July 2022

FRIDAY:  21 May 2021.          Time Allowed: 3 hours. Answer ALL questions. Marks allocated to each question are show n at the end of the question. Show ALL your workings. QUESTION ONE 1.           Modern financial markets employ a wide range of derivative instruments that could suit different needs of their clients. In light of the above statement, describe four types of swaps available to market participants in your country. (4 marks) 2.         Examine live types of risks associated with trading derivatives.      (5 marks) 3.           Describe two uses of index futures.    (4 marks) 4.          The current price of a futures contract is Sh.212. The initial margin requirement is Sh.10 and the maintenance margin required is Sh.8.  An investor can go long            20 contracts, meet all margin calls but does not withdraw any excess margin.  The contract is purchased at the settlement price of that day, so there is no mark to market profit or loss on the day of purchase. The investor has provided the table below: Required: Complete the table above.        (6 marks) Determine the total gains or losses by the end of day 6.        ( 1 mark) (Total:   20 marks)   QUESTION TWO 1.         Highlight four features of a forward contract.   (4 marks) 2.         A 1 year semi-annual equity swap which is based on an index is at 985 and has a fixed interest rate of 4.4%. 90 days after the initiation of the swap, the index is at 982 and the London Interbank Offered Rate (LIBOR) is at 4.6% for 90 days and 4.8% for 270 days. The notional value of the equity swap is Sh.2 million. Required: The value of the swap to the equity payer.     (4 marks) 3.         An investor has an equity portfolio with a 60% allocation to small-cap stocks and a 40% allocation to large cap stocks. The portfolio is currently valued at Sh.150 million. The investor wishes to reduce the small cap allocation to 45% and increase the large cap allocation to 55% for a period of nine months. The large cap beta is 1.15 and the small cap beta is 1.25.  A small cap futures contract that expires in nine months is priced at Sh.195,750 and has a beta of 1.12.  A large cap futures contract that expires in nine months is priced at Sh.215,750 and has a beta of 0.92.  Both contracts have multipliers of I.  After nine months, the large cap stocks are up 4.75% and small cap stocks are up 6.25%. The large cap futures price is Sh.223.762 and the small cap futures price is Sh.206,712. Required: The market value of the portfolio using futures to adjust the allocation.   (8 marks) Citing two reasons, explain why the returns on the futures overlay strategy is not the same as that of a cash market strategy.    (2 marks) 4.          A spot price of an asset is Sh.50, the interest rate is 6.25%, the futures value of the storage cost is Sh.1.35 and the futures expires in   15 months. Required: Determine the futures price.      (2 marks) (Total: 20 marks)   QUESTION THREE 1.         Distinguish between “over the counter (OTC)” and “Exchange market” as used in derivatives trading.      (4 marks) 2.          Wazembo Limited’s share is trading for Sh.70 and pays a Sh.2.20 dividend in one month.  The one-month risk free rate is  10% quoted on an annual compounding basis.  The share (racks ex-dividend the same day the single share forward contract expires. Required: The one-month forward price for Wazembo Limited’s ordinary share.    (3 marks) 3.          A firm has entered into a receive-floating 6×9 FRA    – forward rate agreement at a rate of 0.86%, with a notionalamount of Sh.10 million LIBOR.  The six-month spot Shilling London interbank offered rate (LIBOR) was 0.628% and the nine-month Shilling LIBOR was 0.712%. The 6×9 FRA rate is quoted in the market at 0.86%. After 90 days have passed, the three-month Shilling LIBOR is 1.25% and the six-month Shilling LIBOR is 1.35%. Required: Calculate the value of the original receive-floating 6×9 FRA after 90 days.      (4 marks) 4.         Top-Tech Limited arranged a floating rate loan on  15 June 2019 to finance the construction of one of its factories. The company’s Chief Executive Officer (CEO) has approached you to help reduce the firm’s exposure to the risk of rising interest rates.  You respond by purchasing caplets and selling floorlets to establish a zero-cost position. Details concerning the loan transaction and hedging transaction are summarised below. The LIBOR rates and the number of days falling within each settlement period are also provided. Required: Calculate the effective interest due on   15 June 2020.    (7 marks) Determine the caplet payoff on 15 June 2021.      (2 marks) (Total: 20 marks)   QUESTION FOUR 1.       Outline three advantages and three limitations of the Black-Scholes-Merton (BSM) model.                (6 marks) The underlying is priced at Sh.225 and the continuously compounded dividend yield is 2.7%. The exercise price is Sh.200. The continuously compounded risk free rate is 5.25%. The time to expiration is three years and the volatility is 0.15. Required: The price of a call option using the Black-Schole-Merton (BSM) model adjusted for cash flows on the underlying.       (4 marks) 2.           Tyson Mkubwa is a financial analyst and would like to obtain the value of a European call option with two years to expiration and an exercise price of Sh.100. The underlying bond is Sh.100 par value,   7% annual coupon bond with three years to maturity. The interest rate at the start of the call option contract is 3% and it is expected to either go up to 5.99% or

FRIDAY: 21 May 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 1.          The Basel III accord is a set of financial reforms that was developed by the Basel Committee on Banking Supervision (BCBS), with the aim of strengthening regulation, supervision and risk management within the banking industry. Basel III was introduced to improve the banks’ ability to handle shocks from financial stress and to strengthen their transparency and disclosure. In light of the above statement, explain three principles of Basel III accord.  (6 marks) Explain two implications of Basel III accord on the banking industry.       (4 marks) 2.          Explain four methods of payment that could be used in international business.     (4 marks) 3.          Describe six ways that the central bank could use to intervene in the foreign exchange market in your country. (6 marks) (Total: 20 marks)   QUESTION TWO 1.          Examine two reasons why emerging economies adopt trade restrictions.      (4 marks) 2.           Mwangaza Enterprises is a company incorporated in Kenya with its core business being importation of high quality electronics from United Kingdom. The firm enjoys three month’s credit from the date it procures a consignment of the gadgets. On 1 February 2021, Mwangaza Enterprises imported a consignment worth 500,000 Sterling Pounds (£).   Additional information: The spot rate on 1 February 2021 and 1 May 2021 were as follows: As at   1 February 2021, Shilling futures were forecasted to trade at  0.00675 (contract size   1,000,000) during the month of May 2021. Required: Demonstrate how Mwangaza Enterprises could have used a futures contract as a hedging tool, indicating any hedging gain or loss.     (4 marks) The number of futures contracts that Mwangaza Enterprises could have purchased if the contract size was 1,500,000.  (2 marks) 3.       The following data has been provided by a foreign exchange market: Spot exchange rate: United States dollar and Sterling pound ($:£)   = 1.3500 — 1.3550 Annual risk free interest rate (one-year maturity): United Kingdom Sterling Pound (£)               1.50% — 1.56% United States Dollar ($)                                    4.55% — 4.58%   Required: The bid-ask quote for the one-year forward exchange rate between the United States  dollar and the Sterling pound ($:£).    (4 marks) Paul Njoya is an international businessman. He wishes to calculate the cross rate between the Euro (€) and the South Korean Won (E:Won). A major dealer on the Forex Market provides the following quotes: United States Dollar/South Korean Won: ($:Won)                     1014.0 — 1015.0 Euro/United States Dollar: (€:$)                                                      1.52000 — 1.62500   Required: The bid ask cross exchange rate between the Euro and South Korean Won (E:Won).      (4 marks) Suggest two factors that could affect the bid-ask spread in  (i) and  (ii) above.    (2 marks) (Total: 20 marks)   QUESTION THREE 1.         Argue six cases why Multi-National Corporations (MNCs) engage in foreign direct investments (FDIs).  (6 marks) 2.         Analyse three methods that could be used to determine whether a transfer price between parents and subsidiaries is reasonable.     (6 marks) 3.          