may 2014-CPA Part III Section 5 ADVANCED FINANCIAL MANAGEMENT

CPA Part III Section 5

ADVANCED FINANCIAL MANAGEMENT

Some candidates did not perform well in the following questions: Question No. 4 in which candidates were unable to differentiate between “futures contracts” and “forward contracts”. Candidates also experienced difficulties in evaluating the wisdom of hedging interest rate risk using an interest rate collar instead of an option. In addition, candidates had difficulties in explaining how basis risk arises. Candidates further experienced difficulties in calculating the current market price of a call option. In answering this question, the following was expected:


• Differences between futures and Forwards



 

• An interest rate collar involves the purchase of a put option and the simultaneous selling of a call option at different exercise prices. The main advantage is that it is cheaper than just purchasing the put option. This is because the premium received from selling the call option reduces the higher premium payable for the put option. The main advantage is that the benefit from any upside movement in interest rates is capped by the sale of the call option. With just the put option, the full upside benefit would be realised.

• Basis risk arises from the fact that the price of a futures contract may not move as expected in relation to the value of the instrument being hedged. Basis changes do occur and thus represent potential profit/losses to investors. Basis risk is the difference between spot and futures prices and so there is no basis risk where a futures contract is held until maturity. Thus, basis risk arises when the characteristics of the futures contract differ from those of the underlying asset. Thus, Basis = Spot – Future.

 

Suppose you purchase one share of stock and “h” call options. If stock price goes up, the pay off = 42 + 7h If stock price goes down, pay off = 31 +0h Hence, 42 + 7h = 31 + 0h h = - 11/7 Therefore a perfectly hedged portfolio can be formed by purchasing 1 share of stock and selling 11/7 call options. Hence, 42 + 7 (- 11/7) = 31 + 0 (- 11/7) 31 = 31 Therefore a perfectly hedged portfolio will pay Sh.31 with certainty in 6 months. This implies that the portfolio is identical to a Treasury bond that pays Sh.31 in six months. The price of such a Treasury bond would be 31¸ 1.02 = 30.39. But 30.39 must also be the net cost of buying 1 share of stock and selling 11/7 call options. Therefore 30.39 = 36 – (11/7) C C = 3.57 = Current market price of the call option

Question No. 5

in which candidates had difficulties in explaining the terms “locational arbitrage” and “triangular arbitrage”. Candidates were also unable to use the information provided to compute the expected spot rate and arbitrage profit. In addition, candidates were unable to explain four reasons why mergers and acquisitions fail.
• Locational arbitrage - this is an action to capitalise on a discrepancy in quoted exchange rates between banks.
• These differences are usually small and short-lived. The disparity in rates occurs since information is not always immediately available to all banks.
• Triangular arbitrage - this is an action to capitalize on a discrepancy where the quoted cross exchange rates is not equal to the rate that should exist at equilibrium.
• The appropriate cross rate can be determined given the value of the two currencies with respect to some other currency.
• Expected spot rate can be obtained from the purchasing power parity theorem:  
• Arbitrage profit rRF = (1 + rR) (1 + i) – 1 (1.025) (1.015) - 1 = 4.04% (US risk –free rate) (1.025) (1.02) - 1 = 4.55% (British risk – free rate) Borrow £ 689,700 in the U.K. at 4.55% for one year - must repay £721,081 ( i.e 689,700 x 1.0455) $ 1,000,000 invested for 1 year @ 4.04% = $1,040,400 $1,040,400 converted to U.K.£ at the forward rate = $1,040,400 x 0.6931 = £721,101 £721081 needed to pay U.K. loan Profit: £721,101 - £721,108 = £20.00

• Some reasons why mergers and acquisitions fail

–– Bidders pay too much. This usually arises from an overestimation or miscalculation of the potential payoffs arising from the merger.
–– Too many executives do not understand the importance of achieving appropriate levels of commonality in their processes and systems. Quite simply, a mismatch of cultures.
–– Executives are frequently unable to follow through on the difficult decisions related to post-acquisition and post-merger consolidation. This mainly arises from the euphoria and excitement that accompanies any merger or acquisition.
–– Failure to communicate the rationale behind the merger or acquisition, leading to a breakdown in the free flow of valuable information throughout the corporate structure.
–– Focusing on how the merger or acquisition will increase the size of the company and not how it will create value for shareholders.
–– Not enough effort being expanded on the due diligence process or screening of the target company.
–– Political pressures on the post merged company not to retrench staff.

