CERTIFIED PUBLIC ACCOUNTANT

INTERMEDIATE LEVEL EXAMINATIONS

I1.1: MANAGERIAL FINANCE
DATE: TURSDAY 29, FEBRUARY 2024

INSTRUCTIONS:
1. Time allowed: 3 hours 15 minutes (15 minutes reading
and 3 hours writing).
2. This examination has two sections; A&B.
3. Section A has three compulsory questions while B has
three questions of which two should be attempted.
4. In summary attempt five questions.
5. Marks allocated to each question are shown at the end of
the question.
6. Show all your workings where necessary.
7. The question paper should not be taken out of the
examination room.

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 SECTION A
QUESTION ONE
(a) Alpha Limited is a company operating in kivu district dealing with motor vehicle
assembly and other motor vehicle spare parts. The Managing Director of the company during
the Annual General Meeting suggested that the current procurement policy of procuring
stock in advance is no longer profitable to the company which according to him (Managing
Director) the firm is paying for a cost that can be done away with. Currently the firm has
been using economic order quantity model of inventory management which the Procurement
Manager is confident that it is the best policy. The Finance Manager has differed with his
counterpart and according to him Just In Time (JIT) model should be adopted.

Required:
Explain five advantages that Alpha Limited would enjoy if they adopt the new policy of
Just In Time model. (5 Marks)

(b) Phonex Limited is planning to change its current stock management policy. The
management currently orders 200,000 units of electrical appliance when their reorder level
hits 70,000 units. The company’s forecasted annual usage of stock valued FRW
1,250,000,000. The cost of placing an order is FRW 500 and carrying cost of 10% of
purchase price. The purchase price is FRW 1,000. The company’s lead time is 14 days and
operation of the firm is evenly for 52 weeks a year.

Required:
(i) Determine the optimal stock level. (3 Marks)
(ii) Calculate the relevant cost. (2 Marks)

(c) Bokasa Limited operates in the Northern province dealing in merchandised products and
has been concerned with the current operation of business. The Finance Manager has
requested his Accountant to examine the financial data of business because he feels that they
are overtrading and has provided the following comparative financial statements of the firm
Bokasa Limited statement of financial position as at 30th December.

2022 FRW 2023 FRW

Noncurrent asset 140,000 154,000
Inventory 80,000 112,000
Account receivable 40,000 56,000
Cash in hand 12,000 15,000
Total assets 272,000 337,000
Equity and liabilities
Equity
Ordinary shares capital 97,000 97,000
Retain profits 9,520 11,660
Long term liabilities
10% bank loan 19,840 9,840
Current liabilities
Account payable 125480 186340

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 Taxation 6000 8000
Bank overdraft 14160 24160
Total equity and liabilities 272000 337000

Bakosa Limited comparative income statement for the year ended 31st December

2022 FRW 2023 FRW

Sales 400,000 500,000
Cost of Sales 300,000 375,000
Gross profit 100,000 125,000
Operating cost 40,000 50,000
Operating profit 60,000 75,000
Loan interest 1,984 984
Corporate tax 5,734 7,026
Profit after tax 52,282 66,990
Dividend paid 42,762 55,330

The firm operates 360 days a year.

Required:
Compute the following ratios
(i) Current ratio. (2 Marks)
(ii) Quick ratio. (1 Mark)
(iii) Debtors’ collection period in days. (1 Mark)
(iv) Inventory days. (1 Mark)
(v) Asset turnover ratio. (2 Marks)
(vi) Comment if the company is overtrading basing on liquidity ratio, turnover ratio
and efficiency ratio computed above (3 Marks)
(Total: 20 Marks)

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QUESTION TWO
(a) Working capital management is a key factor in an organization’s long-term success plan. A
business must have a clear policy for the management of each component of working capital.
Working capital management is one of the direct responsibilities of the finance managers.

Required:
(i) Briefly discuss three reasons why finance managers should understand the
Importance of working capital management in the business. (3 Marks)
(ii) Briefly discuss three types of working capital funding policies. (6 Marks)

(b) Gahunda Investment Ltd (GIL) is a company located in Kigali investment center and its
management are interested in holding optimum cash balances during the upcoming period. GIL
faces a fixed cost of FRW 5,000 to obtain new funds. There is a requirement for FRW
12,000,000 of cash over each period of one year for the foreseeable future. The annual interest
cost of new funds is 15% per annum. The interest rate earned on short term securities is 10% per
annum.

