CS ADVANCED LEVEL

FINANCE FOR DECISION MAKING

MONDAY: 2 December 2024. Afternoon Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) Summarise FOUR disadvantages of retained earnings as a source of finance. (4 marks)

(b) Discuss THREE challenges encountered when making capital investment decisions. (6 marks)

(c) The following information relates to a capital project in Toto Limited:

Sh.“000”
Project cost 130,000
Annual cash flows (after tax) 45,000
Project economic life 5 years
Minimum required rate of return 12%

Required:

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

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(i) Net present value (NPV). (4 marks)

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(ii) Internal rate of return (IRR). (6 marks)
(Total: 20 marks)
QUESTION TWO
(a) Highlight FOUR limitations of financial ratios. (4 marks)

(b) Explain THREE objectives of working capital management in an organisation. (6 marks)

(c) The following information relates to Uzima Ltd. for the four months given below:

Sh.“000”
Sales: September 240
October 240
November 280
December 360
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 8% cash discount. The remaining debtors are expected to pay by the beginning of the following
month.

Raw materials purchases Sh.“000”

September 80
October 160
November 160
December 120

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

Wages and salaries Sh.“000”

September 48
October 60
November 68
December 52
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 Additional information:
1. All employees are paid in the month in which the wage or salary is earned.
2. Rent of Sh.40,000 for each quarter is paid in the month of March, June, September and December.
3. Other cash overheads of Sh.8,000 per month are payable.
4. A new plant due for delivery in September will be paid in November at a cost of Sh.100,000.
5. On 1 October, the firm plans to have Sh.40,000 in the bank.

Required:
A cash budget for the months of October, November and December. (10 marks)
(Total: 20 marks)

QUESTION THREE
(a) Explain FOUR factors that could affect the success of a rights issue. (4 marks)

(b) Propose FOUR ways of solving conflict between shareholders and auditors in relation to agency theory of a firm.
(4 marks)

(c) The following is an extract from the financial statements of Alpha Ltd. and Beta Ltd. as at 31 March 2024:

Alpha Ltd. Beta Ltd.

Sh.“000” Sh.“000”
Ordinary share capital (Sh.15 par value) 60,000 45,000
Retained earnings as at 1 July 2023 15,600 7,000
15% preference share capital (Sh.25 par value) 12,400 32,000
12% loan stock 32,000 36,000
120,000 120,000

Additional information:
1. The profit before interest and tax for the year ended 31 March 2024 for Alpha Ltd. and Beta Ltd.
amounted to Sh.42.8 million each.
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2. The ordinary shares of Alpha Ltd. and Beta Ltd. are currently quoted at the securities exchange at Sh.58
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and Sh.87 respectively.
3. Both Alpha Ltd. and Beta Ltd. did not declare any dividends for the year ended 31 March 2024.
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4. The corporation tax applicable to both firms is 30%.

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Required:
Calculate the following financial ratios for Alpha Ltd. and Beta Ltd. and interpret your answer in each case.
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(i) Debt ratio. (3 marks)

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(ii) Earnings per share (EPS). (3 marks)

(iii) Price earnings (P/E) ratio. (3 marks)

(iv) Return on equity (ROE). (3 marks)

(Total: 20 marks)

QUESTION FOUR
(a) Describe FOUR roles of cost of capital to a firm. (4 marks)

(b) Evaluate FOUR reasons for the time preference for money. (4 marks)

(c) Highlight SIX reasons for valuation of securities. (6 marks)

(d) Stephen Mwakwesi borrowed Sh.2,000,000 from Huduma Bank at an annual compound interest rate of 12% on the
reducing balance basis. The loan was repayable in annual instalments over a period of four years. The instalments
were payable at the end of the year.

Required:
Prepare a loan amortisation schedule for the bank. (6 marks)
(Total: 20 marks)

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QUESTION FIVE
(a) In relation to time value of money, explain the following terms:

(i) Compounding techniques. (2 marks)

(ii) Discounting techniques. (2 marks)

(iii) A growing annuity. (2 marks)

(b) Discuss THREE mechanisms that could be used to ensure that managers act in the best interest of shareholders.
(6 marks)

(c) Sukuma Ltd. has the following capital structure:

Debt 30%
Equity 50%
Preference shares 20%

The management of the company has provided the data below:

Pre-tax cost of debt 10%

Corporate tax rate 30%
Growth rate of ordinary dividend 9%
Market price per ordinary share Sh.30
Dividend price per ordinary share Sh.2.50
Market price per preference share Sh.120
Floatation cost per preference share Sh.10
Dividend per preference share Sh.8

Required:

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Calculate the following:

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(i) After tax cost of debt. (2 marks)

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(ii) Cost of ordinary share. (2 marks)

(iii) Cost of preference shares. (2 marks)

(iv) The weighted average cost of capital (WACC). (2 marks)

(Total: 20 marks)
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 CS ADVANCED LEVEL

FINANCE FOR DECISION MAKING

MONDAY: 19 August 2024. Afternoon Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) Summarise FOUR unethical financial practices in organisations. (4 marks)

(b) Explain THREE ways through which goals of a firm may conflict with one another. (6 marks)

(c) Simon Kimani borrowed Sh.1,000,000 from XYZ commercial bank at an interest rate of 12% per annum. The loan
shall be repaid over a period of five years. The interest on the loan shall be compounded at the end of each year.

Required:
(i) The amount payable and cumulative interest payable after five years. (3 marks)

(ii) Assuming interest is compounded semi-annually, determine the total amount and cumulative interest
payable after five years. (3 marks)

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(iii) Assuming interest is compounded continuously, calculate the total amount and cumulative interest

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payable after five years. (4 marks)

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(Total: 20 marks)

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QUESTION TWO
(a) Discuss FOUR advantages of using term loans as a source of finance for an organisation. (4 marks)

(b) Describe THREE methods of issuing ordinary shares. (6 marks)

(c) Kanda Limited intends to invest in either Project TR or Project ZK. The following are the expected net cash flows
from the two projects:
Expected cash flow
Year Project TR Project ZK
Sh. Sh.
0 (4,500,000) (500,000)
1 1,200,000 1,500,000
2 1,400,000 1,800,000
3 1,250,000 1,600,000
4 2,000,000 1,800,000

Additional information:
1. The projects have estimated scrap values as follows:
Sh.
Project TR 300,000
Project ZK 500,000
2. The company’s cost of capital is 12%.

Required:
(i) Calculate the profitability index (P1) of each project. (8 marks)

(ii) Advise the management on the project to invest in. (2 marks)

(Total: 20 marks)

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QUESTION THREE
(a) Explain the following theories of valuation:

(i) Technical theory. (2 marks)

(ii) Fundamental theory. (2 marks)

(iii) Random walk theory. (2 marks)

(b) Lima Limited paid a dividend of Sh.15 per share in the last accounting year. The dividends are expected to grow at
the rate of 10% for the first 4 years and at the rate of 12% thereafter in perpetuity.

The investors’ expected rate of return is 15%.

Required:
Determine the intrinsic value of Lima Limited’s ordinary share. (6 marks)

(c) Tinga Limited manufactures and sells a single product named “T140”.