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.


 

MAY 2014 - LAW AND REGULATIONS GOVERNING FINANCIAL MARKETS

  Some candidates did not perform well in the following questions:

Question No. 5
in which candidates were unable to discuss three principles of cooperation in regulation of securities markets as enumerated in the International Organization of Securities Commission (IOSCO) principles. Candidates were also unable to explain three common characteristics of breaches of securities law.

In answering the question, the following was expected from candidates as a minimum.

• Three principles of cooperation in regulation of the securities markets as enumerated in the IOSCO principles.

–– The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
–– Regulators should establish information sharing mechanisms that set out when and how they will share both public and non public information with their domestic and foreign counterparts.
–– The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

• Common characteristics of breaches of securities law.
–– Shifting/transferring proceeds of crime to foreign jurisdictions.
–– Wrong doers fleeing to a foreign country.
–– Routing transactions through foreign jurisdiction to disguise the identity of parties or the flow of funds.
–– Use of foreign accounts to hide beneficial ownership of shares.
–– Facilitation of cross border breaches through the use of international communications media including the internet.

• The scope of cooperation of such an arrangement.
–– Identification of the circumstances under which assistance may be sought.
–– Identification of the types of information and assistance that can be provided.
–– Safeguards of the confidentiality of information transmitted.
–– A description of the permitted uses of the information.

Question No. 6
In which candidates were unable to explain two circumstances when securities exchange, with the approval of the regulator might grant a request for the voluntary suspension of any listed security. Candidates were also unable to summarize the issuer’s obligations when its securities are suspended. In addition, candidates were unable to describe the five steps to be followed where the lifting of suspension is required by the issuer.

The suggested responses are presented below:

• Circumstances when the exchange might with the approval of the Authority grant a request for the voluntary suspension of any listed security.

–– Where a decision has been made that will lead to the placing of the issuer of the securities under statutory management, liquidation or voluntary winding up.
–– In the event of a significant restructuring involving the listed securities such as in the process of acquisition mergers or takeovers approved by the Authority.
–– Where a recommendation has been made by the directors to the shareholders to have the securities suspended through a special resolution at which at least 75% of such security holders are represented.

• Issuer’s obligations when its securities are suspended it shall:

–– Continue to comply with all the continuous listing obligations unless expressly exempted from doing so by the exchange or Authority in writing.
–– Submit to the exchange and the Authority a progress report pertaining to the prevailing state of the affairs of the issuer and any proposed action by the issuer.
–– If the issuer is suspended for more than three months, advise its shareholders on a quarterly basis concerning the prevailing status of the affairs of the issuer and any proposed action by the issuer including the expected date on which the suspension is to be lifted.

• Procedure to be followed where the lifting of suspension is required by the issuer.

–– The issuer shall apply to the Exchange and the Authority demonstrating that it has complied with the conditions for lifting of the suspension.
–– The listing committee shall review the request of the issuer and determine whether the suspension should be lifted and make a recommendation to the Board.
–– The Chief Executive of the Exchange shall then inform the Authority of the recommendation of the Exchange.
–– The issuer shall then be informed of the lifting of the suspension after the approval of the Authority.
–– The Exchange shall then issue a public statement of the lifting of suspension and restoration of the securities of the issuer to listing and trading stating the approval of the Authority.

May 2014 -INTRODUCTION TO LAW

Some candidates did not perform well in the following questions:

Question No. 2

In which candidates had difficulties explaining three consequences of contravention of the provision where the owner shall not enforce any right to recover possession of the goods from the hirer in a hire purchase contract. In addition, candidates had difficulties describing three exceptions to implied agency. Candidates had further difficulties discussing four circumstances under which the government might not be held liable in tort.

