Fundamentals of finance revision kit – 2015 to 2022 kasneb past papers with answers

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GENERAL OBJECTIVE

This unit covers the competencies required to manage finances in an organisation. Competencies include: Applying finance concepts in evaluating financial implications of relevant business decisions, applying time value of money principles in evaluating financing and investment decisions, evaluating appropriate source of business finance, applying appropriate capital budgeting techniques, maintaining liquidity through appropriate working capital management, applying risk and return concepts in making optimal investment decisions, identifying concepts that inform the dividend decision making process and identifying finance and investment opportunities using Islamic finance concepts

 

LEARNING OUTCOMES

  • Apply finance concepts to manage finance in an organisation
  • Apply time value of money principles to evaluate financing and investment decisions
  • Determine the optimal cost of capital of an organisation
  • Make capital budgeting decision using appropriate techniques
  • Make working capital management decisions using appropriate methods
  • Apply risk and return concepts to make optimal investment decisions
  • Identify concepts that inform the dividend decision making process
  • Apply valuation models to determine the value of securities

 

CONTENT

8.1      Apply finance concepts to manage finance in an organisation

1.1 Nature and scope of finance

1.1.1 Investment decisions

1.1.2 Dividend decisions

1.1.3 Financing decisions

1.1.4 Liquidity decisions

1.2 Relationship between accounting and finance

1.2.1 Similarities and differences

1.2.2 Cost accounting

1.2.3 Financial accounting

1.2.4 Management accounting

1.3 Finance Functions

1.3.1 Routine

1.3.2 Non-Routine (Managerial)

1.4 Goals/Objectives of a Firm

1.4.1 Financial

1.4.2 Non-financial goals

1.4.3 Overlaps and conflicts among the objectives

1.5 Agency Theory

1.5.1 Key definitions

1.5.1.1 Principal

1.5.1.2 Agent

1.6 The nature of agency relationships

1.6.1 Ordinary shareholders and management

1.6.2 Shareholders and debenture holders

1.6.3 Shareholders and external auditors

1.6.4 Shareholders and Government

1.7 Causes of conflict in each relationship and suggested remedial measures

8.2      Evaluate appropriate source of business finance

2.1 Factors to consider when choosing a source of finance

2.2 Sources of finance

2.2.1 Short term

2.2.2 Medium term and

2.2.3 Long-term

2.3 Types of finance

2.3.1 Internally generated funds

2.3.2 Externally generated funds

2.4 The nature of each source of funds

2.5 Characteristics for sources based on

2.5.1 Short term sources

2.5.2 Medium term sources

2.5.3 Long-term sources

2.6 Merits and demerit for:

2.6.1 Short term sources

2.6.2 Medium term sources

2.6.3 Long-term sources

2.7 Sources of finance for small and medium sized enterprises (SMEs)

2.7.1 The SME owner, family and friends

2.7.2 The business angel

2.7.3 Trade credit

2.7.4 Leasing

2.7.5 Factoring and invoice discounting

2.7.6 The venture capitalist

2.7.6.1 Listing

2.7.6.2 Supply chain financing

2.8 Challenges encountered by SMEs in raising capital and remedial measures

2.8.1 SMEs’ difficulties in accessing finance

2.8.2 Lack of information infrastructure for SMEs

2.8.3 Low level of business R&D in SMEs sector

2.8.4 Insufficient use of information technology in SMEs

2.9 Remedies for the above challenges

2.9.1 Diversifying Channels of Financing

2.9.2 Development of SME Database and Credit Risk Analysis of SMEs

2.9.3 R&D Tax Incentives

2.10 Utilising Information for SMEs

 

8.3  Apply time value of money principles to evaluate financing and investment decisions

3.1 The Time value of money

3.1.1 Time value versus time preference for money

3.1.2 The relevance of time value of money

3.2 Estimating cash flows

3.2.2 Compounding techniques

3.2.3 Discounting techniques

3.3 Preparation of the loan amortization schedule

3.3.1 Principal amount

3.3.2 Repayment period

 

