SECTION II – TOTAL 60 MARKS

Registration Number:
Question Twenty One
You are provided with the following extracts of the statement of profit or loss for Sepetuka Limited:

Sepetuka Limited
Statement of profit or loss extract for the year ended 30 September:
2019 2020
Year
Sh.“000” Sh.“000”
Sales 54,000 64,800
Cost of sales -32,400 -32,400
Gross profit 21,600 32,400
Operating expenses -10,800 -10,125
Operating profit 10,800 22,275
Depreciation -600 -800
Profit before interest and tax 10,200 21,475
Finance costs (interest Expense) -5,000 -7,000
Profit before tax 5,200 14,475
Income tax expense -1,560 -4,343
Profit after tax 3,640 10,132

Required:
(a) Calculate and interpret the following ratios:

(i) Annual revenue growth rates for years 2020, 2021 and 2022.

(ii) Three years cumulative average growth rate (CAGR) for year 2022.

(iii) Effective tax rate for the period 2019 to 2022.

(b) Now assume the following for Sepetuka Limited:

1. Revenue growth rates are forecast under three scenarios namely base case, optimistic case and p
The base case growth rate for the first year forecast is the 2022 CAGR. This is expected to reduce by 2
until the last year of the forecast subject to a minimum of 15%. The optimistic case is 20% above the b
while the pessimistic case is 10% below the base case in all forecast periods.
2. Gross profit margin for the first year of the forecast is the 3-year average for the period from yea
This is expected to reduce by 2% annually until the last year of the forecast subject to a minimum of 50
3. Operating expense ratios are modelled as 3-year averages for the period from 2020 to 2022. Thes
to remain constant over the forecast period.
4. Depreciation to revenue ratio is assumed to remain constant as the 3-year average for the period
5. Finance costs are expected to reduce steadily as the loans are repaid. Use the reduction rate in ye
forecast period.
6. Income tax expense is calculated as the historical effective tax rate.
Required:
Prepare five-year forecast statements of profit or loss for Sepetuka Limited from year 2023 to year 2027.

Forecast statements of profit or loss for Sepetuka Limited from year 2023 to year 2027.

Year 2022 2023

Sales 95,580 115,651.80
Cost of sales -38,232 (25,615.44)
Gross profit 57,348 90,036
Operating expenses -14,934
Operating profit 42,414
Depreciation -900
Profit before interest and tax 41,514
Finance costs -8,000
Profit before tax 33,514
Income tax expense -10,054
Profit after tax 23,460

OP
Year 2022 2023
Sales 95,580 138,782.16
Cost of sales -38,232
Gross profit 57,348
Operating expenses -14,934
Operating profit 42,414
Depreciation -900
Profit before interest and tax 41,514
Finance costs -8,000
Profit before tax 33,514
Income tax expense -10,054
Profit after tax 23,460

PE
Year 2022 2023
Sales 95,580 104,086.62
Cost of sales -38,232
Gross profit 57,348
Operating expenses -14,934
Operating profit 42,414
Depreciation -900
Profit before interest and tax 41,514
Finance costs -8,000
Profit before tax 33,514
Income tax expense -10,054
Profit after tax 23,460
 (I) Annual revenue growth rates
2020 2021
20% 25%

The Growth Rate between 2020 and 2021 is higher than 2021 and 2022
2021 2022
Sh.“000” Sh.“000” (II) CUMMULATIVE AVERAGE GROWTH RATE 2022
81,000 95,580 21.0%
-32,400 -38,232
48,600 57,348 (III) EFFECTIVE TAX RATE FOR THE PERIOD 2019 TO 2022.
-21,094 -14,934 2019 2020
27,506 42,414 30% 30%
-750 -900
26,756 41,514
-9,000 -8,000
17,756 33,514
-5,327 -10,054
12,429 23,460

(3 marks)

(3 marks)

(2 marks)

mistic case and pessimistic case.

cted to reduce by 2% annually
s 20% above the base case

e period from year 2020 to year 2022.

o a minimum of 50%.
020 to 2022. These are assumed

age for the period 2020 to 2022.

duction rate in year 2022 over the
 (12 marks)
(Total: 20 marks)
o year 2027.

