of Fila Ltd.

4b

Working capital management

The following information was extracted from the financial statements of Tana Enterprises Ltd. for the year ended 31 December 2013 and 31 December 2014:

Statement of financial position
	2014	2013
Assets:	Sh.million"	Sh.million"
Non-current assets	1,850	1,650
Depreciation	(350)	(225)
Net non-current assets	1,500	1,425
Intangible assets	150	150
Current assets
Inventory	330	230
Accounts receivable	220	170
Cash	100	90
Total current assets	650	490
Total assets	2,300	2,065
Equity and liabilities:
Ordinary share capital (Sh.2 par value 100 million shares issued)	200	200
Additional paid in ordinary share capital	325	325
Retained earnings	550	470
Ordinary shareholders' equity	1,075	995
Preference share capital (10%, Sh.100 par value)	150	150
Long-term liabilities:
Long-term debt	625	540
Deferred tax	100	80
Total long-term liabilities	725	620
Current liabilities:
Accounts payable	85	105
Accruals	65	85
Current portion of long-term debt	75	-
Short-term bank notes	125	110
Total current liabilities	250	300
Total equity and liabilities	2,300	2,065

Statement of comprehensive income
	2014 Sh."million"	2013 Sh."million"
Net sales	3,500	2.990
Cost of goods sold	2,135	1,823
Selling. general and administrative expenses	1,107	974
Operating profit	258	193
Net interest expense	74	64
Income from operations	184	129
Income taxes	55	38
Net income	129	91
Preference dividends	15	15
Net income available for ordinary shareholders	114	76
Dividends deciared	40	30

Assume that a year has 365 days.

Required:

Compute and interpret the following ratios for the year ended 31 December 2014:

(i). Cash conversion cycle.

(ii). Equity turnover.

(iii). Fixed charge cover.

(iv). Return on capital.

5a

Business/Financial asset Valuation models

Distinguish between "required rate of return" and "expected rate of return

5b

Islamic finance

Discuss three contracts that are made through Islamic financial instruments

5c

Contemporary issues and emerging trends

Summarise six benefits of the integrated financial management information system (IFMIS).

5d

Introduction to portfolio analysis

Makata Limited intends to invest its surplus funds in shares with the following return expectations:

Economic condition
Boom
Average
Recession

Probability
0.20
0.60
0.20

Share returns
40%
15%
-10%

Required:
Using the coefficient of variation, assess the risk level associated with the investment.

November 2015

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