Past Questions & Answers
Question
Kibera Ltd, a holding company operating in the IT industry, is considering diversifying its portfolio by acquiring a subsidiary in the healthcare sector. Two companies – Nakuru Ltd and Kisumu Ltd – have been identified as potential acquisitions.
The following draft financial statements relate to Nakuru Ltd.
Income Statement for the year Ended 31 December 2024
GH¢ GH¢ Revenue
7,000,000 Cost of Goods Sold
Opening Inventory 450,000
Purchases 2,500,000
Closing Inventory (650,000)
(2,300,000) Gross Profit
4,700,000 Other Income
50,000 Salaries & Wages
(1,250,000) Utilities
(150,000) Medical Equipment Maintenance
(50,000) Depreciation
(250,000) Administrative & General Expenses
(550,000) Interest Expense
(150,000) Profit Before Tax
2,350,000 Income Tax
(950,000) Net Profit After Tax
1,400,000
Retained Profit for the Year
1,400,000
Statement of Financial Position as of 31 December 2024
GH¢ Non-Current Assets
Medical Equipment 3,300,000 Intangible Assets 320,000
3,620,000 Current Assets
Inventory 650,000 Accounts Receivable 800,000 Bank 1,200,000 Cash 50,000
2,700,000 Total Assets 6,320,000 Equity and Liabilities
Equity
Share Capital 2,000,000 Retained Earnings 3,000,000 Total Equity 5,000,000 Non-Current Liabilities
Long-term Loans 950,000 Current Liabilities
Accounts Payable 250,000 Income Tax Payable 120,000 Total Liabilities 1,320,000 Total Equity & Liabilities 6,320,000
Additional information: i) The Board of Kibera Ltd at its most recent meeting engaged the services of a consultant
to perform due diligence on the financial affairs of Nakuru Ltd. From the due diligence report, the following were revealed: 10% of the sales of Nakuru Ltd in 2024 (GH¢700,000) were made to Cinchona Ltd,
which has wound up. These sales remain unpaid. The closing inventory included third-party inventory costing GH¢100,000. 5% of accounts receivable (GH¢40,000) should be written off as bad debt.
ii) The following ratios have been computed for Kisumu Ltd, one of the targets in the
acquisition:
Ratios Value Gross Profit Margin 59% Operating Profit Margin 20% Return on Capital Employed (ROCE) 31% Current Ratio 4.5:1 Quick Ratio 3:1 Debtors Collection Period 1.5 days Creditors Payment Period 50 days Net Assets Turnover 1.3 times Debt to Equity Ratio (Long-term debt/equity) 40% Capital Gearing (Long-term debt/capital employed) 28%
Required: a) Show the adjusting entries to reflect the due diligence findings.
b) Compute the comparable ratios for Nakuru Ltd based on the due diligence findings.
c) Prepare a report to the board of Kibera using the ratios computed in (b). Since the two
projects are mutually exclusive, advise the board whether to invest in Nakuru Ltd or Kisumu Ltd.
Find Related Questions by Tags, levels, etc.
- Author Samuel Duah
- Professional Bodies ICA (Ghana)
- Programs PROFESSIONAL PROGRAM
- Tags Comparable Ratios, Creditors Payment, Current Ratio, Debtors Collection, Gross Profit Margin, Net Assets Turnover, Operating Profit Margin, Post-Adjustment, Quick Ratio, ROCE
- Series NOV 2025
- Subjects FINANCIAL REPORTING
- Topics Ratio Analysis
Question
a) The National Corporate Governance Code for Kenya 2022 outlines thirteen (13)
fundamental principles of corporate governance to guide effective and sound
governance of organizations in Kenya.
Evaluation of SLC’s corporate governance under the following fundamental
principles: (i) sound appointments and balanced board composition, (ii)
professional independence and checks, (iii) commensurate remuneration, (iv)
periodic evaluations and reviews, and (v) operating sustainably and humanely.
b) Critically assess the corporate governance of SLC by identifying and explaining five of the seven key corporate governance issues and analyzing how each one applies to the company’s current governance structure and practices
Find Related Questions by Tags, levels, etc.
- Author Samuel Duah
- Professional Bodies ICA (Ghana)
- Programs PROFESSIONAL PROGRAM
- Tags Assessment, Board Responsibilities, Composition, Corporate Governance, Disclosure, Financial Reporting, Key Issues, Remuneration, Risk Management, Shareholders’ Rights
- Series NOV 2025
- Subjects STRATEGIC CASE STUDY
- Topics Professional practice and codes of ethics
Question
a) Exchange rate volatility creates foreign exchange risk for any company involved in buying,
selling, borrowing or investing in foreign currency. WCL faces foreign currency risk because it imports and pays for its products in the United States dollars. Foreign currency risk can be classified into three types of risks.
Required: State and explain the specific type of foreign currency risk that WCL may be exposed to in each of the following situations: i) WCL products becoming expensive due to exchange rate instability/volatility, ii) foreign suppliers granting WCL 90 – 120 days of credit, and
WCL consolidating the financial statements of Kenya subsidiary when it becomes operational.
b) WCL’s current debt portfolio comprises two types of instruments, straight debt issued to
financial institutions and convertible bonds issued to corporate lenders. Mr. Johnson is now considering the issuance of bonds with warrants attached as an additional debt financing option.
Required: i) Explain the following debt instruments to Mr. Johnson: straight debts and bonds with
warrants attached. ii) Explain to Mr. Johnson the key difference between convertible bonds and bonds with
warrants attached. iii) Explain the key advantage that convertible bonds offer to WCL over straight debt in
relation to interest rate costs. iv) Explain to Mr. Johnson the concept of “conversion premium” as it applies to convertible
bonds.
Find Related Questions by Tags, levels, etc.
- Author Samuel Duah
- Professional Bodies ICA (Ghana)
- Programs PROFESSIONAL PROGRAM
- Tags Bonds with Warrants, Conversion Premium, Convertible Bonds, Debt Instruments, Differences, Interest rates, Straight Debt
- Series NOV 2025
- Subjects STRATEGIC CASE STUDY
- Topics Sources of Finance