Mac Limited is a Kenyan based company that has just constructed a manufacturing plant in Rwanda. The following additional information is provided: The construction cost is 9 billion Rwandese Francs (RWF). Mac Limited intends to leave the plant open for three years. During the three years of operation, Rwandese Francs cash flows are expected to be as follows: Year                                                        1             2              3 Cash flows (RWF “Billions”)           3              3              2 Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Mac Limited expects to sell the plant for 5 billion RWF. The required rate of return is 14%. It currently takes 9 RWF to buy one Kenya Shillings (KES). Rwandan Franc is expected to depreciate by 5% per year. Required: Advise Mac  Limited whether it should undertake the project using the Net Present Value  (NPV) method. (8 marks) (Total: 20 marks)   QUESTION FOUR 1.         PNK Limited, a Kenyan based Multinational Corporation (MNC) has subsidiaries in Eastern and Western African Countries.  The company intends to hedge its translation exposure due to fluctuations in the value of subsidiaries home country’s currencies. Required: Argue four cases against hedging translation exposure in the context of the above statement.     (4 marks) 2.         Assume that Victoria Limited, a company based in the United Kingdom (UK) imported goods from New Zealand and needs 100,000 New Zealand dollars (NZ$) 180 days from now.  The company is trying to determine whether to hedge this position. Victoria Limited has developed the following probability distribution for the New Zealand dollar: Additional information: The 180-day forward rate of the New Zealand dollar is 1.52. The spot rate of the New Zealand dollar is £0.49. Required: A feasibility analysis table indicating the possible real costs of hedging.    (6 marks) The probability that hedging will be more costly to the firm than not hedging.     (2 marks) The expected value of the additional cost of hedging.       (3 marks) 3.           Summarise five benefits of a centralised cash management system to a multinational enterprise.   (5 marks) (Total: 20 marks)   QUESTION FIVE 1.           Summarise five indicators of high country risk that a multinational corporation should consider when making international investment decisions.       (5 marks) 2.           The following information relates to Sigma Limited, a manufacturing company based in South Africa; South Africa Stock Exchange market index; and the world market index, together with the standard deviation (SD) of returns and the expected returns (ER): Required: The domestic country beta for Sigma Limited.      (2 marks) The

THURSDAY: 20 May 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 1.          Describe five qualities of a valid benchmark as used in evaluating portfolio performance.     (5 marks) 2.          BlackBrick Limited   (BBL) offers a defined benefit pension plan to its employees. Joshua Mutiso, a portfolio manager has collected the following details about BBL: The plan is fully funded. The average age of the participants is 38 years. The active to retired participant’s ratio is 3:1. The company has reported strong financial results in the current financial year. The discount rate used to determine the present value of future obligations is 8%. The duration of plan liabilities is 22 years. The sponsor has proposed a return objective of 8.5%. BBL offers a one-for-one inflation indexation through a cost of living allowance. Future benefits are twice as high relative to accrued benefits and are attributable to future real wage growth. BBL is considering the inclusion of an early retirement provision. Required: State BBL’s return objective.    (2 marks) Identify two purposes which the sponsor may have in stating a return objective of 8.5%.          (2 marks) Formulate the risk tolerance, liquidity and time horizon components for BBL’s investment policy statement (IPS).     (6 marks) 3.        Gibson Kipsang has recently inherited Sh.5 million and wishes to invest in equities. He identifies and allocates the funds to a set of four managers each with their distinct investment styles as follows: Required: The portfolio’s active return with respect to the equities allocation.      (2 marks) Determine the manager with the highest true active risk.       (3 marks) (Total: 20 marks)   QUESTION TWO 1.          Explain how each of the following behavioural factors could affect asset allocation: Illusion of control.      (2 marks) Mental accounting.  (2 marks) Availability bias.   (2 marks) 2,          Rose Ambani is analysing the trading costs of her most recent purchase of 1,000 shares of Tambun Ltd. She accumulates the following facts for her evaluation: The benchmark price was Sh.60 per share. The order was placed last Tuesday, when the shares of Tambun Ltd. closed at Sh.59.90 per share. 500 shares were purchased at a price of Sh.61.05 per share. Commission and fees were Sh.50. On Wednesday, 200 more shares were purchased at Sh.62.05 per share. Commission and fees were Sh.20. Shares of Tambun Ltd. closed at Sh.61.03 during the same day. On Thursday, no more shares were purchased and the order was cancelled. The market closed at Sh.62.00 per share. Rose meant to use this data to calculate the implementation shortfall of her trade. Required: The total implementation shortfall for the trade in the shares of Tambun Ltd.    (4 marks) Determine the contribution of the various cost components to the total implementation shortfall.     (4 marks) 3.         Sospeter Obonyo has gathered the following data to evaluate the performance of a portfolio manager: Required: The time weighted rate of return for the manager for the month of April 2021.     (6 marks) (Total: 20 marks)   QUESTION THREE 1.          Highlight three reasons why commodity returns are weakly correlated with stock and bonds returns.   (3 marks) 2.         Ruth Wangu is a high net worth (HNW) investor who invests with an equity manager with a quoted base fee rate of 0.50% of beginning asset under management (AUM) plus 30% of performance in excess of the NSE Index. Four years later, Wangu evaluates the performance of the equity manager relative to the NSE index as a benchmark index. The equity manager fund is subject to a high water mark (HWM). * Gross of investment management fees.   Required: Calculate the value of the high watermark, gross of investment management fees at the end of the third year.     (2 marks) Determine the amount of fees which will be received by the equity manager in the fourth year.  (2 marks) Discuss two relative strengths of adopting a performance fee based structure.     (2 marks) Discuss two relative weaknesses of adopting a performance-fee based structure.   (2 marks) 3.          Moses Abongo is a financial analyst who has recently joined the graduate trainee scheme of a large buyside multi- asset investment manager. The scheme will involve Abongo spending time in all of the major divisions of the firm, first of which is the fixed income division. Abongo initially works alongside Roberto James, a bond fund manager who specialises in dedication strategies designed to ensure that portfolios meet the future liabilities of investors. One of Roberto’s clients is Abdi Ali, a high net worth individual who is aiming to meet a personal liability due in 10 years’ time, the present value of which is equal to Sh.2,951,100. Abdi Ali’s current portfolio consists of three bonds, details of which are displayed below. Each holding is of Sh.1 million. Abdi Ali’s fixed income portfolio Security                                    Price (Sh.)            Macaulay Duration     Modified duration Bond 1                                             102.36                                  3.7                                      3.6 Bond 2                                             97.61                                    9.9                                      9.7 Bond 3                                             95.14                                   16.9                                    16.6 Roberto James also runs a portfolio for John Muturi. This portfolio is engaged in a dedication strategy known as contingent immunisation. Details of the strategy are given below: John Muturi contingent immunisation strategy Current portfolio value                                                                            Sh.30 million Portfolio modified duration                                                                    5.5 Liability to be repaid in 8 years                                                               Sh.40 million Effective annual discount rate applied to liabilities                                  5% Roberto James demonstrates to Moses Abongo how a derivatives overlay could be used to close the current duration gap on the portfolio run for John Muturi. He collects information on a relevant futures contract which is displayed below: Futures Contract Information National principal                                                                                    Sh.100,000 Coupon                                                                                                   6% Range of maturities of deliverable bonds                                                8 years to 12 years Basis point value (BVP) for one futures contract                                   Sh.76.22   Required: 1. 

