KASNEB Financial Management - Question 1a

Explain four disadvantages of public private partnerships (PPPs).... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 1b

Describe six steps involved in personal financial planning... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 1c

The following data was extracted from the financial statements of XYZ Limited for the year ended 30 September 2016. Total assetsSh.7,000,000Total liabiliti... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 2a

Discuss three possible solutions to adverse selection. ... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 2b

Sandy Ltd. presented the following extracts of the statement of financial position as at 31 October 2016: EquitySh. '000'Sh. '000'Ordinary shares (Sh.5 nomin... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 3b

The following information was extracted from the financial statements of a manufacturing company: Sh.Average total debtors outstanding48,000Raw materials con... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 5a

Explain the following terms as used in the bond market: (i) . Yield-to-maturity (YTM). (ii). Yield-to-call (YTC). ... [Click to view full question and step-by-step solution]

KASNEB Financial Management - Question 5c

The following data was extracted from Mwakuhenga Limited's financial statements for the year ended 30 June 2016: Sh.Total sales3,000,000Variable costs(900,0... [Click to view full question and step-by-step solution]

November 2016

1a

The financing decision

Explain four disadvantages of public private partnerships (PPPs).

1b

The financing decision

Describe six steps involved in personal financial planning

1c

Financial statements analysis and forecasting

The following data was extracted from the financial statements of XYZ Limited for the year ended 30 September 2016.

Total assets	Sh.7,000,000
Total liabilities	Sh.4,000,000
Preference share capital	Sh.500,000
Earnings per share (EPS)	Sh.1.10
Price-earnings (P/E) ratio	15
Outstanding number of ordinary shares	400,000

Required:

(i) Book value per share.

(ii) Market price per share.

(iii) Market value to book value ratio.

2a

Contemporary issues and emerging trends

Discuss three possible solutions to adverse selection.

2b

Introduction to capital structure decisions

Sandy Ltd. presented the following extracts of the statement of financial position as at 31 October 2016:

Equity	Sh. "000"	Sh. "000"
Ordinary shares (Sh.5 nominal value)	800,000
Reserves	3,600,000	4,400,000
Long term liabilities
4% preference shares (Sh.1 nominal value)	600,000
7% bonds (redeemable after 6 years)	600,000
Long term bank loan	200,000	1,400,000

Additional information:

1. Ordinary shares of Sandy Ltd. have an ex-div market value of Sh.47.00 per share and an ordinary dividend of Sh.3.63 per share has just been paid.

2. The following dividends have been paid over the past four years:

Year	2013	2014	2015	2016
Dividend per share (Sh.)	3.09	3.22	3.36	3.50

3. The preference shares are not redeemable and have an ex-div market value of 40 cents per share.

4. The 7% bond is redeemable at 5% premium to their nominal value of Sh.100 per bond and have an exinterest market value of Sh.104.50.

5. The bank loan has a variable interest rate that has averaged 4% per year in recent years.

6. The corporate tax rate is 30%.

Required:

(i) The weighted average cost of capital (WACC).

(ii) Explain four reasons why the cost of equity could be greater than the cost of debt.

3a

Financial statements analysis and forecasting

The management of Georgina Ltd. wishes to establish the amount of external financial needs for the year ending 31 December 2016. The statement of financial position of the company as at 31 December 2015 was as follows:

	Sh."000"
Plant and machinery	31,200
Furniture and fittings	18.720
Motor vehicles	12,480
Inventory	19,200
Account receivablés	14,400
Cash and bank	3,600
	99,600
Financed by:
Ordinary share capital	42,000
Retained profit	17,600
14% debenture capital	10,000
Account payables	18,000
Accrued expenses	12,000
	99,600

Additional information:

1. The sales for the year ended 31 December 2015 amounted to Sh.120.000.000.

2. The company forecasts that sales will increase by 10% for the year ending 31 December 2016.

3. For the year ended 31 December 2015, the after-tax profit of the company amounted to Sh.18,000,000.

4. The company adopts 80% payout ratio as its dividend policy. The payout ratio is expected to remain constant each year in perpetuity.

5. The after-tax profit margin is also expected to remain constant each year.

6. Assets are expected to vary directly with sales while account payables and accrued expenses form the spontaneous sources of financing.