The following information relates to the product:

Sh.
Selling price per unit 180
Variable cost per unit 80
Fixed costs per annum 5,000,000

Required:
(i) Breakeven point in units and in shillings. (4 marks)

(ii) The number of units to be produced to earn a profit of Sh.1,200,000. (4 marks)

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QUESTION FOUR
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(a) Matunda Limited intends to raise capital as follows:
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 Issue 2,000,000 ordinary shares with a par value of Sh.20 at Sh.25. Floatation cost is 10% of the issue
price.
 Issue 1,000,000 8% preference shares of Sh.10 at Sh.20 each.
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 Issue 200,000 10% debentures of Sh.100 at Sh.110 each.

 Utilise Sh.15,000,000 from the retained earnings.
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Additional information:
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1. Ordinary shareholders expect a dividend of Sh.5 per share with a growth rate of 6% per annum.
2. Corporation tax rate is 30%.

Required:
(i) Cost of ordinary shares. (2 marks)

(ii) Cost of retained earnings. (1 mark)

(iii) Cost of preference shares. (2 marks)

(iv) Cost of debentures. (2 marks)

(v) Weighted average cost of capital (WACC) using book values. (3 marks)

(b) Ngana Ltd. has a cost of equity of 10%. Currently, the company has 250,000 ordinary shares which are quoted at
the securities exchange at Sh.120 per share. The company’s earnings per share is Sh.10 and it intends to maintain a
dividend payout ratio of 50% at the end of the current financial year.

The expected net income for the current year is Sh.3 million and the available investment proposals are estimated
to cost Sh.6 million.

Required:
Using the Modigliani and Miller (MM) model determine:

(i) The price of a share at the end of the year if dividend is not paid. (2 marks)

(ii) The price at the end of the year if dividend is paid. (2 marks)
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 (iii) The number of shares to be issued if dividends are not paid. (3 marks)

(iv) The number of shares to be issued if dividends are paid. (3 marks)

(Total: 20 marks)

QUESTION FIVE
(a) Summarise FOUR costs of disclosing financial information. (4 marks)

(b) The following information relates to Nile Ltd. for the year ended 31 December 2023:

Earnings yield 25%

Dividend for the year Sh.4
Market price per share Sh.150

Required:
(i) Earnings per share (EPS). (2 marks)

(ii) Dividend cover (DC). (2 marks)

(iii) Price-earnings (P/E) ratio. (2 marks)

(c) The projected monthly working capital requirements for Bahari Ltd. for the year ending 31 December 2024 is as
follows:

Month Amount of working capital required

Sh.“000”
January 5,500
February 5,500
March 7,250
April 9,000

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May 12,500

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June 17,750

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July 23,000

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August 26,250

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September 17,750
October 10,750
November 9,000
December 7,250

The expected cost of short-term funds is 25% while that of long-term funds is 30%. Ignore taxation.

Required:
(i) A schedule showing the amount of permanent and seasonal working capital requirements for each month.
(2 marks)

(ii) The average amount of long-term and short-term finance that would be required monthly. (2 marks)

(iii) The total cost of working capital finance, if the firm adopted an aggressive financing strategy. (2 marks)

(iv) The total cost of working capital finance, if the firm adopted a conservative financing strategy. (2 marks)

(v) The total cost of working capital using the matching policy. (2 marks)
(Total: 20 marks)

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 CS ADVANCED LEVEL

FINANCE FOR DECISION MAKING

MONDAY: 22 April 2024. Afternoon Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) Highlight FIVE advantages of issuing preference shares as a source of finance for a company. (5 marks)

(b) Explain FIVE challenges that may be encountered when preparing budgets. (5 marks)

(c) Luna Ltd. is contemplating raising an additional Sh.5 million to finance an expansion programme. The firm’s
capital structure which is considered to be optimal is given as follows:

Sh.“000”
Ordinary share capital (Sh.50 par value) 10,000
Reserves 6,000
12% debenture capital (Sh.100 par value) 8,000
14% preference share capital (Sh.25 par value) 12,000

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36,000

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Additional information:

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1. New ordinary shares will be issued at Sh.70 each to a floatation of 10% of issue price. The firm’s dividend

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policy is that future dividends are expected to grow at 8% each year in perpetuity. The firm paid dividend
of Sh.4 per share in the current year.
2. New 12% irredeemable debentures will be issued at Sh.120 each. Floatation cost of Sh.10 per unit issued
will be incurred.
3. New 14% preference shares will be issued at Sh.30. A floatation cost of Sh.3 per share issued will be
incurred.
4. The corporation tax rate is 30%.

Required:
(i) Cost of retained earnings. (2 marks)

(ii) Cost of ordinary shares. (2 marks)

(iii) Cost of 12% debenture capital. (2 marks)

(iv) Cost of 14% preference shares. (2 marks)

(v) Weighted marginal cost of capital (WMCC) of the firm. (2 marks)

(Total: 20 marks)

QUESTION TWO
(a) Explain FOUR ways of resolving conflict between the government and shareholders. (4 marks)

(b) ABC Ltd. plans to borrow Sh.12 million, which it will use to repurchase shares. The following information is
given:
1. Share price at time of share repurchase was Sh.60.
2. The earnings after tax was Sh.6.6 million.
3. Earnings per share (EPS) before share repurchase was Sh.3.
4. Price earnings ratio (P/E) = 60/3 = 20.
5. Earnings yield (E/P) = 3/60 x 100 = 5%.
6. Shares outstanding was 2.2 million.
7. Planned share repurchase was 200,000 shares.

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 Required:
(i) The earnings per share (EPS) after the share repurchase assuming the after-tax cost of borrowing is the
company’s customary after tax borrowing rate of 5%. (2 marks)

(ii) The earnings per share (EPS) after the share repurchase, assuming the company’s borrowing rate increase
to 6% because of the increased financial risk of borrowing Sh.12 million. (2 marks)

(c) Kola Limited leased a machinery under a 5 year lease requiring equal year-end annual payments of Sh.4,000,000.
The lessee’s incremental borrowing rate is 14%.

Required:
(i) Determine the amount the lessee’s would report as asset and liability at the date of the lease. (2 marks)

(ii) Prepare a lease amortisation schedule. (10 marks)

(Total: 20 marks)

QUESTION THREE
(a) Discuss FOUR advantages of a company using retained earnings as a source of finance. (4 marks)

(b) (i) Highlight FOUR factors that affect the value of a bond in the secondary market. (4 marks)
(ii) Jackson Kiilu has been offered a 10 year 6% coupon of Sh.1,000 par value bond at a price of Sh.900.

Required:
Determine the rate of return on the bond. (4 marks)
(c) Vuka Limited intends to invest in a project. The following information relates to the project:

Initial investment (Sh.) 3,885,000

Estimated life 10 years
Annual cash inflows (Sh.) 1,000,000
Cost of capital 12%
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Required:
(i) Determine the internal rate of return of the project using 12% and 24%. (6 marks)
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(ii) Advise the management whether to invest in the project or not. (2 marks)
(Total: 20 marks)
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QUESTION FOUR
(a) Summarise FOUR assumptions of Walter’s dividend theory. (4 marks)
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(b) The following information relates to Maji Limited for the year 2023:
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Current dividend per share Sh.3.25

Growth rate 6% per year
Market return 12%
Return on treasury bills 9% per annum
Asset beta 1.5

Required:
(i) Determine the value of Maji’s share using Gordon Growth Model. (5 marks)

(ii) State whether the shares are overvalued or undervalued if the current market value of Maji’s shares is
Sh.60. (1 mark)

(c) Makinika Ltd.’s share has a nominal value of Sh.100. The company pays 10% of the nominal value of the share as
dividend for the year. The current market price of the share is Sh.160 with 20% earnings yield.

