EXAMINATION : INTERMEDIATE LEVEL
SUBJECT : FINANCIAL MANAGEMENT
CODE : B1
EXAMINATION DATE : THURSDAY, 12TH MAY, 2022
TIME ALLOWED : THREE HOURS (2:00 P.M. – 5:00 P.M.)
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GENERAL INSTRUCTIONS
2. There are TWO Sections in this paper. Sections A and B which comprise a total
of SIX questions.
2. Answer question ONE in section A.
3. Answer any FOUR questions in Section B.
4. In total answer FIVE questions.
5. Marks are shown at the end of each question.
6. Calculate your answers to the nearest two decimal points unless otherwise directed.
7. Show clearly all your workings in respective answers where applicable.
8. This question paper comprises 7 printed pages.
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SECTION A
Compulsory Question
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QUESTION 1
(a) Working capital management refers to the day to day activities of managing current
assets and current liabilities and the interrelationship between them. It involves the
management of cash, receivables, inventory and liability which ensures liquidity and
profitability of a business.
REQUIRED:
(i) Discuss how working capital affects both the liquidity and profitability of
business. (3 marks)
(ii) “Taking a long time to pay suppliers invoices is always a cheap form of finance.”
Critically discuss this statement. (3 marks)
(iii) Identify three (3) working capital policies that a business firm can adopt and
explain how each affects the operations of a business. (5 marks)
(b) ABC Ltd is a company located at Mafinga in Iringa. The company sells timber to small
scale and large-scale buyers from all over the country. The company’s annual sales for
the previous year (2021) were TZS.720,000,000 of which 80% was credit sales.
According to the credit terms, debtors have a one-month period to pay their dues.
Due to collection problems experienced in previous years, the company has contracted
Majembe Ltd which is an experienced debts collection firm. Majembe Ltd, is willing
to offer factor services with an advance of 90% of the total credit sales for a fee of 2%
per month plus a commission of 5% on the total amount of the debts. This arrangement
is expected to save TZS.2,600,000 annually in management costs and avoid bad debts
at 1% of credit sales.
The Finance Manager of ABC Ltd considers the factoring services to be unfavourable
and has consulted Uchumi Bank which is ready to make an advance equal to 90% of
the debts at an interest rate of 15% per annum. The Bank requires a processing fee of
2% on the debts.
REQUIRED:
Advise ABC Ltd, whether to use the services from Majembe Ltd or the advance from
Uchumi bank. Justify your answer. (9 marks)
(Total: 20 marks)
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SECTION B
There are FIVE questions. Answer ANY FOUR questions
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QUESTION 2
(a) It is vital for Financial Managers to make a thorough analysis when deciding on
alternative financing options available. Beside risks considerations, a typical Financial
Manager will make consideration of cost involved as well as the structure of the capital.
You have been approached by a colleague for an advice. He has provided you with the
following financial data for two companies showing their positions as of 31st December
2021:
Particulars Mafiga Co. Ltd Ilomba Co. Ltd
TZS.”000” TZS”000”
Current assets 100,000 80,000
Plant and machinery 100,000 120,000
Total assets 200,000 200,000
Current Liabilities 20,000 80,000
Long term debt 80,000 20,000
Common stock 50,000 50,000
Retained Earnings 50,000 50,000
Total liabilities and equity 200,000 200,000
Annual earnings before interest and taxed for each of the firms are TZS.30 million,
and the corporate tax rate is 40%.
REQUIRED:
(i) Compute the return on equity for each company if the interest rate on current
liabilities is 10 percent and the interest rate on long term debt is 13 percent.
(5 mark)
(ii) Suppose the short-term rate rises to 20 percent, while the rate on new long-term
debt rises to 16 percent, and the interest rate on existing long-term debt remains
unchanged. What would be the return on equity for each of the companies under
these conditions? (5 marks)
(iii) Which company is in a riskier position? Why? (4 marks)
(b) Compare and contrast the public sector objectives of ‘value for money’ and the private
sector objectives of ‘maximization of shareholder wealth’. (6 marks)
(Total: 20 marks)
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QUESTION 3
(a) Analysis of financial statements is an attempt to assess the performance of an
enterprise. Thus, the analysis and interpretation of financial statements is very essential
to measure the efficiency, profitability, financial soundness and future prospects of a
business.
REQUIRED:
(i) Explain any four (4) limitations of financial statement analysis. (6 marks)
(ii) Explain how the interest coverage ratio affect the capital structure of a firm.
(4 marks)
(b) The following information is from Dancan Limited’s financial statements for the year
2021:
Sales to total assets 2 times
Total debts to assets 30%
Current ratio 3 times
Inventory turnover 5 times
Average collection period 18 days
Non-current assets turnover 5 times
Number of days in a year. 360 days
Sales (all on credit) TZS.400,000,000
REQUIRED:
Construct Dancan Limited’s Statement of Financial Position in the following form:
TZS. TZS.