Required:
(i) Calculate the optimum cash balance to be raised by the management of Gahunda
Investment Ltd? (3 Marks)
(ii) Determine the number of transactions that will arise each year (1 Mark)
(iii) Compute the cost of making those transactions per annum (2 Marks)
(iv) Calculate the opportunity Cost of holding cash per annum (2 Marks)

(c) A minimum cash balance of FRW 200,000 is required at Gahunda Investment Ltd and
transferring money to or from the bank costs is FRW 500 per transaction. The Finance Manager
performs the inspection of daily cashflow movement over the past few years, and suggests that
the standard deviation of cash flows will be FRW 30,000 per day. The interest rate is 0.03% per
day.

Required:
By using Miller-Orr Model of cash management, formulate a decision rule for Gahunda
Investment Ltd by showing the following:

(i) The spread between the upper and lower limits. (4 Marks)
(ii) Upper limit. (2 Marks)
(iii) Return Point. (2 Marks)
(Total: 25 Marks)

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QUESTION THREE
(a) Tujyanemwo Partners Ltd is a company incorporated in Rwanda under Rwanda
Development Board. The company should be Corporate Socially Responsible in accordance
with Rwandan regulatory authority by acting as a good corporate citizen.

Required:
As a CPA Candidate, advise the Management of Tujyanemwo Partners Ltd on the
benefit of acting as a good citizen. (3 Marks)

(b) Tujyanemwo Partners Ltd is engaged in providing different services including, but not
limited to, foreign exchange services, brokerage and commission services, and investment
advisory among others.

Required:
Briefly discuss how the government can influence financial institutions like
Tujyanemwo Partners Ltd. (3 Marks)
(c) Tujyanemwo Partners Ltd is considering two investments, A and B, each project has the
following Expected return and chances of getting that return. Each project lasts for one year,
and the project returns will depend on next year’s state of the economy.

The estimated rates of return are shown below:

State of the Probability of Rate of return for Rate of return for
economy Occurrence Project A Project B
Recession 0.25 10% 9%
Average 0.5 14% 13%
Boom 0.25 16% 18/%

Required:
(i) Find each project expected rate of return and the standard deviation for each
project. (2 Marks)
(ii) Compute the expected return on a portfolio if the firm invests equal wealth on each
Project. (1 Mark)
(iii) Compute the covariance and correlation coefficient between the two projects A and
B. (4 Marks)
(iv) Compute the standard deviation of the portfolio. (2 Marks)
(Total: 15 Marks)

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 SECTION B
QUESTION FOUR
(a) Duterimbere Investment Limited (DIL) is a firm established to undertake investment in
other company’s shares. Its base is in the City of Kigali and specializes in buying and selling
securities at a profit. The firm expects with some degree of certainty to generate the following
net income and capital expenditures during the next 5 years.

Years Earnings after tax Investment capital outlay

FRW Million FRW Million
1 20 10
2 12 12
3 18 20
4 25 20
5 23 15

The firm has 1,0000,000 issued and fully paid ordinary shares of FRW 1,000 nominal value
and distribute its earnings of FRW 10 per share.

During the year end meeting, the directors declared dividends for the year but not sure if the
current policy will be attractive to potential investors.

Required:
Compute the dividend per share and external borrowings under each of the following
policies:
(i) Residual policy. (2.5 Marks)
(ii) Constant amount policy for year 1 and 2 only. (2.5 Marks)
(iii) Constant payout ratio of 50% for year 3 and 4 only. (2.5 Marks)
(iv) Under which policy under are aggregate dividends maximized and external
borrowings minimized (2 Marks)

Isume Limited is a firm located in Kigali and offers consultancy service to many companies in
the country. One of the professional services is valuation of companies, financial consultancy,
and auditing and tax consultancy among others. One of its clients is Rolling Mills of Kigali
which deals in iron sheet manufacturing and wishes to acquire a competitor firm located in the
city

The firm wanted to know their worth Chief Executive Officer of Isume Limited has been using
Gordon dividend model to value companies, the client has not agreed with CEO on the model
to use and he prefers to use Walter’s model to determine its worth. The CEO has approached
you for more clarification on the model.