Required:
(i) Compute earnings per share. (2 marks)
(ii) Calculate dividend cover. (2 marks)

(iii) Compute price earnings ratio. (2 marks)

(iv) Determine market value to book value ratio. (2 marks)

(v) Using your answer in (c) (iv) above, advise the shareholders on whether there is value creation or not.
Justify your answer. (2 marks)
(Total: 20 marks)

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QUESTION FIVE
(a) Summarise FOUR functions of a finance manager. (4 marks)

(b) The following information relates to Umoja Limited for the month of March 2024:
Sales (Sh.) 20,000,000
Sales commission 10% of sales
Advertising expenses Sh.500,000 + 12% of sales
Miscellaneous selling expenses Sh.100,000 + 1% of sales
Office salaries Sh.700,000
Travel and entertainment Sh.400,000
Miscellaneous administration expenses Sh.175,000
Required:
Prepare a selling and administrative budget. (6 marks)

(c) Ubunifu Limited uses 50kgs of material K20 per day. The ordering costs are Sh.300 per order. The material costs
are Sh.150 per Kg and the carrying costs are 20% per year. The company operates for 250 working days in a year.
Determine:
(i) Economic order quantity (EOQ).

(ii) Number of orders per year.

(iii) Average inventory.

(iv) Total relevant inventory costs.

(10 marks)
(Total: 20 marks)
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 CS ADVANCED LEVEL

FINANCE FOR DECISION MAKING

MONDAY: 4 December 2023. Afternoon Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) Highlight FOUR advantages of the Net Present Value (NPV) technique in capital budgeting. (4 marks)

(b) Discuss FOUR limitations of the profit maximisation goals of a firm. (4 marks)

(c) The board of directors of Ukweli Ltd. is considering a review of the company’s dividend policy. The following
information is provided.
1. The company paid Sh.3 million as dividend in the previous financial year.
2. The profit after tax for the last financial year was Sh.12 million.
3. The company has not issued any preference shares.
4. The company has been having a constant growth rate of 10% per annum for the past 10 years.
5. The expected profit after tax for the current year is Sh.18 million.
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6. The company anticipates investment opportunities worth Sh.2 million in the current financial year.
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7. The capital structure of the company consists of 60% equity and 40% debts.
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Required:
The optimal total dividend for the current financial year if the company wishes to adopt the following independent
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dividend policies:
(i) Constant payout ratio policy. (3 marks)
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(ii) Stable predictable dividend policy. (3 marks)

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(iii) Pure residual dividend policy. (3 marks)

(iv) Low dividend plus extra dividend policy. (3 marks)

(Total: 20 marks)

QUESTION TWO
(a) Enumerate FOUR differences between factoring and pledging as sources of finance. (4 marks)

(b) Describe THREE working capital financing policies. (6 marks)

(c) The following is an extract from the financial position of MG Limited relating to its equity and liability as at 30
September 2023:
Sh.“000”
Ordinary shares capital (Sh.10 each) 10,000
Capital reserves 40,000
Revenue reserves 100,000
10% debentures 60,000
210,000

Additional information:
1. The profit after tax for the year ended 30 September 2023 was Sh.6,000,000.
2. The dividend pay-out ratio for the year ended 30 September 2022 was 60%.
3. The market price per share as at 30 September 2023 was Sh.36.
4. The corporation tax is 30%.

CS32 Page 1
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 Required:
(i) Debt to Equity ratio. (2 marks)

(ii) Dividend Yield (DY). (2 marks)

(iii) Return on Capital Employed (ROCE). (2 marks)

(iv) Earnings Per Share (EPS). (2 marks)

(v) Times Interest Covered ratio. (2 marks)

(Total: 20 marks)

QUESTION THREE
(a) Highlight FOUR assumptions of cost-volume-profit (CVP) analysis. (4 marks)

(b) Describe THREE principles that govern the stakeholder’s theory. (6 marks)

(c) Kings Limited is considering raising Sh.8,000,000 for its expansion.

The management estimates to use the following financing mix:

Sh.
12% bank Loan 4,000,000
Ordinary shares (Sh.20 par value) 2,000,000
Retained earnings 2,000,000
8,000,000

Additional information:
1. The market value of the ordinary shares is Sh.40.
2. The ordinary shareholders expect a dividend of Sh.4 per share with an expected growth rate of 6% per
annum to perpetuity.

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3. Floatation costs are Sh.2 per share.

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4. Corporation tax rate is 30%.

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Required:

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Calculate the weighted average cost of capital (WACC) of the company. (10 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Examine TWO reasons why money has time value. (4 marks)

(b) Trade credit as a source of finance of a firm has distinct advantages for buyers and sellers.

Required:
In relation to the above statement and the management of creditors, summarise THREE costs to an organisation
of:
(i) Taking trade credit. (3 marks)

(ii) Not taking trade credit. (3 marks)

(c) Demo Ltd. is evaluating an investment project which requires the importation of a new machine at a cost of
Sh.4,400,000. The machine has a useful life of six years.

Additional information:
1. The following additional costs would be incurred in relation to the machine:
Sh.“000”
Installation costs 600
Modification costs 500
Import duty 1,500
Freight charges 360

2. The machine is expected to increase the company’s annual cash flows (before tax) as shown below:

Year 1 2 3 4 5 6
Annual cash flow (Sh.“000”): 2,992 2,312 1,785 1,530 1,428 1,290

3. The machine is to be fully depreciated over its useful life using the straight line method.
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 4. An investment in working capital amounting to Sh.1 million will be required on commencement of the
project.
5. The firm pays corporation tax at the rate of 30%.
6. Cost of capital is 12% per annum.

Required:
(i) Total initial costs. (3 marks)

(ii) The annual net cash flow after tax. (4 marks)

(iii) The net present value (NPV). (3 marks)

(Total: 20 marks)

QUESTION FIVE
(a) Distinguish between “a flexible budget” and a “static budget”. (4 marks)

(b) Discuss THREE factors that influence the credit period extended by a company to its customers. (6 marks)

(c) The shares of Maweni Ltd. are currently trading at Sh.60 each at the securities exchange. Maweni Ltd’s price
earnings ratio is 10 times. The company adopts a constant 60% payout ratio as its dividend policy. It is predicted
that the company’s dividend will grow at an annual rate of 15% for the first two years, 10% for the next two years
and thereafter at a constant rate of 6% per annum in perpetuity. The investor’s minimum required rate of return is
10%.