8.4 Apply valuation models to determine the value of securities

4.1 Nature and scope of valuation models

4.2 Relevance of valuation of securities

4.2.1 Debentures

4.2.2 Preference shares

4.2.3 Ordinary shares

4.3 Concept of value

4.3.1 Going concern value

4.3.2 Liquidation value

4.3.3 Fair value

4.3.4 Investment value

4.3.5 Intrinsic value

4.4 Valuation of:

4.4.1 Debentures

4.4.2 Preference shares

4.4.3 Ordinary shares

 

8.5      Determine cost of capital for a business entity

5.1 The Cost of capital

5.5.1 Relevance of cost of capital to firms

5.5.2 Usage

5.5.3 Factors influencing a firm’s cost of capital

5.2 Components of cost of capital

5.2.1 Debt

5.2.2 Ordinary shares

5.2.3 Preference shares

5.3 The firm’s overall cost of capital:

5.3.1 Weighted average cost of capital

5.3.2 Weighted Marginal cost of capital

5.4 Limitations of the weighted average cost of capital

 

8.6      Apply appropriate project appraisal technique to make capital budgeting decisions

6.1 Nature and importance of capital investment decisions

6.2 Characteristics of capital investment decisions

6.2.1 Large investments

6.2.2 Irreversible decision

6.2.3 High risk

6.2.4 Long-term effect on profitability

6.2.5 Impacts cost’s structure

6.3 Types of capital investment decisions

6.3.1 On the basis of expansion

6.3.2 On the basis of dependency

6.4 Capital investment cash flows:

6.4.1 Total initial cash outlay

6.4.2 The total terminal cash flows and

6.4.3 Annual net operating cash flows

6.5 The features of an ideal capital budgeting technique:

6.5.1 Based on size

6.5.2 Based on duration

6.5.3 Based on risk

6.5.4 Based on impact to cost structure

6.5.5 Based on difficulty

6.6 Capital Budgeting techniques

6.6.1 Non discounted techniques

6.6.1.1 Accounting Rate of Return (ARR)

6.6.1.2 Payback period

6.6.2 Discounted techniques

6.6.2.1 Internal Rate of Return

6.6.2.2 Net Present Value

6.6.2.3 Profitability index and

6.6.2.4 Discounted payback period approach

6.7 Merits and demerits of each capital budgeting technique

6.8 Conflict between NPV and IRR in Ranking Projects

6.9 Practical challenges of capital budgeting in the real world

6.9.1 Small businesses

6.9.2 Large businesses

6.9.3 Public institutions

6.9.4 Private institutions

 

8.7   Maintain liquidity through appropriate working capital management

7.1 Nature and importance of working capital management

7.2 Factors influencing working capital needs of a firm based on the:

7.2.1 Nature of business

7.2.2 Size of business

7.2.3 Production policy

7.2.4 Manufacturing process/length of production cycle

7.2.5 working capital cycle

7.2.6 Based on credit policy

7.2.7 business cycle

7.3 Working capital operating cycle

7.3.1 The relevance

7.3.2 Components of the cycle

7.3.3 Computation of the cycle

7.4 Working capital financing policies

7.4.1 Management of Cash

7.4.2 Management of Debtors

7.4.3 Management of creditors

7.4.4 Management of inventory

 

8.8    Apply risk and return concepts to make optimal investment decisions

8.1 The nature of risk and return

8.2 Distinction between risk-free and risky assets

8.3 Sources of risk

8.3.1 Competitive risk

8.3.2 Financial risk

8.3.3 Market and opportunity risk.

8.3.4 Political and economic risk

8.3.5 Technology risk

8.3.6 Operational risk

8.3.7 Environmental risk

8.4 Expected Return

8.4.1 For single asset

8.4.2 For two assets

8.5 Risk

8.5.1 Standard deviation and variance:

8.5.1.1 For a single asset

8.5.1.2 For two assets

8.5.2 Coefficient of variation

8.6 Relationship between risk and return on investment/Risk return trade off

 