BASE Gross Profit Margin

2024 2025 2026 2027 2020
137,625.64 161,022.00 185,175 212951.596508 50%
1,930.72 52,499.23 137,241.75 270,673.98
139,556 213,521 322,417 483,626 Average Gross Margin
57%

OPTIMISTIC
2024 2025 2026 2027
165,150.77 193,226.40 222,210.36 255,541.92

PESSIMISTIC
2024 2025 2026 2027
123,863.08 144,919.80 166,657.77 191,656.44
 2022
18%

higher than 2021 and 2022

GROWTH RATE 2022 98010.00

E PERIOD 2019 TO 2022.

2021 2022
30% 30%
fit Margin
2021 2022
60% 60%

ross Margin

0.0125
SECTION II – TOTAL 60 MARKS
Registration Number:
Question Twenty Two
Mrs Jane Wakwa is the Marketing Director of Vuma Limited, a company that makes and sells electronic devices.
The company is considering the launch of a new mobile phone model branded “Trex”. The available data is not fully reliable though Jane sti
that she can make a recommendation on whether or not to launch “Trex”.
Additional information:
1. Trex is estimated to have a shelf life of five years commencing year 2023.
2. Trex will require the purchase of a machine at a cost of Sh.100 million at the end of year 2022, after which the machine will be sold for
at the end of the fifth year.
3. The selling price and cost structures of Trex (for the first year 2023) with expected inflation factors are as follows:
Sh.
(Per unit)
Selling price 5,000
Material costs 2,000
Direct labour costs 1,000
Incremental fixed cost (excludes depreciation) 500
4. The company is eligible for capital allowances (depreciation for tax purposes) at the rate of 25% on reducing balance.
5. At the end of the project when the machine is sold, any gain or loss on disposal will be considered for tax.
6. The tax rate on income and capital allowances is at the rate of 30% per annum. Assume that the tax for a given period is paid in the sam
7. The project will require an initial investment in working capital of Sh.20 million which will be increasing by Sh.5 million at the end of
general inflation. The whole amount together with the periodic increase will, however, revert at the end of the project.
8. Experience has shown that demand for new products is not exactly known in year one but tends to be stable thereafter. Jane has come up
estimates of demand for year 2023:

Probability Expected sales (Units)

30% 40,000
40% 30,000
30% 10,000
Jane expects an initial increase in demand in year 2024 of 25% then a decline of 50% in year 2025. This level will remain the same till
9. Vuma Limited has a real weighted average cost of capital (WACC) of 8% and general inflation is expected to be at 4%.
Due to the risk of the project, Jane feels that the relevant nominal WACC should be increased by 3%.

Required:
Compute the following:
(a) The weighted average cost of capital to be used to evaluate the project.

(b) The relevant cash flows over the project period.

(c) The net present value (NPV) of the project. Advise on the viability of the project.
 selling Price
Material costs
Direct labour costs
Incremental fixed cost (excludes depreciation)
Depreciation
Demand

CASH FLOW
Revenue
Material Cost (Variable cost)
Labour
Contribution Margin
Less Fixed Cost
EBDT
Depreciation
EBT
Tax
EAT
Add Back Dep
Net Cash Flow

INITIAL INVESTMENT
2023 WC
2024 WC
2015 WC
2016 WC
2017 WC
Total Intial Cost

NPV (Ksh196,075,263.88)
is not fully reliable though Jane still feels

which the machine will be sold for Sh.20 million salvage / residual value

re as follows:
Inflation rate (%) - from year 2024 onwards

2%
4%
5%
10%
reducing balance.

or a given period is paid in the same year.

asing by Sh.5 million at the end of each year to cater for
nd of the project.
stable thereafter. Jane has come up with the following

This level will remain the same till the end of the project.
pected to be at 4%.