THURSDAY: 20 May 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 1.         Private investors use structured products to gain access to alternative investments. In light of the above statement, cite four reasons for popularity of structured products in the recent past.   (8 marks). 2.          Explain the meaning of the following terms as used in commodities market: Contract for differences (CFDs).       (2 marks) Calendar spread strategy.     (2 marks) 3.           Stawi Fund is a hedge fund with a value of Sh.250 million at the beginning of 2018. The fund charges 2.5% management fees based on the asset under management (AUM) at the beginning of the year and a 25% incentive fee with a 7.51)/0 hurdle rate and uses a high water mark (HWM) provision. Incentive fees are calculated on gains net of management fees. The closing values for each year before fees are as follows: Year                                                        Amount                                                            Sh.”000″ 2018                                                           285,450 2019                                                           288,120 2020                                                           307,670   Required: The total fees and investor’s net return for each of the three years.  (8 marks) (Total: 20 marks)   QUESTION TWO 1.           Highlight five disadvantages of investing in real estate as an alternative investment class.   (5 marks) 2.          Explain three incentives for hedge funds replication strategies in the context of hedge fund management (6 marks) A hedge fund utilises a strategy which generates profits on assets of 0.3% per month. The interest expense on its leverage is 0.2% per month. The fund seeks a return on equity (ROE) of 0.8%. Required: Determine the leverage that the fund must utilise to generate the desired return on equity (ROE).      (3 marks) 3.           Webmill Group Limited manages a Sh.250 million private equity fund. Investors committed to a total of Sh.300 million over the term of the fund and a specified carried interest of 20% and a hurdle rate of 10%. Carried interest is distributed on a deal by deal basis. 60% of the Sh.250 million has been invested at the beginning of year 1 in Kimbo Ltd. with the remaining 40% invested in Tidco Ltd. Both firms are sold at the end of the third year, realising a Sh.45 million profit for Kimbo Ltd. and a Sh.35 million profit for Tidco Ltd. Required: The carried interest paid to the fund’s general partner for Kimbo Ltd. and Tidco Ltd.      (6 marks) (Total: 20 marks)   QUESTION THREE 1.           An appraiser has been asked to estimate the value of a warehouse and has collected the following information: Each adjustment is based on the unadjusted sales price of the comparable. Properties depreciate at the rate of 2% per annum. Condition adjustment; Good: + 5%, average: none, poor: —5%. Location adjustment: Prime — none, secondary —10%. Over the past 24 months, sales price has been appreciating at the rate of 0.5% per month. Required: Calculate the estimated value of the warehouse using the sales comparison method.      (10 marks) 2.         Abby Mutugi recently completed a Monte Carlo simulation analysis of a collateralised mortgage obligation (CMO) tranche. Abby’s analysis included six equally weighted paths, with the present value calculated using four different discounts rates, shown below: Representative path              Present value if spread                 Present value if spread                     Present value if spread is 50 basis points                         is 60 basis points                             is 70 basis points 1                                                                     70                                                68                                                         66 2                                                                      73                                                 70                                                        68 3                                                                      68                                                66                                                         64 4                                                                      71                                                 69                                                         68 5                                                                       77                                                 75                                                         73 6                                                                       75                                                 73                                                         71   The actual market price of the CMO tranche is 70.17. Required: The tranche’s option adjusted spread (OAS).     (4 marks) 3.          An investor currently holds the following structured products: A fairly new home equity-backed asset backed security (ABS). Automobile receivable-backed asset backed security (ABS). Planned amortisation class (PAC) collateralised mortgage obligation (CMO). Support bonds collateralised mortgage obligation (CMO). He is concerned about the expected decline in interest rates: Required: Giving two reasons in each case, identify the cash flow of the ABS that will be more affected by the decline in interest rates and the ABS that will be less affected by a decline in interest rates.  (4 marks) Explain the effects of decline in interest rates on the two types of collateralised mortgage obligations (CMOs).  (2 marks) (Total: 20 marks)   QUESTION FOUR 1.       