Required:
b) Explain the meaning of Walters Valuation Model. (2.5 Marks)
c) Discuss with the CEO three assumptions that are applied by the model. (6 Marks)

I1.1 Page 6 of 11
d) List four critics of the model. (2 Marks)
(Total: 20 Marks)

QUESTION FIVE
You are an investment analyst at GS partners Ltd. During last meeting of senior management
team held last month, the Chief Executive Officer raised issues on capital structure of the
company and suggested that the optimum capital structure exists where the company’s cost of
capital is minimized for any mix of finance in capital structure.

Your managers have asked you to do a presentation during management team meeting
scheduled for the next three weeks. Your presentation will be focus on how company can
achieve on the optimum capital structure.

Required:
Present the content by answering the following question:
a) Briefly explain five factors affecting the capital structure of the company. (5 Marks)

b) Briefly explain the below capital structure theories:

(i) The traditional view Theory (2 Marks)
(ii) The net income approaches (2 Marks)
(iii) Net operating income approach (2 Marks)
(iv) Miller and Modigliani theory after tax (2 Marks)

c) Describe the following trends:

(i) Crypto currency. (2 Marks)
(ii) Fintech. (2 Marks)

d) Define the following terms:

(i) Altman’s Z-Scores. (2 Marks)
(ii) Corporate Raider. (1 Mark)
(Total: 20 Marks)

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 QUESTION SIX

Kamo Ltd is a family-owned business based in Kamonyi District. The company deals in
manufacturing of wine from bananas and has been in operation since 2015. The company has
applied for listing on Rwanda Stock Exchange. One of the requirements to list on the stock
exchange is to have a wide range of shareholders. For the Initial public offering (IPO) to be
successful, a realistic and fair price must be used to issue shares to the public. Since the
company was unlisted, the share price is not known.
You have been identified as an expert in investment analysis to help them to identify the
share price and you have been provided with financial statements of the company for the
most recent year.

Statement of financial position as at 31 December 2023

FRW (000)
Non-current asset
Property, Plant, and equipment 250,000
Motor-vehicles 120,000
Goodwill 30,000
400,000
Current asset
Inventory 50,000
Receivables 30,000
Bank 20,000
100,000
Total asset 500,000
Equity and liability
Share capital @ FRW 300 400,000
Reserves 50,000
450,000
Noncurrent liabilities
10% Debentures 40,000
Current liabilities
Payables 10,000
Total equity and liabilities 500,000

Statement of profit or loss for year ended at 31 December 2023

FRW (000)
Sales revenue 250,000
Gross profit 180,000
Operating expenses 50,000
Interest 30,000
Profit before tax 100,000

I1.1 Page 8 of 11
Tax (30%) 30,000
Profit after tax 70,000
Dividend 26,235
The finance director of Kamo Ltd has advised management that they need to hire an actuary
or valuer to revalue the assets of the company before determination of its value. The valuer
provided the following information:

1. The company has 10,000 shares in issue.

2. Property, plant, and equipment revalued to FRW 300 million.
3. Motor vehicles are revalued to FWR 100 million.
4. The valuer failed to determine the market value of Goodwill because it was internal
generated.
5. Among receivables, there is a client who owed to the company FRW 5 million declared
bankrupt.
6. The dividends have grown from FRW 15 million in 2019 to FRW 26.235 million in
2023 and the growth rate is expected to remain the same even in the future.
7. The appropriate Price Earnings ratio of similar quoted companies is 12 but due to
different risk profile have to be adjusted to 2/3
8. The company’s cost of capital is 20%.

Required:
(a) Calculate the growth in Dividend. (2 Marks)
(b) Determine the value per share of Kamo Ltd using the following methods:
(i) Asset based model. (4 Marks)
(ii) Dividend valuation model. (3 Marks)
(iii) Price earning (P/E) ratio (3 Marks)

(c) When there is hostile takeover bid received from another company, what are four
defense tactics companies can use to ovoid that unwelcome take over? (4 Marks)
(d) Briefly discuss four key considerations in performing financial due diligence in
making investment decisions like mergers and acquisitions. (4 Marks)
(Total: 20 Marks)

End of question paper

I1.1 Page 9 of 11
Present value interest factor of FRW1 per period at i% for n periods, PVIF(i,n)

Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239

Present value interest factor of FRW1 per period at i% for n periods, PVIF(i,n)

Period 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065

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Present value interest factor of an (ordinary) annuity of FRW1 per period at i% for n
periods, PVIFA(i,n).

Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606

Present value interest factor of an (ordinary) annuity of FRW1 per period at i% for n
periods, PVIFA(i,n).

Period 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675

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