intial cost 100,000,000.00

 2023 2024 2025 2026 2027
5000 5100 5202 5306.04 5412.1608
2,000 2080 2163.2 2249.728 2339.71712
1,000 1050 1102.5 1157.625 1215.50625
500 501.10 502.20 503.30 504.40
25,000,000.00 18,750,000.00 14,062,500.00 10,546,875.00 7,910,156.25
27000 33750 13500 13500 13500

2023 2024 2025 2026 2027

135000000 172125000 70227000 71631540 73064170.8
54000000 70200000 29203200 30371328 31586181.12
27000000 35437500 14883750 15627937.5 16409334.375
54000000 66487500 26140050 25632274.5 25068655.305
13500000 16912125 6779700 6794550 6809400
40500000
25,000,000 18,750,000.00 14,062,500.00 10,546,875.00 7,910,156.25
15,500,000.00 (18,750,000.00) (14,062,500.00) (10,546,875.00) (7,910,156.25)
4,650,000.00 (5,625,000.00) (4,218,750.00) (3,164,062.50) (2,373,046.88)
10,850,000.00 (13,125,000.00) (9,843,750.00) (7,382,812.50) (5,537,109.38)
25,000,000.00 18,750,000.00 14,062,500.00 10,546,875.00 7,910,156.25
35,850,000.00 5,625,000.00 4,218,750.00 3,164,062.50 2,373,046.88

50000000
100,000,000.00
20000000.00
45045045.05
40581121.66
36559569.07
32936548.71
275,122,284.48
 (2 marks)

(15 marks)

(3 marks)
(Total: 20 marks)
62,373,046.88
SECTION II – TOTAL 60 MARKS
Registration Number:
Question Twenty Three
You are evaluating a four-year project with an initial investment of Sh.10,000,000 on 1 January 2023 and the following cash flow characteristics:

DATE CASH FLOW KES

Date Cash flow (Sh.)
1-Jan-23 -10,000,000
30-Jun-23 2,750,000
1 January 2023 -10,000,000
31-Jul-24 4250000
30-Sep-25 3250000
30 June 2023 2,750,000
31-Dec-26 2750000
rate 8%
31 July 2024 4,250,000

Rate
30 September 2025 3,250,000

NPV Ksh791,273.16
31 December 2026 2,750,000
XNPV 1062559.85294308

The discount rate is given as 8%.

Required:
(a) (i) Calculate the NPV and XNPV of the project and hence determine whether the project is viable.
(ii) Highlighting the cause of the difference between NPV and XNPV, explain which one you would use in your analysis and why.

(b) (i) Calculate the IRR and XIRR of the project and hence determine whether the project is viable.
(ii) Highlighting the cause of the difference between IRR and XIRR, explain which one you would use in your analysis and why.

QUESTION A(i)
Date Cash flow (Sh.)
Sunday, January 1, 2023 -10,000,000
Friday, June 30, 2023 2,750,000
 Wednesday, July 31, 2024 4,250,000
Tuesday, September 30, 2025 3,250,000
Thursday, December 31, 2026 2,750,000
Discount Rate 8%
NPV 791,273.16
XNPV 1062559.85294308
PROJECT IS VIABLE

QUESTION A(ii)
The XNPV uses specific dates that correspond to each cash flow being discounted in the series, whereas the regular NPV function
automatically assumes that all the time periods are equal . For This reason, the XNPV function is far more precise and should be used
instead of regular NPV function.

QUESTION B(i)
Date Cash flow (Sh.)
Sunday, January 1, 2023 -10,000,000
Friday, June 30, 2023 2,750,000
Wednesday, July 31, 2024 4,250,000
Tuesday, September 30, 2025 3,250,000
Thursday, December 31, 2026 2,750,000
Discount Rate 8%
IRR 11.54%
XIRR 13.58%

QUESTION B(ii)
IRR doesn't take into account when the actual cash flow takes place, so it rolls them up into annual periods. On the other hand the XIRR
considers the dates when the cash flow actually happens. Because of this reason, XIRR is a more accurate way to evaluate an investment.
Therefore I would use XIRR in my analysis
IRR 12%
XIRR 0.135834

