CPA – FINANCIAL MANAGEMENT REVISION KIT (QUESTION AND ANSWER) UPTO NOVEMBER 2019 PAST PAPER

CPA

CS

CCP

 

PART II

SECTION 3

 

REVISION KIT

 

 

PAST EXAMINATION PAST PAPERS WITH SUGGESTED ANSWERS

 

 

 

 

Updated with November 2019 Examination Past paper

 

 

PAPER NO.8 FINANCIAL MANAGEMENT

 GENERAL OBJECTIVE

This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply financial management principles in practice.

8.0       LEARNING OUTCOMES

A candidate who passes this paper should be able to:

  • Analyse the sources of finance for an organisation and evaluate various financing options
  • Evaluate various investment decision scenarios available to an organisation
  • Evaluate the performance of a firm using financial tools
  • Make appropriate capital structure decisions for a firm
  • Value financial assets and firms
  • Make appropriate liquidity and dividend decisions for a firm
  • Evaluate current developments in business financing strategies.

 

CONTENT

 8.1       Overview of financial management

  • Nature and scope of finance
  • Finance functions
  • Goals of a firm; financial and non-financial objectives, overlaps and conflicts among the objectives
  • Agency theory, stakeholder’s theory and corporate governance
  • Measuring managerial performance, compensation and incentives
  • Ethical issues in financial management
  • Corporate social responsibility (CSR) and financial management

 8.2       The financing decision

  • Nature and objectives of the financing decision
  • Factors to consider when making financing decisions
  • Sources of finances for enterprises; internally generated funds and the externally generated funds, long term sources, medium term and short term sources of finance
  • Evaluation of financing options
  • Methods of issuing ordinary shares – public issue, private placement, bonus issue, employee stock option plans (ESOPS) and rights issues

 8.3       Financial institutions and markets

  • Nature and role of financial markets
  • Classification of financial markets: primary and secondary securities market, money and the capital markets, over-the counter and organised market, derivatives market, mortgage market, forex market
  • The security exchange listing and cross border listing
  • Market efficiency – efficient market hypothesis
  • Stock market indices
  • The financial institutions and intermediaries: commercial banks, savings and loans associations and co-operative societies, foreign exchange bureaus, Unit trusts and mutual funds, insurance companies and pension firms, insurance agencies and brokerage firms, investment companies, investment banks and stock brokerage firms, micro-finance institutions and small and medium enterprises (SMEs)
  • The role of regulators in financial markets
  • Central depository system and automated trading system
  • Timing of investment at the securities exchange – Dow theory and Hatch system of timing

8.4       Time-value of money

  • Concept of time value of money
  • Relevance of the concept of time value of money
  • Time value of money versus time preference of money
  • Compounding techniques
  • Discounting techniques

8.5       Valuation models

  • Concept of value; book value, going concern value, substitution value, replacement value, conversion value, liquidation value, intrinsic value and market value
  • Reasons for valuing financial assets/business
  • Theories on valuation of financial assets; fundamental theory, technical theory, random walk theory and the efficient market hypothesis
  • Valuation of redeemable, irredeemable and convertible debentures and corporate bonds
  • Valuation of redeemable, Irredeemable and convertible preference shares
  • Valuation of ordinary shares; net asset basis, price earnings ratio basis, capitalisation of earnings basis, Gordon’s model, finite earnings growth model, Super-profit model, Marakon model, Walter’s model, Discounted free cash flow, residual income model
  • Use of relative measures such as Economic Value added (EVA) and Market Value Added (MVA)
  • Valuation of unit trusts and mutual funds
  • Valuation of private companies: income and market based approaches

8.6       Cost of capital

  • Firms capital structure and factors influencing capital structure decisions
  • Factors influencing firms cost of capital
  • Relevance of cost of capital
  • Component costs of capital
  • The firm’s overall cost of capital
  • Weighted average cost of capital (WACC)
  • Weighted marginal cost of capital (WMCC)
  • Introduction to break-points in weighted marginal cost of capital schedule
  • Operating and financial leverage – degree of operating leverage and operating risk; degree of financial leverage and financial risk
  • Combined leverage – degree of combined leverage and total risk