Required:
The intrinsic value of the shares of Maweni Ltd. (10 marks)
(Total: 20 marks)
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 CS ADVANCED LEVEL

FINANCE FOR DECISION MAKING

MONDAY: 21 August 2023. Afternoon Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) Explain THREE financing decisions made by the Board and management in an organisation. (6 marks)

(b) Describe THREE benefits that may accrue to a firm from preparing a cash flow statement. (6 marks)

(c) Texa Limited practices a strict residual dividend policy. It maintains a capital structure of 60% debt and 40%
equity. Earnings for the year are Sh.10,000,000.

Required:
(i) Using the debt ratio, determine the maximum amount of capital expenditure possible without selling new
equity. (3 marks)

(ii) Suppose that the planned investment outlay for the coming year is Sh.20,000,000, evaluate whether the

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company will pay a dividend. (5 marks)

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(Total: 20 marks)

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QUESTION TWO

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(a) Summarise FOUR users of financial statements, citing the information need. (4 marks)

(b) Describe THREE internal factors that could influence financing decisions in an organisation. (6 marks)

(c) The following information was extracted from the financial statements of Kwekwe Ltd. for the year ended
31 December 2022:
Sh. “million”
Cash and cash equivalent 500
Fixed assets 1,600
Sales (all on credit terms) 5,000
Net income 250
Current liabilities 600
Current ratio 3 times
Debtors collection period 40.55 days
Return on shareholders equity 25%

Assume 365 days in a year.

Required:
Calculate the following for the year ended 30 December 2022:

(i) Accounts receivable. (2 marks)

(ii) Current assets. (2 marks)

(iii) Return on total assets as a percentage. (2 marks)

(iv) Total shareholders equity. (2 marks)

(v) Quick ratio. (2 marks)

(Total: 20 marks)

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QUESTION THREE
(a) Highlight FOUR objectives of accounting. (4 marks)

(b) The following trial balance was extracted from the books of Sunlight Ltd. as at 31 March 2023:

Sh.“000” Sh.“000”
Gross profit 100,000
Other operating income 16,000
Administrative expenses 52,000
Distribution cost 24,000
General operating expenses 6,200
Interim ordinary dividend paid 8,000
Corporation tax (1 April 2022) 2,000
Ordinary share capital (Sh.50 par value) 40,000
10% preference share capital (Sh.100 par value) 36,000
10% debentures 32,000
Land and building (net book value) 100,000
Plant and machinery (net book value) 32,000
Motor vehicle (net book value) 8,000
Inventory 24,000
Trade receivables and trade payables 80,000 76,000
Cash at bank 16,400
Capital redemption reserve fund 24,000
Share premium 16,000
Retained profit (1 April 2022) 12,000
Debenture interest paid 1,600
Preference dividend paid 1,800 ______
354,000 354,000

Additional information:
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1. A building whose net book value was Sh.20 million as at 31 March 2023 was to be revalued to Sh.36
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million.
2. The corporation tax for the year is estimated at Sh.10 million.
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3. The directors have proposed a final dividend of 20% on the ordinary shares.
4. The directors have agreed to transfer Sh.2 million to capital redemption reserve fund.
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Required:
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(i) Prepare statement of profit or loss for the year ended 31 March 2023. (6 marks)

(ii) Statement of financial position as at 31 March 2023. (10 marks)

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(Total: 20 marks)

QUESTION FOUR
(a) Enumerate FOUR causes of soft capital rationing as used in capital budgeting. (4 marks)

(b) A company is considering undertaking a capital investment project that is expected to generate annual cash flows
of Sh.1 million for 5 years. The cash flows shall grow at a rate of 5% per year. The cost of capital for the company
is 10%.

Required:
Compute the present value of cash flows. (4 marks)

(c) The following was the capital structure of Ushindi Ltd. as at 31 December 2022:

Sh.“000”
Ordinary share capital (Sh.20 par value) 12,000
12% preference share capital (Sh.25 par value) 5,760
10% debentures (Sh.1,000 par value) 5,040
Total 22,800

Additional information:
1. The current market prices per share is Sh.25. The most recent dividend paid by the company is Sh.2.50.
Dividends are expected to grow at an annual rate of 10% per year.
2. New preference shares will be issued at Sh.35 per share subject to a floatation cost of Sh.5 per share.
3. New debentures will be issued at Sh.1,200 per debenture with a discount of Sh.30 and floatation cost of
Sh.30 per debenture.
4. Corporation tax rate is 30%.
CS32 Page 2
Out of 3
 Required:
(i) The cost of ordinary share capital. (2 marks)

(ii) The cost of preference share capital. (2 marks)

(iii) The cost of debenture capital. (2 marks)

(iv) The weighted average cost of capital (WACC) using market value weights. (6 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Describe THREE red flags that could indicate that financial statements are of poor quality. (6 marks)

(b) Explain the following theories of dividend:

(i) Information signalling theory. (2 marks)

(ii) Tax differential theory. (2 marks)

(c) The following are the forecasted assets and liabilities of Ngurue Limited as at 30 June 2024:

Budget proposal for Ngurue Limited for the year ending 30 June 2024:

Assets: Sh.
Cash 150,000
Accounts receivable 800,000
Inventory 1,200,000
Land 7,000,000
Buildings 19,000,000
Goodwill 2,600,000
Liabilities:

ke
Accounts payable 430,000

o.
i.c
Salaries payable 70,000

op
.ch
Taxes payable 190,000

w
w
Mortgage payable 800,000

w
Ordinary shares 10,000,000
Retained earnings 820,000

Required:
Determine the company’s budgeted net working capital requirement. (4 marks)

(d) The following information was extracted from the financial statement of Usawa Ltd.:

Net income (earnings after tax) Sh.30 million

Number of ordinary shares Sh.3 million
Capitalisation rate 12%
Payout ratio 60%
Internal rate of return 16%

Required:
Calculate the intrinsic value of a share under:

(i) Gordon’s growth model. (3 marks)

(ii) Walter’s model. (3 marks)

(Total: 20 marks)
.......................................................................................................

CS32 Page 3
Out of 3
 CS ADVANCED LEVEL

FINANCE FOR DECISION MAKING

MONDAY: 24 April 2023. Afternoon Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) Enumerate FOUR reasons for the valuation of securities or firms. (4 marks)

(b) Zatex Ltd. paid an ordinary dividend of Sh.3.60 per share for the year ended 31 September 2022. The management
of the company projects that the earnings of the company will increase in the coming years as follows:

Year ending 31 December Projected earnings growth rate per annum (%)
2023 20
2024 20
2025 15
2026 15
2027 and subsequent years 10
e
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The minimum required rate of return is 12%
.co

Required:
Calculate the intrinsic value of the share using Gordon’s growth model. (6 marks)
pi

(c) Wauzaji Ltd. presented the following financial statements for the year ended 31 December 2022:
ho

Statement of profit or loss for the year ended 31 December 2022

C

Sh. Sh.
Sales 9,040,000
Cost of sales: Opening inventory 2,500,000
Purchases 6,820,000
9,320,000
Closing inventory (2,860,000) 6,460,000
Gross profit 2,580,000
Expenses (2,640,000)
Net loss (60,000)

Statement of financial position as at 31 December 2022:

