Complete copy of CPA ADVANCED FINANCIAL MANAGEMENT Revision Kit is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.com






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


A candidate who passes this paper should be able to:

  • Evaluate advanced capital budgeting decisions
  • Design an optimal capital structure for an organisation
  • Predict corporate failure
  • Apply derivatives in financial risk management
  • Apply financial management skills in the public sector
  • Understand concepts of corporate restructuring and re-organisation
  • Apply valuation techniques in real estate finance



15.1 Advanced capital budgeting decision

  • Incorporating risk/uncertainty in capital investment decisions
  • Nature and measurement of risk and uncertainty
  • Techniques of handling risk: sensitivity analysis, scenario analysis, decision trees, simulation analysis, utility analysis, risk adjusted discounting rate(radr) and certainty equivalent method
  • Incorporating capital rationing in capital investment appraisal
  • Incorporating inflation in capital investment appraisal
  • Evaluation of projects of unequal lives
  • The real options-strategic investment option, timing option, abandonment option and the replacement option
  • Common capital budgeting pitfalls
    • 2 Portfolio theory and analysis:
  • The modern portfolio theory: background of the theory; portfolio expected return; the actual and weighted portfolio risk; derivation of efficient sets; the capital market line (CML) model and its applications, the mean variance dominance rule; short comings of portfolio theory
  • Capital Asset Pricing Model-CAPM : background of the theory; assumptions; beta estimation – beta coefficient of an individual asset and that of a portfolio and the interpretation of the result; security market line(SML) model and its applications; conceptual differences between portfolio theory and capital asset pricing model
  • Shortcomings of the capital asset pricing model
  • The Arbitrage pricing model (APM) and other multifactor models: background of the theory; conceptual differences between the Capital asset pricing model and the Arbitrage pricing model; application of the Arbitrage pricing model, shortcomings of Arbitrage pricing model; Pastor Stambaugh model
  • Evaluation of portfolio performance: Treynor’s measure, Sharpe’s measure, Jensen’s measure, appraisal ratio measure, information ratio, Modigliani and Modigliani (M2)
    • 3 Advanced financing decision
  • The nature of financing decision, principle objectives of making financing decision
  • Overview of cost of capital: meaning and relevance of cost of capital: the firm’s overall cost of capital; weighted average cost of capital (WACC) and weighted marginal cost of capital (WMCC) ; analysis of breakpoints in weighted marginal cost of capital schedule
  • Capital structure theories: nature of capital structure and factors influencing the firm’s capital structure; traditional theories of capital structure – assumptions of the theories, Net income theory and Net operating income theory; Franco Modigliani and Merton Miller’s propositions – MM without taxes, MM with corporation taxes, MM with corporation and personal tax rates and MM with taxes and financial distress costs; other theories of capital structure; the pecking order theory and Trade-off theory determination of the firm’s optimal capital structure using the Hamada model, CAPM and WACC
  • Special topics in financing decision: analysis of operating profit (EBIT)/EPS at point of indifference in firm’s earnings; establishing the range of operating profit within which each financing option; leverage and risk; operating leverage and operating risk, financial leverage and financial risk, combined leverage and total risk; quantifying leverage using the degree of operating leverage, degree of financial leverage and degree of combined leverage
  • Long term financing decisions; bond refinancing decision, lease-buy evaluation and the rights issues
  • Impact of financing on investment decisions – the concept of adjusted present value (APV)


  • 4 Mergers and acquisitions
  • Nature of mergers and acquisitions
  • Reasons of mergers and acquisitions
  • Acquisition and Mergers verses organic growth
  • Valuation of acquisitions and mergers
  • Prediction of a takeover target
  • Defence tactics against hostile takeovers
  • Financing of mergers and acquisitions
  • Analysis of combined operating profit (EBIT) and post-acquisition earning per share at the point of indifference in firms earnings under various financing options.
  • Determination of range of combined operating profit.
  • Regulatory frame work for mergers and acquisitions
  • Reasons why there are failed mergers and acquisitions
  • Mergers and acquisitions in a global context


