KSh 550.00
Description
GENERAL OBJECTIVE
This paper is intended to equip the candidate with knowledge, skills and attitudes that will
enable him/her to apply financial management principles in practice.
8.0 LEARNING OUTCOMES
A candidate who passes this paper should be able to:
• Analyse the sources of finance for an organisation and evaluate various financing
options
• Evaluate various investment decision scenarios available to an organisation
• Evaluate the performance of a firm using financial tools
• Make appropriate capital structure decisions for a firm
• Value financial assets and firms
• Make appropriate liquidity and dividend decisions for a firm
• Evaluate current developments in business financing strategies.
CONTENT
8.1 Overview of financial management
– Nature and scope of finance
– Finance functions
– Goals of a firm; financial and non-financial objectives, overlaps and conflicts among
the objectives
– Agency theory, stakeholder’s theory and corporate governance
– Measuring managerial performance, compensation and incentives
– Ethical issues in financial management
– Corporate social responsibility (CSR) and financial management
8.2 The financing decision
– Nature and objectives of the financing decision
– Factors to consider when making financing decisions
– Sources of finances for enterprises; internally generated funds and the externally
generated funds, long term sources, medium term and short term sources of finance
– Evaluation of financing options
– Methods of issuing ordinary shares – public issue, private placement, bonus issue,
employee stock option plans (ESOPS) and rights issues
8.3 Financial institutions and markets
– Nature and role of financial markets
– Classification of financial markets: primary and secondary securities market, money
and the capital markets, over-the counter and organised market, derivatives market,
mortgage market, forex market
– The security exchange listing and cross border listing
– Market efficiency – efficient market hypothesis
– Stock market indices
– The financial institutions and intermediaries: commercial banks, savings and loans
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associations and co-operative societies, foreign exchange bureaus, Unit trusts and
mutual funds, insurance companies and pension firms, insurance agencies and
brokerage firms, investment companies, investment banks and stock brokerage firms,
micro-finance institutions and small and medium enterprises (SMEs)
– The role of regulators in financial markets
– Central depository system and automated trading system
– Timing of investment at the securities exchange – Dow theory and Hatch system of
timing
8.4 Time-value of money
– Concept of time value of money
– Relevance of the concept of time value of money
– Time value of money versus time preference of money
– Compounding techniques
– Discounting techniques
8.5 Valuation models
– Concept of value; book value, going concern value, substitution value, replacement
value, conversion value, liquidation value, intrinsic value and market value
– Reasons for valuing financial assets/business
– Theories on valuation of financial assets; fundamental theory, technical theory,
random walk theory and the efficient market hypothesis
– Valuation of redeemable, irredeemable and convertible debentures and corporate
bonds
– Valuation of redeemable, Irredeemable and convertible preference shares
– Valuation of ordinary shares; net asset basis, price earnings ratio basis, capitalisation
of earnings basis, Gordon’s model, finite earnings growth model, Super-profit
model, Marakon model, Walter’s model, Discounted free cash flow, residual income
model
– Use of relative measures such as Economic Value added (EVA) and Market Value
Added (MVA)
– Valuation of unit trusts and mutual funds
– Valuation of private companies: income and market based approaches
8.6 Cost of capital
– Firms capital structure and factors influencing capital structure decisions
– Factors influencing firms cost of capital
– Relevance of cost of capital
– Component costs of capital
– The firm’s overall cost of capital
– Weighted average cost of capital (WACC)
– Weighted marginal cost of capital (WMCC)
– Introduction to break-points in weighted marginal cost of capital schedule
– Operating and financial leverage – degree of operating leverage and operating risk;
degree of financial leverage and financial risk
– Combined leverage – degree of combined leverage and total risk
8.7 Capital budgeting decisions
– The nature and importance of capital investment decisions
– Capital investment’s cash flows – initial cash outlay, terminal cash flows and annual
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net operating cash flows, incremental approach to cash flow estimation
– Capital investment appraisal techniques
– Non-discounted cash flow methods – payback period and accounting rate of return
– Discounted cash flow methods – net-present value, internal rate of return,
profitability index, discounted payback period and modified internal rate of return
(MIRR)
– Strengths and weaknesses of the investment appraisal techniques
– Expected relations among an investment’s NPV, company value and share price
– Capital rationing – evaluation of capital projects and determination of optimal capital
budget in situations of capital rationing for a single period rationing
– Capital investment options – timing option, strategic investment option, replacement
option and abandonment option
– Problems/difficulties encountered when making capital investment decisions in
reality
8.8 Financial analysis and forecasting
– Users of financial statements and their information needs
– Ratio analysis; nature of financial ratios, classification and calculation of financial
ratios and limitation of financial ratios
– Common size statements – Vertical and horizontal analysis
– Financial forecasting; cash budgeting and percentage of sales method of forecasting
8.9 Working capital management
– Introduction and concepts of working capital
– Working capital versus working capital management
– Factors influencing working capital requirements of a firm
– Importance and objectives of working capital management
– Working capital operating cycle; the importance and computation of the working
capital operating cycle
– Working capital financing policies aggressive, conservative and matching financing
policy
– Management of stock, cash, debtors and creditors
8.10 Dividend decision
– Forms of dividend
– How to pay dividends and when to pay dividends
– How much dividend to pay
– Firms dividend policy and factors influencing dividend decision
– Why pay dividends
– Dividend relevance theories; Bird in hand, Clientele effect, Information signaling
theory, Walter’s model, Tax differential theory, Modigliani and Miller dividend
irrelevance theory
8.11 Introduction to risk and return
– Risk-return trade off/relationship
– Distinction between risk free and risky assets
– Expected return of an asset
– Total risk of an asset
– Relative risk of an asset
– Expected return of a 2 asset-portfolio
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– The actual total risk of a 2-asset portfolio
8.12 Islamic finance
– Justification for Islamic Finance; history of Islamic finance; capitalism; halal; haram;
riba; gharar; usury
– Principles underlying Islamic finance: principle of not paying or charging interest,
principle of not investing in forbidden items such as alcohol, pork, gambling or
pornography; ethical investing; moral purchases
– The concept of interest (riba) and how returns are made by Islamic financial
securities
– Sources of finance in Islamic financing: muhabaha, sukuk, musharaka, mudaraba
– Types of Islamic financial products:- sharia-compliant products: Islamic investment
funds; takaful the Islamic version of insurance Islamic mortgage, murabahah,;
Leasing – ijara; safekeeping – Wadiah; sukuk – islamic bonds and securitisation;
sovereign – sukuk; Islamic investment funds; Joint venture – Musharaka, Islamic
banking, Islamic contracts, Islamic treasury products and hedging products, Islamic
equity funds; Islamic derivatives
– International standardisation/regulations of Islamic Finance: case for standardisation
using religious and prudential guidance, National regulators, Islamic Financial
Services Board
8.13 Emerging issues and trend
