August 2025 Management Principles and Practice Past Paper Answers

Description

QUESTION ONE
(a) Explain FOUR causes of conflict between shareholders and employees. (4 marks)
(b) Analyse THREE ethical dilemmas facing financial managers in their day-to-day duties. (6 marks)

(c) Seko Ltd. issued a new bond five years ago. The bond was sold at par value of Sh.1,000 and has a coupon rate of 12% and a maturity of 30 years. The coupon payments are made semi-annually. The interest rate has currently gone down to 10%.
Required:
(i) The current price of the bond. (5 marks)
(ii) The current yield of the bond. (3 marks)
(iii) The capital gain on the bond. (2 marks)
(Total: 20 marks)

QUESTION TWO
(a) Explain FOUR reasons why directors of a company might issue shares using private placement. (8 marks)
(b) Makanda borrowed Sh.20,000,000 from a bank at an annual interest rate of 14%. The loan is to be repaid in 5 equal annual instalments.

Required:
(i) Annual instalment. (2 marks)
(ii) Loan amortisation schedule. (4 marks)

(c) Stephen Mwangangi wishes to invest Sh.1,000,000 for four years (with interest compounded) but with the right to withdraw at a moment’s notice. The following investment options are available:
Option A
Invest with Nyati Building Society currently offering an interest rate of 16% per annum after tax with interest paid semi-annually.
Option B
Invest with Faidika Bank Ltd. at an interest rate of 20% per annum with interest paid annually.
Option C
Invest with Dawa Bank Ltd. which is offering an interest rate of 18% per annum with interest paid every three months.

Required:
Using suitable computations, advise Stephen Mwangangi on the best investment option he should consider. (6 marks)
(Total: 20 marks)

QUESTION THREE
(a) Summarise FOUR factors influencing capital structure decisions. (4 marks)
(b) Kung’u Limited intends to invest in either Project Q or Project R. The following are the expected net cash flows from the projects:

Project Q Project R
Year Sh. Sh.
0 (12,000,000) (10,000,000)
1 – 5 4,000,000 4,500,000
5 (salvage value) 200,000 500,000

The company’s cost of capital is 14%.

Required:
(i) Calculate the profitability index for each project. (4 marks)

(ii) Advise the management on the project to invest in. (2 marks)
(c) The following information relating to Cipi Ltd. was obtained from the financial statements of the company for the year ended 30 June 2025:

Sh.“000”
Ordinary shares capital (Sh.30 par value) 96,000
10% debentures 14,400
Profit after tax for the year 14,400

Additional information:
1. The shares of the company are currently quoted on the securities exchange at Sh.80 per share.
2. Corporation tax rate is 30%.

Required:
Using the above information, compute the following:
(i) Earnings before interest and tax (EBIT). (3 marks)
(ii) Times interest earned ratio. (2 marks)
(iii) Earnings per share (EPS). (3 marks)
(iv) Price earning (P/E) ratio. (2 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Outline FOUR causes of hard capital rationing. (4 marks)

(b) Explain the following theories of dividend:
(i) Bird in hand theory. (2 marks)
(ii) Clientele effect theory. (2 marks)
(iii) Tax differential theory. (2 marks)

(c) Sunny Ltd. is analysing two options on how to expand its operations. The following data relates to the two options:

Option A Option B
Fixed costs Sh.200,000 Sh.280,000
Selling price per unit Sh.150 Sh.150
Variable cost per unit Sh.90 Sh.75
The expected sales 6,000 units 6,000 units

Required:
(i) Contribution margin per unit. (3 marks)
(ii) The break-even point for both options. (3 marks)

(iii) The operating income under both options. (2 marks)

(iv) Advise Sunny Ltd. on which option is more favourable and why. (2 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Enumerate FOUR benefits that may accrue to an organisation as a result of preparing statement of cash flows.
(4 marks)

(b) Citing THREE reasons justify the need for working capital management in organisations. (6 marks)
(c) (i) A company’s ordinary shares currently trade at Sh.50 per share. The company is expected to pay a dividend of Sh.2.50 next year. The dividend is anticipated to grow at a constant rate of 6% annually.

Required:
Calculate the cost of ordinary shares. (2 marks)

(ii) A firm issued irredeemable preference shares with a par value of Sh.100 and an annual dividend rate of 8%. The current market price of these irredeemable preference shares is Sh.95.

Required:
Determine the cost of the irredeemable preference shares. (2 marks)

(iii) XYZ Ltd. has a 10-year, 9% debenture with a face value of Sh.1,000 currently selling at Sh.980. The company corporate tax rate is 30%.

Required:
Compute the after-tax cost of debenture for XYZ Ltd. (2 marks)

(iv) Summarise FOUR differences between “ordinary shares” and “preference shares”. (4 marks)
(Total: 20 marks)
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