Sh. Sh.
Non-current assets:
Premises 5,600,000
Fixtures and fittings (NBV) 500,000
Motor vehicles (NBV) 1,040,000 7,140,000
Current assets:
Stock 2,860,000
Debtors 3,260,000
6,120,000
Current liabilities:
Trade creditors 2,900,000
Bank overdraft 2,800,000
5,700,000
Net current assets 420,000
Net assets 7,560,000
CS32 Page 1
Out of 4
 Sh. Sh.
Financed by:
Ordinary share capital 2,000,000
Retained profit 3,160,000
Long term loans 2,400,000
Capital employed 7,560,000

Assume a 360 day year

Required:
Compute.
(i) Current ratio. (2 marks)

(ii) Quick ratio. (2 marks)

(iii) Gross profit margin ratio. (2 marks)

(iv) Debtors collection period. (2 marks)

(v) Creditors payment period. (2 marks)

(Total: 20 marks)

QUESTION TWO
(a) Explain FOUR reasons why the cost of capital is important to a firm. (4 marks)

(b) Discuss THREE benefits of working capital management. (6 marks)

(c) The following information relates to product X which is manufactured and sold by Neema Ltd.:
Sh.
Selling price per unit 2,000

ke
Direct material cost per unit 600

o.
i.c
Direct labour cost per unit 300

op
Variable manufacturing overhead per unit 200

.ch
w
Variable marketing cost per unit 250

w
w
Total fixed manufacturing overhead 500,000

Required:
Calculate the level of profits in the following independent situations:

(i) The level of output is 1,000 units. (2 marks)

(ii) The level of output is 750 units. (2 marks)
(iii) The selling price per unit falls to Sh.1,900 and the level of output produced increases to 1,500 units.
(3 marks)

(iv) Direct material unit cost falls to Sh.500, selling price falls to Sh.1,900 per unit and the output produced
rises to 1,750 units. (3 marks)
(Total: 20 marks)

QUESTION THREE
(a) Describe the following categories of agency conflicts:

(i) Managers versus shareholders. (2 marks)

(ii) Creditors versus shareholders. (2 marks)

(iii) Shareholders versus employees. (2 marks)

(b) Discuss FOUR reasons why accounting profits might not be the best measure of a company’s performance.
(8 marks)
(c) Kelly Neno borrowed Sh.1,000,000 from a local bank at an interest rate of 15% per annum to be repaid in equal
annual repayments for the next six years.
Required:
Prepare a loan amortisation schedule. (6 marks)
(Total: 20 marks)
CS32 Page 2
Out of 4
QUESTION FOUR
(a) Highlight SIX factors that might influence a company’s capital structure. (6 marks)

(b) Jawabu Ltd.’s capital structure as at 1 October 2022 was as follows:

Sh.“000”
Ordinary share capital (Sh.10 each) 373,000
Retained earnings as at 1 July 2022 27,000
18% debentures 400,000
800,000

The company is considering the acquisition of an investment project that will cost Sh.270 million. In order to
finance the investments project, the company would be required to raise additional capital.

Additional information:
1. The above capital structure is considered optimal.
2. The company can obtain additional debentures at an interest rate of 18% per annum.
3. The dividend for the year ended 30 September 2022 was expected to be Sh.2.40 per share.
4. Additional ordinary shares can be issued in the securities exchange at a price of Sh.54 per share net of
floatation cost of Sh.6 per share.
5. Dividends are expected to grow at a rate of 8% per annum for the foreseeable future.
6. Corporation tax is 30%.
7. The company will utilise 100% of its retained earnings.

Required:
Calculate:
(i) The cost of debentures. (1 mark)

(ii) The cost of retained earnings. e (1 mark)

(iii) The cost of ordinary shares. (2 marks)

.k
(iv) The amount of equity to be financed through the issue of new ordinary shares if the company is to
.co

maintain the optimal capital structure. (2 marks)

pi

(v) Amount to be raised through debentures. (2 marks)

ho

(c) Wauza Piki Ltd. planned to manufacture 2,000 units of motorcycles in 2,200 hours. However, it took 2,000 hours
to manufacture 2,000 units of motorcycles. The variable cost items are as follows:
C

Budgeted cost per Cost incurred

direct labour hour
Sh. Sh.
Direct labour 8 9,700
Direct material 1 1,200
Other variable costs 1 1,300
10 12,200

Required:
Using the principles applicable to flexible budgeting, prepare in tabular format a performance report to the
management of Wauza Piki Ltd. showing:

(i) Budget based on 2,200 actual hours. (2 marks)

(ii) Budget based on 2,000 hours allowed. (2 marks)

(iii) Total budget variance. (2 marks)

(Total: 20 marks)

CS32 Page 3
Out of 4
QUESTION FIVE
(a) Analyse TWO characteristics of good investment evaluation criteria. (4 marks)

(b) Mahari Ltd. is considering its capital budget for the year 2024. The following information relates to four mutually
exclusive projects that the management is contemplating about:

Projects Cash outflows (Sh.“000”) Cash inflows (“Sh.000”)

Year 1 Year 2 Year 3
A (8,000) 2,000 4,000 6,000
B (10,000) 4,000 6,000 6,000
C (20,000) 8,000 12,000 10,000
D (16,000) 6,000 10,000 8,000
Additional information:
1. The firm has a capital budget ceiling of Sh.20 million.
2. The cost of capital for Mahari Ltd. is 10%
3. The cash flows are assumed to occur at the end of each year.

Required:
Advise the management of Mahari Ltd. on the project to undertake using each of the following investments
appraisal techniques:

(i) Net present value (NPV). (6 marks)

(ii) Profitability index (PI). (4 marks)

(c) A firm has a total investment of Sh.500 million in assets and 5 million outstanding ordinary shares at Sh.100 per
share (par value). It earns a rate of 15% on its investment and has a policy of retaining 50% of the earnings. If the
appropriate discount rate of the firm is 10%, determine the price of its share using Gordon’s Model.

(i) At a payout of 50%. (2 marks)

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o.
i.c
(ii) At a payout of 80%. (2 marks)

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w
(iii) At a payout of 20%. (2 marks)

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(Total: 20 marks)
.......................................................................................................

CS32 Page 4
Out of 4
 CS ADVANCED LEVEL

FINANCE FOR DECISION MAKING

MONDAY: 5 December 2022. Afternoon Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) Highlight THREE advantages of issuing shares through private placement. (3 marks)

(b) Describe THREE circumstances under which a firm might find it appropriate to use retained earnings as a
source of finance. (6 marks)

(c) Magharibi limited is evaluating a change in its credit policy.

