INSTITUTE OF ACCOUNTANCY ARUSHA
FINANCIAL MANAGEMENT
NACHELOR OF HUMAN RECOURCES MANAGEMENT (BHRM II)
REVIEW QUESTION
QUESTION ONE
A. From a financial standpoint, the value of money changes with time so a TZS.5,000,000 now and a
TZS.5,000,000 three years later is not the same. It is a concept known as the time value of money.
The implication is that, lapse of time comes along with many economic factors which affect value
attached to money.
REQUIRED:
i) Explain importance of the time value of money concept.
ii) Describe features of future value.
B. An individual acquired a loan of $100,000 from Barclays Bank at an interest rate of 9% per annum
to be repaid into three equal annual installments.
a. What is the amount of equal annual installments?
b. How much of the annuity/installment in each year is interest and how much is the principle.
QUESTION TWO
Qgas Co. Ltd is an international gas production and supply company with customers all over the world.
Qgas Co. Ltd experienced strong initial growth but in recent periods the company has been criticized
for under-investing in its non-current assets. Extracts from Qgas’s financial statements are provided
below:
Qgas Co. Ltd
Statement of Financial Position as at 30th June
Details 2022 2021
TZS.‘000’ TZS.‘000’
Non-current assets:
Property, plant and equipment 317,000 174,000
Intangible assets (note 2) 20,000 16,000
337,000 190,000
Current assets:
Inventories 580 490
Trade and other receivables 6,100 6,300
Cash and cash equivalents 9,300 22,100
Total current assets 15,980 28,890
Total assets 352,980 218,890
Equity and liabilities
Equity shares 3,000 3,000
Retained earnings 44,100 41,800
Revaluation surplus 145,000 -
Total equity 192,100 44,800
Liabilities
Non-current liabilities
6% loan notes 130,960 150,400
Current liabilities
Trade and other payables 10,480 4,250
6% loan notes 19,440 19,440
Total current liabilities 29,920 23,690
Total equity and liabilities 352,980 218,890
Other extracts from Qgas Co. Ltd’s financial statements for the year ended 30th June were as
follows:
Details 2022 2021
TZS.‘000’ TZS.‘000’
Revenue 154,000 159,000
Profit from operations 12,300 18,600
Finance costs (9,200) (10,200)
Cash generated from operations 18,480 24,310
The following information is also relevant:
1. Qgas Co. Ltd had exactly the same production volume in 2022 as in 2021, with the overall
supply being the same in both years.
2. In April 2022, Qgas Co. Ltd had to renegotiate its license with five major customer states, which
led to an increase in the prices for which Qgas Co. Ltd had to pay for the right to supply gas.
The license with ten more major customer states are due to expire in 30th June 2023, and
Qgas CO. Ltd is currently in negotiation with these states.
REQUIRED:
(a) Calculate the following ratios for the year ended 30th June 2021 and 2022:
(i) Operating profit margin
(ii) Return on capital employed
(iii) Net asset turnover
(iv) Gearing
(v) Interest cover ratio
(b) (i) Comment on the performance and position of Qgas Co. Ltd for the year
ended 30th June 2022
(ii) Increase in non-current assets is expected to add value in the productivity, and
hence profitability of the firm. However, this has not been the case for Qgas Co.
Ltd. Comment on this statement, and provide the reasons for such a situation.
(iii) Explain what could be the possible impact of the ongoing negotiation with
customers on the future profits of Qgas Co. Ltd.
QUESTION THREE
ABC ltd is proposing to modernize its milk processing plant located in industrial area. The additional
investments will cost Tshs60m and other carriage charges will cost Tshs10m. Clearing charges are expected
at Tshs5m and the company currently spends Tshs7m on salaries of technicians who maintain its
equipment’s. These salaries are expected to increase to Tshs10m as an additional engineer will be required.
The new equipment will be housed in an extension at no cost. This was formerly used as a warehouse at a
rental income of Tshs6m per year.
REQUIRED
Derive the initial outlay on proposed investment
QUESTION FOUR
JB Ltd has 100,000 ordinary shares of Tshs8,000/= each and has made the following earnings over the
last five years
YEAR 1 2 3 4 5
EARNINGS AFTER TAX 500 20 300 600 80
TSHS (000,000)
The management of JB Ltd has recommended the following proposals as dividend that could be
paid for a year:
Proposal 1: Pay 15% of available earnings as dividends.
Proposal 2: Pay 10% of the total share capital available as dividend per year.
Proposal 3: Pay 500/= as dividend for each share and 10% of any surplus earnings
REQUIRED
i) Determine the level of annual dividends for each of the five years under each policy
ii) Evaluate the strength and weaknesses of each of the dividend policies used in (i) above
and recommend the best policy for the firm.
iii) Explain why it is important for the management of JB Ltd to implement a stable dividend
policy in the firm.
QUESTION FIVE
After discovering a new gold vein in Geita Region, McGregory Mining Corporation must decide whether to
mine the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that
results in environmental damage. To go ahead with the extraction, McGregory must spend TZS.900 million
for new mining equipment and pay TZS.165 million for its shipment and installation. The gold mined will net
the firm an estimated TZS.350 million each year over the 5year life of the vein. McGregory’s cost of capital
is 14 percent. Assume that the cash inflows occur at the end of the year.
