CPA
Intermediate Leval
Financial-Management-November 2015
ANSWERS

• Treasury Bills (T-Bills): Short-term government securities with maturity periods of a few days to one year, used to raise funds and manage short-term liquidity needs.
• Commercial Paper: Unsecured, short-term debt issued by corporations to meet immediate financial obligations, typically with maturities ranging from a few days to 270 days.
• Certificates of Deposit (CDs): Time deposits offered by banks with fixed interest rates and fixed maturity dates, providing a secure investment option for short to medium-term savings.
• Repurchase Agreements (Repos): Short-term agreements where one party sells securities to another with an agreement to repurchase them at a higher price, effectively serving as collateralized short-term loans.
• Short-Term Government Bonds: Bonds issued by governments with relatively short maturities, providing a low-risk investment option for investors seeking stability and liquidity.
• Bankers' Acceptances: Short-term debt instruments that arise from international trade transactions, with a bank providing a payment guarantee on behalf of a buyer.

(ii) Random Walk Theory:

Challenges the idea of consistently predicting market movements. It suggests that asset prices move randomly, making it difficult to forecast future prices accurately. The theory implies that markets are efficient, with prices already reflecting all available information, and attempting to predict future movements based on historical data is akin to a random process.

ii. New value of the bond, if yield to maturity goes down to 8% per annul

• Seniority: Debentures typically hold a higher claim on the company's assets and earnings compared to preference shares. In case of liquidation, debenture holders are prioritized for repayment, providing a more secure position.
• Fixed Interest Payments: Debentures pay fixed interest, providing certainty to investors. Preference shares, on the other hand, may have variable dividend payments, making debentures more predictable for income-seeking investors.
• Ownership Control: Debenture holders do not have voting rights, allowing equity shareholders to retain control over decision-making. This can be advantageous for existing shareholders who want to maintain control of the company.
• Lower Volatility: Debentures are generally less influenced by market fluctuations compared to preference shares. The stability of fixed interest payments can make debentures a more stable investment option.
• Tax Advantage: Interest paid on debentures is considered a tax-deductible expense for the issuing company, providing potential tax advantages compared to dividends paid on preference shares.

ii. Dividend cover

iii. Price-earnings (P/E) ratio

• LDR: Lower Discount Rate - The lower boundary for the discount rate range.
• NFV: Net Future Value - The net present value of future cash flows.
• NPV: Net Present Value - The present value of future cash flows minus the initial investment cost.
• HDR: Higher Discount Rate - The higher boundary for the discount rate range.

(ii) Profitability index (PI).

(ii) Advise the management of Nile group of hotels whether to proceed with the acquisition of Victoria hotel.

ii. Equity turnover

iii. Fixed charge cover

iv. Return on capital

The required rate of return is the minimum return that an investor expects to achieve from an investment to compensate for the level of risk undertaken. It is influenced by factors such as the risk-free rate, the risk premium associated with the specific investment, and the investor's risk tolerance. The required rate of return is a crucial component in investment decision-making and is used to assess the attractiveness of an investment opportunity. If the expected rate of return is equal to or exceeds the required rate of return, the investment may be considered acceptable.

Expected Rate of Return:

The expected rate of return is the anticipated or forecasted return that an investor estimates from an investment based on various factors, including historical performance, market conditions, and future expectations. It represents the average return an investor can reasonably expect under normal circumstances. The expected rate of return is forward-looking and serves as a benchmark for assessing the potential profitability of an investment. It is a subjective estimate and may differ from the actual return realized. Investors use the expected rate of return to make informed decisions about allocating their capital among different investment opportunities.

Murabaha:

Murabaha is a cost-plus-profit arrangement. In this contract, the Islamic financial institution purchases an asset requested by the client and sells it to the client at a markup. The client pays the amount in installments, making it a transparent and Sharia-compliant financing method.

Mudarabah:

Mudarabah is a profit-sharing arrangement where one party provides capital (Rab-ul-Mal), and the other party manages the business (Mudarib). Profits generated are shared based on a pre-agreed ratio, but losses, if any, are borne by the capital provider. This promotes risk-sharing and aligns the interests of both parties.

Ijarah:

Ijarah is an Islamic leasing contract. In this arrangement, the Islamic financial institution purchases an asset and leases it to the client for a specified period and rental amount. At the end of the lease term, the client may have the option to purchase the asset or return it.

Sukuk:

Sukuk represents Islamic bonds that comply with Sharia principles. These bonds are structured to generate returns through ownership of tangible assets or services. Sukuk holders receive a share of the profits generated by the underlying assets, and the issuance is backed by those assets, promoting asset-backed financing.

Istisna:

Istisna is a contract for manufacturing or construction. It involves the sale of goods that are yet to be produced. The Islamic financial institution may finance the production or construction process, and the client takes delivery of the completed asset.

These contracts and financial instruments are designed to meet Sharia principles, ensuring ethical and transparent financial transactions within the Islamic finance framework.

• Enhanced Efficiency: IFMIS streamlines financial processes, reducing manual efforts and enhancing overall operational efficiency.
• Real-time Financial Reporting: Provides real-time access to financial data, enabling timely and accurate reporting for informed decision-making.
• Budgetary Control: Facilitates effective budget planning, monitoring, and control, ensuring compliance with financial plans.
• Improved Transparency: Enhances transparency by providing stakeholders with clear visibility into financial transactions and expenditures.
• Integrated Data: Integrates financial data from various departments, promoting a unified and comprehensive view of the organization's financial health.
• Cost Reduction: Reduces administrative costs associated with manual processes and enhances cost-effectiveness in financial management.
• Risk Management: Supports risk identification and mitigation through better monitoring and control of financial activities.
• Compliance: Ensures compliance with regulatory requirements and financial standards through automated checks and validations.
• Streamlined Procurement: Improves procurement processes by automating workflows, reducing delays, and enhancing transparency in procurement activities.
• Enhanced Decision Support: Provides decision-makers with accurate and timely financial information, facilitating better-informed strategic decisions.