Presently, 70% of sales are on credit. The gross profit margin is 20%. The following information relates to the
company:
Current New
Credit policy Credit policy
Sales Sh.8,000,000 Sh.10,000,000
Collection expenses 3% of credit sales 4% of credit sales
e
.k
Collection period 72 days 90 days
Number of days in a year 360 days 360 days
.co

Required:
(i) Change in gross profit. (3 marks)
pi

(ii) Change in collection expenses. (3 marks)

ho

(iii) Change in average accounts receivable. (3 marks)

C

(iv) Using the results in (c) (i) - (iii) above, advise the management whether or not to change the current
credit policy if the borrowing rate is 16% per annum. (2 marks)
(Total: 20 marks)
QUESTION TWO
(a) Examine THREE ethical issues facing financial managers. (6 marks)
(b) Highlight FOUR arguments in favour of wealth maximisation objective. (4 marks)

(c) The following information relates to Upendo Technologies Ltd:

Paid-up equity capital Sh.2,000,000
Earnings of the company Sh.200,000
Dividend paid Sh.160,000
Price-earning (P/E) ratio 12.5 times
Number of shares outstanding 20,000

Required:
Determine the following:

(i) Earnings per share (EPS). (2 marks)

(ii) Dividend per share (DPS). (2 marks)
(iii) The intrinsic value of a share using Walter’s model. (3 marks)
(iv) Whether the company’s dividend pay-out ratio is optimal using Walter’s model. (3 marks)
(Total: 20 marks)
CS32 Page 1
Out of 3
QUESTION THREE
(a) Outline FOUR reasons for time preference for money. (4 marks)

(b) Explain THREE characteristics of capital investment decisions. (6 marks)

(c) Arthur Kiplangat holds a 5-year, 12%, Sh.1,000 debenture par value.

Determine the value of the above debenture. (4 marks)

(d) The following details relate to a capital project in Furaha Ltd:

Initial cash outlay Sh.104,000,000

Annual net operating cash flow (after tax) Sh.33,600,000
Useful life of project 6 years
Minimum required rate of return 16%

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

(i) Net present value (NPV). (2 marks)

(ii) Internal rate of return (IRR). (4 marks)

(Total: 20 marks)

QUESTION FOUR
(a) Describe FOUR benefits that might accrue to a company by having its shares quoted in the securities exchange.
(4 marks)

(b) Explain TWO ways in which a company could issue new shares to its existing shareholders. (4 marks)

ke
(c) Describe TWO costs associated with disclosure of financial statements information. (4 marks)

o.
i.c
op
(d) The management of Makadilio Ltd. has decided to prepare a cash budget.

.ch
w
w
w
The following projections and other information are drawn from their balances:

1. The opening cash balance on 1 February 2023 is expected to be Sh.30,000,000.

2. The projected sales are as follows:
Sh. “000”
December 2022 80,000
January 2023 90,000
February 2023 75,000
March 2023 75,000
April 2023 80,000
3. Analysis of books shows that accounts receivables are settled as follows:
60% within the month of sale
25% the month following
15% the month following (second month after the month of sale)
4. Projected purchases were as follows:

Sh. “000”
January 2023 60,000
February 2023 55,000
March 2023 45,000
April 2023 55,000
5. All purchases are on credit and past experience shows that 90% are settled on the month of purchase
and the balance settled the month after.
6. Wages are Sh.15 million per month and overhead of Sh.20 million per month (including Sh.5 million
depreciation) are settled monthly.
7. Taxation of Sh.8 million has to be settled in March 2023 and the company will receive settlement of an
assurance claim of Sh.25 million in April 2023.

Required
Prepare a cash budget for the month of February, March and April 2023. (8 marks)
(Total: 20 marks)

CS32 Page 2
Out of 3
QUESTION FIVE
(a) Examine TWO reasons why a company may prefer debt capital to equity capital. (4 marks)

(b) Discuss THREE importance of capital budgeting to a company. (6 marks)

(c) (i) Simon Nyaga intends to save a certain amount of money every year for five years in a bank paying
10% interest annually in order to raise college fee of Sh.5,000,000 for his daughter.

Required:
Determine the annual deposit that Simon Nyaga makes. (3 marks)

(ii) Janet Pendo has acquired a 20-month auto loan of Sh.6,000,000 at an annual interest rate of 12%.

Required:
Determine the amount of monthly loan repayments that Janet Pendo makes. (3 marks)

(d) The following information relates to product K produced and sold by Poka Limited.

Sh.
Selling price 12,000
Variable cost per unit 8,000
Fixed costs per annum 20,000,000

Required:
Determine the following:

(i) Break-even point in shillings. (2 marks)

(ii) Number of units to be produced and sold in order to achieve a profit of Sh.30,000,000. (2 marks)
(Total: 20 marks)
.......................................................................................................
e
.k
.co
pi
ho
C

CS32 Page 3
Out of 3
 CS ADVANCED LEVEL

PILOT PAPER

FINANCE FOR DECISION MAKING

December 2021. 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) The functions of a finance manager have evolved due to the dynamic nature of the business environment. Highlight
some of the emerging roles of finance management. (4 marks)

(b) Outline the practical difficulties faced by small scale enterprises wishing to obtain finance to expand production.
(4 marks)

(c) ABC Ltd. is in the agricultural industry. The company’s balance extract as at 31 March 2020 is as below:

ke
Sh.“million”

o.
i.c
op
Ordinary share capital (Sh.10 par value) 400

.ch
Retained earnings 200

w
w
w
10% preference share capital (Sh.20 par value) 100
12% debenture (Sh.100 par value) 200
900

Additional information:
1. Corporate tax rate is 30%.
2. Preference shares were issued 10 years ago and are still selling at par value (MPS = Par value).
3. The debenture has a 10 year maturity period. It is currently selling at Sh.90 in the market.
4. Currently the firm has been paying dividend per share at Sh.5. The DPS is expected to grow at 5% p.a.
in future. The current MPS is Sh.40.

Required:
(i) Calculate the market weighted cost of capital for this firm. (8 marks)

(ii) Outline the weaknesses of using the weighted average cost of capital as a discounting rate. (4 marks)
(Total: 20 marks)

QUESTION TWO
(a) Distinguish between convertible debentures and non-convertible debentures. (2 marks)

(b) Company XYZ Ltd. has sold 10,000 ordinary shares of Sh.30 (partly called up) plus 20,000 Sh.45 preference
shares, which are convertible. Compute the total number of ordinary shares after conversion. (4 marks)

(c) Outline the constraints to the growth of Venture Capital in Kenya. (6 marks)

CS32 Page 1
Out of 3
(d) For each of the companies described below, advice the company on the most appropriate dividend policy to be
adopted by the company.

(i) A company with a large proportion of inside ownership, all of whom are high income individuals.
(2 marks)

(ii) A growth company with an abundance of good investment opportunities. (2 marks)

(iii) A company experiencing ordinary growth, has high liquidity and much unused borrowing capacity.
(2 marks)

(iv) A dividend-paying company that experiences an unexpected drop in earnings from the trend. (2 marks)
(Total: 20 marks)

QUESTION THREE
The following financial statements relate to the ABC Company:

Assets Sh. Liabilities & Net worth Sh.

