ACCOUNTING TECHNICIANS DIPLOMA ( ATD )
LEVEL II
KASNEB REVISION KIT
PAST EXAMINATION PAST PAPERS WITH SUGGESTED ANSWERS
Updated with November 2019 Examination Past paper
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GENERAL OBJECTIVE
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply the principles of finance in business decision making.
8.0 LEARNING OUTCOMES
- Identify various sources of finance for organisations
- Calculate non-complex risk and return measures
- Make basic dividend decisions for a firm
- Determine the cost of capital for an organisation
- Apply the basic valuation models to determine value of financial securities
- Evaluate the viability of capital investments using appropriate appraisal techniques
- Apply basic concepts of Islamic Finance.
CONTENT
8.1 Overview of finance
- Nature and scope of finance
- Relationship between accounting and finance
- Finance functions
- Goals of a firm
- Agency theory: conflicts and resolutions
8.2 Sources of finance
- Factors to consider when choosing a source of finance
- Internally generated and externally generated finance
- Short term, medium and long term sources of finance
8.3 Financial markets and systems
- Roles and importance of financial markets and systems
- Market participants and financial innovation
- Types of financial markets
- Characteristics of a good market
- Functions of financial markets
- The flow of funds and the financial system
- Organisation, structure and functions of securities markets
- Automation of securities exchanges; automated trading system (ATS), Central depository system (CDS)
- Role of government in the financial system; capital markets authority, central bank, central depository and settlement company
8.4 Time value of money
- Time value versus time preference for money
- The relevance of time value of money
- Discounting techniques
- Compounding techniques
- Preparation of the loan amortisation schedule
8.5 Introduction to risk and return
- Components of risk and return
- Sources of risk
- Measures of risk and return for a single asset
- Distinction between risk-free and risky assets
- Relationship between risk and return on investments
8.6 Cost of capital
- Significance of cost of capital to firms
- Factors influencing a firm’s cost of capital
- Components of cost of capital
- Weighted average cost of capital
- Weighted marginal cost of capital
8.7 Working capital management
- Nature and importance of working capital management
- Determinants of working capital
- Working capital operating cycle
- Working capital financing policies
- Cash management
- Accounts receivable management
- Accounts payable management
- Management of inventory, debtors and creditors
8.8 Capital budgeting decisions under certainty
- Importance, characteristics and types of capital investment decisions
- Capital investment cash flows; total initial cash outlay, the total terminal cash flows and annual net operating cash flows
- Investment evaluation criteria
- The features of an ideal capital budgeting technique
- Investment appraisal techniques; Accounting Rate of Return (ARR), Payback period, Internal Rate of Return, Net Present Value, Profitability index
8.9 Dividend decisions
- Factors influencing the dividend decision of a firm
- Forms of dividend payment
- The dividend policies; pay-out ratio policy, residual policy, stable predictable policy, low regular plus extra policy
- Dividend payment chronology- declaration date, holder of record date, ex-dividend date and payment date
8.10 Fundamentals of Islamic finance
- Principles and trends in Islamic banking
- Differences between Islamic and conventional banking
- The concept of interest (riba) and how returns are made by Islamic financial securities
- Sources of finance in Islamic financing
8.11 Emerging issues and trends
TABLE OF CONTENT PAGE
Past papers
- November 2019………………………………………….7
- May 2019……………………………………….…………12
- November 2018…………………………………………18
- May 2018………………………………….………….…23
- November 2017…………………………………………28
- May 2017…………………………………………………33
- November 2016………………………………………..38
- May 2016………………………………………….……..43
- November 2015………………………………………..48
- September 2015……………………………….………..42
Suggested answers and solutions:
- November 2019…………………………………………59
- May 2019……………………………………………….…74
- November 2018…………………………………………86
- May 2018……………………………………………………95
- November 2017………………………………….………105
- May 2017…………………………………………………..117
- November 2016………………………………………….130
- May 2016…………………………………………………..141
- November 2015………………………………………….152
- September 2015…………………………………………163
NPV VALUES…………………………………………………….177
ATD LEVEL II
FUNDAMENTALS OF FINANCE
WEDNESDAY: 27 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) Describe the functions of the following financial market participants:
(i) Brokers.
(ii) Investment banks.
