INSTITUTE OF BANKERS IN MALAWI
DIPLOMA IN BANKING EXAMINATION
SUBJECT: FINANCIAL CONCEPTS B (IOBM – D207)
Date: Tuesday, 1st May 2012
Time Allocated: 3 hours (08:00 – 11:00 am)
INSTRUCTIONS TO CANDIDATES
1 This paper consists of TWO Sections, A and B.
2 Section A consists of 4 questions, each question carries 15 marks.
Answer ALL questions.
3 Section B consists of 4 questions, each question carries 20 marks. Answer ANY TWO questions.
4You will be allowed 10 minutes to go through the paper before the start of the examination, you may write on this paper but not in the answer book.
5Begin each answer on a new page.
6Please write your examination number on each answer book used. Answer sheets without examination numbers will not be marked.
7DO NOT open this question paper until instructed to do so.
SECTION A (60 MARKS)
Answer ALL questions from this section.
QUESTION 1
(a)In seeking to attain the financial objectives of an organization or enterprise, a financial manager has to make three fundamental decisions that support the objective of maximizing shareholders wealth.
Required:
(a)Explain the three decisions that are being referred to.
(6 marks)
(b)(i) Explain what an aggressive working capital policy is.
(4 marks)
(ii) Name any oneother working capital policy than aggressive policy. (1 mark)
(c)What are commonly regarded as any two features of sensible working capital policies? (4 marks)
(Total 15 marks)
QUESTION 2
(a) It is widely argued that there are several advantages of using cash flow accounting as compared to accrual accounting. This argument justifies the need for cash flow statements.
Required:
List any four reasons that may support this claim. (4 marks)
(b)Cash flow statement classifies cash flows into:
(i) Operating activities;
(ii) Investing activities; and
(iii) Financing activities.
Required:
Give any three examples of cash flows from operating activities and any three examples of financing activities. (6 marks)
(c) The operating profit of Mbvunguti Enterprises is MK250,000. There was a deprecation charge of MK350,000. Inventory increased by MK270,000 from the previous year’s closing inventory. The business increased trade receivables by MK580,000 and its trade payables by MK440,000.
Required:
From the information given above, calculate the net cash flow from operating activities. (5 marks)
(Total 15 marks)
QUESTION 3
(a) Mathematical problems with a single cash flow involve some four values.
Required:
Name the twoother values that would be relevant for mathematic notation for time value of money problems apart from the Present Value (PV or P) and the Future Value (FV) and their purposes in the problems. (4 marks)
(b) Mamangidwe Civil Engineershave just started constructing a two storey building and the Managing Engineer has identified a plant to purchase for the firm to use on site. The following details relating to the plant:
Cost of the plant MK60,000,000
Expected useful life 5 years
Scrap value MK15,000,000
Cost of capital 12 percent
Year Cash flow Discount Factor
MK (12 percent)
1 10,000,000 0.8929
2 12,000,000 0.7972
3 28,000,000 0.7118
4 20,000,000 0.6355
5 30,000,000 0.5674
Required:
Calculate the net present value (NPV).
Advise whether or not Mamangidwe Civil Engineers should proceed and buy the plant. (11 marks)
(Total 15 marks)
QUESTION 4
(a) Clearly state the difference between nominal interest rate and real interest rate. (2 marks)
(b) Professor Kabwere-bwere has an amount of MK166,000 and plans to deposit it in one of the bank accounts at 7 percent per annum on 01st October 2012.
Required:
Calculate an amount which Professor Kabwere-bwere will have on 30th September 2015 using:
(i) Compound interest; (3 marks)
(ii) Simple interest. (2 marks)
Where does the extra amount between these two approaches come from? Explain. (2 marks)
(c) Professor Kabwere-bwere’s niece needs to have K87,000 in two year’s time without making any interim deposits.
Required:
Compute the amount which the niece must invest now at 5 percent per annum to realise the K87, 000. (6 marks)
(Total 15 marks)
SECTION B (40 MARKS)
Answer ANY TWO questions from this section.
QUESTION 5
(a) IAS 24 Related Party Transactions gives an objective of the standard as well as some examples of Related Party Transactions, among other things.
Required:
(i) Explain what you understand by the term Related Party Transaction. (2 marks)
(ii) State the objective of IAS 24. (3 marks)
(ii) Give sixexamples of Related Party Transactions. (6 marks)
(b)Provide instances and name the situations when any two would be deemednotto be related. (5 marks)
(c)It is argued that ‘‘Related Party Transactions can affect the financial position and operating results of a firm in a number of ways’’.
Required:
Explain clearly in what way you consider this argument to be true.
(4 marks)
(Total 20 marks)
QUESTION 6
ZinthuZisintha achieved the following consolidated results from a collection of its seven investments:
Year ended 31st December / 2012 / 2011 / 2010 / 2009 / 2008(est)
MK ’m / MK ’m / MK ’m / MK ’m / MK ’m
Turnover / 4,360.7 / 4,250.6 / 4,165.0 / 4,123.8 / 3,885.0
Profit after taxation / 53.8 / 4.8 / 45.7 / 45.9 / 42.8
Earnings per share (tambala) / 8.4 / 7.6 / 7.3 / 7.5 / 7.0
Equity per share (tambala) / 255.5 / 251.4 / 249.1 / 246.8 / 243.0
The index consumer price levels as at the end of each year are as follows:
Year 2008 245.9
Year 2009 253.3
Year 2010 268.5
Year 2011 73.9
Year 2012 (projected) 282.0
Required:
(a) Carry out a trend analysis using year 2012 prices as a common level. (17 marks)
(b) Comment on the results. (3 marks)
(Total 20 marks)
QUESTION 7
(a) With reference to the principal – agent problem, explain the Agency Theory. (10 marks)
(b) There are a number of incentives that have been introduced to encourage goal congruence between management and shareholders.
Required:
Name any two such incentive schemes and explain how they operate. (7 marks)
(c)Explain briefly thelimitations of the incentives that you have named in your answer to part (b) above.
(3 marks)
(Total 20 marks)
QUESTION 8
(a)Identify any two situations when a banker may require to use break-even calculations to assist them in decision making.
(4 marks)
(b)Chalk & Dusters Fabricators produces chalk and dusters for bookshops, stationers and other retailers in the Shire Valley Region. The following details apply to the product duster:
Variable costs per unit MK750Total fixed cost MK 1,500,000
Selling price per unit MK1,000
Number of units sold 12,000
Required:
(i)Calculate the break-even quantity andthe break-even value.
(8 marks)
(ii)Calculate the margin of safety in terms of units and value.
(8 marks)
(Total 20 marks)
END OF THE EXAMINATION PAPER
A qualification examined by the Institute of Bankers in Malawi1