Cash 28,500 Trade creditors 116,250
Debtors 270,000 Notes payable (9%) 54,000
Stock 649,500 Other current liabilities 100,500
Total current assets 948,800 Long term debt (10%) 300,000
Net fixed assets 285,750 Net worth 663,000
1,233,750 1,233,750

Income Statement for the year ended 31 March 1995

e
.k
Sh.
.co
Sales 1,972,500
Less cost of sales 1,368,000
Gross profit 604,500
pi

Selling and administration expenses 498,750

Earning before interest and tax 105,750
ho

Interest expense 34,500

71,250
C

Estimated taxation (40%) 28,500

Earnings after interest and tax 42,750

Required:
(a) Calculate:
(i) Inventory turnover ratio. (2 marks)

(ii) Times interest earned ratio. (2 marks)

(iii) Total assets turnover. (2 marks)

(iv) Net profit margin. (2 marks)

(Note: Round your ratios to one decimal place)

(b) The ABC Company operates in an industry whose norms are as follows:

Ratio Industry Norm

Inventory turnover 6.2 times
Times interest earned ratio 5.3 times
Total assets turnover 2.2 times
Net profit margin 3%
CS32 Page 2
Out of 3
 Required:
(i) Comment on the revelation made by the ratios you have computed in part (a) above when compared with the
industry average. (4 marks)

(ii) Explain the limitations of using financial ratios in decision making. (8 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Distinguish between Capital structure and financial structure of a firm. (4 marks)

(b) Roca Real Estate Developers purchased a machine five years ago at a cost of Sh.7,500. The machine had an
expected economic life of 15 years at the time of purchase and a zero estimated salvage value at the end of 15
years. It is being depreciated on a straight line basis and currently has a book value of Sh.5,000. The Financial
Manager has conducted a feasibility study aimed at acquiring a new machine for Sh.12,000 and is depreciated over
its 10 years useful life. The new machine will expand sales from Sh.10,000 to Sh.11,000 per annum and will
reduce labour and materials usage sufficiently to cut operating cost from Sh.7,000 to Sh.5,000. The salvage value
of the new machine is Sh.2,000 at the end of useful life. The current market value of the old machine is Sh.1,000
and tax is 40%. The firms cost of capital is 10%. The financial manager wishes to make a decision on whether to
replace the old machine with a new one and he seeks your held.

Required:
(i) Compute the NPV of incremental cash flows and advice the company on whether to replace the old
machine with a new machine. (10 marks)

(ii) Discuss the advantages of using NPV techniques in evaluating investments. (6 marks)
(Total: 20 marks)

QUESTION FIVE

ke
o.
(a) Explain the concept of crowdfunding and highlight relevant examples. (4 marks)

i.c
op
.ch
(b) Explain the significance of valuation securities. (4 marks)

w
w
w
(c) XYZ Ltd is expected to pay a DPS of Sh.6 in one year’s time. The dividend payout ratio is 60% and the Return on
Equity is 15%. Determine whether the share is overvalued if the MPS is Sh.40. (4 marks)

(d) Highlight the defensive tactics against a hostile takeover bid. (8 marks)
(Total: 20 marks)

…………………………………………………………………………………..

CS32 Page 3
Out of 3
 kasneb
CS ADVANCED LEVEL

FINANCE FOR DECISION MAKING

WEDNESDAY: 15 December 2021. 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 a digital economy, the role of finance manager is pervasive in all activities of the firm.

Required: (8 marks)
In light of the above statement, discuss four main managerial roles played by a finance manager.

In relation to working capital management, distinguish between "over-capitalisation" and "under-capitalisation".

(b)
(4 marks)

The following information relates to two companies: Alpha Ltd. and Beta Ltd. for the year ended 31 December
(c)
2020:
e
Alpha Ltd. Beta Ltd.
.k
Annual sales (Sh."000") 15,000 10,000
Percentage of gross profit on sales 25% 22%
.co

Average stock (Sh."000") 800 650

Current liabilities (Sh. "000*") 1,000 800
3:1 2.6:1
pi

Current ratio
Closing stock (Sh."O00°") 820 600
2,000 1,250
ho

Receivables at year end (Sh."000")

Required:
C

Using the above information calculate the following:

(2 marks)
Stock turnover ratio.

Acid test ratio.

(2 marks)
ii)
Receivables turnover.
(2 marks)
(ii)
(2 marks)
(iv) Average age of receivables in months. (Total: 20 marks)

QUESTION TWO
pecking order theory. (5 marks)
Highlight five sources of finance in their order of preference according to the
(a)
Ltd. for the last four years.
The following information relates to profits reported by Donnet
(b)
2018 2019 2020
2017
6.2 6.3 6.3
Profit after tax (Sh. "million") 6.0

earnings yield is 12%.

The firm's

Required (5 marks)
Limited.
The market value of Donnet
CS32 Page1
Out of 3
 statement of financial position of ZAP Limited
(c) extracted from the
C TOlowing information was

Sh."000
2,500
Ordinary Shares (Sh.0.50 each) 1,000
12% unsecured bonds

Additional information:
Sh.1.30 each.
The ordinary shares are currently quoted at
The 12% bonds are trading at Sh.72. rate of 10%.
paid with an expected growth
.

ordinary dividend of Sh.0.15 has just

been
The
The corporation tax rate 30%.

Required (10 marks)

The weighted average cost of capital(WACC) for the company. (Total: 20 marks)

QUESTION THREE
Mathew Wakili intends to start a small business enterprise.
(a) (8 marks)
Advise Mathew Wakili on four external sources of finance that may be available to him.

machine was
machine 1 year ago at a cost of Sh.1,200,000. At that time, the
(b) Pambo Limited Purchased a special costs for the old machine are
estimated to have a useful life of 6 years and no salvage value. The annual operating
estimated at Sh.400,000.

same job but with an annual operating

A new been introduced to the market which will do the
machine has just
and has an estimated useful life of 5 years
with zero
cost of Sh.340,000. The new machine costs Sh.2,100,000
salvage value.

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The old machine can be sold for Sh.1,000,000.

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Additional information:
The company uses straight line method of depreciation.
The corporation tax rate is 30%.
3. The company's cost ofcapital is 10%.

Required: (2 marks)
The initial investment for new machine.

The incremental cash inflow after tax. (2 marks)

(1i)
The Net Present Value (NPV) of the new machine. (2 marks)
(iii)
machine. (2 marks)
Advise the management whether to invest in the
new
(iv)
from the books of Kawaida Ltd. for the year ended 31 December
(c) The following information has been extracted
2020:

Profit after tax Sh.15 million

Total dividend paid Sh.9 million
Number of shares outstanding 2 million
Cost of equity capital 20%
Rate of return on investment 25%

Required: (4 marks)
The current theoretical market value of the company's share using the Walters Model.
(Total: 20 marks)

CS32 Page 2
Out of 3
QUESTION FOUR
(a) With respect to working capital management, describe four possible methods of easing cash shortages in an
organisation.
(4 marks)

(b) XYZ Ltd. has a dividend capitalisation rate of 12% on its investment of Sh.600,000 in assets. The
comp: ha
600,000 outstanding ordinary shares at Sh. 10 per share cach. The company's rate of return is 10% and it has a
policy of retaining 40% of the carnings.

Required:
) Using Gordon's model, determine the price of the company's share. (3 marks)

(ii) Critique Gordon's Model as a method of valuing securities. (3 marks)

(C) Fred Onyango visited his local bank in search for additional working capital and proposesto borrow Sh.120,000
repayable in six months. The eredit analyst at the bank upon interviewing Fred Onyango discovers that although
the customer's cash inflows have been averagely steady over the last few years, his busincss experiences a boom
twice a year at intervals of six months. The end of the ncxt six months coincides with the end of the proposed
loan's tenure. A partially amortising loan with Sh.60,000 being paid at the end of the sixth month is
recommended.