7. Any external financing will be effected through long term debt financing.

Required:

(i) The amount of external 12% long term debt financing that would be required for the year ending 31 December 2016.

(ii) A forecast statement of financial position as at 31 December 2016.

(iii) Comment on two weaknesses of the method of forecasting applied in (a)(i) and (a)(ii) above.

3b

Working capital management

The following information was extracted from the financial statements of a manufacturing company:

	Sh.
Average total debtors outstanding	48,000
Raw materials consumption	440,000
Total production cost	1,000,000
Total cost of sales	1,050,000
Sales for the year	1,600,000
Value of average stock maintained:
Raw material	32,000
Work in progress	35,000
Finished goods	26,000
Number of days in a year	365
Average period of credit allowed to suppliers	16 days

Required:

(i) The operating cycle in days.

(ii) The amount of working capital required.

4a

Business/Financial asset Valuation models

Bundacho Ltd. generated Sh.50 million profit after-tax in the previous financial year. The firm adopts 40% payout ratio as its dividend policy. The total number of issued ordinary shares are 10,000,000.

The company has a potential investment opportunity. If undertaken, dividends are expected to grow at the rate of 10% each year for the first 3 years and then stabilise at the rate of 5% each year thereafter in perpetuity.

The investor's minimum required rate of return is 18%.

Required:

The current intrinsic value of the share.

4b

Business/Financial asset Valuation models

A firm issued 10% preference shares to raise funds. The shares have a par value of Sh.100 each and are currently selling at Sh.110 each.

The minimum required rate of return by the investors is 8%.

Required:

Explain whether the share is overvalued or undervalued by the market.

4c

Introduction to capital budgeting decisions

Mwarakaya Ltd. is considering the acquisition of a new machine to replace the existing machine currently being used in production processes. The existing machine was acquired 2 years ago at a cost of Sh.2,000,000. It was originally estimated to have a useful life of 5 years with no salvage value.

A critical evaluation of the machine now shows that the machine is usable for another 5 years with a salvage value of Sh.250,000 at the end of this period. The disposal value of the existing machine is currently estimated at Sh.1,250,000.

The new machine is estimated to cost Sh.3,140,000 and its estimated salvage value is Sh.1,000,000 at the end of its useful life of 5 years. The new machine will also require an additional investment in working capital of Sh.650,000 at the start of the asset's useful life.

The investment in working capital will however be recovered at the end of the 5 years useful life.

The following information relates to the estimated earnings before depreciation and tax (EBDT) over the coming five-vear period for the two machines.

Year	New machine Sh.	Existing machine Sh.
1 2 3 4 5	1.400.000 1,350,000 3,000,000 1,450,000 1,200,000	800,000 700,000 750,000 650,000 600,000

The cost of capital is 10% and the firm applies the straight line method of depreciation. The corporate tax rate is 30%.

Required:

Using the net present value (NPV) technique, advise the company's management on whether to replace the existing machine.

5a

Business/Financial asset Valuation models

Explain the following terms as used in the bond market:

(i) . Yield-to-maturity (YTM).

(ii). Yield-to-call (YTC).

5b

Business/Financial asset Valuation models

Kaoyeni Limited has issued a Sh.10,000 par value 10-year bond with a coupon rate of 12% per annum. The bond is currently trading at Sh.8,830 and is callable at Sh.10.500 after 5 years.

The company pays interest on its bonds semi-annually.

Required:

(i) Yield-to-maturity of the bond.

(ii) Yield-to-call of the bond.

5c

Financial statements analysis and forecasting

The following data was extracted from Mwakuhenga Limited's financial statements for the year ended 30 June 2016:

	Sh.
Total sales	3,000,000
Variable costs	(900,000)
Contribution	2,100,000
Fixed costs	(1,500,000)
Earning before interest and tax (EBIT)	600,000
Interest	(75,000)
Profit before tax	525,000

Required:

Using the concept of leverage, determine:

(i). The percentage taxable income if EBIT increases by 6%.

(ii). The percentage EBIT if there is a 10% increase in sales.

(iii). The percentage taxable income if sales increase by 8%.

November 2016

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