8.7       Capital budgeting decisions

  • The nature and importance of capital investment decisions
  • Capital investment’s cash flows – initial cash outlay, terminal cash flows and annual net operating cash flows, incremental approach to cash flow estimation
  • Capital investment appraisal techniques
  • Non-discounted cash flow methods – payback period and accounting rate of return
  • Discounted cash flow methods – net-present value, internal rate of return, profitability index, discounted payback period and modified internal rate of return (MIRR)
  • Strengths and weaknesses of the investment appraisal techniques
  • Expected relations among an investment’s NPV, company value and share price
  • Capital rationing – evaluation of capital projects and determination of optimal capital budget in situations of capital rationing for a single period rationing
  • Capital investment options – timing option, strategic investment option, replacement option and abandonment option
  • Problems/difficulties encountered when making capital investment decisions in reality

8.8       Financial analysis and forecasting

  • Users of financial statements and their information needs
  • Ratio analysis; nature of financial ratios, classification and calculation of financial ratios and limitation of financial ratios
  • Common size statements – Vertical and horizontal analysis
  • Financial forecasting; cash budgeting and percentage of sales method of forecasting

8.9       Working capital management

  • Introduction and concepts of working capital
  • Working capital versus working capital management
  • Factors influencing working capital requirements of a firm
  • Importance and objectives of working capital management
  • Working capital operating cycle; the importance and computation of the working capital operating cycle
  • Working capital financing policies aggressive, conservative and matching financing policy
  • Management of stock, cash, debtors and creditors

8.10    Dividend decision

  • Forms of dividend
  • How to pay dividends and when to pay dividends
  • How much dividend to pay
  • Firms dividend policy and factors influencing dividend decision
  • Why pay dividends
  • Dividend relevance theories; Bird in hand, Clientele effect, Information signaling theory, Walter’s model, Tax differential theory, Modigliani and Miller dividend irrelevance theory

8.11    Introduction to risk and return

  • Risk-return trade off/relationship
  • Distinction between risk free and risky assets
  • Expected return of an asset
  • Total risk of an asset
  • Relative risk of an asset
  • Expected return of a 2 asset-portfolio
  • The actual total risk of a 2-asset portfolio

8.12    Islamic finance

  • Justification for Islamic Finance; history of Islamic finance; capitalism; halal; haram; riba; gharar; usury
  • Principles underlying Islamic finance: principle of not paying or charging interest, principle of not investing in forbidden items such as alcohol, pork, gambling or pornography; ethical investing; moral purchases
  • The concept of interest (riba) and how returns are made Islamic financial securities
  • Sources of finance in Islamic financing: muhabaha, sukuk, musharaka, mudaraba
  • Types of Islamic financial products:- sharia-compliant products: Islamic investment funds; takaful the Islamic version of insurance Islamic mortgage, murabahah,; Leasing – ijara; safekeeping – Wadiah; sukuk – islamic bonds and securitisation; sovereign – sukuk; Islamic investment funds; Joint venture – Musharaka, Islamic banking, Islamic contracts, Islamic treasury products and hedging products, Islamic equity funds; Islamic derivatives
  • International standardisation/regulations of Islamic Finance: case for standardisation using religious and prudential guidance, National regulators, Islamic Financial Services Board

8.13    Emerging issues and trends

 

 

 

 

 

CONTENT                                                                                          PAGE

 

Past papers

  1. November 2019 ……………………………………9
  2. May 2019……………………………………………..16
  3. November 2018…………………….……………24
  4. May 2018…………………………………………….31
  5. November 2017…………………………………….37
  6. May 2017…………………………………………….43
  7. November 2016……………………………………50
  8. May 2016……………………………………….…….56
  9. November 2015………………………………………61
  10. September 2015……………………………….……68

 

Suggested answers and solutions:

  1. November 2019 ……………………………………75
  2. May 2019………………………………………..…….90
  3. November 2018………………………………….…104
  4. May 2018………………………………….…………121
  5. November 2017……………………………………133
  6. May 2017……………………………………………..147
  7. November 2016……………………………………159
  8. May 2016………………………………………….….174
  9. November 2015……………………………………189
  10. September 2015……………………………………200

 

NPV Tables………………………………………………..…..216

 

 

To purchase this revision kit, CALL|TEXT WHATSAPP +254728 776 317

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Email : info@masomomsingi.com

 

 

 

 

CPA PART II SECTION 3

CS PART II SECTION 3

CCP PART II SECTION 3

 

FINANCIAL MANAGEMENT

 

TUESDAY: 26 November 2019.                                           Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

 

QUESTION ONE

(a) In the context of agency theory:

(i) Explain the “principal-agent” problem.                                                (2 marks)

(ii) Explore two ways of addressing the principal-agent problem.                       (4 marks)

(b) Sasumua Ltd. is considering a review of its credit policy as a way of enhancing its working capital management:

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

CPA PART II SECTION 3

CS PART II SECTION 3

CCP PART II SECTION 3

 

FINANCIAL MANAGEMENT

 

WEDNESDAY: 22 May 2019.                                                  Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

 

QUESTION ONE

 

a) Explain the following dividend theories:

  1. Information signalling theory.                                                            (2 marks)
  2. Tax differential theory.                                                                       (2 marks)
  3. Bird-in-hand theory.                                                                                  (2 marks)
  4. Agency theory.                                                                                             (2 marks)

 

(b) ClareMwatata is planning to invest in a long-term project. An investment banker has provided her with the following two investment options:

 

Option 1:To invest in a corporate bond selling at Sh.875. The bond would be redeemed after 5 years atSh. 1,600.