The following were some of the expected responses from candidates:

• Consequences of contravening the two-thirds rule:-
–– The hire-purchase agreement if not previously terminated shall terminate.
–– The hirer shall be released from all liability under the agreement and shall be entitled to recover from the owner by suit all sums paid.
–– A guarantor shall be entitled to recover from the owner by suit all sums paid by him under the contract of guarantee.

• Exceptions to implied agency:
–– Agency by necessity; where the principal was available for contact but was not contacted, he may repudiate the agency.
–– Agency of the wife; where the husband proves that the wife was well supplied with such goods and he has given notice to the trader.
–– There is no authority for a separated wife to pledge the husband’s credit.
–– Agency by estoppel; where the principal gives notice to the outside world that the agent is no longer working for him.

• Circumstances when the government might be excluded from liability in tort:
–– The government is not liable in respect of anything done or omitted to be done by any person while discharging responsibilities of a judicial nature.
–– It is not liable if the government officer was acting outside the scope of his ordinary duties.
–– In proceedings against the government, the court cannot make a declaratory order.
–– The government cannot be held liable if it refuses to produce documents on grounds of public interest.
–– No claim for tort can be brought against the government after 1 year from the date the cause of action arose.

Question No. 3
in which candidates had difficulties analysing the legal principles in a case where an insured person gives false information in an insurance contract and the insurance company refuses to honour a claim by the insured person. In addition, candidates had difficulties highlighting three contents of an invitation to tender in relation to public procurement. Candidates had further difficulties outlining four advantages of registering an “invention” in the context of intellectual property.

Candidates were expected to bring out the following points, among others:

• Legal principles applicable in the insurance case:
–– Insurance contracts are contracts of utmost good faith.
–– The insured must faithfully disclose all facts known to her/him so that the insurer can decide whether to insure or not.
–– Beatie Osolika committed fraudulent misrepresentation when he lied about his pregnancy status.
–– Misrepresentation does not render the contract void but the party misled will be able to avoid liability on the contract by proving that the misrepresentation was of a material fact.
–– Hope Insurance Company can escape liability by relying on misrepresentation of Beatie Osolika’s health status which misled them to enter into the insurance contract.
–– The medical cover was based on fidelity/utmost good faith (as a fundamental fact).
–– Beatie Osolika cannot successfully sue.

• Information to be contained in an invitation to tender:
–– name and address of the procuring entity.
–– the tender number.
–– how the tender documents may be obtained, including the fee payable.
–– where and when the tenders must be submitted.
–– where and when tenders will be opened. –– a statement that those submitting tenders or their representatives may attend the opening of tenders.

• Advantages of registering an invention:
–– to protect one’s invention from privacy.
–– to reward the creative effort of the inventor.
–– acts as an incentive to innovation and increased economic activity.
–– acts as a means of informing other players in the industry about the latest technical advances.

December 2013 exam-CSIA -LAW AND REGULATIONS GOVERNING FINANCIAL MARKETS

Some candidates did not perform well in the following questions: Candidates did not perform well in the following questions:

QUESTION NO. 3
Candidates were unable to discuss the eligibility requirements for listing in the Fixed Income Securities Market Segment (FISMS).

These include:
• Incorporation status where the company to be listed is a body corporate limited by shares.
• Share capital where the minimum authorized capital of Sh. 50 million should be issued and fully paid up.
• Net assets should be more than Sh. 100 million just before the offer.
• Transferability of shares- All fixed income securities except for commercial papers are freely transferable.
• Financial records, of the past three years which are audited, must be availed to the regulator.
• Directors and management – the directors of the issuer must be competent persons without any legal encumbrances.
• Certificate of comfort - if the issuer is licensed to operate by any regulator in any country, the Authority shall obtain a certificate of no objection from the relevant regulators.
• Debt ratios -total indebtedness shall not exceed 400% of the company’s net worth as at the latest statement of financial position.
• Minimum size for listing of its fixed income security shall be Sh. 50 million. Candidates were also unable to outline the purpose for the establishment of the Central Depository Guarantee Fund (established for the purpose of ensuring settlement of trades through the central depository).