  • 5 Corporate restructuring and re-organisation
  • Background on restructuring and re organisation
  • Indicators/symptoms of restructuring
  • Considerations in designing an appropriate restructuring programme
  • Financial reconstruction: forms of financial reconstruction; impact of financial reconstruction on share price; impact of financial reconstruction on the weighted Average cost of capital (WACC)
  • Portfolio reconstruction: various ways of unbundling a firm: divestment, de-merger, spin-off, liquidation, sell-offs, equity curve outs, strategic alliances, management buyout, leveraged buyouts and the management buy-ins.
  • The relevance of the various forms of portfolio reconstruction
  • Organisational reconstruction: The nature and benefits of this form of restructuring; models of predicting corporate failure; Multiple discriminant analysis (Z-Score model), Beaver failure ratio, Argenti model, Taffler’s model
  • Causes of financial distress
  • Forms of financial distress and solutions to financial distress


  • 6 Derivatives in financial risk management
  • The meaning, nature and importance of derivative instruments: futures, forwards, options and swaps
  • Pricing and valuations of derivatives: futures, forwards, options and swaps
  • Types of risks: operational risks, political risks, economic risks, fiscal risks, regulatory risks, currency risks and interest rate risks
  • Foreign currency risk management: Types of forex risks, hedging currency risks, forward contracts, money market hedge, currency options, currency futures and currency swaps
  • Interest rate risks: Term structure of interest rates, forward rate agreement, interest rate futures, interest rate swaps, interest rate options


  • 7 International financial management
  • International investments
  • International financial markets
  • International financial institutions
  • Methods of financing international trade
  • International parity conditions: Interest rate parity, purchasing power parity and International fisher effect
  • International arbitrage: locational arbitrage, triangular arbitrage and covered interest arbitrage
  • Divided policy for multinationals
  • International debt instruments: International bonds (euro bond), certificate of deposits, securitisation of loans, commercial paper
  • Availability and timing of remittances
  • Transfer pricing: impact on taxes and dividends


  • 8 Real estate finance
  • Overview of real estate business – nature of real estate business, legal and economic framework and participants in real estate business in Kenya
  • Valuation approaches (income, cost and sales comparison approaches)
  • REITS: types; advantages and disadvantages; valuation: net asset value per share (NAVPS); use of funds from operations (FFO), adjusted funds from operations (AFFO) in REIT valuation
  • Instruments of real estate financing – mortgages, lien, title, mortgage requirements and mortgage clauses
  • Rights in case of debt – default and its consequence, equity of redemption, foreclosure, statutory redemptions
  • Mortgage and financial markets: demand for funds in mortgage market, disintermediation effects, primary and secondary mortgage market, mortgage market and cost of money, role of central bank and the role of government in mortgage markets
  • Savings and loan association – classification, state accounts, insurers. Mortgage backed bonds and services
  • 9 Emerging issues and trends




Topic 1: Advanced capital budgeting decision…………………………………….10

Topic 2: Portfolio theory and analysis………………………………………….…21

Topic 3: Advanced financing decision……………………………………………..35

Topic 4: Mergers and acquisitions………………………………………………….51

Topic 5: Corporate restructuring and re-organisation……………………………..59

Topic 6: Derivatives in financial risk management……………………………..…71

Topic 7: International financial management…………………………………..….81

Topic 8: Real estate finance……………………………………………………….86

Topic 9: Emerging issues and trends……………………………………………….87




Topic 1: Advanced capital budgeting decision…………………………………….90

Topic 2: Portfolio theory and analysis.………………………………….…….….116

Topic 3: Advanced financing decision……………………………………….…..143

Topic 4: Mergers and acquisitions…………………………………………….…178

Topic 5: Corporate restructuring and re-organisation……………………………196

Topic 6: Derivatives in financial risk management……………………………….217

Topic 7: International financial management……………………………….……241

Topic 8: Real estate finance………………………………………………….……251

Topic 9: Emerging issues and trends……………………………………….…….253













Complete copy of CPA ADVANCED FINANCIAL MANAGEMENT Revision Kit is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.com






November 2020 Question One C

Chanzu Ltd. is considering a project which would cost Sh.5,000,000 now. The annual benefits for four years, would be a fixed income of Sh.2,500,000 per annum plus other savings of Sh.500,000 in year 1, rising 5% each year because of inflation. Running costs will be Sh.1,000,000 in the first year but would increase at a rate of 10% each year because of inflating labour costs.