8.9  Identify concepts that inform the dividend decision making process

9.1 Factors influencing the dividend decision of a firm

9.2 Forms of dividend payment

9.2.1 Stock

9.2.2 Cash

9.2.3 Property

9.2.4 Script

9.2.5 Liquidating

9.3 The firm’s dividend policy

9.3.1 Stable predictable policy

9.3.2 Constant pay-out Ratio policy

9.3.3 Regular plus extra policy and

9.3.4 Residual Dividend policy.

9.4 Dividend payment process

9.4.1 Declaration date

9.4.2 Ex-Dividend date

9.4.3 Record date

9.4.4 Payment date

9.5 Dividend theories

9.5.1 The MM dividend irrelevance theory

9.5.2 The residual dividend theory

9.5.3 The bird-in-the-hand theory

9.5.4 The tax preference theory

 

8.10   Identify finance and investment opportunities using Islamic finance concepts

10.1 History of Islamic finance

10.2 The nature of Islamic finance:

10.2.1 Islamic banks

10.2.2 Islamic insurance (Takaful) and Islamic financial instrument

10.3 Principles of Islamic finance

10.3.1 Equity based contracts

10.3.2 Sale based contracts

10.3.3 Debt based contracts

10.3.4 Charitable based contracts

10.4 Differences between Islamic and conventional finance

10.5 The concept of interest (riba) and how returns are made by Islamic financial securities

10.5.1 Sources of Islamic finance

10.6 Islamic finance drivers

10.6.1 Changing nature of regulation

10.6.2 Technological advancements

10.6.3 Cross border transactions

10.6.4 Growing Muslim populations

10.6.5 Emerging economic growth

10.7 Regulation of Islamic finance institutions

10.8 Emerging issues and trends

10.8.1 Cryptocurrency

10.8.2 Block chain technology

10.8.3 Crowdfunding

CHAPTER ONE

 APPLY FINANCE CONCEPTS TO MANAGE FINANCE IN AN ORGANISATION

                                                                  

QUESTION 1

December 2022 Question One B

Explain THREE non-financial goals of a firm.     (6 marks)

Suggested answer

  • Create a positive work environment: Invest in the well- being of employees by creating a positive work environment with amenities such as flexible hours, remote working options and a positive culture.
  • Grow customer loyalty: Focus on creating a customer experience that will encourage repeat purchases and long-term loyalty.
  • Enhance operational efficiency: Streamline operations to reduce costs and increase productivity.
  • Increase market share: Invest in marketing and new products development to expand the reach of the business and gain market share from competitors.
  • Foster innovation: Support and encourage innovative ideas that can improve the business and its offerings.
  • Create a positive brand image: Promote the business’s values, products and services to create a positive image in the public eye.
  • Establish community partnerships: Work with local organizations to build relationships and support the community.

 

QUESTION 2

December 2022 Question Three A

Outline FOUR functions of a finance manager.      (4 marks)

 Suggested answer

  • Developing financial strategies: A finance manager will create and manage strategies for the financial success of the organization. This includes budgeting, forecasting, cashflow analysis, long term planning, and developing strategies to meet financial targets.
  • Overseeing investment activities: A finance manager will oversee investments and capital projects. This includes researching new investments, monitoring investments, creating financial models to evaluate potential investments and providing advice to senior management on the best investment decisions.
  • Analyzing financial data: A finance manager will analyse financial data to identify trends and opportunities for improvement. This includes analysing financial statements, reviewing financial models to project future outcomes.
  • Managing risks: A finance manager will identify and manage risk in order to minimize losses. This includes evaluating risks associated with investments, creating risk management plans, and designing strategies to mitigate risk.
  • Developing financial policies: A finance manager will develop and implement financial policies to ensure the organization is compliant with financial regulations. This includes developing policies related to taxes, investments and other financial matters.
  • Managing finances: A finance manager will manage the finances of the organization. This includes budgeting, preparing financial statements and overseeing accounts.