WEDNESDAY: 19 May 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 1.          The promises of the issuer and the rights of the bondholders are set forth in great detail in a bond’s indenture. As part of the indenture, there are affirmative covenants and negative covenants. In light of the above statement, highlight four affirmative covenants that could be captured in a bond indenture. (4 marks) 2.          Assess six types of risks that could be faced by fixed income investors.      (6 marks) 3.          The following information is provided for three bonds: Bond A                           Bond B                           Bond C Coupon rate                                         0%                                    10%                                  10% Maturity years                                      15                                      20                                    20 Maturity value                                Sh.1,000                          Sh.1,000                        Sh.1,000 Required yield                                      9.4%                                   11%                               10% Par value                                          Sh.1,000                          Sh.1,000                        Sh.1,000   Required: The price of each bond, assuming interest is paid semi-annually.      (6 marks) Comment on the results obtained in (c) (i) above.      (1 mark) 4.          The price of a five year, zero coupon bond is Sh.0.7835 for.Sh.1 par and the price of a two year, zero coupon bond is Sh.0.9426 for Sh.1 par. Required: Determine the three year forward rate two years from now.         (3 marks) (Total:  20 marks)   QUESTION TWO 1.          Explain four classifications of corporate bonds by issuer.     (4marks) 2.         Consider the following data relating to a convertible bond currently trading at Sh.104.80: Par value                                                          Sh.1,000 Coupon                                                             4.50% Maturity                                                           15 years Conversion price                                            Sh.25 per share The issuer’s shares are currently trading at Sh.19.50. Required: The number of shares into which the bond is convertible.        (1 mark) The conversion value.       (1 mark) The conversion premium.       (1 mark) The effective conversion price.         (1 mark) 3.          A 5% coupon bond matures ten years from now. Its price is Sh.96.23119 and the yield is 5.5%. The modified duration is 7.64498. Required: The approximate price change assuming the yield rises or falls by 200 basis points.      (1 mark) The convexity assuming yield changes by 200 basis points.     (2 marks) The net percentage change in the price of the bond.       ( 1 mark) Highlight two limitations of duration as a measure of term structure of a bond and interest rate risk. (2 marks) 4.         A corporate bond based on a 30/360 day-count conversion, with a coupon rate of 10% is maturing on    1 March 2022 and is purchased with a settlement date of 17 July 2020. The yield is 6.5%. The bond’s par value is Sh.100. Required: The bond’s clean price.       (6 marks) (Total: 20 marks)   QUESTION THREE 1.         Differentiate between a “credit score” and a “credit rating”.       (4 marks) 2.          John  Kisire,  a financial  analyst at Kawi  Ltd.  has gathered some  financial  information  for the year ended 31 December 2020. He has also projected the amounts for the year ending 31 December 2021: Kawi Ltd. End of year                                                                                                                   2020                         2021                                                                                                                          Sh. “000”                Sh. “000” Amortisation/depreciation                                                                                        250                            300 Interest expense                                                                                                          350                            350 Earnings before interest, tax, depreciation and amortisation (EBITDA)  1,250                           800 Kawi Ltd. is a company that specialises in power production. John Kisire is concerned that the heavy rains and government expansion of geothermal source of power will affect Kawi Ltd.’s bond covenant compliance. The bond covenant requires an EBITDA coverage ratio of 3.5 times and an earnings before interest and tax (EBIT) coverage ratio of 2.0 times.   Required: Explain whether or not Kawi Ltd. was in compliance with its EBITDA ratio at the end of year 2020. (2 marks) The amount by which Kawi Ltd. needs to increase the EBIT in order to be compliant with its EBIT ratio for the year ending 31 December 2021.      (3 marks) 3. The yields and spot rates for an option-free, 5.25% bond with 3 years to maturity are as shown below: Maturity (years)                     Yield to maturity (%)                Value                          Spot rate (%) 1                                                          3.5                                                      100                                     3.5 2                                                          4.0                                                     100                                     4.01 3                                                          4.5                                                     100                                     4.531 Required: Construct a binomial tree for valuing an option-free bond with three years to maturity and a coupon of 5.25% and determine the value of the option free bond.    (7 marks) 4.         An investor buys a 10 year bond at Sh.85.503 and sells it in four years. The bond has a coupon rate of 8%. After the bond is purchased, the interest rate goes down from  10.40% to 9.40%. The bond has a par value of Sh.100. Required: Calculate the investor’s realised yield.       (4 marks) (Total:  20 marks)   QUESTION FOUR 1.         Describe how the following factors could affect the value of a

WEDNESDAY: 19 May 2021.      Time Allowed: 3 hours. Answer ALL questions. Marks allocated to each question are shown at the end of the question. QUESTION ONE TABS GROUP LIMITED (TGL) Tabs Group Limited (TGL) was established 50 years ago with the purpose of improving quality of life (human, animal and crops) across the African Region. Initially established as a family business, the group is now a public limited company with its head office in Kenya. TGL has operations in thirteen African Countries and a workforce of over 800 staff members.  Currently, the group has four subsidiaries; Metapharma Ltd. which deals with human medicines, Thrift Ltd. which deals with veterinary products, Cheminex Ltd. which deals with detergents, fertilisers, school equipment and industrial chemicals and finally Dwellings Ltd., a company which deals with real estate and affordable housing. Expansion and growth across the continent has mainly been achieved through a mix of both greenfield and brownfield investments. The latest investment by TGL is a state of the art manufacturing facility for vaccines in Gabon. The facility will be used to manufacture Covid-19 vaccines to curb the spread of Corona Virus in Africa. It is feared that many vaccines in the market may not be effective especially on the South African Covid-19 variant. The group has outperformed its peers and sustained a compounded annual growth rate of 6% over the last five years. However, the performance of the real estate venture has been on a declining trend and the board has proposed divestiture in the next two years. The staff and management of Dwellings Ltd. are anxious about this new development. TGL has an elaborate corporate governance framework that has drawn international accolades, including gaining recognition by the UN Global Compact for its transparency in reporting. TGL’s board comprises thirteen members, eight of whom are independent non-executive directors. The board has three committees: nominations, audit and remuneration. Similar structures are replicated by the subsidiary companies. Three directors of each subsidiary are executive directors recruited by the TGL leadership and with reporting responsibilities to the Group Chief Executive Officer (CEO) and the Chief Operations Officer (COO). In addition, TGL has a group executive committee (ExCo) which is the highest executive committee and advisory body to the Group CEO. The committee discusses matters that significantly impact on management, such as group management strategy and business executive policy. The ExCo holds a retreat annually to review group performance and formulate harmonised annual operational plans for each subsidiary. Most of TGL’s executive directors have served cumulatively for over ten years and their terms continue to be renewed by shareholders owing to their great confidence in them. However, there have been concerns regarding high turnover of non-executive directors in two of its subsidiaries in the recent past. The group appreciates the stifling role of corruption to the realisation of Africa’s potential in terms of sustainable development, and the attendant spotlight on the private sector in the discourse on corruption. Particularly, the board of directors is concerned about the perception that public tenders are not awarded in a level playing field and fairly competed for in two of its countries of operations. As part of its corporate sustainability, TGL is committed to maintaining its strong internal systems and controls. The group has maintained practices of sharing internal policies, experiences and success stories with external stakeholders, in support of ongoing efforts by governments in the countries where it operates. Additionally, the group has set up a foundation  (TGL Sustainability Foundation) to coordinate its corporate social responsibility initiatives. The foundation whose board is chaired by the Group COO, has set its eyes on three priority areas: participating in ventures aimed at increasing transparency in the supply of medication to vulnerable populations, supporting medical camps and finally supporting ethical disposal of medical waste. Overall, TGL plans to double its spending on corporate social responsibility to 1.5% of its gross turnover. One of TGL’s subsidiaries, Metapharma Ltd. was recently embroiled in a public scandal regarding irregularities in procurement and supply of medical equipment for the Covid 19 response. Although the company directors were confident that Metapharma’s actions were above board, the attention and cross national interest that this matter attracted as well as the emotive rants which exploded on social media platforms, have potential to damage the firm’s reputation and image. The directors of TGL believe that they need to scale up their involvement in procurement matters so as to mitigate against such emerging risks. Cognisant of the fact that TGL’s current five year strategy implementation period comes to an end in six months, the board commissioned an end of strategy term review, including operational review of its subsidiaries. The scope of the comprehensive review, undertaken by a renowned OECD governance and balance score card (BSC) consultant includes review of performance against the strategic plan targets, evaluation of board performance and risk management. The findings of the review will inform the next strategy formulation of an Enterprise Risk Management Roadmap and reconstitution of boards for the four subsidiaries. With regards to addressing the risks associated with corruption, the board is confident that the consultant will share experiences from OECD countries in the recommendations. Required: 1.          Advise on four measures that TGL’s management could adopt to manage the staff anxiety and concerns as it pursues divestiture of Dwellings Ltd.    (8 marks) 2.        With regard to the Board of Directors of TGL and its subsidiaries: Explain four roles of the nominations committee.        (4 marks) Describe four ways in which TGL’s nominations committee could approach the task of nominating and appointing new directors to mitigate the high turnover of directors of its subsidiary companies. (4 marks) 3.          Explain five benefits of an elaborate corporate governance framework to TGL.       (5 marks) 4.         Discuss three roles of the board of directors with regard to procurement at TGL.      (6 marks) 5.       

