ATD LEVEL III

FUNDAMENTALS OF FINANCE

THURSDAY: 22 August 2024. Morning Paper. Time Allowed: 2 hours.

This paper consists of fifty (50) Multiple Choice Questions. Answer ALL questions by indicating the letter
(A, B, C or D) that represents the correct answer. Each question is allocated two (2) marks. Do NOT write anything
on this paper.

1. Which of the following factors is LEAST likely to influence the investment decisions of a firm?
A. Market trends
B. Cost of capital
C. Regulatory requirements
D. Employee salaries (2 marks)

2. Core Capital Agribusiness, a recently incorporated Small and Medium Enterprise (SME), is looking for ways to
improve its access to finance. Which one of the following statements is NOT a potential benefit of diversifying
their financing channels?
A. Reducing dependence on any single source of funding
B. Accessing different types of financing with varying terms and conditions

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C. Lowering overall financing costs

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D. Increased administrative burden due to managing multiple financing sources (2 marks)

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3. Farmers Ltd. is considering a project that requires an initial investment of Sh.100,000,000 and is expected to

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generate cash flows of Sh.40,000,000 per year for 5 years. The cost of capital for the company is 8%. What is the
net present value (NPV) of the project?
A. Sh.15,443,500
B. Sh.21,543,500
C. Sh.59,708,500
D. Sh.41,543,500 (2 marks)

4. You need to accumulate Sh.15,000,000 in 5 years for a down payment on a house. How much should you invest
today at an annual interest rate of 7%, compounded annually, to reach your goal? (Rounding off to the nearest 2
decimal places)
A. Sh.10,461,460
B. Sh.10,694,800
C. Sh.11,055,640
D. Sh.11,365,680 (2 marks)

5. Jason Ireri has a loan with an outstanding balance of Sh.12,000,000, an annual interest rate of 9% and monthly
payments of Sh.250,000. How long will it take to fully repay the loan?
A. 54 months
B. 60 months
C. 62 months
D. 66 months (2 marks)

6. Aisha Mbeleva invests Sh.50,000 today in a savings account with an annual interest rate of 6%, compounded
monthly. She plans to withdraw the entire amount five years from now and use it to invest in agricultural
processing units. After five years, what will be the purchasing power of her savings considering an expected
inflation rate of 3% per year?
A. Sh.63,872.15
B. Sh.66,090.00
C. Sh.59,106.46
D. Sh.56,459.89 (2 marks)
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Use the following information to answer question 7, question 8 and question 9.

Alice Gikenye invests Sh.500,000 in a saving account that offers 7% annual interest compounded quarterly. She intends to
withdraw the entire amount after 5 years.

7. What will be the total amount that Alice Gikenye will receive at the end of 5 years?
A. Sh.707,389
B. Sh.741,375
C. Sh.750,250
D. Sh.759,516 (2 marks)

8. If Alice Gikenye needs Sh.1,000,000 in 3 years, how much additional money should she invest today?
A. Sh.264,900
B. Sh.285,347
C. Sh.312,083
D. Sh.337,482 (2 marks)

9. Alice Gikenye is considering two options for her additional investment: a lump sum deposit today or monthly
contributions for 3 years. If the monthly interest rate remains 1.75% (quarterly compounding), which one of the
following options would be more beneficial and why?
A. Lump sum deposit since it benefits from longer compounding over 3 years
B. Monthly contributions as they allow flexibility and avoid risking a large sum upfront
C. There is no difference in total value for either option at the same interest rate
D. It depends on Alice Gikenye’s financial situation and risk tolerance (2 marks)

10. The following information has been extracted from the books of Bidii Company as at 31 December 2023
• Receivable days: 58
• Inventory turnover: 10 times per annum
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• Payable days: 45
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• Non-current asset days: 36
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What is the length of the cash operating cycle of Bidii Company as at 31 December 2023?
A. 23 days
B. 49.5 days
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C. 85.5 days
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D. 139.5 days (2 marks)

11. Deral Limited is deciding on whether to offer a 2% early settlement discount that half of all customers take up.
C

This will encourage the customers to pay in 1 month instead of the usual 2 months. Deral Limited pays 10% per
annum for its overdraft facility.
What will be the impact of the 2% early settlement discount on the cash operating cycle and reported profits?

Cash operating cycle Reported profits

A. Reduce increase
B. Unaffected increase
C. Reduce reduce
D. Unaffected reduce (2 marks)

12. Wema Investments Company has a current ratio of 2. Outstanding trade receivables of Sh.3,000,000 and current
liabilities amounting to Sh.2,000,000. Assume a year has 365 days.
Determine inventory days for Wema Investments Company if cost of sales is Sh.10,000,000 per annum?
A. 36.5 days
B. 91.25 days
C. 14.6 days
D. 243.3 days (2 marks)

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13. Zion Traders has annual credit sales of Sh.20 million and accounts receivable of Sh.4 million. Working capital is
financed by an overdraft at 12% interest per year. Assume a year has 365 days. What is the annual financial effect
if management reduces the collection period to 60 days by offering an early settlement discount of 1% that all
customers adopt?
A. Sh.85,479 benefit
B. Sh.114,521 cost
C. Sh.85,479 cost
D. Sh.285,479 benefit (2 marks)

14. Four mutually exclusive projects; K,L,M and N, have been appraised by Ann Njoka, a financial manager with
Kevote Investments using net present value (NPV), internal rate of return (IRR), return on capital employed
(ROCE) and payback period (PP). Kevote Investments’ objective is to maximise shareholder wealth. Which of the
following projects should be chosen by Ann Njoka?
NPV IRR ROCE PP
A. Project K Sh. 1 million 40% 34% 4 years
B. Project L Sh. 1.1 million 24% 35% 2.5 years
C. Project M Sh. 0.9 million 18% 25% 3 years
D. Project N Sh. 1.5 million 12% 18% 7 years (2 marks)

15. Afya Inc., a pharmaceutical company, experiences delays in clinical trials due to unexpected regulatory changes
by health authorities. This primarily represents which type of risk?
A. Operational risk
B. Technology risk
C. Political and economic risk
D. Environmental risk (2 marks)

16. What is the primary goal of a dividend policy for a company?

A. Maximising share price

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B. Maximising dividends

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C. Minimising taxes

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D. Minimising debt (2 marks)

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17. Which of the following terms is NOT a type of dividend payment?
A. Cash dividend
B. Stock dividend
C. Bond dividend
D. Property dividend (2 marks)

18. Securities dividend is a payment made ________________________.

A. in the form of additional company shares
B. in cash to shareholders
C. in the form of company bonds
D. in kind, such as assets or products (2 marks)

19. Which one of the following dividend policy emphasises on a steady and predictable payout ratio?
A. Constant dividend pay-out policy
B. Residual dividend policy
C. Stable dividend policy
D. Irregular dividend policy (2 marks)

20. Which one of the following statements refers to the primary advantage of a stock repurchase programme for a
company?
A. Increased leverage
B. Tax advantage for shareholders
C. Enhancement of earnings per share
D. Reduced volatility in stock prices (2 marks)

21. The primary purpose of working capital management is _____________________.

A. managing long-term investment
B. maximising shareholder wealth
C. managing short-term assets and liabilities
D. minimising tax liabilities (2 marks)
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22. Which one of the following channels of financing is considered a remedy for Small and Medium Enterprise
(SME) challenges?
A. It limits the options available to SMEs
B. It reduces the complexity of financial management
C. It increases dependence on a single source
D. It provides alternative sources in case of one source failure (2 marks)

