may 2014-CPA Part II Section 3 FINANCIAL MANAGEMENT

CPA Part II Section 3

FINANCIAL MANAGEMENT

Some candidates did not perform well in the following questions:

Question No. 1
in which candidates were unable to explain four features of an ideal investment appraisal method. Candidates were also provided with information but were unable to compute:
• The net present value (NPV).
• The internal rate of return (IRR).

The following were among the expected responses.

• Features of an ideal investment appraisal method:

–– It should use all the cash flows of the project in evaluating the project.
–– It should consider the time value of money by discounting the expected future cash flows of the project.
–– It should be consistent with the goal of shareholders wealth maximisation.
–– It should distinguish between two or more mutually exclusive projects and should rank them in order of their economic viability.
–– It should distinguish between accepted and unacceptable projects (it should have a decision criteria).
–– It should be applicable to any conceivable project independent of all other projects.


• NPV of the project: The following items were important
 

The following items were to be considered in determining cash flow per annum. Annual contribution Less: Fixed Cost Earning before depreciation & tax (EBDT) Less: Depreciation Earning before tax (EBT) Less Tax @ 30% Earning after tax Add depreciation Net cash flow (NCF) Add terminal value scrap value

Question No. 5
in which candidates had difficulties discussing four functions of the capital markets regulator. In addition, candidates were provided with information but had difficulties preparing a statement of working capital requirements for a firm.

The following were some expected points and computations:

• Functions of a capital markets regulator
–– To remove bottlenecks and create awareness for investment in long term securities.
–– To serve as efficient bridge between the public and private sector.
–– Create environment which will encourage local companies to go public.
–– Grant approvals and licences tobrokers.
–– To operate a compensation fund to protect investors from financial losses should licensed brokers fail to meet their contractual obligations.
–– Act as a watchdog for the entire capital market system.
–– Removal of barriers on security transfer.
–– Encourage development of institutional investors, for example pension funds, insurance firms.
–– Provide adequate information to players in the market in order to prevent insider trading.
–– Decentralisation of operations.