FRIDAY: 21 May 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 1.         Differentiate between “correlation analysis” and “regression analysis”.        (2 marks) 2.         Compu World Limited assembles and sells computers. The company estimates that if it optimally assembles computers, it could sell between 1,100 and 2,000 computers per month and the monthly revenue (in thousands of shillings) over this range of sales could be represented by the function The fixed cost of the company amounts to Sh.100,000 per month. If is assumed that all the computers assembled in a given month are sold within the same month. Required: The total cost function.       (2 marks) The profit function,.       (2 marks) The optimal monthly output.       (3 marks) The maximum profit of the company.     (2 marks) 3.           The Registrar of Highfliers University has observed that the grade point aggregate of the University’s students is normally distributed with a mean of 2.75 and a standard deviation of 0.40. Required: The probability that a randomly selected student from the university has a grade point aggregate of between 2.00 and 3.00.     (3 marks) The lowest grade point aggregate that should be obtained by a student for him/her to be among the top ten per cent of the students.      (3 marks) Assuming that the university has a total of 10,000 students, determine the number of students having. a grade point aggregate of 3.70 or higher.     (3 marks) (Total: 20 marks)   QUESTION TWO 1.         Highlight two properties of each of the following probability distributions: Binomial distribution.      (2 marks) Poisson distribution.      (2 marks) 2.         Enumerate two advantages and two disadvantages of the ordinary least squares method of forecasting.                (4 marks) 3.         An investor intends to purchase shares in one of three companies, A, B and C. The three companies have varying degrees of sensitivity to the state of the economy. There are three states of the economy classified as weak, moderate or strong.  The investor has constructed the following pay off table for the profits under the three states of the economy, in millions of shillings. State of the economy Company                                    Weak                            Moderate                     Strong   A                                             -4.0                                  3.5                                6.0 B                                             -2.0                                  2.5                                4.5 C                                             -2.4                                  2.8                                3.5 The probabilities for the three states of the economy are 0.2, 0.4 and 0.4 for weak, moderate and strong respectively. Required: Advise the investor on the best course of action based on the: Maxmin criterion.    (2 marks) Maxmax criterion.    (2 marks) Minimax regret criterion.       (3 marks) Expected value of perfect information.    (5 marks) (Total: 20 marks)   QUESTION THREE 1.           A baker makes and sells cakes to students through their cafeteria system.  The distribution of cakes produced and cakes sold for the last 250 weeks is as follows: Number of weeks                                                 Cakes                                   Cakes Number of cakes        Produced                                Sold 150                                           20                                              35 250                                            50                                              50 350                                            80                                              80 450                                            80                                              65 500                                           20                                              20 Each cake costs Sh.80 to make and is sold for Sh.120 if sold during the week of production, otherwise it is sold during the second week at Sh.60.  If not sold during the second week, the cake’s value drops to zero and the baker suffers the total loss of production. Weekly demand is satisfied from the week’s production and any demand remaining unsatisfied is satisfied from the stock of the previous week. A stock out costs the baker Sh.20 per cake. The following random numbers are applicable: Cakes produced                   33,      86,      50,      41,       31,     78,      30,     22,     26,     88 Cakes sold                            79,      03,       40,       13,      58,      61,     72,      49,     82,     86   Required: Simulate the baker’s average weekly profit over an 8-week period.   (10 marks) 2.         Kazi na Bidii Ltd. sells four types of products. The resources needed to produce one unit of each product and the sales prices are given as follows: Cost and resources requirements for Kazi na Bidii Ltd. Resource                                         Product 1                      Product 2               Product 3             Product 4 Raw materials (units)                      2                                            3                                4                                7 Labour hours                                      3                                           4                                5                                6 Sales price (Sh.)                                 4                                           6                                7                                8   Additional information: Currently, 4,600 unfits of raw materials and 5,000 labour hours are available. To meet customers’ demand, exactly 950 total units must be produced and at least 400 units of Product 4 must be produced. A computer output of the above linear programming model has been given as follows: Required: The optimal solution to the problem.         (2 marks) The optimal solution if the company raises the price of product 2 by Sh.0.50 per unit.    (2 marks) The optimal Z-value if a total of 980 units must be produced.       (3 marks) The optimal Z-values where 4,500 units and 4,400 units of raw materials are available.    (3 marks) (Total: 20 marks)   QUESTION FOUR 1.          Enumerate eight applications of quantitative analysis in business.     (8 marks) 2.          The following is a pay-off matrix of a zero sum two person

FRIDAY: 21 May 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 1.           Highlight four benefits of investing in an index fund.    (4 marks) 2.          You have been appointed as a fund manager for a pension development fund for civil servants in your country. Required: Draft an investment policy statement (IPS) for the fund, clearly indicating the key sections.      (10 marks) 3.           Examine three key differences between “traditional finance” and “behavioural finance”.      (6 marks) (Total: 20 marks)   QUESTION TWO 1.            Felix Otieno, an analyst at Diamond Investment Fund has outlined the factor exposures of two stocks using macroeconomic factors as shown below: Factor                                                 Stock A                          Stock B Confidence                                                0.2                                     0.6 Time horizon                                             0.6                                     0.8 Inflation                                                 — 0.1                                  — 0.5 Business cycle                                          4.0                                     2.0 Market timing                                            1.0                                     0.7   Required: Compute the factor exposures of a portfolio invested 50% in Stock A and remainder in Stock B. (3 marks) Contrary to general forecasts, you expect strong economic growth with a slight increase in inflation. Recommend the stock that you should overweigh in your portfolio.    (2 marks) 2.          An investment advisor is counselling Susan Nkatha, a client who recently inherited Sh.l.2 billion and has above average risk tolerance (RA = 2) and wants returns that will outpace inflation in the long-term. Susan expects to liquidate Sh.60 million of the portfolio in 12 months ideally without invading the initial capital. The alternative strategic asset allocation choices for Susan are as follows: Investor’s forecasts Asset allocation                                   Expected Return                    Standard deviation of return A                                                                 10%                                                           20% B                                                                 7%                                                              10% C                                                                 5.25%                                                           5%   Required: Determine the preferred asset allocation based on risk adjusted expected returns for the asset allocation. (5 marks) Determine the shortfall level, RL, assuming that Susan’s desire is not to invade the Sh. 1.2 billion principal.  (2 marks) Select the best asset allocation using Roy’s safety first criterion.     (3 marks) 3.           