23. The cash conversion cycle measures the time it takes for ______________________.
A. collecting accounts payable
B. paying accounts receivable
C. converting cash into inventory
D. collecting accounts receivable (2 marks)

24. Factoring contributes to working capital management by ____________________.

A. increasing inventory turnover
B. accelerating cash inflows from receivables
C. delaying payments to creditors
D. reducing short-term borrowing (2 marks)

25. In Islamic finance, which one of the following terminologies is used instead of interest on loans?
A. Profit-sharing
B. Riba
C. Dividends
D. Zakat (2 marks)

26. The primary driver behind the development of Islamic finance is ___________________.
A. profit maximisation

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B. social justice and ethical principles .k
C. technological advancement
D. political influence (2 marks)
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27. Which one of the following crowdfunding model allows investors backers to receive a share of the profits or
revenue generated by the project they support?
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A. Reward-based crowdfunding
B. Equity crowdfunding
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C. Donation-based crowdfunding
D. Debt-based crowdfunding (2 marks)
C

28. Which one of the following statements explains the primary purpose of a smart contract in the context of
blockchain technology?
A. Exchanging physical goods
B. Automating contract execution
C. Enhancing cybersecurity
D. Generating new cryptocurrencies (2 marks)

29. The long-run objective of financial management is to maximise _____________________.

A. earnings per share
B. the value of the firm’s securities
C. return on investment
D. market share (2 marks)

30. What is the earnings per share (EPS) for a company that earned Sh.100,000 last year in after tax profit, has
200,000 common shares outstanding and Sh.1,200,000 in retained earnings at the end of the year?
A. Sh.100,000
B. Sh.6.0
C. Sh.0.50
D. Sh.6.50 (2 marks)

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31. Baramwezi Industries is a company specialising in manufacturing sustainable clothing and is currently facing a
sudden drop in consumer demand due to a competitor launching a similar line at a cheaper price. Which one of the
following types of risk is highlighted in this scenario?
A. Financial risk
B. Competitive risk
C. Market and opportunity risk
D. Political and economic risk (2 marks)

32. The decision function of financial management can be broken down into the __________________ decisions.
A. financing and investment
B. investment, financing and asset management
C. financing and dividend
D. capital budgeting, cash management and credit management (2 marks)

33. An examination of the sources and application of funds statement is part of ___________________.
A. forecasting technique
B. fund flow analysis
C. a ratio analysis
D. calculations for preparing of financial statements (2 marks)

34. In proper capital budgeting analysis, we evaluate incremental ___________________.

A. accounting income
B. cash flows
C. earnings
D. operating profits (2 marks)

35. Tax authorities allow the full installed cost of an asset to be written off for tax purposes. This amount is called
assets’_____________________.

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A. depreciable basis

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B. initial cash outlay

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C. cost of capital

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D. sunk cost (2 marks)

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36. Baraka Limited is considering automation of its production processes. The following information relates to
purchase of proposed machine:
1. The purchase of the machine will cost Sh.950,000.
2. Shipping and installation would cost Sh.10,000.
3. The automation would result in savings of Sh.90,000 a year due to reduced scrap and Sh.130,000 a year
due to reduced labor costs.
4. The machine has useful life of 4 years.
5. The estimated final salvage value of the machine is Sh.240,000.
6. The firms’ marginal tax rate is 34%.

Determine the incremental cash flow at time period.

A. Sh.560,000
B. Sh.760,000
C. Sh.960,000
D. Sh.1,060,000 (2 marks)

37. Profitability Index (PI) of 0.70 means that the ________________________.

A. project return 70 cents in present value for each current shilling invested
B. payback period is less than one year
C. project’s Net Present Value (NPV) is greater than 0
D. present value of benefits is 70% greater than the project cost (2 marks)

38. Jitegemee Ltd. is considering a project that calls for an initial outlay of Sh.50,000,000. The expected net cash
flows from the project are Sh.7,791,000 for each of the 10 years. What is the internal rate of return (IRR) of the
project?
A. 9%
B. 8%
C. 7%
D. 6% (2 marks)
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39. Which one of the following statements is CORRECT in relation to project evaluation?
A. If the Net Present Value of a project is greater than 0, its Profitability Index would be 0
B. If the Internal Rate of Return of a project is 0%, its Net Present Value using a discount rate k, greater
than 0 would be 0
C. If the Profitability Index of a project is less than 1, its Net Present Value should be less than 0
D. If the Internal Rate of Return of a project is greater than the discount rate, k, Profitability Index will be
less than 1 and its Net Present Value will be greater than 0 (2 marks)

40. A project’s profitability Index (PI) is equal to the ratio of the _________________ of a project’s future cash flows
to the project’s __________________.
A. net present value, initial cash outlay
B. present value, initial cash outlay
C. present value, depreciable basis
D. net present value, depreciable basis (2 marks)

41. Two mutually exclusive investment proposals have a ‘scale difference’ that is the cost of the project differs.
Ranking these projects on the basis of the Internal Rate of Return, Net Present value and Profitability Index
methods __________________ give contradictory result.
A. may
B. will always
C. will never
D. will generally (2 marks)

42. The ____________________ method provides correct ranking of mutually exclusive projects when the firm is not
subject to capital rationing
A. net present value
B. internal rate of return

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C. payback period .k
D. profitability index (2 marks)
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43. The actual market value of a right’s issue will differ from its theoretical value for all of the following reasons
EXCEPT for the ______________________.
A. size of the firm’s marginal tax rate
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B. amount of transaction costs incurred

C. investor’s speculation
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D. irregular exercise and sale of rights over the subscription period (2 marks)
C

44. What is the term used to describe a situation where the investment banker bears the risk of not being able to sell a
new security at the established price?
A. A best effort offering
B. Underwriting
C. Shelf registration
D. Making a market (2 marks)

45. To say that there is “asymmetric information” in issuing of securities or debt means that the ________________.
A. investor has nearly perfect information
B. market has nearly perfect information
C. investor has more accurate information than the management
D. management has more accurate information than the investor (2 marks)

46. The market price of JKL Ltd. share is Sh.60 per share and each share gives its owner one subscription right. Four
rights are required to purchase an additional share at the subscription price of Sh.54 per share. What would be the
theoretical value of a right if the share is currently selling “right on’’?
A. Sh.0.96
B. Sh.1.20
C. Sh.1.50
D. Sh.6.00 (2 marks)

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47. Which of the following statements BEST describes financial intermediaries?
A. They do not invest in new long-term securities
B. They include insurance companies and pension funds
C. They include the national and regional stock exchanges
D. They are usually underwriting syndicates (2 marks)

48. Kameni Paul wants to buy an ordinary annuity that will pay Sh.4,000,000 a year for the next 20 years. He expects
that the annual interest rate will be 8% over that time period. What is the maximum price that Kameni Paul would
be willing to pay for the annuity?
A. Sh.32,000,000
B. Sh.39,272,400
C. Sh.40,674,000
D. Sh.80,000,000 (2 marks)

49. Patel Shah is considering investing a zero- coupon bond that sells for Sh.500. At maturity in 16 years, it will be
redeemed for Sh.2,000. What approximate annual rate of growth would this represent?
A. 8%
B. 9%
C. 12%
D. 25% (2 marks)

50. In estimating after tax incremental cash flows for a project, you should include all of the following
EXCEPT_____________________.
A. sunk costs
B. opportunity costs
C. changes in working capital resulting from the project, net of spontaneous change in current liabilities
D. effects of inflation (2 marks)
……………………………………..……………………………………

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 ATD LEVEL III

FUNDAMENTALS OF FINANCE

THURSDAY: 25 April 2024. Morning Paper. Time Allowed: 2 hours.

