B1 B4 B5 Merged

EXAMINATION : INTERMEDIATE LEVEL
SUBJECT : FINANCIAL MANAGEMENT
CODE : B1
EXAMINATION DATE : MONDAY, 21ST FEBRUARY, 2022
TIME ALLOWED : THREE HOURS (09:00 A.M. – 12:00 NOON)
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GENERAL INSTRUCTIONS
1. There are TWO Sections in this paper. Sections A and B which comprise a total
of SIX questions.
2. Answer question ONE in section A.
3. Answer any FOUR questions in Section B.
4. In total answer FIVE questions.
5. Marks are shown at the end of each question.
6. Calculate your answers to the nearest two decimal points unless otherwise
directed.
7. Show clearly all your workings in respective answers where applicable.
8. This question paper comprises 10 printed pages.
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A5, February 2022 Page 17 of 161

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SECTION A
Compulsory Question
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QUESTION 1
(a) Financial forecasting is defined as a systematic process of analyzing the economic

social and financial influences affecting a business with an object of predicting
business’s total needs of funds for the future on the basis of the past and present
information.
REQUIRED:
Explain why do you think most financial planning begin with sales forecasts?
(4 marks)
(b) Explain the meaning of ‘debt factoring’ (accounts receivable factoring),

distinguishing between ‘with recourse; and ‘without recourse’ agreement.
(4 marks)
(c) The Finance Director of Madeni Company, a listed company on the stock
exchange wishes to estimate what impact the introduction of debt finance is likely
to have on the company’s cost of equity and overall cost of capital. The company
is currently financed only by equity.
Madeni Company Summarized Capital Structure: TZS.

Ordinary Shares (TZS.750 par value) 15,000,000
Reserves 33,000,000
Total 48,000,000
The company’s current share price is TZS.12,600 and up to TZS.60,000,000 of

fixed rate five-year debt could be raised at an interest rate of 10% per annum.
The corporate tax rate is 30%.
Madeni’s current earnings before interest and tax are TZS.75,000,000. These
earnings are not expected to change significantly for the foreseeable future. The
debt finance will be used to repurchase ordinary shares. All earnings are paid out
as dividends.
REQUIRED:
Using Miller and Modigliani’s Model in a world with corporate tax, estimate the
impact of raising TZS.60,000,000 on Madeni’s:
(i) Market Value of the Company. (2 marks)

(ii) Market Value of Equity (2 marks)

(d) Kibanda Company Ltd was registered with the capital market some years ago.
The following information is provided to help estimate the company’s cost of
equity and cost of debt.
Market value of shares TZS.8,100 per share

Dividend just paid TZS.1,620 per share
Expected future dividend growth rate 5% per annum
Market value of 8% irredeemable debentures TZS.160,000 per
TZS.200,000 nominal value
Corporation tax 30%
Risk free rate 10% per annum
Expected return on the Market portfolio 18% per annum
Beta of company’s equity 2
The company maintains a Debt-Equity ratio of 4:6.
REQUIRED:
(i) Estimate the company’s cost of equity and cost of debt, using both the
dividend valuation model and the Capital Asset Pricing Model (CAPM).
(4 marks)
(ii) Estimate the company’s overall capitalization rate, using both the dividend
valuation model and the Capital Asset Pricing Model (CAPM).
(4 marks)
(Total: 20 marks)

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SECTION B
There are FIVE questions. Answer ANY FOUR questions
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QUESTION 2
(a) Different financial instruments offer different interest rates.
REQUIRED:
Discuss five (5) factors which determine the appropriate interest rate for a
particular financial instrument. (5 marks)
(b) KAMAZIMA Company is an e-business which trades solely over the internet. In
the last year the company had sales of TZS. 15 million. All sales were on 30
days’ credit to commercial customers. Extracts from the company’s most recent
Statement of Financial Position relating to working capital are as follows:
TZS.’000’
Trade receivables 2,466
Trade payables 2,220
Overdraft 3,000
In order to encourage customers to pay on time, KAMAZIMA Co. proposes