Required:
Prepare a loan amortisation schedule for the two options to assist Fred Onyango in understanding the repayments.
Note: The bank charges an interest rate of 14.40% per annum. (10 marks)
(Total: 20 marks)

QUESTION FIVE
Budgets are not prepared in isolation and then filed away but are the fundamental components of what is known as
a)
the budgetary planning and control system.
e
.k
In line with this statement:
.co

Explain the meaning of the term "budgetary planning and control system". (1 mark)
)

i) State five objectives of a budgetary planning and control system. (5 marks)

pi

JNS Manufacturers Limited manufactures two products namely; "Skyline" and "Digitex". The company is in the
b)
ho

are made by the same grade of labour, grade C. The

process of preparing the year 2022 budgets. Both products
company currently holds 800 units of Skyline and 1,200 units of Digitex in inventory but 250 units of Digitex
have been discovered by auditors to have deteriorated in quality and must therefore be scrapped. Budgeted annual
C

sales of Skyline are 3,000 units and of Digitex are 4,000 units, provided that the company maintains finished

goods inventories at a level equal to three months sales.

Grade C labour was originally expected to produce one unit of Skyline in two hours and one unit of Digitex in
three hours at an hourly rate of Sh.250 per hour. However, in discussions with Wafanyikazi trade union
negotiators, it has been agreed that the hourly wage rate should be raised by Sh.50 per hour provided that the times
to produce Skyline and Digitex are reduced by 20%.

Required:
Production budget for the year 2022 (6 marks)
(1)
(ii) Direct labour budget for the year 2022 indicating the direct labour cost per hour. (4 marks)

(c)
Summarise four assumptions of the Walter's dividend relevance model. (4 s)
(Total: 20 marks)
***e*tesse*************************************

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 CS ADVANCED LEVEL

FINANCE FOR DECISION MAKING

MONDAY: 1 August 2022. Afternoon paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) Highlight five limitations of profit maximisation objective of a firm. (5 marks)

(b) Explain five assumptions of cost volume profit analysis. (5 marks)

(c) The projected weekly working capital requirements for Uwezo Ltd. for the second week of August 2022 is as
follows:
Day Amount of working capital required
Sh.“000”
Monday 9,000
Tuesday 9,000
Wednesday 12,500

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Thursday 16,000

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Friday 23,000

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Saturday 33,500

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Sunday 44,000

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The expected cost of short term funds is 20% while that of long term funds is 25%.
Ignore taxation.

Required:
(i) A schedule showing the amount of permanent and seasonal working capital requirement for each day.
(4 marks)
(ii) The average amount of long term and short term finance that would be required daily. (2 marks)

(iii) The total cost of working capital finance if the firm adopted an aggressive financing strategy. (2 marks)

(iv) The total cost of working capital finance, if the firm adopted a conservative financing strategy. (2 marks)
(Total: 20 marks)

QUESTION TWO
(a) Explain the following terms as used in valuation:

(i) Book value. (2 marks)

(ii) Replacement value. (2 marks)

(b) Discuss three importance of capital investment decisions. (6 marks)

(c) The capital structure of Maziwa Ltd. which is considered optimal as at 31 May 2022 was as follows:

Sh.“000”
Ordinary share capital 225,000
Retained earnings 75,000
8% preference share capital (Sh.100 par value) 75,000
12% debenture (Sh.1,000 par value) 125,000
500,000

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 The company intends to raise additional funds for investing in a new project which is estimated to cost Sh.150
million.

Additional information:
1. Any new ordinary shares issued will incur a 15% floatation cost per share.
2. The most recent ordinary dividend paid by the company was Sh.5 per share. Dividend is expected to
grow at the rate of 8% per annum.
3. The current dividend yield is 6.25%.
4. The company expects to raise a maximum of Sh.22,500,000 from retained earnings to finance the
project.
5. Additional 8% preference shares can be issued at the current market price of Sh.120 per share.
6. A new 12% debenture can be issued at Sh.960 per debenture.
7. Corporation tax rate is 30%.

Required:
(i) The current market price per ordinary share. ( 2 marks)

(ii) The number of ordinary shares that should be issued to finance the project. (2 marks)

(iii) The cost of retained earnings. (1 mark)

(iv) The cost of ordinary shares. (1 mark)

(v) The cost of preference shares. (1 mark)

(vi) The cost of debenture capital. (1 mark)

(vii) The company’s weighted marginal cost of capital. (2 marks)

(Total: 20 marks)

QUESTION THREE
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(a) Cyrus Mwavuli borrowed Sh.1,000,000 from Hakika Bank at an annual interest rate of 12% on reducing
balance. The loan was repayable in annual instalments over a period of four years. The instalments were payable
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at the end of the year.

Required:
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A loan amortisation schedule. (4 marks)

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(b) Discuss three factors that could influence a firm’s capital structure decisions. (6 marks)
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(c) The following data was extracted from the books of Banda Ltd. for the year ended 31 December 2021:

Total sales Sh.40,000,000

Total asset turnover 2 times
Total debt to total assets 30%
Current ratio 3 times
Inventory turnover 5 times
Average collection period 18 days
Fixed assets turnover 5 times
Gross profit margin 25%

Assume 360 days in a year.

Required:
Banda Ltd.’s statement of financial position as at 31 December 2021. (10 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Explain each of the following dividend policies:

(i) Stable dividend. (2 marks)

(ii) Constant dividend payout ratio. (2 marks)

(iii) Residual dividend. (2 marks)

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(b) Discuss three causes of conflict between shareholders and creditors. (6 marks)

(c) The shares of Ukweli Limited are currently trading at Sh.60 each at the securities exchange. Ukweli Limited’s
price earning (P/E) ratio is 6 times. The company adopts 50% payout ratio as its dividend policy. It is predicted
that the company’s dividends will grow at an annual rate of 25% for the first three years, 20% for the next 2
years and thereafter at a constant rate of 10% per annum in perpetuity. The investor’s minimum required rate of
return is 16%.

Required:
(i) Current intrinsic value of the shares of Ukweli Limited. (6 marks)

(ii) Advise a prospective investor whether or not to buy the shares of Ukweli Limited. (2 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Summarise two differences between “master budget” and “cash budget”. (4 marks)

(b) Argue four cases in favour of factoring as a source of finance. (4 marks)

(c) The directors of Sports Wear Ltd. is considering the selection of a project from two mutually exclusive projects
each with an estimated productive life of five years.

Project Alpha will cost Sh.4,960,000 and is expected to generate annual cash flows of Sh.1,200,000 with an
estimated residual value of Sh.1,180,000.

Project Beta will cost Sh.2,400,000 and is expected to generate annual cash flows of Sh.600,000 with an
estimated residual value of Sh.405,000.

The company employs a straight line depreciation policy. The company’s cost of capital is 12% per annum.

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Required:

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(i) Pay back period for each project. (4 marks)

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(ii) Net present value (NPV) of each project. (6 marks)

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(iii) Advise the board of Sports Wear Ltd. on which project to undertake under each of the investment
evaluation method in (c) (i) and (c) (ii) above. (2 marks)
(Total: 20 marks)
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