TYPES OF MONIES THAT CONSTITUTE THE CENTRAL DEPOSITORY GUARANTEE FUND INCLUDE:
• A contribution of Sh. 1,500,000 by such central depository agents.
• Such sums of money as accrued from interest and profits from investing the funds money.
• All penalties and fines imposed by the central depository.
• Levies of all financial transactions through the securities exchanges as approved by the Authority.
• Funds constituting the Nairobi Securities Exchange Investor Compensation Fund.
• Contribution from the revenue of the central depository as its board may from time to time determine.

QUESTION NO. 4
Candidates were unable to discuss the security measures that a stock dealer should put in place to ensure that the internet trading service is adequate for securities transactions.

These include:
• Confidentiality of information in such a way that information is only accessible to an authorized person or system.
• Controls to prevent noncompliance with rules and regulations leading to illegal transactions, fraud and malpractice or manipulation of data.
• Satisfactory arrangements and contingency plans are in place to ensure that the business can continue in the event of a large scale disruption.
• Ensure that orders placed through its systems are fairly allocated in accordance with the rules of the relevant securities exchange.
• Ensure that there is an effective audit trail to address risks arising from the opening, modification or closing of a client account, any transaction with significant financial consequence and any authorization granted to a client to exceed a limit.

Candidates were also unable to explain the following terms as used in contract law:

• Specific performance –This is defined as a court order which compels the defendant to perform his part of the contract as previously agreed without failure.
• Injunction - This is a stop order which can either be prohibitory or mandatory which the court restrains a party from doing or continuing to do a particular thing.
• Recession - this is a remedy granted by the court which seeks to restore the parties to the original position they were in before they entered into the contract.
• Rectification – This occurs when the contract between the parties has a mistake which prevents it from reflecting what the parties intended.

INTRODUCTION OF ADDITIONAL CONTROLS ON THE ADMINISTRATION OF KASNEB EXAMINATIONS

INTRODUCTION OF ADDITIONAL CONTROLS ON THE ADMINISTRATION OF KASNEB EXAMINATIONS I wish to inform you that KASNEB has introduced the following additional controls on administration of its examinations with effect from the November/December 2014 sitting. These controls complement other regulations as stipulated in the existing Guidelines for the Conduct and Administration of the examinations of KASNEB. 1. Mobile phones will not be allowed in the examinations room Mobile phones will strictly NOT be allowed in the examinations room. The previous rule only barred the usage of mobile phones in the examinations room. The new rule now specifically bans candidates from bringing mobile phones to the examinations room 2. Candidates to indicate the serial numbers of their answer booklets in the Signature Register Candidates will be required to record the serial number of their answer booklets immediately below their signatures in the Signature Register for each paper that a candidate attempts. Chief invigilators will be required to ensure that this is done by each candidate at the time of signing the register. P.M. Nduatih SECRETARY AND CHIEF EXECUTIVE

GROUNDS FOR DEFERRAL OF EXAMINATION FEES

GROUNDS FOR DEFERRAL OF EXAMINATION FEES KASNEB introduced/revised a number of examination policies with effect from 1 July 2013. Among the policies introduced was that of deferral of examination fees. However, some students still seem not clear on the conditions under which an application for deferment may be considered. These conditions are summarised below for note: (i) A formal application shall be made by the student for deferment of examination fees to the subsequent sitting. (ii) Deferment of fees shall only be allowed on the basis of medical reasons, change of work station or similar extraneous circumstances as approved by the Secretary and Chief Executive. All relevant evidence shall be required to be attached. Each application shall be treated on its own merit. (iii) A student shall be allowed to defer fees to the subsequent sitting only ONCE in any particular level or section. The full amount of deferred fees not utilised in the subsequent sitting shall be forfeited to KASNEB. (iv) An administrative charge equivalent to 15% of the applicable examination fees shall be levied as a precondition for the deferment of the examination fees. (v) An application for deferment together with the administrative charge must be received at least thirty (30) days before the commencement date of the examination, except for medical reasons for which an application may be received any time prior to the commencement of the examinations.