(iii) Securitisers.
(b) Discuss four ways in which the potential agency problems between shareholders and the management could be resolved.
SAMPLE PAGES
ATD LEVEL II
FUNDAMENTALS OF FINANCE
TUESDAY: 21 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 terms as used in finance:
(i) Financial intermediaries.
(ii) Risk-return trade off.
(iii) Stakeholder management.
(b) Describe three motives of holding inventory.
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ATD LEVEL II
FUNDAMENTALS OF FINANCE
TUESDAY: 27 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) Differentiate between “primary market” and “secondary market”.
(b) In relation to Islamic finance, explain four sources of finance.
(c) A businessman wants to save for the university education of his son. The businessman estimates that the education expenses will be Sh.1 million per year for four years when his son joins university in 16 years time. The expenses will be payable at the beginning of the years. He expects the annual interest rate of 80/0 over the next two decades. (Assume that the deposit is made at the end of the year).
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ATD LEVEL II
FUNDAMENTALS OF FINANCE
TUESDAY: 22 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) Distinguish between a “risky asset” and a -risk-free asset”.
(b) In relation to financial markets, describe four characteristics of a good market.
(c) Stanely Kamaki is considering buying ordinary shares of ABC Ltd. which are currently trading at a market price per share (MPS) of Sh.25. The forecasted market price of each share after one year and their probability of occurrence in different states of nature are given as follows:
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ATD LEVEL II
FUNDAMENTALS OF FINANCE
TUESDAY: 28 November 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 factors that could influence the amount of cash that a firm should hold.
(b) Describe three challenges faced by Islamic financial institutions (IFIs) in your country.
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ATD LEVEL II
FUNDAMENTALS OF FINANCE
TUESDAY: 23 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) Differentiate between “business risk” and “financial risk”.
(b) Discuss three advantages of leasing as a source of finance.
(c) Ufanisi Ltd. is considering raising additional Sh.10 million to finance an expansion programme. The firm’s capital structure which is considered to be optimal is given as follows:
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ATD LEVEL II
FUNDAMENTALS OF FINANCE
TUESDAY: 22 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) Summarise two differences between “accounting” and “finance”.
(b) Discuss four ways in which the goals of a business organisation might complement each other.
(c) Joel borrowed a 3-year loan of Sh.1,500,000 at an interest rate of 9 per cent per annum from his employer to buy a saloon car. His employer required a three equal end-of-year repayments.
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ATD LEVEL II
FUNDAMENTALS OF FINANCE
TUESDAY: 24 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) Outline four advantages that could accrue to a firm from using debt capital over equity capital as a mode of financing.
(b) Describe three factors that should be considered while evaluating an investment in securities.
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ATD LEVEL II
FUNDAMENTALS OF FINANCE
WEDNESDAY: 18 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) Explain the term “agency conflict”.
(b) Describe four roles of a finance manager.
(c) Analyse three motives of holding cash by an organisation.
(d) Discuss four factors to be considered by an organisation when choosing the source of finance.
SAMPLE PAGES
ATD LEVEL II
FUNDAMENTALS OF FINANCE
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) Explain three factors that a company could consider when formulating its dividend policy.
(b) Outline four advantages of paying scrip dividends by a company.