Option 2:To invest in a 16% debenture with a face value of Sh. 100 quoted at Sh.95.

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

CPA PART II SECTION 3

CS PART II SECTION 3

CCP PART II SECTION 3

FINANCIAL MANAGEMENT

 

 WEDNESDAY: 28 November 2018.                                      Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

 

QUESTION ONE

(a) Examine four assumptions of the Modigliani and Miller (MM) dividend irrelevance Theory.                                                                                                                     (4 marks)

(b) Differentiate between the following terms as applied in finance:

  • “Operating leverage” and “financial leverage”.                                        (2 marks)
  • “Cum-right ’ and “ex-right” market price per share.                             (2 marks)
  • “Time value of money” and “time preference for money”.                     (2 marks)

(c) The fixed operating cost for Gahaleni Pharmaceutical Ltd. are Sh.5.8 million per annum and the variable cost ratio is 0.20.

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

CPA PART II SECTION 3

CS PART II SECTION 3

CCP PART II SECTION 3

 

FINANCIAL MANAGEMENT

 

 

WEDNESDAY: 23 May 2018.                                             Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

 

QUESTION ONE

(a) Explain three working capital financing policies and their implications in an organisation.                                                                                     (6 marks)

(b) Chauringo Limited wishes to expand its business. The company is considering to issue Sh.50 million worth of redeemable bonds denominated in Sh. 1,000. The bond’s rate of interest is 10% and will mature on 30 June 2028.

The bonds will be issued on 1 July 2018.

The cost of capital is 18% per annum for the whole period.

 

Required:

(i)   The current value of the bond.                                                      (3 marks)

(ii)  The par value of the bond.                                                            (2 marks)

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

CPA PART II SECTION 3

CS PART II SECTION 3

CCP PART II SECTION 3

 

FINANCIAL MANAGEMENT

 

WEDNESDAY: 29 November 2017.                                         Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question arc shown at the end of the question.                                                                    Show ALL your workings.

 

QUESTION ONE

(a) Explain four factors that might be considered when establishing an effective credit policy in an organisation. (4 marks)

(b) Summarise four hindrances to international standardisation of Islamic finance.          (4 marks)

(c) Illustrate how the problem of window dressing manifests itself in measuring business performance using financial ratioanalysis.               (4 marks)

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

CPA PART II SECTION 3

CS PART II SECTION 3

CCP PART II SECTION 3

 

FINANCIAL MANAGEMENT

 

WEDNESDAY: 24 May 2017.                                                   Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

 

QUESTION ONE

(a) Highlight four limitations of long-term debt finance to an organisation. (4 marks)

(b) Discuss the relevance of cost of capital to a business enterprise.               (6 marks)

(c) Upendo Ltd.’s existing capital structure is given as follows:

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

CPA PART II SECTION 3

CS PART II SECTION 3

CCP PART II SECTION 3

FINANCIAL MANAGEMENT

 

WEDNESDAY: 23 November 2016.                                       Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

  

QUESTION ONE

(a) Explain four disadvantages of public private partnerships (PPPs).                          (8 marks)

(b) Describe six steps involved in personal financial planning.                                    (6 marks)

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

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

CPA PART II SECTION 3

CS PART II SECTION 3

CCP PART II SECTION 3

 

FINANCIAL MANAGEMENT

 

WEDNESDAY: 25 May 2016.      Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

 

QUESTION ONE

(a) Explain four principles of capital budgeting.            (8 marks)

(b) A firm is considering the following investment projects:

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

CPA PART II SECTION 3

CS PART II SECTION 3

CCP PART II SECTION 3

 

FINANCIAL MANAGEMENT

 

WEDNESDAY: 25 November 2015.         Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

 

QUESTION ONE

(a) Highlight three financial instruments that are traded in money markets.    (3 marks)

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

(i) Fundamental theory.                                                                            (3 marks)

(ii) Random walk theory.                                                                          (3 marks)

 

(c) 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.