introducing an early settlement discount of 1% for payment within 30 days, while
increasing its normal credit period to 45 days. It is expected that, on average,
50% of customers will take discount and pay within 30 days, 30% of customers
will pay after 45 days, and 20% of customers will not change their current paying
behaviour.
REQUIRED:
Calculate the Net Benefit or Cost of the proposed changes in trade receivables
policy and comment on your findings. (5 mark)
(c) Mafanikio Ltd is expecting an EBIT of TZS.5,000,000 per annum on investment

of TZS.100,000,000. The company is in need of TZS.10,000,000 for expansion
activities. The company can raise this amount by equity shares capital, 12%
preference share capital, and 10% debentures. The company is considering the
following financing alternatives:
(i) TZS.10,000,000 through issue of equity shares at par
(ii) TZS.5,000,000 by issue of equity share capital and remaining
TZS.5,000,000 by issue of debentures
(iii) TZS.5,000,000 through equity shares and TZS.2,500,000 through 12%
preference share capital and remaining TZS. 2,500,000 through 10%
debentures.
(iv) TZS.5,000,000 through debt and TZS.2,500,000 through equity shares and
remaining TZS.2,500,000 through 12% preference share capital.

REQUIRED:
By using Earning Per Share (EPS) concept comment on the best financing
alternative among given alternatives assuming tax rate is 50%. (10 marks)
(Total: 20 marks)
QUESTION 3
(a) Before making an investment decision, a prudent investor always considers

systematic and unsystematic risks that may be involved.
REQUIRED:
State any two (2) differences between the two categories of risk. (4 marks)
(b) Pamoja Trust Fund has investments in stocks of two companies; TanTel Ltd and
NiaTel Ltd. TanTEl Ltd earned an average of 14% per annum over the past 3
years and had a standard deviation of 30%. NiaTel Ltd provided an average return
of 12% over the same period, but had a standard deviation of 20%. Short-term
Treasury yield are 2%.
Pamoja Trust Fund manager is not very happy with the performance of NiaTel
Ltd and is contemplating selling the shares.
REQUIRED:
Should the manager sell the NiaTel shares? Support your answer with
calculations. (4 marks)
(c) Discuss two (2) sources and characteristics of long-term debt finance which may
be available to a corporate firm. (2 marks)
(d) Kaswaki, a newly established Japanese-based car manufacturer, is evaluating two

overseas locations for a proposed expansion of production facilities at a site in
Dar es Salaam (Tanzania) and another in Nakuru (Kenya). The likely future
return from investment in each site depends to a great extent on future economic
conditions. Three scenarios are postulated, and the Internal Rate of Return (IRR)
from each investment is computed under each scenario. The returns with their
estimated probabilities shown below:
Economic Probability Internal Rate of Return (IRR) (%)
Condition Dar es Salaam Kenya
Boom 0.3 10 10
Recession 0.3 20 30
Depression 0.4 15 20
REQUIRED:
Calculate the expected return and the standard deviation of the following
investment strategies and comment on the best strategy to be adopted by Kaswaki:

(i) Investment Strategy No.1
Committing 50% of available funds to the site in Dar es Salaam and 50%
to Nakuru? (4 marks)
(ii) Investment Strategy No.2

Committing 75% of available funds to the site in Dar es Salaam and 25%
to Nakuru? (4 marks)
(e) Assuming Kaswaki investors are risk averse recommend a better investment
strategy. (2 marks)
(Total: 20 marks)
QUESTION 4
(a) An efficient market is one in which the market price of all securities traded on it
reflects all the available information. A perfect market is the one which responds
immediately to the information made available to it.
REQUIRED:
(i) Explain how shares are bought and sold in the market (1 marks)
(ii) Explain how shares are valued in the market. (1 marks)
(iii) Discuss the differences between weak form, semi-strong form, and strong
form capital market efficiency. (3 marks)
(iv) Discuss the significance of the Efficient Market Hypothesis (EMH) for
financial manager. (3 marks)
(b) Describe the principal advantages of a right issue as a financing alternative and
outline how the company should set the price for a right issue to secure the
acceptance of shareholders. (2 marks)
(c) TRIPLE D Enterprise is planning to raise external funds to finance increase in

assets needed to produce extra 10,000 sales units. The firm is operating at full
capacity. The finance director has provided the following key financial indicators
of the company:
Selected Financial Indicators: 31st December 2021