(c) The following information was extracted from the books of Kogello Limited as at 31 March 2015:
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FUNDAMENTALS OF FINANCE
NOVEMBER 2019
QUESTION 1
a) Functions of the financial market participants
- Brokers – A broker acts as an intermediary for their clients to transact at a stock exchange. They can offer advisory services e.g on shares to buy
- Investment banks
- Asset management for large investment funds
- Personal wealth management for high net worth clients
- Handling mergers and acquisitions
- Underwriting stock issues
- Acting as financial advisor
SAMPLE PAGES
FUNDAMENTALS OF FINANCE
MAY 2019
QUESTION 1
Explanations of terms
- Financial intermediaries
Refers to middlemen who act as a bridge between institutions with surplus funds and institutions with a deficit in funds like commercial banks and insurance companies
- Risk-return trade off
Risk refers to probability of loss on any investment made
Return refers to money generated from investment made
Risk-return trade off refers to the dilemma faced by the investors whereby if they want to make higher return then they should be ready to assume extra risk
SAMPLE PAGES
FUNDAMENTALS OF FINANCE
NOVEMBER 2018
QUESTION 1
- Differentiation between primary market and secondary market
| Primary market | Secondary market |
| 1. This is a new issue market where new securities are sold therefore capital has to be raised so as to finance the buying of new securities 2. Increase the outstanding number of securities |
1. This is one whereby existing securities are bought and sold
2. No increase in the outstanding number of securities |
SAMPLE PAGES
FUNDAMENTALS OF FINANCE
MAY 2018
QUESTION 1
- Distinction between risky asset and risk free asset
Risk free asset is an asset in which the return is known with certainty e.g the ten year treasury bond while a risky asset is an asset that have significant degrees of price volatility like equities, commodities, real estate and currencies
SAMPLE PAGES
FUNDAMENTALS OF FINANCE
NOVEMBER 2017
QUESTION 1
Factors that influence the amount of cash a firm should hold
- Economic conditions prevailing and opportunities available for growth
- Unique factors to the industry or company
- Availability of funding options
- Firm size
- Cash flow volatility
- Capital expenditure
- New networking capital
- Firm age
- Transaction costs e.g costs associated with buying and selling securities
SAMPLE PAGES
FUNDAMENTALS OF FINANCE
MAY 2017
QUESTION 1
- Difference between business risk and financial risk
| Financial risk | Business risk |
| It is related to the payment of debt | Purely operational |
| It can be avoided if the firm doesn’t take debt | It is not avoidable |
| It will be there until the equity financing is increased drastically | It will be there as long as the company operates |
| It is the risk of not being able to pay off the debt that the company has taken to get financial leverage | It is the risk of not being able to make operations profitable so that the company can meet its expenses easily |
| Can be reduced by reducing debt financing and increasing equity financing | Can be decreased by systemizing the process of production and operations and by minimizing production costs |
| Measured by variability in operating profit | Measured using debt-asset ratio and financial leverage multiplier |
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FUNDAMENTALS OF FINANCE
NOVEMBER 2016
QUESTION 1
- Differences between accounting and finance
| Accounting | Finance | |
| Clients | Individuals , businesses and government | Businesses and government |
| Main employers | Public accounting firms and corporations | Banks and corporations |
| Attention to detail | High | Moderate |
| Thought process | Rules based | Analysis based |
| Business process | Communicating the financial position | Figuring out how to add value |
| Focus | Accuracy and reliability | Insights and analysis |
| View point | Historical | Future oriented |
| Financial statement | Responsible for preparing them | Responsible for analyzing them |
Ways in which the goals of a business organization can complement each other (overlapping business goals)
- A profitable firm can be able to pay more taxes to the government
- If a company is profitable, in most cases, it will increase shareholders’ wealth
SAMPLE PAGES
FUNDAMENTALS OF FINANCE
MAY 2016
QUESTION 1
Advantages of using debt capital over equity capital as a source of financing
- It involves less floatation costs as compared to issue of ordinary share capital since the obligations involved are minimal
- A lot of procedures are not involved thus be raised faster than equity capital
- It does not lead to dilution of the earnings per share since no shares are issued thus the market value of the shares is not affected.
- It does not lead to dilution of the ownership and control of the firm since the providers of the debt capital do not acquire voting rights and ownership of the firm
- Interest on debt capital is usually an allowable deduction for tax purposes unlike dividends paid to ordinary shareholders.
SAMPLE PAGES
FUNDAMENTALS OF FINANCE
NOVEMBER 2015
QUESTION 1
Agency conflict
Refers to conflict of interest that arises when one person called a principal appoints some other person called agent to do so task on behalf of them. The agent may do some acts which may injure the interests of principal e.g independent auditors may collude with management to give unqualified opinion which may mislead shareholders.
SAMPLE PAGES
FUNDAMENTALS OF FINANCE
2015 PILOT PAPER (SEPTEMBER)
QUESTION 1
Factors to consider when formulating dividend policy
- State of capital markets – if the market is favourable the management can adopt a liberal dividend policy otherwise they align to conservative dividend policy
- State of economy – for example during inflationary periods, the management may retain large portion of earnings to finance replacement of obsolete machines
- Legal restrictions – a firm may only pay dividends from current profits or past profits made by company