REQUIRED:
i) What is the Net Present Value (NPV) and payback period PBP of this project?
ii) Recommend with reasons which appraisal technique is appropriate to measure the
viability of the project.
iii) Briefly explain the process/steps in capital budgeting decision
QUESTION SIX
A. Explain the concept of financial leverage
B. Java Ltd requires Tsh.300m for construction of a new production facility and the following options
are being evaluated.
Option A: To issue 30,000 debentures at Tsh.10,000 each bearing a coupon rate of 10%
Option B: To issue 15,000 common shares at Tsh.10,000 each, and Tsh.150,000, 10% debentures
at Tshs.1,000 each
Option C: To issue 300,000 shares at Tsh.1,000 each
Option D: To issue 240,000 debentures of interest rate 10% at shs.1,000 each and 60,000 common
shares at Tsh.1,000.
Currently, the company has Tsh.20,000 outstanding shares and it is expected that the profits before interest
and tax will be Tsh.150m. The objective of Java Ltd is to select the best financial option that will maximize its
earnings per share. Corporation tax rate is 30%
REQUIRED:
i) Recommend the best financing alternative
ii) Comment on the implications of financial leverage that can be concluded from your
recommendations.
QUESTION SEVEN
MUKO Ltd considers dividend payment as a residual decision and has a high degree of confidence that the
following conditions will prevail over the next five years
The business has 10,000 shares of Tshs10,000/= each
Year Net Earnings Capital projects
Tshs(000,000) to be financed
Tshs(000,000)
1 200 100
2 150 150
3 250 200
4 230 150
5 180 200
REQUIRED
i. Determine the dividends per share and the external funds needed to cover the capital budgets in each
of the years under review.
ii. What are the advantages and disadvantages of this approach in determining the level of dividends
that should be paid per year?
QUESTION EIGHT
A. Briefly discuss FOUR (4) main limitations of ratio analysis
B. During the year to 31st December 2022, Tinde Ltd attempted to stimulate sales and increase its
profit by reducing selling prices, holding large inventories and giving customers longer credit terms.
All the company’s purchases and sales are on credit terms. Summarized financial statements for
the year to 31st December 2022 (with comparative figures for 2021) are as follows:
Tinde Ltd
Statement of Profit or Loss and Other Comprehensive Income for
the year to 31st December
DETAILS 2022 2021
TZS. million TZS. million
Sales revenue 5,327 3,725
Cost of sales (4,420) (2,905)
Gross profit 907 820
Operating expenses (87) (75)
Operating profit 820 745
Interest expenses (130) (20)
Profit before tax 690 725
Tax expenses (135) (145)
Profit for the year 555 580
Tinde Ltd
Statement of Financial Position as at 31st December
DETAILS 2022 2021
TZS. million TZS. million
Assets
Non-current assets
Property, plant and equipment 5,120 4,700
Current assets
Inventories 1,334 730
Trade receivables 1,278 596
Bank 11 2,623 400 1,726
Total assets 7,743 6,426
Equity
Ordinary shares of TZS. 2,000 2,000
Retained earnings 3,508 3,433
5,508 5,433
Liabilities
Non-current assets
Long-term loans 1,000 150
Current liabilities
Trade payables 1,100 698
Tax payables 135 1,235 145 843
Total equity and liabilities 7,743 6,426
Note:
Ordinary dividends of TZS.480,000,000 were paid during the year to 31st December 2022.
REQUIRED:
Calculate the following ratios for Tinde Limited for each of the two years and comment on the results of
these calculations.
i. Return on capital employed
ii. Operating profit
iii. Current ratio
iv. Quick ratio
v. Inventory holding period
vi. Receivable collection period
vii. Capital gearing ratio
QUESTION NINE
a) Ratio analysis is among commonly used tools in analyzing and evaluating company performance. It’s
easy to use though it can mislead when used in isolation of other financial and non-financial data.
Required:
Briefly discuss FIVE main limitations of ratio analysis
b) In recent years many analysts have commented on a growing disillusionment with the usefulness
and
reliability of the information contained in some companies’ income statements.
Required:
Discuss the extent to which a company’s cash flow statement may be more useful and reliable than its income
statement.
c) Liquidity is one of the useful aspects in analyzing various financial statements of entities.
Required:
State the importance of understanding the liquidity of an entity to different users of financial statements,
giving examples to different ratios of liquidity that can be computed.
QUESTION TEN
A company is considering which of two mutually exclusive projects abroad it should
undertake. The finance director thinks that the project with the higher NPV should be
chosen, whereas the managing director thinks that the one with the higher IRR should be
undertaken, especially as both projects have the same initial outlay and length of life. The
company anticipates a cost of capital of 10%, and the net after tax cash flows of the
projects are as follows:
Year Project X Project Y
$000 $000
0 (200) (200)
1 35 218
2 80 10
3 90 10
4 75 4
5 20 3
Required:
(a)Calculate the Net present value (NPV) and payback (PBP) of each project.
(b)Recommend, with reasons, which project you would undertake (if either).
(c)Discuss the advantages and disadvantages of the payback and accounting rate of
return methods of investment appraisal.