This paper is made up of fifty (50) Multiple Choice Questions. Answer ALL questions by indicating the letter
(A, B, C or D) that represents the correct answer. Each question is allocated two (2) marks. Do NOT write anything
on this paper.

1. In the context of finance functions, which one of the following BEST describes the routine role of finance
functions?
A. Addressing one-time financial issues
B. Day-to-day financial operations
C. Strategic financial planning
D. Financial decision making for major projects (2 marks)
2. Which one of the following is a non-financial goal of a firm?
A. Maximising shareholder wealth
B. Achieving sustainable growth
C. Maximising profits

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D. Increasing market share (2 marks)

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3. In agency theory, who is typically considered the "PRINCIPAL"?

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A. External auditors

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B. Government regulators
C. Shareholders
D. Management (2 marks)

4. Which agency relationship involves conflicts related to the risk-return trade-off in investment decisions?
A. Ordinary shareholders and management
B. Shareholders and debenture holders
C. Shareholders and external auditors
D. Shareholders and government (2 marks)

5. What is the key difference between financial accounting and management accounting?
A. Both focus on internal decision-making
B. Financial accounting is more future-oriented
C. Financial accounting is primarily for external reporting
D. Both use the same set of accounting principles (2 marks)

6. What is the common cause of conflict between shareholders and debenture holders?
A. Dividend distribution
B. Voting rights
C. Capital structure decisions
D. Strategic business planning (2 marks)

7. How does an increase in the current ratio (current assets/current liabilities) affect liquidity?
A. Improves liquidity
B. Reduces liquidity
C. No impact on liquidity
D. Increases profitability (2 marks)

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8. A small business needs funds for a project with a relatively short duration. Which source of finance is the MOST
suitable in this situation?
A. Long-term bank loan
B. Trade credit
C. Factoring
D. Venture capital (2 marks)

9. Which of the following is an example of internally generated funds?

A. Bank loan
B. Sale of stocks
C. Retained earnings
D. Trade credit (2 marks)

10. Which one of the following is NOT a typical source of financing for a new small and medium sized enterprises
(SME) owner?
A. Personal savings and assets
B. Loans from family and friends
C. Bank loans
D. Venture capital investment (2 marks)

11. A business angel investor primarily seeks _________________.

A. High security over their investment
B. Regular dividends from the invested company
C. Long-term capital appreciation through an exit strategy
D. Direct involvement in the daily operations of the company (2 marks)

12. Trade credit allows small and medium enterprises (SMEs) to ______________.

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A. Borrow money from a bank .k
B. Delay payment to suppliers for goods or services
C. Sell assets to raise capital
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D. Issue bonds to investors (2 marks)

13. Leasing equipment instead of buying it has an advantage of _____________________.

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A. Higher depreciation tax deduction

B. Increased ownership of assets
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C. Reduced upfront capital investment

D. Greater flexibility in upgrading equipment (2 marks)
C

14. Marcos Kiraithe, an SME proprietor, is considering factoring their outstanding invoices to improve cash flow.
However, they are concerned about the potential fees and loss of control over their receivables.
Which of the following options would be the MOST attractive to them?
A. Full recourse factoring with a high discount rate
B. Non-recourse factoring with a low discount rate
C. Invoice discounting with immediate access to funds
D. Supply chain financing with extended payment terms (2 marks)

15. Which one of the following challenges is NOT typically faced by small and medium sized enterprises (SMEs) in
accessing finance?
A. Complex and lengthy loan application processes
B. High risk perception by lenders due to limited operational history
C. Lack of adequate financial information and documentation
D. Stringent regulatory requirements imposed by financial institutions (2 marks)

16. Karibu Digital Ventures, an SME in the technology sector, is struggling to attract venture capital due to its lack of
a proven track record. Which of the following strategies could improve their chances of securing venture capital
(VC) funding?
A. Focus on increasing profitability in the short term
B. Develop a strong business plan with clear exit strategies for investors
C. Reduce research and development (R&D) spending
D. Increase reliance on bank loans (2 marks)

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17. John Abdul, an SME owner, is concerned about their reliance on trade credit from suppliers. Which of the
following potential drawbacks of trade credit should be of MOST concern?
A. Early payment discounts offered by suppliers
B. Increased dependence on suppliers for financing
C. Improved relationship with suppliers
D. Simplified accounting processes (2 marks)

18. Determine the present value of the following cash flows, given a discount rate of 14%.

Year: 0 1 2 3 4
Sh: 0 Sh.1,000,000 Sh.-500,000 Sh.2,000,000 Sh.-600,000
A. Sh.1,214.850
B. Sh.1,487,150
C. Sh.1,601,850
D. Sh.1,710,150 (2 marks)

19. Duncan Korir is planning to make an additional investment at the end of each year for his retirement in 20years.
He will invest Sh.50,000 each for the next five years, there after Sh.80,000 each year for the next 5 years and
Sh.120,000 each year for the remaining 10 years. The rate of return is 9 percent. How much will Duncan Korir
have at the end of 20 years?
A. Sh.3,790,000
B. Sh.4,556,760
C. Sh.4,046,550
D. Sh.4,752,550 (2 marks)

20. Chelagat Wamai would like to have an annuity of Sh.400,000 for 20 years when she retires in 25 years. She
expects a return on investment of 8%. How much will Chelagat Wamai need to invest at the end of each year to

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achieve her goal.

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A. Sh.64,910

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B. Sh.53,720

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C. Sh.72,190

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D. Sh.62,040 (2 marks)

21. Risk is best described by which of the following statements?

A. The phrase total risk is synonymous with variability of return from an asset
B. Risk can be reduced by investing in one class of securities
C. Bond quality ratings do not show the probability that an issue of bonds falls into default
D. Treasury bonds are free from default risk (2 marks)

22. The Uzuri Corporation had the following returns on its ordinary shares over the past 5 years: -7,10, -6, 25 and 18.

Determine Uzuri Corporation average return and standard deviation of returns over the past 5 years.
A. 8.0% and 11.44%
B. 8.2% and 12.76%
C. 8.0% and 12.76%
D. 7.9% and 12.1% (2 marks)

23. Which of the following risks are common internal risks of a company?
A. Operational risks, financial risks and economic risks
B. Operational risks, financial risks and human resource risks
C. Financial risks, human resource risks and market risks
D. Financial risks, economic risks and social and cultural risks (2 marks)

24. Which one of the following statements BEST explains the going concern concept of valuation?
A. It considers the long-term potential of the business, taking into account its ability to generate future cash
flows, maintain profitability and sustain operations
B. This concept is relevant in situations where the business is facing financial distress or is at risk of closure.
It provides an estimate of the minimum value that could be realised from selling off the company's assets
C. It is used by value investors to identify opportunities where the market price of an asset is lower than its
intrinsic value, suggesting a potential investment opportunity
D. It reflects the price at which an asset or liability could be exchanged between knowledgeable and willing
parties (2 marks)
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25. Which one of the following statements is NOT an assumption of the constant perpetual growth valuation model?
A. The required return must be greater than the dividend growth rate
B. Dividends grow at a constant rate forever
C. The required rate of return can vary
D. The firm’s risk and its cost of capital remain constant (2 marks)

Use the following information to answer question 26 and question 27.