(6 marks)
(4 marks)

(6 marks)
(4 marks)
(Total: 20 marks)
SECTION II – TOTAL 60 MARKS
Registration Number:
Question Twenty Four
Bamuda Limited presented the following financial statements for the years ended 30 June 2021 and 30 June 2022:

Statement of profit or loss for the year ended 30 June 2022:

Sh.“million” Sh.“million”
Revenue 473
Cost of sales -229
Gross profit 244
Gain on financial assets at fair value 5
Investment income 6
255
Other expenses:
Administration expenses 48
Distribution costs 76
Finance costs 17 -141
Profit before tax 114
Income tax expense -47
Profit after tax for the year 67

Statement of financial position as at 30 June: Sh.“million” Sh.“million”

2022 2021
Assets:
Non-current assets:
Property, plant and equipment 327 264
Intangible assets 40 50

Financial assets through other comprehensive income (OCI) 22 10

389 324
Current assets:
Inventory 123 176
 Trade receivables 95 87
Financial assets at fair value 65 30
Cash and cash equivalents 29 312 0 293
Total assets 701 617
Equity and liabilities:
Equity:
Ordinary share capital (Sh.10 each) 230 150
Share premium 30 0
Revaluation reserve 36 67
Finacial assets through OCI - equity reserve 2 0
Retained profits 121 91
419 308
Non-current liabilities:
10% convertible loan stock 100 150
Current liabilities:
Bank overdraft 22
Trade payables 156 100
Interest payable 7 3
Income tax payable 19 182 34 159
Total liabilities 282 309
Total equity and liabilities 701 617

Additional information:
1. Property, plant and equipment held by Bamuda Limited are items of plant and equipment and freehold premises. During the year ended 30 June 2022,
items of plant and equipment which originally cost Sh.40 million were disposed of resulting in a loss of Sh. 6 million charged in administrative expenses.
These items had a net book value of Sh.28 million as at the date of disposal.
2. Depreciation charge for the year ended 30 June 2022 was Sh.43 million.
3. Sh.50 million of convertible loan stock was converted to Sh.50 million ordinary share capital at par during the year ended 30 June 2022.

Required:
Prepare the statement of cash flows for Bamuda Limited for the year ended 30 June 2022 as per IAS 7 “Statement of Cash Flows”. (Total 20 marks)
 CASH FLOW FOR DARUBINI LIMITED 2022
2022
OPERATING ACTIVITIES
Profit before Tax 114
ADJUSTMENT
Depreciation of PPE 43
Loss on disposal 6
Amortization of intangible 10
Financing cost 17
Gain on finacial asset (5)
Investment Income (6)

WORKING CAPITAL ITEM

Inventory 53
Recievable (8)
Payables 56
Financing/asset of -30
Gross Operating CashFlow 250
interest paid (13)
Less Tax (62)
Net Operating Cash Flow 175 A
INVESTING ACTIVITY CASHFLOW

Cash Preceed on disposal of PPE 22

Investing income 6
Acquisation of PPE (165)
Acquisation of financial Asset -10
 Net Investing cash flows (147) B
FINANCING ACTIVITY CASHFLOW
Cash Proceeding Issue of Shares 60
Divinded paid (37)
Borrowed
Interest Expense
Net financing cashflow 23 C
Cash & cash equivalent 51
Add Cash and cash equivalent bal B/d (22)
Cash & cash equivalent bal c/d 29

r ended 30 June 2022,

administrative expenses.

(Total 20 marks)
SECTION II – TOTAL 60 MARKS
Registration Number:
Question Twenty Five
Farmgate Company Limited produces and sells shovels.