 

SAMPLE WORK

Complete copy of ATD FUNDAMENTALS OF FINANCE 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

QUESTION 3

August 2022 Question One A

With regard to sources of finance, explain the following terms:

  • Factoring     (2 marks)
  • Business angel.      (2 marks)

 

Suggested answer

i) Factoring

This is a financial transaction and a type of debtor finance in which business sells its accounts receivable (i.e invoices) to a third party called a factor at a discount. A business engages in factoring to meet its present and immediate cash needs

 ii) Business angel

These are generally wealthy, entrepreneurial individuals who provide capital in return for a proportion of shareholding in a given start up and established small and medium sized enterprises. They provide a quick and straight forward way of securing funding needed.

 

 QUESTION 4

August 2022 Question Two A

Explain three causes of conflict between shareholders and external auditors.      (6 marks)

 

Suggested answer

  • Colliding with management during the performance of their duties and hence compromising their independence
  • Issuing misleading reports to shareholders and the general public
  • Failure to exercise professional care and due diligence in the performance of their duties and hence failing to detect errors and frauds which they could have otherwise detected.

  

QUESTION 5

August 2022 Question Five A and B

  • Outline four circumstances under which a company would prefer to use short term debt financing compared to other sources of finance.      (4 marks)
  • Explain three differences between a firm’s “value maximisation goal” and “profit maximisation goal”.         (6 marks)

 

Suggested answer

(a) Circumstances under which short term debt finance is preferable to other sources of finance.

  1. Urgent financing needs: Short term debt financing can be useful in situations where a business needs quick access to cash to cover unexpected expenses or short-term cash flow shortages. For example, a company may need to pay for unexpected repairs or purchase inventory quickly to take advantage of a limited-time opportunity.
  2. Seasonal or cyclical businesses: Businesses that experience fluctuations in revenue throughout the year may find it more beneficial to use short term debt financing to bridge the gap between revenue cycles. This can help to ensure that the business has the necessary resources to operate during lean periods.
  3. Lower interest rates: Short term debt financing may have lower interest rates than long term financing options, such as mortgages or bonds. This can make it a more cost-effective option for businesses that only need to borrow funds for a short period of time.
  4. Flexibility: Short term debt financing can be more flexible than other sources of finance, as businesses can often negotiate shorter repayment terms or pay off the loan early without incurring penalties.
  5. Limited financial history: Start-ups or newer businesses with limited financial history may find it easier to secure short term debt financing than longer-term financing options, as lenders may be more willing to take a risk on a shorter-term loan.

 

(b) Differences between a firm’s value maximization goal and profit maximization goal.

  • Wealth maximization is defined as the management of financial resources at increasing the value of the stakeholders of the company while profit maximization is defined as the management of financial resources aimed at increasing the profit of the company.
  • Wealth maximization focuses on increasing the value of the stakeholders of the company in the long term while profit of the company in the short term.
  • Wealth maximization considers the risks and uncertainty inherent in the business model of the company while profit maximization does not considers the risks and uncertainty inherent in the business model of the company
  • Wealth maximization helps in achieving a larger value of a company’s worth, which may reflect in the increased market share of the company while profit maximization helps in achieving efficiency in the company’s day to day operations to make the business profitable

MASOMO MSINGI PUBLISHERS APP – Click to download and access all our materials

 

QUESTION 6

April 2022 Question One A and B

Explain two types of financial decisions made in a company.      (4 marks)

Discuss four potential causes of conflict between shareholders and the management.     (8 marks)

Suggested answer

(a) Types of financial decisions made in a company.

  • Financing decisions – which relates to when, where, and how to raise funds in a firm.
  • Investment (capital budgeting) decisions – which relates to the long-term assets which the company can put money in.
  • Working capital management decisions – which relates to the management of working capital, that is, Inventory, debtors, and payables
  • Dividend decisions – which relates to the division of profits between payment to ordinary shareholders as dividends and retained earnings.