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

CPA PART II SECTION 3

CS PART II SECTION 3

CCP PART II SECTION 3

 

FINANCIAL MANAGEMENT

 

PILOT PAPER

 

 

September 2015.                                                                      Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.

 

QUESTION ONE

(a) “Provision for depreciation is an internally generated source of finance to a company’-.

Explain the basis upon which provision for depreciation is a source of finance to an organisation.                                                                                               (4 marks)

 

(b) MM Company Ltd. is contemplating raising additional finance for an expansion programme. The company is considering Sh.50 million for this expansion programme. The company’s existing capital structure is given below:

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

SUGGESTED ANSWERS AND SOLUTIONS

 

NOVEMBER 2019

 

 

QUESTION 1

 a) i) Explanation of Principal-agent problem

This is one conflict in priorities between a person or group and the representative authorized to act on their behalf. An agent may behave in away that prejudices principal interest.

ii) Ways of addressing the principal-agent problem

  1. Lenders may refuse to lend to the firm or charge higher than normal market interest rates to compensate for increased risk.
  2. They could have covenants related to decision making on financing e.g they could require a representive in annual general meetings or board meetings where credit decisions will made.

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

SUGGESTED ANSWERS AND SOLUTIONS

 

MAY 2019

  

QUESTION 1

  1. Explanation of theories.
  2. Information signaling theory – in this theory management decision to increase, maintain or reduce dividend sends a signal of their expectations about future business performance. If management increases dividends to be paid, then management is indicating they believe future business prospects are good. If they reduce dividends, then the management expects hard times ahead for the business.

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

SUGGESTED ANSWERS AND SOLUTIONS

 

NOVEMBER 2018

 

QUESTION ONE

1 a) Assumptions of Modigliani and miller dividend theory

  1. Existence of perfect capital market
  2. No taxes
  3. The company does not change its existing investment policy
  4. All the investors are certain about the future market prices and the dividends
  5. Investors are indifferent between dividend income and capital gain income

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

SUGGESTED ANSWERS AND SOLUTIONS

 

MAY 2018

 QUESTION ONE

 1 a) Working capital financing policies refers to approach adopted the firm to finance its working capital needs.

i) Aggressive financing policy

  • Refers to the use of short term funds to finance the permanent and seasonal working capital requirements of the company
  • It hurts the profitability of company and results to the deterioration in the liquidity position of the company.

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

SUGGESTED ANSWERS AND SOLUTIONS

NOVEMBER 2017

 

QUESTION ONE

 

a) Factors to be considered when establishing an effective credit policy in an organization

  1. How sensitive are the goods and sensitive you’re offering
  2. Competitors – the kind of credit terms they are offering
  3. Factoring arrangement – factoring entails the sale of debtors to a third party. An effective credit policy should incorporate factoring
  4. Credit period – it should be in line with what similar competing firms are offering, otherwise there is possibility of loss of clients to competing firms

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

SUGGESTED ANSWERS AND SOLUTIONS

 

MAY 2017

 

QUESTION 1

1 a) Limitations of long-term debt finance to an organisation

  1. Issuing debt capital increases the company’s hearing
  2. Assets must be offered as security to get debt capital financing
  3. Payment of interest is mandatory. Any failure to d so may lead to company being liquidated

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

 

SUGGESTED ANSWERS AND SOLUTIONS

MAY 2016

 

QUESTION ONE

1 a) Principles of capital budgeting

  1. The capital budgeting cash flows are not the same as accounting net income.
  2. The timing of Cashflows is critical
  3. Post tax cash flows are used in analysis. Taxes have to be fully incorporated in capital budgeting decision

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

SUGGESTED ANSWERS AND SOLUTIONS

 

NOVEMBER 2015

 

QUESTION 1

Financial instruments that are traded in money markets

  1. Commercial papers
  2. Repurchase agreements
  3. Treasury bills
  4. Bills of exchange
  5. Promissory notes

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

SUGGESTED ANSWERS AND SOLUTIONS

 

SEPTEMBER 2015

 

PILOT PAPER

 

QUESTION 1

 Basis upon which provision for depreciation is a source of finance to an organization

 Depreciation is the systematic allocation of the cost of a business asset to expense over the useful life of the asset. The accounting for depreciation is a debit to Depreciation Expense and a credit to Accumulated Depreciation. As you can see, the entry does not involve the account Cash. Hence, depreciation expense is referred to as a non-cash expense.

FINANCIAL MANAGEMENT REVISION KIT SAMPLE

FINANCIAL MANAGEMENT QUESTION AND ANSWER



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