The general rate of inflation is expected to be 7.5% per annum and the firm’s required nominal rate of return is 16%.


(i) Advise the management of Chanzu Limited on whether to undertake the project.

(4 marks)

(ii) Comment on the impact of inflation in (c) (4) above.                                      (2 marks)



November 2020 Question Four C

Describe four types of real options available to the management while making strategic capital budgeting ‘decisions of a firm.                                               (4 marks)



November 2019 Question One B

Sunny Technologies Ltd. is considering investing Sh.50 million in a new machine to manufacture computer microchips with an expected useful life of 5 years and no salvage value. It is expected that 20 million units of micro chips will be sold each year at Sh.3.00 per unit. Variable production costs are expected to be Sh.1.65 per unit, while incremental fixed costs will be Sh.10 million per annum.

The cost of capital is 12%.


Evaluate the sensitivity of the project’s net present value (NPV) to the following changes:

(i)  Sales volume.                                                                                            (3 marks)

(ii) Sales price.                                                                                               (3 marks)

(iii) Variable costs.                                                                                         (3 marks)



November 2019 Question One C

Further analysis of the company in (b) above suggests that sales volumes could depend on expected economic state as follows:

Economic state Poor Normal Good
Probability 0.30 0.60 0.10
Annual sales volume (units) 17,500,000 20,000,000 22,500,000



The expected net present value (NPV) of the project using scenario analysis

(5 marks)


November 2019 Question Two A

Kanga Limited is considering the design of a new conveyor system. The management must choose among the following three alternative courses of action:

Option l

The firm could sell the design outright to another corporation with payments over 2 years.

Option 2

The firm could license the design to another manufacturer for a period of 5 years which is likely to be the product life cycle of the conveyor system.


Option 3

The company could manufacture and market the system itself. This alternative will result in 6 years of cash inflows.

Cash flows associated with each alternative are as shown below:

Alternative Sell License Manufacture
Initial investment, 10 (Sh.) 400,000 400 000 900,000
Year   Cash inflows (Sh.)  
1 400,000 500,000 400,000
2 500,000 200,000 500,000
3 160,000 400,000
4 120,000 400,000
5 80,000 400,000
6 400,000


The company has a cost of capital of 12%.


Advise Kanga Limited on the best alternative based on:

(i)  Net present value (NPV) approach.                                                         (3 marks)

(ii) Annualised net present value (ANPV) approach.                                    (3 marks)

(iii) Compare and contrast your results obtained in (a) (i) and (ii) above.   (2 marks)



May 2019 Question Five A

Jeza Tours and Travel is a private limited company in the tourism industry. In order to improve customer service and provide the management with timely and quality information, the company is contemplating to purchase 8 micro-computers at a cost of Sh. 100,000 each.

Installation cost for all the computers will amount to Sh.80,000. It is estimated that once installed, the computers will increase the company’s earnings before depreciation and tax from Sh. 12.000.000 to Sh. 12.500,000 annually.

The computers are expected to last for 10 years after which they will be obsolete with no resale value.

The Operations Manager proposes that the computers will be useful for 15 years with no resale value.

The Marketing Manager, on the other hand argues that the company needs the computers for only 5 years, after which they can be disposed of at Sh. 50,000 each.

The probability distribution of the useful life of the computers is given as follows:

Probability Useful life of computers (years)
0.20 5
0.50 10
0.30 15


The company is in the 30% tax bracket.

The company’s cost of capital is 24% and uses the straight-line method of depreciation.


(i)  The expected net present value of the project.                                         (4 marks)

(ii) The standard deviation of the expected net present value.                       (3 marks)

(iii) If the net present value (NPV) of the project is less than Sh.200.000, the firm will be exposed to a financial distress.