 

(b) Potential sources of conflicts between shareholders and the management

This arises out of the separation between the management and control of a business. The shareholders own the business (Principals) and the management are the agents employed to run the daily activities of the business. Sources of conflicts include:

  • Incentive problems – where managers are paid a fixed salary, they lack the incentive to work harder to maximize the shareholders wealth. This is because they paid the same salary irrespective of the profits they generate.
  • Consumption of perks and perquisites – perquisites are high salaries and other fringe benefits that the management may award themselves. This eats on the profits available to the shareholders hence the conflict.
  • Difference in risk profiles – Shareholders prefer high-risk projects in order to earn high returns. Managers, on the other hand may prefer low risk projects for fear of being fired if they undertake high risk projects and fail. This leads to low returns to the shareholders, hence the conflict.
  • Investment evaluation horizon – shareholders prefer long term projects in line with the going concern concept while managers may invest in short term projects.
  • Use of corporate resources for personal use
  • Creative accounting – involves manipulation of finances
  • Failure to declare dividends for no good reason

 

QUESTION 7

December 2021 Question Two A

Explain four remedial measures to agency conflict between shareholders and debenture holders.         (8 marks)

 

Suggested answer

  • Using restrictive covenants: these are agreements that limits the actions of the company. For example, cashflow covenants, liability-based covenants, asset- based covenants, etc
  • Board representation: the creditors may demand to have a representative in the board of directors to take care of their interests.
  • Demanding security/collateral before granting credit.
  • Threats of not granting future credit
  • Convertibility: On breach of loan covenant, the lender may have the right to convert the debentures into ordinary shares.
  • Lenders may sue the company
  • Use of corporate governance mechanisms to minimise the conflict

  

QUESTION 8

August 2021 Question One A

Distinguish between “agency cost” and “agency conflict”.      (4 marks)

 

Suggested answer

  • Agency costs are the cost incurred by the shareholders by having the managers run the business on their behalf (separation of ownership and control). They include monitoring costs, residual cost, and bonding costs.
  • Agency conflicts are the difference in interests between the shareholders (principals) and the managers (agents)

  

QUESTION 9

August 2021 Question Five A

Summarise two disadvantages of the profit maximisation as an objective of a firm.

 

Suggested answer

  • Economic survival – profit is necessary for the economic survival of a business.
  • Profit is a standard of measurement – it is the standard upon which the viability of a business model is measured. Without profits, the survival of the business is at risk.
  • Ensures social and economic welfare – a profit making business means there has been proper use of resources. It means it’s able for pay the factors of production, that is, land, labour, capital, and entrepreneurship.

 

 QUESTION 10

May 2021 Question Five A and B

  • Explain four conflicts that could arise in the course of achieving a firm’s objectives. (8 marks)
  • Summarise four benefits of regulating financial markets in your country. (4 marks)

 

Suggested answer

a) Conflicting objectives

  • A firm cannot maximize profit and at the same time charge low prices for quality products.
  • Paying suppliers maybe impossible if the firms debtors do not pay on time.
  • Profit maximization leads to higher taxes.
  • Businesses seek high profits and maybe reluctant to pay high wages to staff.
  • To grow in size a business will need to spend money which will reduce profit.
  • Shareholder interests may also conflict with suppliers as to increase profitability prices.
  • Customers want to buy quality goods at possible though because a business has to charge higher prices for quality goods produced.

 b) Benefits of regulating financial markets

  • To enforce applicable laws
  • To prosecute places of market misconduct such as insider trading.
  • To license providers of financial services
  • To protect clients and investigate complaints
  • To maintain confidence in the financial system (market confidence)
  • Public awareness-promoting public understanding of the financial system
  • Consumer protection-securing the appropriate degree of protection for consumers.
  • The reduction of financial crime: reducing the extent to which it is possible for a business to be used for a purpose connected with financial crime.

SAMPLE WORK

Complete copy of ATD FUNDAMENTALS OF FINANCE 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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