The Kirui Wanyoike corporation’s dividends have been growing at a rate of 7 percent per year over the last 10 years, and
this rate is expected to continue in the future. Current dividends per share are Sh.3.85 and its required return is 14.5 percent.

26. What is the value of Kirui Wanyoike‘s share?

A. Sh.52.48
B. Sh.49.25
C. Sh.54.93
D. Sh.55.75 (2 marks)
27. If Kirui Wanyoike’s price per share is Sh.40 and its current cash dividend is Sh.3.85 per share and it is growing at
a rate of 7% per annum, determine its required return.
A. 16.2%
B. 15.1%
C. 16.6%
D. 17.3% (2 marks)

28. Determine the price of a Sh.1,000 face value zero coupon bond with a yield to maturity of 14 percent and 20 years
until maturity if compounded annually.
A. Sh.72.76
B. Sh.89.08
C. Sh.67.78
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D. Sh.112.67
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29. Kibet Wanjohi is holding a 5-year, 10% Sh.100,000 debenture. Determine the value of this debenture today if the
cost of capital is 12%.
A. Sh.36,048
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B. Sh.56,740
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C. Sh.92,788
D. Sh.100,000 (2 marks)
C

30. Which of the following best describes the advantages of accounting rate of return (ARR).
A. It is easy to calculate and understand
B. The accounting profits used by ARR can be readily obtained from financial statements and it does not
require a lot of details for example cost of capital
C. ARR uses accounting profits instead of cash flows, yet accounting profits are affected by accounting
estimates and conventions
D. It ignores the concept of time value of money (2 marks)

31. Which of the following best describes the disadvantage of profitability index (P.I)
A. It requires the estimation of the required rate of return or cost of capital which presents practical difficulties
and uses cash flows to appraise the projects
B. It recognises the concept of time value of money
C. It requires the estimation of cash flows which is tedious and is sensitive to discounts rates
D. It is not consistent with wealth maximisation principle (2 marks)

Use the following information to answer question 32 to question 34.

A Project with initial cash outlay of sh.340,000,000 promises the following cashflows:
Year 1 2 3 4
Cash inflows Annuity (Sh.000) 120,000 120,000 120,000 120,000
The cost of capital is 15%

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32. Evaluate the project to establish its payback period using the payback method.
A. 2.83
B. 2.71
C. 2.67
D. 2.33 (2 marks)

33. Evaluate the above project to establish its worth using net present value (NPV) method.
A. Sh.2,600,000
B. Sh.-65,536,000
C. Sh.342,600,000
D. Sh.2,800,000 (2 marks)

34. Evaluate the above project to establish its worth using internal rate of return method.
A. 16.1%
B. 16%
C. 15%
D. 15.38% (2 marks)

35. A project with an initial outlay of Sh.30,000,000 promises annuity cashflows of Sh.8,141,760 for years.
Calculate the internal rate of return of the project.
A. 3.68%
B. 16%
C. 27.14%
D. 15% (2 marks)

36. Which one of the following statements is a capital budgeting challenge in the real world?
A. Optimal resource allocation

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B. Uncertain cash flows

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C. Enhanced decision making

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D. Effective risk management (2 marks)

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37. Which one of the following statements is a component of the cost of equity?
A. Coupon rate
B. Dividend yield
C. Risk-free rate
D. Debt-to-equity ratio (2 marks)

38. What is the cost of debt?

A. Market interest rate
B. Book value of debt
C. Face value of debt
D. Historical cost of debt (2 marks)

39. Biashara Ltd. total sales during the year was of Sh.600 million. 90% of total sales were on credit. If its year end
receivables turnover is 5, determine the average collection period (based on a 365-day year) and the end year
receivables respectively.
A. 365 days and Sh.108,000,000
B. 73 days and Sh.120,000,000
C. 73 days and Sh.108,000,000
D. 81 days and Sh.108,000,000 (2 marks)

40. If economic order quantity (EOQ) = 360 units, order costs are sh. 5.00 per order and the carrying costs are Sh. 0.20
per unit, what is the usage in units?
A. 2,592 units
B. 25,920 units
C. 129,600 units
D. 18,720 units (2 marks)

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41. The credit policy of Kikwetu Ltd is “1.5/10, net 35”. At present 30% of the customers take a discount, 62% pay
within the net period, and the rest pay within 45 days of invoice. What would receivables be if all customers took
the cash discount?
A. Lower than the present level
B. No change from the present level
C. Higher than the present level
D. Unable to determine without more information (2 marks)

42. When a firm needs a short term loan for a specific purpose, the bank loan will likely be a ______________.
A. Compensating balance arrangement
B. Revolving credit agreement
C. Transaction loan
D. Line of credit (2 marks)

43. The cost of equity capital is all of the following EXCEPT ______________________.
A. The minimum rate that a firm should earn on the equity- financed part of the investment
B. A return on the equity–financed portion of an investment that, at worst, leaves the market price of the
stock unchanged
C. By far the most component cost to estimate
D. Generally lower than the before tax cost of debt (2 marks)

44. In calculating the proportional amount of equity financing employed by a firm, we should use ______________.
A. The common stock equity account on the firms’ balance sheet
B. The book value of the firm
C. The current market prices per share of the common stock times the number of shares outstanding
D. The sum of common stock and preferred stock on the balance sheet (2 marks)

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45. Market values are often used in computing the weighted average cost of capital (WACC) because ____________.
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A. This is the simplest way to do the calculation
B. This is consistent with the goal of maximising shareholders’ value
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C. This is a very common mistake
D. This is the only way of doing it (2 marks)
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46. Kiwara Ltd. has paid Sh.10 per share annual dividend on Sh.100 par value preference shares. The preference share
has a current market price of Sh.96 per share. The firms’ marginal tax rate is 40%. The company plans to maintain
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its current capital structure.

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The component cost of preference shares of Kiwara Ltd. would be _____________.

A. 6%
B. 6.25%
C. 10%
D. 10.42% (2 marks)

47. A critical assumption of the net operating income (NOI) approach to valuation is_________________.
A. That the debt and equity levels remain unchanged
B. The dividends increase at a constant rate
C. That cost of equity remains constant regardless of changes in leverage
D. That the interest expense and taxes are included in the calculation (2 marks)

48. Which one of the following statements is NOT an argument for the relevance of dividends?
A. Informational content
B. Reduction of uncertainty
C. Some investors’ preference for current income
D. They are determined by the shareholders (2 marks)

49. The following statements are true in relation to stock split EXCEPT _______________.
A. Market price per share is reduced after the split
B. The number of outstanding shares is increased
C. Retained earnings are changed
D. Proportional ownership is unchanged (2 marks)

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50. The dividend-payout ratio is equal to ________________________.
A. The dividend yield plus the capital gain yield
B. Dividend per share divided by earnings per share
C. Dividend per share divided by par value per share
D. Dividend per share divided by current price per share (2 marks)

……………………………………..……………………………………

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 ATD LEVEL III

FUNDAMENTALS OF FINANCE
TUESDAY: 5 December 2023. Morning 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 FIVE factors to consider when choosing a source of finance. (5 marks)

(b) Highlight SIX similarities between preference share capital and debt capital. (6 marks)

(c) The following is the capital structure of Mugune Limited as at 31 December 2022.
Sh.
Ordinary share capital 20,000,000
Retained earnings 5,000,000
12% loan note 10,000,000
35,000,000
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Additional information:
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1. The company has issued 1,000,000 ordinary shares of Sh.20 par value each. The market value of the
ordinary share is Sh.30.
2. The shareholders expect a dividend of Sh.5 per ordinary share with a growth rate of 10% per annum.
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3. The corporation tax rate is 30%.