Cash Current debts
Accounts receivables Non-current debts
Inventory Total debts
Total current assets Equity
Non-current assets
Total assets Total debts and equity
(10 marks)
(Total: 20 marks)
QUESTION 4
(a) Financial forecasting is defined as a systematic process of analyzing the economic, social
and financial influences affecting a business with an objective of predicting business’s
total needs of funds for the future on the basis of the past and present information.
REQUIRED:
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Explain why do you think most financial planning process begins with sales forecasts?
(5 marks)
(b) Bakanja Plc has earning available for common stockholders of TZS.2,000,000. The
company also has 500,000 shares of common stock outstanding at TZS.600 per share.
The company is currently contemplating the payment of TZS.20 per share in cash
dividend.
REQUIRED:
(i) Calculate the company’s current Earnings Per Share (EPS) and Price/Earnings
(P/E) ratio. (3 marks)
(ii) If the firm can repurchase stock at TZS.620 per share, how many shares can be
purchased in lieu of making the proposed cash dividend payment?
(2 marks)
(iii) How much will the EPS be after the proposed repurchase? Why? (2 marks)
(iv) If the stock sells at the old P/E ratio, what will be the market price after repurchase?
(2 marks)
(v) Compare the EPS before and after the proposed repurchase and give possible
reasons for any difference. (3 marks)
(vi) Compare and contrast the stockholder’s position under the dividend and
repurchase alternatives. (3 marks)
(Total: 20 marks)
QUESTION 5
(a) The Manager of Pangani Co. Ltd believes that knowing forecasting financial
requirements in advance of needs assist a firm manager to perform his responsibilities
more effectively. His company expects sales during 2023 to rise from the 2022 level
of TZS.3.5 million to TZS.3.9 million. Because of the scheduled large payment, the
interest expense in 2023 is expected to drop to TZS. 325,000. The firm plans to increase
its cash dividend payment during 2023 to TZS.320,000. He has presented you with the
following Income Statement:
Income Statement for the year ended April 30th 2022
TZS.”000”
Sales Revenue 3,500,000
Less: Cost of Goods sold 1,925,000
Gross Profit 1,575,000
Less: Operating expenses 420,000
Operating Profit 1,155,000
Less: Interest expenses 400,000
Net profits before taxes 755,000
Less: Taxes (rate 40%) 302,000
Net Profits after taxes 453,000
Less: Cash Dividends 250,000
To Retained Earnings 203,000
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REQUIRED:
(i) Use the percent of sales method to prepare a 2023 proforma income statement for
Pangani Co. Ltd. (8 marks)
(ii) Explain why the statement may underestimate the Pangani’s actual 2023
proforma invoice. (2 marks)
(b) There are conflicting views regarding the impact of dividend decisions on shareholder’s
wealth and the value of the firm. The question is whether the firm should pay out cash
now or retain profits for reinvesting.
REQUIRED:
(i) Explain the Modigliani and Miller’s (MM’s) dividend irrelevant hypothesis.
(5 marks)
(ii) Discuss the idea that dividends should be treated as a residual. (5 marks)
(Total: 20 marks)
QUESTION 6
(a) The Finance Director of Afsa Co. has heard that the market value of a company will
increase if the Weighted Average Cost of Capital (WACC) of the company decreases.
Afsa Co., which is listed on the local stock exchange, has 100 million shares in issue
and the current ex div ordinary share price is TZS.250 per share. Afsa Co. also has in
issue bonds with a book value of TZS.6,000 million and their current ex interest market
price is TZS.10,400 per TZS.10,000 bond. The current after-tax cost of debt of Afsa
Co. is 7% and the tax rate is 30%. The recent dividends per share of the company are
as follows:
Year 2017 2018 2019 2020 2021
Dividend per Share (TZS.) 19.38 20.20 20.41 21.02 21.80
The Finance Director proposes to decrease the Weighted Average Cost of Capital of
Afsa Co, and hence increase its market values, by issuing TZS.4,000 million of bonds
at their nominal value of TZS.10,000 per bond. These bonds would pay annual interest
of 8% before tax and are irredeemable.
REQUIRED:
Calculate the after-tax, market value Weighted Average Cost of Capital (WACC) of
Afsa Co. in the following circumstances:
(i) Before the new issue of bonds takes place. (4 marks)
(ii) After the new issue of bonds takes place. (4 marks)
(iii) Comment on the results. (2 marks)
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(b) You are a Financial Consultant to Makuburi Company. The company is about to raise
funds via a rights issue but the management is not sure of the factors to be considered
when funds are raised via a rights issue.
REQUIRED:
Explain to the management of Makuburi Company the factors to be considered by the
company when choosing to raise funds via a rights issue. (5 marks)
(c) Discuss the reasons for the application of the Pecking Order Theory as an alternative
to the Traditional Theory of Capital Structure. What are the principal limitations of the
Pecking Order Theory? (5 marks)
(Total: 20 marks)
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