The following information relates to price movements of some selected shares: Share                                Start of year 2020                                         End of year 2020 X                                                    110                                                                   130 Y                                                      76                                                                     72 Z                                                      95                                                                   100   Required: Calculate the following types of means based on the holding period return: Arithmetic mean.   (2 marks) Geometric mean.    (2 marks) Explain why a financial analyst is more likely to apply geometric mean as opposed to arithmetic mean. (1 mark) (Total: 20 marks)   QUESTION THREE 1.          Summarise six assumptions of the capital asset pricing model (CAPM).      (6 marks) 2.        An investor has decided to invest Sh.1 million in the shares of two companies namely Edulink (E) and Bookstore (B). The projections of returns from the shares of the two companies along with their probabilities are as follows: Probability                               Edulink (%)                             Bookstore (%) 0.20                                                      12                                                   16 0.25                                                      14                                                   10 0.25                                                     —7                                                   28 0.30                                                      28                                                  —2   Required: Determine the proportion of each of the above shares required to formulate a minimum risk portfolio.        (8 marks) 3.           Jeremiah Kiragu owns a portfolio with the following characteristics:                                                         Security A                    Security B                           Risk free security Factor 1 sensitivity                                       0.80                                  1.50                                                   0 Factor 2 sensitivity                                       0.60                                  1.20                                                   0 Expected return                                             15%                                  20%                                                10% It is assumed that security returns are generated by a two factor model.   Required: Determine the sensitivity of Kiragu’s portfolio to the two factors assuming that he has Sh.l million to invest and sell short Sh.500,000 of security B and purchases Sh.1,500,000 of security A.     (2 marks) Determine the sensitivity of the portfolio to the two factors assuming that Kiragu borrows Sh.1 million at the risk free rate and invest the amount he borrows along with the original amount of Sh.1 million in security A and security B in the same proportion as described in  (i) above.     (2 marks) Calculate the expected return premium of factor 2.      (2 marks) (Total: 20 marks)   QUESTION FOUR 1.          Explain the meaning of the following types of risks that could affect a portfolio: Compliance risk.    (1 mark) Operational risk      (1 mark) Counterparty risk.     (1 mark) 2.         Summarise three ways that could be used by a portfolio manager to manage credit risks.       (3 marks) 3.          Propose two applications of trusts as an estate planning tool.      (4 marks) 4.         A consultant is analysing three investment managers for a new mandate. The table below provides the managers’   ex-ante active return expectations and portfolio weights. The last two columns include the risk and the ex-post, realised active returns for the four securities: All the three managers claim to be good at forecasting returns and also claim to be efficient in portfolio construction. Required: Determine, using the full fundamental law of active management the following: The manager that is best at efficiently building portfolios by anticipating future returns.    (5 marks) The manager that is best at building portfolios to make full use of their ability to correctly anticipate returns.     (5 marks) (Total: 20 marks)   QUESTION FIVE 1.          Analyse three standardised methods for estimating value at risk (VaR).      (6 marks) 2.          Evaluate four factors that could hinder a portfolio manager from investing internationally.       (4 marks) 3.          The following information relates to a fund manager’s annual return and the share index’s return for the last five years: Year                             Fund Manager’s Returns (%)                      Share index’s Returns (%) 2020                                                        

THURSDAY: 20 May 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 1.          Explain the following types of market organisation used in the securities market: Auction market.    (1 mark) Brokered market.    (1 mark) Dealer market.    (1 mark) 2.          The following information relates to the central order book of Dolphin Ventures Limited, a company quoted at the Securities Exchange: Sell orders                                                                                              Buy orders Quantity         Limit (Sh.)                                                            Quantity                    Limit (Sh.) 5,000                       151                                                                             5,000                              146 20,000                     150                                                                             20,000                            144 10,000                    149                                                                              10,000                           143 5,000                       148                                                                             20,000                            142 5,000                       147                                                                              10,000                           141 Required: Alfred Ngugi has entered a market order to purchase  15,000 shares of Dolphin Ventures Limited. Advise him on the price at which he should buy the shares.       (2 marks) Compute the average trade price of the shares based on your answer in  (i) above.    (1 mark) Suppose that Alfred Ngugi had instead wanted to sell 10,000 shares of the company. Determine the price at which he would sell the shares.        (2 marks) Outline four macroeconomic indicators that could influence the securities market in your country. (4 marks) 3.          An analyst gathered the following information regarding Beta Ltd.: Expected earnings per share for 2020                                           Sh.3.34 Retention rate                                                                                       0.40 Required rate of return                                                                       12% Current share price                                                                              Sh.40 Dividends are paid out at the end of the year and are expected to grow at the rate of 6% into perpetuity.   Required: The fraction of the company’s leading price to earnings ratio that comes from the present value of growth opportunities (PVGO).      (5 marks) Explain three causes of a negative present value of growth opportunities (PVGO).     (3 marks) (Total: 20 marks)   QUESTION TWO 1.          Examine five steps that are involved in the equity valuation process.    (5 marks) 2.          Using relevant diagrams, explain three types of technical analysis charts that are used by equity analysts while forecasting the movement of the prices of shares.     (6 marks) 3.         An analyst gathers the following information about Zeb Limited shares: Current market price per share                                                        Sh.22.56 Current annual dividend per share                                                 Sh.1.06 Annual dividend growth rate for years 1 — 4                                9.00% Annual dividend growth rate for years 5 and above                    4.00% Required rate of return                                                                       12% Required: Using the Two-Stage Dividend Discount Model, compute the intrinsic value of the share and comment on the results.  (5 marks) 4.         Smartprint Ltd. is a large-scale printing firm quoted on the Securities Exchange. The company is considering investing Sh.500 million in new printing equipment. The present value of the future after-tax cash flows resulting from the equipment is Sh.750 million. Smartprint Ltd. currently has 100 million shares outstanding, with a current market price of Sh.45 per share. Assume that this project’s new information is independent of other expectations about the company. Required: Determine the effect of the new equipment on the value of Smartprint Ltd.      (3 marks) Comment on the effect of the results obtained in  (i) above on Smartprint Ltd.’s share price.       (1 mark) (Total: 20 marks)   QUESTION THREE 1.          Summarise four factors that could justify the use of the residual income model in the valuation of equity.   (4 marks) 2.         