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Required:
(i) The cost of equity. (2 marks)
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(ii) The cost of the 12% loan note. (2 marks)

(iii) The weighted average cost of capital (WACC) for the company using the market value. (5 marks)
(Total: 20 marks)

QUESTION TWO
(a) Highlight FOUR reasons for the time preference of money. (4 marks)

(b) Explain THREE regulatory measures that govern Islamic finance. (6 marks)

(c) Ubunifu company is considering an investment in a new project. The project requires an initial investment of
Sh.10 million for equipment, Sh.5 million for inventory and Sh.2 million for installation costs. The equipment
will be depreciated using straight line depreciation method over 5 years period with no salvage value. The project
is expected to generate sales worth Sh.10 million and incur costs of Sh.3 million at the end of each year for the
next 5 years. The corporation tax rate is 30%. Assume a discount rate of 10%.

Required:
(i) Total initial cash outlay. (1 mark)

(ii) Annual net operating cash flows for each year. (4 marks)

(iii) Total terminal cash flow at the end of the project. (2 marks)

(iv) Determine whether the project is worthwhile using the discounted payback period approach. (3 marks)
(Total: 20 marks)
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QUESTION THREE
(a) Agency costs refer to the costs incurred to safeguard the shareholders’ interest.
In relation to the above statement, describe THREE types of agency costs. (6 marks)

(b) Paul Mwangi has borrowed Sh.1,000,000 from a commercial bank at an interest rate of 12% per annum. The loan
shall be repaid over a period of five (5) years. The interest on the loan shall be compounded at the end of each
year over the five year period.

Required:
(i) Total amount payable after five years. (2 marks)

(ii) Total amount payable after five years assuming interest is compounded semi-annually. (2 marks)

(iii) Total amount payable after five years assuming interest is compounded continuously using the formula:

(i x t)
FV = PV x e

Where: e = 2.7183
i = interest rate per annum
t = period (2 marks)

(c) A manufacturing company, Zoe Limited, is seeking to assess its working capital operating cycle to improve its
liquidity management. The following financial data is available for the company:
1. Average inventory Sh.150 million.
2. Average accounts receivable Sh.100 million.
3. Cost of goods sold (COGS) Sh.500 million.

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4. Annual sales Sh.750 million.

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5. Average accounts payable Sh.75 million.

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Assume 365 days in a year.

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Required:
(i) Explain the concept of working capital operating cycle. (2 marks)

(ii) Calculate the following components of working capital operating cycle for Zoe Limited.
I. Day sales of inventory (DSI). (1 mark)

II. Day sales outstanding (DSO). (1 mark)

III. Day payables outstanding (DPO). (1 mark)

(iii) Determine the overall working capital operating cycle (in days) for Zoe Limited. (3 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Identify FOUR causes of business risk. (4 marks)

(b) Summarise SIX factors that could influence the dividend policy of a firm. (6 marks)

(c) The ordinary shares of Bidii Ltd. are currently selling at sh.100 each at the securities exchange. The company’s
price earnings (P/E) ratio is 10 times. Bidi Ltd. adopts a 60% payout ratio as its dividend policy. It is predicted
that the company’s earnings and dividends will grow at an annual rate of 15% for the first three years, 10% for the
next two years and 6% thereafter in perpetuity. The investors minimum required rate of return is 12%.
Required:
(i) The initial dividend per share (DPS). (2 marks)

(ii) The current intrinsic value of the shares. (6 marks)

(iii) Advise the investors based on the results in (c) (ii) above on whether to buy or sell the shares of Bidii Ltd.
(2 marks)
(Total: 20 marks)
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QUESTION FIVE
(a) Highlight FOUR characteristics of capital investments decisions. (4 marks)

(b) Enumerate THREE similarities and THREE differences between “accounting” and “finance”. (6 marks)

(c) Billy Lenz is considering buying shares of Kenfam Limited which are currently selling at the securities exchange
for Sh.200 each.

The forecasted market price of each share at the end of one year’s holding period and the corresponding
probability of occurrence are given as follows:

Economic condition Probability occurrence Forecasted market price

per share after one year
Sh.
Poor 0.20 180
Moderate 0.50 220
Good 0.30 240

Required:
(i) The expected rate of returns for Kenfam Limited shares. (5 marks)

(ii) The standard deviation of the returns for Kenfam shares. (5 marks)
(Total: 20 marks)
………………………………………………..……………………………………

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AD33 Page 3
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 ATD LEVEL III

FUNDAMENTALS OF FINANCE
TUESDAY: 22 August 2023. Morning 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 the following type of decisions made in finance:

(i) Liquidity decisions. (2 marks)

(ii) Investment decisions. (2 marks)

(b) In a finance and investment forum, one of the facilitators’ noted that “as firms strive to achieve its objectives, at
times the objectives may overlap with each other and this might cause conflict”.

With reference to the above statement, describe THREE overlaps among objectives that could arise in the
course of a firm’s effort to achieve its objectives. (6 marks)

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(c) The capital structure of Mandela Ltd. as at 30 June 2023 was as follows:

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Sh. “000”

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Ordinary share capital (Sh.10 each) 186,500

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Retained earnings 13,500
10% debenture 200,000
400,000

The company is considering the acquisition of an investment project that will cost Sh.135 million. In order to
finance the investment project, the company would be required to raise additional capital.
Additional information:
1. The above capital structure is considered optimum.
2. The company can obtain additional debentures at an interest rate of 18% per annum.
3. The dividend for the year ended 30 June 2022 was Sh.2.40 per share.
4. Dividends are expected to grow at the rate of 8% each year for the foreseeable future.
5. Additional ordinary shares can be issued at the securities exchange at a price of Sh.54 per share net of
floatation cost amounting to Sh.6 per share.
6. Corporations tax rate is 30%.
Required:
Calculate the following:
(i) Cost of additional debentures. (1 mark)
(ii) Cost of retained earnings. (1 mark)
(iii) Cost of ordinary shares. (1 mark)
(iv) The amount to be financed through equity. (1 mark)
(v) The amount of equity to be financed through issue of new ordinary shares if the company is to maintain
the optional capital structure. (1 mark)
(vi) The amount to be raised through debentures. (1 mark)
(vii) The marginal cost of capital. (4 marks)
(Total: 20 marks)
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QUESTION TWO
(a) With reference to long-term and short-term sources of finance:

(i) State FOUR advantages of bills of exchange. (4 marks)

(ii) Enumerate SIX features of ordinary share capital. (6 marks)

(b) Baraka Ltd. is considering the acquisition of a new machine estimated to cost Sh.6 million. An additional
Sh.280,000 million would be incurred to install the machine.

1. The machine has an estimated economic life of five years with a residual value of Sh.2 million.

2. The projected profit before tax and depreciation is Sh.2.7 million per annum.

3. To support the increased sales, it is estimated that accounts receivable, inventory and accounts payable
would increase by Sh.3 million, Sh.1.7 million and Sh.3.4 million respectively.