Determine the probability that the firm will avoid financial distress. (Assume normal distribution).                                                                                  (3 marks)



November 2018 Question Two A

Discuss three practical challenges that could be encountered when making capital investment decisions.                                                                                      (6 marks)



November 2018 Question Two B

Galanema Ltd. is considering to introduce new cheap plastic rulers into the market. This will involve investing in a new plant at a cost of Sh.280 million.

The plant is expected to have a useful life of 5 years at the end of which salvage value will be nil. The firm’s policy is to depreciate all of its fixed assets on a straight line basis.

Due to market uncertainties, the unit selling price, unit variable cost and annual sales volume of the new plastic rulers have been estimated stochastically as follows:

Unit selling price Unit variable cost Annual sales volume
Value Probability Value Probability Value Probability
(Sh.)   (Sh.)   (Sh.“million”)  
35 0.30 15 0.20 4 0.10
30 0.40 10 0.50 7 0.60
50 0.30 25 0.30 9 0.30


Additional information:

  1. The firm expects to incur fixed operating costs excluding depreciation of Sh.30 million in each year.
  2. The company’s cost of capital is 17%.
  3. The corporate tax rate is 30%.


(i)  The expected net present value (NPV) of the new product.                        (6 marks)

(ii) Simulate the net present values (NPV) using the following random numbers:

(802560   638351   057530   150353  603785    553525    245239     369948    160252    857015) and compute the expected net present value of the project.             (8 marks)



May 2018 Question One B

In relation to investment appraisal, evaluate four limitations of sensitivity analysis.

(4 marks)


May 2018 Question One C

TabLtd. has a potential investment opportunity for which the initial cash outlay and future cash flows are uncertain









Complete copy of CPA ADVANCED FINANCIAL MANAGEMENT Revision Kit is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.com





November 2020 Question One C

Chanzu Ltd

i) Whether to undertake the project

Money rate of return

(1 + i) = (1 + r ) (1 + h)

Where: i = money rate

r = Real rate

h = inflation rate

=  × 100%

= (1.247 – 1) × 100%

= 24.7%

Year Fixed income Savings Total
1 2,500,000 500,000 ×  = 525,000 3,025,000
2 2,500,000 500,000 ×  = 551,250 3,051,250
3 2,500,000 500,000 × 578,812.5 3,078,812.5
4 2,500,000 500,000 × = 607,753.125 3,107,753.125


Year Total Running costs Net cash flows
1 3,025,000 1,000,000 ×  = 1,100,000 1,925,000.000
2 3,051,250 1,000,000 ×  = 1,210,000 1,841,250.00
3 3,078,812.5 1,000,000 ×  = 1,331,000 1,747,812.500
4 3,107,753.125 1,000,000 ×  = 1,464,100 1,643,653.125


Year Cash flows D.F 24.7% PV
1 1,925,000.000 0.8010 1,543,657.500
2 1,841,250.000 0.6431 1,184,107.875
3 1,747,812.500 0.5157 901,346,906
4 1,643,653.125 0.4136 679,814.933
PV of cash flows 4,308,927.214
Less initial outlay 5,000,000


ii) Comment on the impact of inflation

Inflation leads to increase in cash flows

Inflation leads to increase in the cost of capital



November 2020 Question Four C

Types of real options available to the management while making strategic capital budgeting decisions

  • Strategic investment option: A project can be undertaken because it will lead to rise of new opportunities but not because of its positive NPV. Managers have to beware why they are undertaking certain projects. This option is highly exercised in development projects such as schools.
  • Expand option
  • Timing / Postpone option: These are options that allow the management to delay investment in capital project if they feel they need to gather sufficient information about the project that will lead to success of the project.
  • Abandonment option: Abandoning is a circumstance where a company undertakes a project for a few years then liquidates the same project



November 2019 Question One B

i) Sensitivity of the project’s net present value (NPV) to the changes in Sales volume

Holding other factors constant, if sales volume decreases 14.11% then wewill reject the project.

ii) Sensitivity of the project’s net present value (NPV) to the changes in Sales price

Assume sales price is y



Complete copy of CPA ADVANCED FINANCIAL MANAGEMENT Revision Kit is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.com


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