The company provides the following data for quantities of shovels produced and the related production cost for the calendar year 2021:

Month Quantity
Production cost Total variable cost fixed coxt
produced (units)
(year 2021) Sh. Sh.
January 150,000 18,000,000 14275825.3461129 3977635.7827476
February 120,000 14,000,000 11420660.2768903 3977635.7827476
March 200,000 23,000,000 19034433.7948172 3977635.7827476
April 170,000 19,000,000 16179268.7255946 3977635.7827476
May 120,000 16,000,000 11420660.2768903 3977635.7827476
June 250,000 30,000,000 23793042.2435215 3977635.7827476
July 220,000 27,000,000 20937877.1742989 3977635.7827476
August 90,000 11,000,000 8565495.20766773 3977635.7827476
September 180,000 24,000,000 17130990.4153355 3977635.7827476
October 300,000 32,000,000 28551650.6922258 3977635.7827476
November 280,000 29,000,000 26648207.3127441 3977635.7827476
December 350,000 36,000,000 33310259.1409301 3977635.7827476
231268370.607029
Required:
(a) Determine the variable cost per unit and the total variable costs using regression analysis. (6 marks)

(b) Estimate the total production cost if the following number of units are produced: Y Total
= a + Production
bx Cost
No. of Units (Sh) XV
(i) 100,000 units 100000 13494852.6801562
4000000
3000000

Residuals
(ii) 150,000 units 150000 18253461.1288605 2000000
1000000
0
(iii) 200,000 units 200000 23012069.5775648 -1000000
50,000 100
-2000000
 3000000

Residuals
2000000
1000000
0
-1000000
50,000 100
-2000000

Include the lower and upper boundaries at 95% confidence intervals.

(c) Prepare a chart plotting the predicted Y versus the actual Y from the regression function determined in (a) above.
Interpret your answer.

SUMMARY OUTPUT
XV
Regression Statistics 40,000,000
Multiple R 0.97848637756 35,000,000
R Square 0.95743559107 30,000,000
Adjusted R Square 0.95317915017 25,000,000
Standard Error 1683999.3305 20,000,000

Y
Observations 12 15,000,000
10,000,000
ANOVA 5,000,000
df SS MS F Significance F 0
Regression 1 637891462548811 6.37891463E+14 224.938067997 3.50091914429825E-08 50,000 100,000
Residual 10 28358537451189.2 2835853745119
Total 11 666250000000000

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 3977635.78275 1373881.03010297 2.895182112275 0.01596481185 916438.081568245 7038833.483927
X Variable 1 95.1721689741 6.34568466051578 14.99793545782 3.5009191E-08 81.0331024395373 109.31123550863

RESIDUAL OUTPUT

Observation Predicted Y Residuals

1 18253461.1289 -253461.128860492
2 15398296.0596 -1398296.05963792
 3 23012069.5776 -12069.5775647871
4 20156904.5083 -1156904.50834221
5 15398296.0596 601703.940362085
6 27770678.0263 2229321.97373092
7 24915512.957 2084487.0429535
8 12543130.9904 -1543130.99041534
9 21108626.1981 2891373.80191693
10 32529286.475 -529286.474973377
11 30625843.0955 -1625843.09549166
12 37287894.9237 -1287894.92367767
 X Variable 1 Line Fit Plot
total cost 40,000,000
Sh. 35,000,000
18253461.1289
30,000,000
15398296.0596
25,000,000
23012069.5776
Y
20156904.5083 20,000,000
Predicted Y
Y

15398296.0596 15,000,000
27770678.0263 10,000,000
24915512.957
5,000,000
12543130.9904
0
21108626.1981
50,000 100,000150,000200,000250,000300,000350,000400,000
32529286.475
X Variable 1
30625843.0955
37287894.9237

Lower 95.0% Upper 95.0%

(6 marks) -67885.032041 5093.287200604
0.0085654878 0.011554587258

X Variable 1 Residual Plot

4000000
3000000
Residuals

2000000
1000000
0
-1000000
50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000
-2000000
X Variable 1
 3000000

Residuals
2000000
1000000
0
-1000000
50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000
-2000000
X Variable 1

X Variable 1 Line Fit Plot

40,000,000
35,000,000
30,000,000
25,000,000
Y
20,000,000
Predicted Y
Y

15,000,000
10,000,000
5,000,000
0
50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000
X Variable 1

Lower 95.0% Upper 95.0%

916438.081568 7038833.48393
81.0331024395 109.311235509