4. The company uses the straight-line method of depreciation and the cost of capital is 8%.

5. The corporate tax rate is 30% per annum.

Required:
Using net present value (NPV), advise Baraka Ltd. on whether the machine should be acquired. (10 marks)
(Total: 20 marks)

QUESTION THREE
(a) In relation to time value of money, distinguish between the following terms:

(i) “Ordinary annuity” and “annuity due”. (2 marks)

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(ii)
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“A growing annuity” and “a perpetual annuity”. (2 marks)
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(b) Maandani Ltd. is considering buying a machine which is expected to generate the following cash flows at the
end of each year over the machine’s economic life of 5 years:
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Year Cash flows

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Sh.
1 100,000
2 90,000
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3 80,000
4 70,000
5 60,000

The cost of capital is 12%.

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

(c) John Maneno has computed the profitability index (PI) for a new proposed project to be 1.12. The projects
initial cash outlay is Sh.10 million. The project has a useful life of five years. The minimum required rate of
return on the project is 16%.

Required:
Compute the following for the project:
(i) Annual cash inflows. (3 marks)
(ii) Payback period. (3 marks)
(iii) Net present value. (3 marks)
(iv) Internal rate of return. (3 marks)
(Total: 20 marks)

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QUESTION FOUR
(a) Explain THREE benefits of block chain technology to an organisation. (6 marks)

(b) Describe THREE ways of resolving conflict between shareholders and debenture holders in an organisation.
(6 marks)

(c) Nandwa Ltd. maintains a minimum cash balance of Sh.2,000,000. The variance of the daily cash flows is
Sh.100 million. The transaction cost of each marketable security is Sh.80.

The interest rate of a marketable security is 12% per annum. Assume 365 days in a year.

Required:
Using the Miller-Orr model of cash management, determine:

(i) The return point. (2 marks)

(ii) The upper cash limit. (2 marks)

(iii) The average cash balance. (2 marks)

(iv) The spread. (2 marks)

(Total: 20 marks)

QUESTION FIVE
(a) Differentiate between “time value of money” and “time preference for money”. (4 marks)

(b) Masii Ltd. has a cost of equity of 10%. Currently, it has 250,000 ordinary shares which are quoted at the
securities exchange at Sh.60 per share. The company’s earnings per share is Sh.10 and its expected dividend per

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share is Sh.5 at the end of the current financial year. The expected net income for the current year is

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Sh.3 million and the available investment proposals are estimated to cost Sh.6 million.

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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 of a share at the end of the year if dividend is paid. (2 marks)

(iii) The value of a firm at the end of the year if dividend is not paid. (3 marks)

(iv) The value of a firm at the end of the year if dividend is paid. (3 marks)

(c) In assessing the credit worthiness of customers, a company should obtain information from certain sources.

Required:
Examine THREE sources of credit information that a bank would rely on when assessing a customer for
consideration for a loan facility. (6 marks)
(Total: 20 marks)
……………………………………………………………………..

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 ATD LEVEL III

FUNDAMENTALS OF FINANCE
TUESDAY: 25 April 2023. Morning 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 factors that may determine the amount of cash to be held by a firm. (4 marks)

(b) Outline FOUR underlying principles of Takaful (Islamic) insurance. (4 marks)

(c) The capital structure of Mapato Ltd. is as follows: Sh.“000”

Ordinary share capital (par value of Sh.10 each.) 40,000
14% preference share capital (par value of Sh.10 each) 20,000
20% debentures 6,000
16% long-term loan 10,000
76,000
Additional information:
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1. Ordinary shares are currently trading at Sh.15 on the securities market.
2. The company has paid a dividend of Sh.2 per share from an earnings per share (EPS) of Sh.6. The
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dividends are expected to grow annually at the rate of 40% for the foreseeable future.
3. The 20% debentures have a par value of Sh.1,000. The market price of the debentures is currently at
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Sh.950. The debentures have a maturity of ten years.

4. The preference shares are currently trading at Sh.14 per share.
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5. The company’s tax rate is 30%.

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Required:
Determine the following for Mapato Ltd.:

(i) The cost of ordinary share capital. (2 marks)

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

(iii) The cost of debentures. (2 marks)

(iv) The cost of long-term loan (after tax). (2 marks)

(v) The company’s market weighted average cost of capital. (4 marks)

(Total: 20 marks)

QUESTION TWO
(a) Explain THREE causes of conflict between the government and shareholders. (6 marks)

(b) Differentiate between “compounding techniques” and “discounting techniques” as used in time value of money.
(4 marks)
(c) Josphat Mwanzia has invested in a portfolio that comprises two stocks; A and B as shown below:

Stock A Stock B
Amount invested Sh.2,000,000 Sh.8,000,000
Expected return 11% 25%
Standard deviation 25% 30%
Correlation coefficient between the rates of return of stock “A” and stock “B” is 0.20.
AD33 Page 1
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 Required:
Compute the following for Josphat Mwanzia:
(i) Expected return of the portfolio. (3 marks)
(ii) Covariance of the portfolio. (3 marks)
(iii) Standard deviation of the portfolio. (4 marks)
(Total: 20 marks)

QUESTION THREE
(a) Summarise FOUR advantages of scrip dividend instead of cash dividend. (4 marks)

(b) Explain the following terms as used in valuation:

(i) Going concern value. (2 marks)

(ii) Liquidation value. (2 marks)

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

The projects will generate the following cash inflows:

PROJECT
Year W X Y Z
Sh.“000” Sh.“000” Sh.“000” Sh.“000”
0 (8,000) (10,000) (20,000) (16,000)
1 2,000 4,000 8,000 6,000
2 4,000 6,000 12,000 10,000
3 6,000 6,000 10,000 8,000

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Additional information:

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1. The company has a capital budget ceiling of Sh.20 million.

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2. The cost of capital for Maktaba Ltd. is 10%.

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3. The cash flows are assumed to occur at the end of the year.

Required:
Advise the management of Maktaba Ltd. on which project to undertake using the following investment appraisal
methods:

(i) Net present value (NPV). (8 marks)

(ii) Profitability index (PI). (4 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Explain THREE reasons why it is not advisable for a company to use a bank overdraft as a short-term source of
finance. (6 marks)

(b) Karibu Ltd. has annual sales of Sh.12 million and all sales are on 30 days credit period although customers on
average take 10 days more than the credit period to pay.

Additional information:
1. The company’s gross margin on sales is 40%. The company currently has no bad debts.
2. Accounts receivable are financed using a bank overdraft at an annual interest rate of 7%.
3. The management has plans to offer an early settlement discount of 1.5% for payment within 15 days
and to extend the maximum credit period offered to 60 days.
4. The management expects that these changes will increase annual credit sales by 5% while also leading
to additional incremental costs equal to 0.5% of sales revenue.
5. The discount is expected to be taken by 30% of the customers with the remaining customers taking an
average of 60 days to pay.
6. Assume 365 days in a year.

Required:
Evaluate whether Karibu Ltd. should adopt the proposed changes in credit policy. (8 marks)
AD33 Page 2
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(c) Modern Appliance Ltd. has recently issued a Sh.1,000, 10% convertible bond. The bond can be converted into
20 ordinary shares at the end of five years. The current market price of the shares of Modern Appliance Ltd. is
Sh.30 per share. The price is expected to grow at the rate of 10% per annum. The investor’s required rate of
return is 14%.

