CPA Section 3 – Financial Management (KASNEB)

About Course

This unit is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply financial management principles in practice

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.

Course Content

Overview of Financial Management
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

The Financing Decision
The financing decision

Financial Institutions and Markets
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 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

Time-Value of Money
Time-value of money

Valuation Models
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

Cost of Capital
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

Capital Budgeting Decisions
Capital budgeting decisions

The nature and importance of capital investment decisions
Capital investment’s cash flows – initial cash outlay, terminal cash flows and annual 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

Financial Analysis and Forecasting
Financial analysis and forecasting

Working Capital Management
Working capital management

Dividend Decision
Dividend decision

Introduction to Risk and Return
Introduction to risk and return

Islamic Finance
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

CPA Section 3 – Financial Management (KASNEB)

About Course

What Will You Learn?

Course Content

Overview of Financial Management 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

The Financing Decision 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

Financial Institutions and Markets 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 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

Time-Value of Money 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

Valuation Models 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

Cost of Capital 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

Capital Budgeting Decisions Capital budgeting decisions

The nature and importance of capital investment decisions

Capital investment’s cash flows – initial cash outlay, terminal cash flows and annual 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

Financial Analysis and Forecasting 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

Working Capital Management 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

Dividend Decision Dividend decision

Forms of Dividend

Overview of Financial Management
Overview of financial management

The Financing Decision
The financing decision

Financial Institutions and Markets
Financial institutions and markets

Time-Value of Money
Time-value of money

Valuation Models
Valuation Models

Cost of Capital
Cost of capital

Capital Budgeting Decisions
Capital budgeting decisions

Financial Analysis and Forecasting
Financial analysis and forecasting

Working Capital Management
Working capital management

Dividend Decision
Dividend decision

Introduction to Risk and Return
Introduction to risk and return

Islamic Finance
Islamic finance

Emerging Issues and Trends
Emerging issues and trends