The following information relates to Sky Blue Ltd.: Debt                                                                                                                         Sh.20,000,000 Long-term growth of revenues and after tax operating income                  5% annually Gross profit margin                                                                                                40% Depreciation                                                                                                              2% of sales Other operating expenses                                                                                      Sh.4,000,000 Working capital required                                                                                        10% of additional revenues Sales                                                                                                                            Sh.100,000,000 Corporation tax rate                                                                                                30% Capital expenditure is expected to equal projected depreciation expense plus 5% of incremental revenues   Required: Explain whether a prospective investor should use reported earnings or normalised earnings in estimating the free cash flow to firm (FCFF) for Sky Blue Ltd.    (2 marks) Calculate the forecast free cash flow to firm (FCFF) for Sky Blue Ltd. for the upcoming year. (5 marks) 3.          An analyst gathered the following data for TZ Construction Ltd.: Recent market price per share                                                         Sh.30 Number of shares outstanding                                                         40 million                                                                                                     Sh.”000″ Market value of debt                                                                               120 Cash and marketable securities                                                              75 Investments                                                                                              200 Net income                                                                                                 160 Interest expense                                                                                           9 Depreciation and amortisation                                                               12 Taxes                                                                                                             48 Required: Calculate the enterprise value to earnings before interest, taxes and depreciation (EV/EBITDA) multiple.   (4 marks) 4.         Wema Ltd. reported the following figures for the end of its financial year: Revenues                                                                Sh.40.8 million Pretax income                                                       3h.8.6 million Assets                                                                     Sh.53.2 million Liabilities                                                              Sh.27.8 million Dividends per share                                            Sh.0.35 Number of shares outstanding                         8 million Corporation tax rate                                            30% The beta for Wema Ltd. is 1.2, the current risk free rate is 4.5% and the expected return on the market is   12.5%.   Required: The value of the shares using a single-stage residual income model.    (5 marks) (Total: 20 marks)   QUESTION FOUR 1.           Evaluate three momentum valuation indicators

THURSDAY: 20 May 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 1.          Bidii Cement Company is listed in the local securities market. Some of the other listed cement manufacturing companies provide extensive disclosures in their external reports about their environmental policies and practices. Required: Discuss two reasons that may cause Bidii Cement Company to voluntarily disclose its environmental policies and practices as part of its annual reports.    (4 marks) Explain three potential advantages of voluntary environmental disclosures to Bidii Cement Company. (6 marks) 2.          Milele Ltd. is a public limited company. As at 31 March 2019, Milele Ltd. had issued share capital of Sh.10 million.  The  shares  are denominated  at  Sh.0.25  each.  Milele  Ltd.’s earnings attributable to its ordinary shareholders for the year ended 31 March 2019 were also Sh.10 million giving an earning per share of Sh.0.25. The following transactions took place during the year ended 31 March 2020: On 1 July 2019, Milele Ltd. issued eight million ordinary shares at full market value. On 1 January 2020, a bonus issue of one ordinary share for every four ordinary shares held was made. Earnings attributable to ordinary shareholders for the year ended 31 March 2020 were Sh.13,800,000. Transactions for the year ended 31 March 2021 were as follows: On 1 October 2020, Milele Ltd. made a rights issue of share of two new ordinary shares at a price of Sh.1.00 each for every five ordinary shares held. The offer was fully subscribed. The market price of Milele Ltd. ordinary shares immediately prior to the offer was Sh.2.40. Earning attributable to ordinary shareholders for the year ended 31 March 2021 were Sh.19,500,000. Required: Earning per share (EPS) for the year ended 31 March 2020 including comparative figure for the year ended 31 March 2019.     (4 marks) Earning per share (EPS) for the year ended 31 March 2021 including comparative figure for the year ended 31 March 2020.   (6 marks) (Total: 20 marks)   QUESTION TWO 1.         Operating segment information in a set of financial statements has been viewed by some investors as just too much information which may be difficult to understand. Some investors argue that this information is also costly to produce and its cost outweighs its benefits. Required: Describe three benefits that could be derived by investors from reviewing the operating segment disclosures accompanying financial statements when making decisions on investments.   (6 marks) Explain two limitations of using operating segment information when making investment decisions. (4 marks) 2.         Drible Cable  (DC) experienced a period of rapid expansion in the six months following the launch of a new product on 1 July 2020. The following information is available from the books of DC: Note: Assume a 365-day year. Required: For each of the periods above, calculate the following ratios: Inventories turnover period.   (1 mark) Payables turnover period.   (I mark) Receivables turnover period.   (1 mark) Current ratio.      (I mark) Quick ratio.      (1 mark) Gross profit margin.  (1 mark) Using the calculations in  (i) to (vi) above, comment on the financial performance of DC.          (4 marks) (Total: 20 marks)   QUESTION THREE 1.          Duka Limited owns a piece of machinery and entered into an agreement to lease the machinery on 1 January 2017 In the lease contract, the company requires four annual payment of Sh.28,679 starting on 1 January 2017. The present value of the lease payments using a 10% discount rate is Sh.100,000 and the fair value of the equipment is Sh.90,000. The useful life of the machinery is four years and its salvage value is zero. Required: Duka Ltd.’s cumulative income related to the lease.      (8 marks) Distinguish between reporting a lease as an operating lease or as a finance lease in the financial statements. (4 marks) Jane Mara, a financial analyst is seeking to identify companies with potential unrecorded leases. She studied the 2020 annual report of Basket Ltd. which reported an operating lease from 2020 to 2025 as shown below: Basket Ltd. Operating lease payments Year                                           Amount                                               Sh.”000″ 2020                                                215 2021                                                 I86 2022                                                 160 2023                                                 141 2024                                                 136 2025                                                 136 Jane Mara noted that Basket Ltd. had issued a bond with an effective interest rate of 6% per annum. Required: The present value of the operating lease commitment.     (4 marks) 2.         The following information relates to Minoh Ltd.’s pension plan as at 31 December 2020: The present value of a company’s defined benefit obligation is Sh.5,485 million and the fair value of the pension plan asset is Sh.5,798 million. The company has unrecognised transition liabilities of Sh.50 million, unrecognised actuarial losses of Sh.59 million and unrecognised past service costs of Sh.70 million. The present value of available future refunds and reductions in future contribution is Sh.3 I3 million. Required: The amount of the pension asset to be reported as at 31 December 2020 in the statement of financial position. (4 marks) (Total: 20 marks)   QUESTION FOUR 1.          International  Accounting Standard  (IAS)   10,  Events  After the  Reporting  Period, shall be applied  in the accounting for, and disclosure of, events after the reporting period. Required: Explain the term “events after the reporting period”.    (2 marks) Highlight two types of events that are identified under the standard.     (2 marks) 2.         White Ltd. (WL) has a number of investments in subsidiary and associate entities. During the year ended 30 June 2020, WL acquired an investment in QB Ltd. The statements of financial position of WL, group for the years ended 30 June 2020 and 30 June 2019 are shown below:   Additional information: During the year ended 30 June   2020, there was