Required:
Determine the current value of the bond. (6 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Explain the term “bird in the hand dividend theory”. (2 marks)

(b) Explain TWO reasons why the financing decisions of an organisation are important. (4 marks)

(c) (i) Outline FOUR challenges encountered by small and medium enterprises (SMEs) in raising capital.
(4 marks)

(ii) Simon Kamala obtained a loan from ABC bank of Sh.2 million. The rate of interest was fixed at 12%
per annum. The loan is to be repaid semi-annually over a period of 3 years.

Required:
Prepare a loan amortisation schedule over the three year period. (6 marks)

(d) Blades Ltd. issued 15% preference shares to raise funds. The shares have a par value of Sh.100 each and
currently sell at Sh.140 each. The investor’s minimum required rate of return is 10%.

Required:
(i) Determine the current intrinsic value of the share. (2 marks)

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(ii) Advise the investor based on whether to buy or sell the share. (2 marks)
(Total: 20 marks)
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 ATD LEVEL III

FUNDAMENTALS OF FINANCE
TUESDAY: 6 December 2022. Morning 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) Outline THREE limitations of retained earnings as a source of finance. (3 marks)

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

(c) Heko Ltd. has the following capital structure which is considered optimal:
Sh.“000”
Debt (par value Sh.1,000) 300,000
Preference shares (par value Sh.100) 180,000
Ordinary shares (par value Sh.100) 720,000

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Additional information:

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1. The investors of Heko Ltd. expect earnings and dividends to grow at a constant rate of 9% in the future.

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2. The company has just paid ordinary shareholders dividend of Sh.4.2 per share.

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3. The current market price of ordinary shares of Heko Ltd. is Sh.80 each.

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4. The firm will incur a floatation cost of Sh.4 per share to issue new shares.
5. New preference shares can be sold at Sh.105 per share with a dividend of Sh.11 per share and floatation
cost of Sh.10 per share.
6. The company will issue debenture under the following terms:
• The coupon rate 12% per annum
• Discount Sh.30 per debenture
• Floatation cost Sh.20 per debenture
• The par value is Sh.1,000
• Maturity period of ten years
7. The corporate tax rate is 30%.

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. (3 marks)
(iv) The weighted average cost of capital (WACC) using market value weights. (4 marks)
(Total: 20 marks)

QUESTION TWO
(a) Explain the term “venture capitalist” as used in finance. (2 marks)

(b) Identify THREE differences between “factoring” and “invoice discounting”. (6 marks)

(c) Erick Nandwa borrowed Sh.250,000 from Pritt Sacco at a monthly interest rate of 3%. The loan is to be
amortised using the reducing balance method and be repaid in 6 equal monthly instalments, payable at the end of
each month.

Required:
Prepare a loan amortisation schedule. (6 marks)
AD33 Page 1
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(d) Paul Kalama is considering investing in a five-year Sh.1,000 par value bond bearing a coupon rate of 7%. Paul
Kalama’s required rate of return is 8%. The bond is quoted at Sh.950 in the bond market. The bond will be
redeemed at par value.

Required:
(i) Compute the intrinsic value of the bond. (4 marks)

(ii) Advise Paul Kalama on whether he should purchase the bond based on your computation in (d) (i)
above.
(2 marks)
(Total: 20 marks)
QUESTION THREE
(a) Outline FOUR functions of a finance manager. (4 marks)

(b) Explain FOUR chronological steps of dividend payment process. (4 marks)

(c) Makupa Limited intends to invest Sh.32,000,000 in a project which is expected to generate the following cash
flows:

Year 1 2 3 4
Sh. Sh. Sh. Sh.
Cash flows 15,000,000 10,000,000 9,000,000 8,000,000

The expected scrap value at the end of year 4 is Sh.4,000,000.

The company’s cost of capital is 14%.

Required:
(i)
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Calculate the internal rate of return of the project. (8 marks)
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(ii) Advise the management on whether to invest in the project or not based on your results in (c) (i) above.
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(2 marks)

(iii) Highlight TWO advantages of using internal rate of return (IRR) to appraise investment projects.
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(2 marks)
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(Total: 20 marks)

QUESTION FOUR
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(a) Identify FOUR benefits that may accrue to a firm from business crowdfunding. (4 marks)

(b) Citing THREE reasons, justify why a company should endeavour to maintain a stable dividend payment policy.
(6 marks)

(c) The following balances were extracted from the books of Eaglite Manufacturing Company for the year 2021:

Beginning of year 2021 End of year 2021

Sh.“000” Sh.“000”
Raw materials stock 72,000 96,000
Work-in-progress 32,000 44,000
Finished goods 126,000 138,000
Accounts receivable 218,000 254,000
Accounts payable 208,000 202,000

Additional information:
1. Annual sales amounted to Sh.4,748 million.
2. Cost of production during the year amounted to Sh.2,320 million.
3. Raw materials purchased during the year amounted to Sh.1,526 million.
4. Annual cost of sales amounted to Sh.2,862 million.
5. All sales and purchases made during the year were on credit terms.

Assume that a year has 365 days.

AD33 Page 2
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 Required:
(i) Compute the working capital cycle for Eaglite Manufacturing Company. (8 marks)

(ii) The directors of Eaglite Manufacturing Company intend to negotiate for longer credit periods from
suppliers of raw materials.

Explain the effect of this action on the working capital cycle. (2 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Highlight TWO benefits and TWO limitations of Islamic finance. (4 marks)

(b) Identify FOUR ways in which technological risk may affect the operations of a business negatively. (4 marks)

(c) James mambo intends to purchase either security AX or security BY.

The following information relates to the two securities:

State of economy Probability Returns

AX BY
% %
Boom 0.5 14 8
Stable 0.2 16 9
Recession 0.3 10 12

Required:
(i) Compute the expected return of securities AX and BY. (4 marks)

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(ii) Compute the standard deviation of each of the securities AX and BY. (6 marks)

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(iii) Advise James Mambo on the security to purchase based on the results obtained in (c) (ii) above.

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(2 marks)

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

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 ATD LEVEL III

PILOT PAPER

FUNDAMENTALS OF FINANCE
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) (i) Distinguish between internal and external sources of finance for a limited liability company. (2 marks)

(ii) Discuss the advantages of leasing an asset compared to borrowing or purchase of an asset. (4 marks)

(b) Explain the types of agency costs that arise in agent-principal relationship between shareholders and managers.
(4 marks)

(c) Suggest the merits of using discounted cash flows in evaluating long term investments. (4 marks)

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(d) ABC Ltd. is in the Telecommunications Industry. The company’s statement of financial position as at 31 December

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2020 is as shown below:

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Liability and Owners Equity Assets
Sh.’000’ Sh.’000’
Current liabilities 12,500 Current assets 32,500
18% debentures (Sh.1,000 par) 16,000 Net fixed assets 42,875
10% preference shares 6,250
Ordinary shares (Sh.10 par) 12,500
Retained earnings 28,125 _____
75,375 75,375

Additional information
1. The debentures are now selling at Sh.950 in the market and will be redeemed 10 years from now.
2. By the end of the last financial period, the company had declared and paid Sh.5.00 as dividend per share.
The dividends are expected to grow at an annual rate of 10% in the foreseeable future. Currently, the
company’s shares are trading at Sh.38 per share at the local stock exchange.
3. The preference shares were floated in 2015 and their prices have remained constant.
4. Most banks are lending money at an interest of 22% per annum.
5. The Corporation tax rate is 40% per annum.