UPDATE ON THE ONGOING MAJOR REVIEW OF THE EXAMINATION SYLLABUSES

The major review of the examination syllabuses of KASNEB is nearing completion. The review process has been consultative, participative, inclusive and comprehensive. A number of stakeholders workshops have been held where the draft syllabuses were presented and comments invited. The draft syllabuses are expected to be considered and approved by the Board of KASNEB by early April 2015, whereupon advance copies of the syllabuses will be distributed to training institutions. In addition, the transition arrangements will be communicated to students, trainers and other stakeholders as appropriate before the roll-over to the new syllabuses on 1 July 2015. The first examination will be administered for the first time from the November/December 2015 sitting. Closing dates for applicants wishing to register as candidates for the December 2015 examinations are as shown below: Normal Registration: Friday, 29 May 2015 Late Registration: Tuesday, 30 June 2015 Source: KASNEB NEWSLINE

CSIA May 2015 Examination Time table

PART I SECTION 1
Financial Mathematics- Friday 22-Morning
Financial Institutions and Markets-Friday 22-Afternoon
Entrepreneurship and Communication- Monday 25-Morning

SECTION 2
Economics- Monday 25-Afternoon
Financial Accounting-Tuesday 26-Morning
Taxation Theory and Practice -Tuesday 26-Afternoon

PART II SECTION 3
Financial Management- Wednesday 27-Morning
Management Information Systems- Wednesday 27- Afternoon
Financial Statements Analysis-Thursday 28-Morning

SECTION 4
Advanced Finance, Investment and Equity Analysis-Thursday 28-Afternoon
Quantitative Analysis- Friday 29-Morning
Law and Regulations Governing Financial Markets- Friday 29-Afternoon

PART III SECTION 5
Valuation and Analysis of Fixed Income Instruments - Wednesday 27-Morning
Principles and Practice of Management-Wednesday 27-Afternoon
Asset Management-Thursday 28-Morning

SECTION 6
Portfolio Management- Thursday 28-Afternoon
International Finance-Friday 29-Morning
Valuation and Analysis of Derivatives- Friday 29-Afternoon

May 2015 CPA EXAMINATION TIMETABLE

CPA PART I SECTION 1
Financial Accounting- FRI 22- Morning
Introduction to Law- FRI 22- Afternoon
Entrepreneurship and Communication- MON 25-Morning

SECTION 2
Economics- MON 25-Afternoon
Cost Accounting-TUE 26-Morning
Auditing and Assurance-TUE 26-Afternoon

CPA PART II SECTION 3
Financial Management- WED 27-Morning
Management Information Systems- WED 27- Afternoon
Financial Reporting-THUR 28-Morning

SECTION 4
Taxation-THUR 28-Afternoon
Quantitative Analysis- FRI 29-Morning
Company Law- FRI 29-Afternoon

CPA PART III SECTION 5
Management Accounting- WED 27-Morning
Principles and Practice of Management- WED 27- Afternoon
Advanced Financial Management-THUR 28-Morning

SECTION 6
Advanced Taxation-THUR 28-Afternoon
Advanced Financial Reporting- FRI 29-Morning
Advanced Auditing and Assurance- FRI 29-Afternoon

HOW TO CREATE A STUDENT ACCOUNT ON THE KASNEB STUDENT PORTAL

All students are required to open a student account on the KASNEB website. To open the account, follow the steps below:

1. Click on the student login link then choose the student icon or proceed to click the student icon if you use the direct link (http://online.kasneb.or.ke) to the student portal.

2. Click on create account and select whether you have a Student Registration Number or not and proceed to provide names, preferred email address and a strong password (which will be used for future access to self information) and click save.

3. Provide the email address and password used when creating the account and click unlock to login in.

4. Select the “Registration Details” tab.

5. Access the “Course Choice” tab.

6. Select the examination from the dropdown box, click on the “Yes” checkbox and provide the registration number without the prefix (e.g. if your registration number is NAC/68148, provide 68148 as the registration number) and click save.

Benefits You will be able to:
• Download authority to sit for examination/timetable
• Result summary.


Once the website upgrade is finalized in the near future, you will be able to:

• Edit your contact address
• Check payment status
• Book for examinations.