WEDNESDAY: 19 May 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 1.           Jamii Ltd. has decided to purchase a new machine that costs Sh.    3 million. The machine will be worthless after three years and will be depreciated on a straight line basis. Umoja Bank has offered Jamii Ltd. a three year loan of Sh.3 million. The repayment schedule is composed of three-yearly principal repayments of Sh.l million and an interest charge at the rate of 12% per annum on the outstanding balance of the loan at the beginning of each year. The market wide rate of interest is 12% per annum. Both principal repayments and interest are due at the end of each year. Pamoja leasing Ltd. offers to lease the same machine to Jamii Ltd. The lease payments of Sh.1.2 million per year are due at the end of each of the three years of the lease. The corporation tax rate is 30%. Required: Advise Jamii Ltd. on whether it should lease the machine or buy it with bank financing.    (8 marks) 2.           Bidii Machinery Ltd. is planning to replace an old machine with a new one. The old machine had a cost of Sh.650,000 and the new one will cost Sh.780,000. The new machine will be depreciated on a straight line basis to zero over its five year useful life. It will have a salvage value of Sh.140,000 after five years. The old machine is being depreciated at the rate of Sh.130,000 pear year. It will be completely written off in three years. If it is not replaced now, it will have to be replaced in two years. It can be sold now for Sh.230,000; in two years, it will be worth Sh.90,000. The new machine will save Bidii Machinery Ltd. Sh.125,000 per year in operating costs. The corporate tax rate is 30% and the discount rate is 14%. Required: Determine whether the machine should be replaced now or Bidii Machinery Ltd. should wait to replace it in two years’ time.       (12 marks) (Total: 20 marks)   QUESTION TWO 1.          Explain three types of commonly used contracts in Islamic finance.         (6 marks) 2.          Explain two limitations of sensitivity analysis in capital investment decisions.   (4 marks) 3.          Bahati Ltd. sells Product A and Product B, with sales of both products occurring evenly throughout the year. Product A The annual demand for Product A is 300,000 units and an order for new inventory is placed each month. Each order costs Sh.267 to place. The cost of holding Product A in inventory is Sh.0.10 per unit per year. Buffer inventory equal to 40% of one month’s demand is maintained. Product B The annual demand for Product B is 456,000 units per year and Bahati Ltd. buys this product at Sh.1 per unit on 60 days credit. The supplier has offered an early settlement discount of   1% for settlement of invoices within 30 days. Additional information: Bahati Ltd. finances working capital with short-term finance costing 5% per year. There are 365 days in a year. Required: For Product A, calculate the net cost or savings of introducing an ordering policy using the economic order quantity (EOQ).      (6 marks) Calculate the net value to Bahati Ltd. of accepting an early settlement discount for Product B.     (4 marks) (Total 20 marks)   QUESTION THREE 1.          Describe three financial strategies that could be used in corporate restructuring.   (6 marks) 2.         Faida Ltd. is analysing the possible acquisition of Hasara Ltd. Neither firm has debt. The forecast of Faida Ltd. shows that the purchase would increase its annual after-tax cash flow by Sh.600,000 indefinitely. Additional information: The current market value of Hasara Ltd. is Sh.20 million. The current market value of Faida Ltd. is Sh.35 million. The appropriate discount rate for the incremental cash flow is 8%. Faida Ltd. is trying to decide whether it should offer 25% of its stock or Sh.15 million in cash to Hasara Ltd. Required: Determine which alternative Faida Ltd. should use.      (6 marks) 3.          Bamboo Ltd. has an equity cost of capital of 14.4% and a debt cost of capital of 6%. The firm maintains a debt- equity ratio of 1. Bamboo Ltd. is considering an expansion that will contribute Sh.4 million in free cash flows for the first year growing by 4% per year thereafter. The expansion will cost Sh.60 million and will be financed with Sh.40 million in new debt initially with a constant debt-equity ratio maintained thereafter. Bamboo Ltd.’s corporate tax rate is 30%, the tax rate on interest income is   15% and the tax rate on equity income is 5%. Required: Compute the value of the expansion using the adjusted present value (APV) method.    (8 marks) (Total 20 marks)   QUESTION FOUR 1.          Explain three disadvantages of using the internal rate of return in project appraisal.    (6 marks) 2.          A Ltd. and B Ltd. are firms operating in the same industry and are considered to be in the same risk class. Each firm generates operating profit (EBIT) of Sh.125 million in each year. The capital structures of both firms are as follows: Each of the two firms adopts a 100% payout ratio as its dividend policy. The corporation tax rate applicable is 30%. Required: Using the Modigliani and Merton Miller (MM) 11 proposition with corporation tax: Determine the equilibrium market value for both firms.       (2 marks) Calculate the weighted average cost of capital (WACC) for both firms.    (4 marks) Comment on your observations in  (i) and  (ii) above.    (2 marks) 3.       

WEDNESDAY: 19 May 2021.                  Time Allowed: 3 hours. Answer any FIVE questions.        ALL questions carry equal marks. QUESTION ONE 1.           Outline two differences between “statute law” and “case law”.   (4 marks) 2.          Benta Limited intends to make an application to operate as a central depository agent. Advise the company on the following: Four types of persons who might be appointed to operate as central depository agents.    (4 marks) Four factors that the regulator might take into account in determining whether an applicant is eligible to operate as a central depository agent.      (4 marks) 3.           In the context of the Capital Markets Authority (CMA) or the equivalent regulator in your country: Explain four objectives of the CMA or equivalent regulator in your country.     (4 marks) Outline four powers that the CMA or equivalent regulator in your country could use to enforce compliance with capital markets legislation and the associated regulations.    (4 marks) (Total: 20 marks)   QUESTION TWO 1.          Outline four types of market participants at the capital market in your country.     (4 marks) 2.         Describe the composition of the Board of Directors of the Central Bank of your country.      (4 marks) 3.         In the context of the law of contract: Analyse four ways through which a contract might be frustrated.     (8 marks) Explain four circumstances under which a plea of “non est factum” might be allowed by the courts. (4 marks) (Total: 20 marks)   QUESTION THREE 1.          With reference to the law of agency, describe three types of authority of an agent.  (6 marks) 2.         Evaluate five particulars that are contained in the legal opinion accompanying a prospectus.     (10 marks) 3.         In the context of the regulation of financial market intermediaries, explain the following terms: Investment bank.  (2 marks) Venture capital company.   (2 marks) (Total: 20 marks)   QUESTION FOUR 1.           Define the term “dematerialisation of securities”.       (2 marks) 2.         Describe four documents required to accompany an application for approval and registration of a credit rating agency in your country.    (8 marks) 3.           Discuss five grounds for removal from office of the Director General of the Financial Reporting Centre.   (5 marks) 4.           In the context of investment funds, explain five unique characteristics of real estate investment trusts (REITs). (5 marks) (Total: 20 marks)   QUESTION FIVE 1.          Discuss three circumstances under which the Capital Markets Authority (CMA), or equivalent regulator in your country, might require a securities exchange to de-list a security.   (6 marks) 2.         Describe three principles for co-operation in regulation under the International Organisation of Securities Commissions (TOSCO) objectives and principles of securities regulation.   (6 marks) 3.           In the context of governance and controls, the Board of a market intermediary is required to establish a corporate governance framework that provides strategic guidance and promotes the effective monitoring of the management and accountability of the firm. In the context of the above statement, describe four contents of a board charter.     (8 marks) (Total: 20 marks)   QUESTION SIX 1.          Explain six sources of funds for the Criminal Assets Recovery Fund.       (6 marks) 2.         Summarise eight conditions to be satisfied by a SACCO society intending to be licensed to undertake deposit- taking business.       (8 marks) 3.           With reference to the Proceeds of Crime and Anti-Money Laundering Act (POCAMLA) 2009, or equivalent legislation in your country, explain three anti-money laundering obligations of a reporting institution.   (6 marks) (Total: 20 marks)   QUESTION SEVEN 1.          Explain three duties of a trustee in a collective investment scheme.     (3 marks) Discuss three circumstances under which the trustee in  (i) above might be removed from office. (6 marks) 2.           In the context of securities transactions, explain the following terms: Front running.      (3 marks) Market rigging.   (3 marks) Market manipulation.       (3 marks) 3.           Identify two professional bodies that operate in the financial services sector.     (2 marks) (Total: 20 marks)