Required:
The market weighted cost of capital for this firm. (6 marks)
(Total: 20 marks)

QUESTION TWO
(a) Outline four factors that might influence the working capital needs of a firm. (4 marks)

(b) Highlight the mechanism of resolving the agency problem between shareholders and debenture holders. (5 marks)

(c) Suggest reasons why the market for venture capital is not well developed your country. (5 marks)

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(d) The following information was from XYZ feasibility studies on the viability of two investment alternatives:

Project I

Initial cost Sh.100,000 and Sh.160,000 at the beginning of year 4 it will generate the following inflows:
Year Sh.
1–3 80,000 per annum
4–6 50,000 per annum

Project II
Initial cost Sh.200,000 and Sh.80,000 at the beginning of year 4 and it will generate the following inflows:
Year Sh.
1–2 100,000 per annum
3–6 70,000 per annum

Required:
Using the cost of finance of 12%, compute the net present value (NPV) and the profitability index (P.I) of these two
projects, and advise the company accordingly.
(6 marks)
(Total: 20 marks)

QUESTION THREE
(a) Distinguish between business risk and financial risk. (4 marks)

(b) Discuss the traditional functions of a financial manager in a contemporary corporate set-up. (8 marks)

(c) Consider the returns of two securities, A and B which depend on the states of nature with the following
probabilities:
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Returns
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State Probability A B
Favourable 0.3 12 6
Moderate 0.4 15 7.5
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Unfavourable 0.3 10 5
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Required:
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Advice the investor on which of the two securities to invest in on the basis of risk and expected return. (8 marks)

(Total: 20 marks)

QUESTION FOUR
(a) Explain the concept of time value of money. (2 marks)

(b) Joseph intends to invest in a piece of land costing Sh.850,000. He is certain that he will sell the piece of land for
Sh.910,000 the same time next year, a sure gain of Sh.60,000. Given that banks are offering a 10% interest, should
he invest in this project? (2 marks)

(c) Discuss the weaknesses associated with profit maximisation as a goal of the firm. (4 marks)

(d) Suggest practical problems faced by finance managers in capital budgeting decisions. (6 marks)

(e) Highlight the factors influencing the dividend policy of a firm. (6 marks)
(Total: 20 marks)

QUESTION FIVE
(a) ABC Limited is considering a project with the following details:
Sh.
Project X cost 500,000
Scrap value 100,000

The stream of income before depreciation and taxes are as follows:

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 Sh.
Year 1 100,000
Year 2 120,000
Year 3 140,000
Year 4 160,000
Year 5 200,000

Use a tax rate of 50% and straight-line depreciation.

Required:
(i) Calculate the Accounting Rate of Return (ARR) and advice the company. (6 marks)

(ii) Highlight the advantages of using the ARR technique in evaluating projects (4 marks)

(b) Outline the key functions of Capital Markets. (5 marks)

(c) Highlight the key principles of Islamic finance. (5 marks)

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

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 ATD LEVEL III

FUNDAMENTALS OF FINANCE
TUESDAY: 2 August 2022. Morning 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) With regard to sources of finance, explain the following terms:

(i) Factoring. (2 marks)

(ii) Business angel. (2 marks)

(b) Analyse three factors that could influence the dividend decision of a firm. (6 marks)

(c) Sunlight Limited intends to invest in Project Y or Project Z.

The following are expected net cash flows from the projects:
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Y Z
Year Sh. Sh.
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0 (12,000,000) (10,000,000)
1 3,000,000 4,000,000
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2 3,000,000 3,000,000
3 3,200,000 2,000,000
4 2,000,000 4,000,000
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5 1,000,000 2,000,000

The company’s cost of capital is 12%.

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

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

(Total: 20 marks)

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

(b) Citing three reasons, justify the time preference value for money. (6 marks)

(c) The following information relates to Mafuta Safi Ltd.:

Sh.“000”
Purchase of raw materials (all on credit) 6,700
Usage of raw materials 6,500
Sale of finished goods (all on credit) 25,000
Cost of sales (finished goods) 18,000
Average creditors 1,400
Average raw materials inventory 1,200
Average work in progress 1,000

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 Sh.“000”
Average finished goods inventory 2,100
Average debtors 4,700
Assume a 365 days year.

Required:
The length of the operating cash cycle. (8 marks)
(Total: 20 marks)

QUESTION THREE
(a) Explain the following terms as used in valuation of securities:

(i) Fair value. (2 marks)

(ii) Investment value. (2 marks)

(b) In a finance and investment seminar, one of the facilitators’ noted that “Management of debtors is crucial in working
capital management”.
With reference to the above statement, discuss three factors that might influence the level of debtors in a firm.
(6 marks)
(c) The following is the capital structure of Kenland Ltd.:
Sh.“000”
Ordinary share capital (par value Sh.100) 120,000
Preference share capital (par value Sh.100) 52,500
Debentures (par value Sh.1,000) 40,500
213,000

Additional information:

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1. The company has paid ordinary dividend of Sh.2.5. The dividend is expected to grow at a constant rate of

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10% in the future and floatation cost of 12% of the market price.

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2. The current market price of one ordinary share of Kenland Ltd. is Sh.120.

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3. New preference shares can be sold at Sh.140 per share with a dividend of Sh.15 per share and floatation
costs of Sh.8 per share.
4. The company pays out all its earning as dividends.
5. The company will sell 14% debentures with a maturity of 10 years at Sh.1,100 per debenture.
6. The par value of the debenture is Sh.1,000.

Corporate tax rate is 30%.

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 market weighted average cost of capital. (4 marks)

(Total: 20 marks)

QUESTION FOUR
(a) Explain the following terms as used in finance:
(i) Cryptocurrency. (2 marks)
(ii) Block chain technology. (2 marks)
(b) Islamic finance and investment has experienced substantial and unprecedented growth in recent years.
With reference to the above statement, discuss four Islamic finance drivers. (8 marks)
(c) John Juma borrowed Sh.500,000 on 1 May 2022 from a local bank repayable semi-annually over a two year period.
The interest rate on the loan is 8% per annum.

Required:
A loan repayment schedule for the two year period. (4 marks)
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(d) Kikwetu Enterprises is considering purchasing a five year Sh.1,000 par value debenture which is currently trading
on the securities exchange is at Sh.950. The debenture has a coupon rate of interest of 12% per annum. Kikwetu
Enterprises’ required rate of return is 16%.

Required:
(i) The intrinsic value of the debenture. (3 marks)

(ii) Advise Kikwetu Enterprises on whether or not to purchase the debenture. (1 mark)
(Total: 20 marks)

QUESTION FIVE
(a) Outline four circumstances under which a company would prefer to use short term debt financing compared to other
sources of finance. (4 marks)

(b) Explain three differences between a firm’s “value maximisation goal” and “profit maximisation goal”. (6 marks)

(c) The following information relates to returns of two securities under three states of the economy as follows:

State of economy Probability Return on Return on

security X security Y
Boom 0.40 18% 24%
Normal 0.50 14% 22%
Recession 0.10 12% 21%

Required:
(i) Expected returns on security X and Y. (2 marks)

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(ii) Standard deviation of returns on security X and security Y.
.k (2 marks)

(iii) Kalama Chivuva has invested 20% in security X and 80% in security Y. Determine his expected portfolio
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return. (1 mark)

(iv) Calculate covariance of returns of security X and Y. (3 marks)

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(v) Determine the portfolio risk as measured by standard deviation. (2 marks)

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