Current Sales Level (Year 2021) TZS.15 million
Projected increase in sales (Year 2022) TZS.3 million
Total assets TZS.9 million
Fixed Assets TZS.3 million
Inventory TZS.2 million
Accounts Receivable TZS.3 million
Accounts Payable TZS.3.75 million
Accrued Expenses TZS.0.75 million
Net Profit Margin 3%
Dividend Payout Ratio 50%

Historical values of sales, inventory and external financing requirements over the
past five years are as shown below: (Millions of TZS.)
Year Inventory Sales External Financing

Requirement
2017 1.4 9 6
2018 1.5 10 7
2019 1.6 11 8
2020 1.8 13 10
2021 2.0 15 13
REQUIRED:
(i) Using the percent of Sales Method forecast the values of the following
financial indicators for the year 2022:
• Total Assets
• Fixed Assets
• Accounts Receivable
• Accounts Payable
• Additional Funds Needed (4 marks)
(ii) Using Regression Analysis predict the external financing requirements for the
TRIPLE D Enterprise in Year 2025. (3 marks)
(iii) Using Regression Analysis predict the inventory values for the TRIPLE D
Enterprise in Year 2025 if the projected sales level in that year is TZS.23
million. (3 marks)
(Total: 20 marks)
QUESTION 5
(a) Explain and discuss the key differences between an “operating lease” and a
“finance lease.” (5 marks)
(b) Warden Company plans to buy a new machine. The cost of the machine, payable
immediately, is TZS.8,000,000 and the machine has an expected life of five years.
Additional investment in working capital of TZS.900,000 will be required at the
start of the first year of operation. At the end of the years, the machine will be sold
for scrap, with the scrap value expected to be 5% of the initial purchase cost of the
machine. The machine will not be replaced.
Production and sales from the new machine are expected to be 100,000 units per
year. Each unit can be sold for TZS.160 per unit and will incur variable costs of
TZS.110 per unit. Incremental fixed costs arising from the operation of the machine
will be TZS.1,600,000 per year.
Warden Co. has an after-tax cost of capital of 11% which it uses as a discount rate
in investment appraisal. The company pays profit tax one year in arrears at an
annual rate of 30% per year. Capital allowances and inflation should be ignored.

REQUIRED:
(i) Calculate the Net Present Value (NPV) of investing in the new machine and
advise whether the investment is financially acceptable. (7 marks)
(ii) Calculate the Internal Rate of Return (IRR) of investing in the new machine
and advise whether the investment is financially acceptable. (3 marks)
(c) SOKOTA Company purchases many hundreds of components each year from
external suppliers for assembling into products. It used 40,000 units per annum of
one particular component. It is considering converting its purchasing, delivery and
stock control of this item to a just-in-time system. This will raise the number of
orders placed but lower the administrative and other costs of placing and
receiving orders. If successful, this will provide the model for switching most of
its inwards supplies on to this system. Details of actual and expected ordering
and carrying costs are given below:
Actual Proposed
Ordering cost per order (O) TZS.100 TZS.25
Purchase cost per item (P) TZS.2.50 TZS.2.50
Inventory holding, cost (as a % of the
purchase cost) (I) 20% 20%
To implement the new arrangement will require one-off re-organization costs

estimated at TZS.4,000 which will be treated as a revenue item for tax purposes.
The rate of corporation tax is 30% and SOKOTA can obtain finance at 12%. The
effective life span of the new system can be assumed to be eight years.
REQUIRED:
By using calculations determine the effect of the new system on the Economic
Order Quantity (EOQ) (5 marks)
(Total: 20 marks)
QUESTION 6
(a) Cash management is the process that involves collecting and managing cash flows
from operating, investing and financing activities of a company. In business, it is
a key aspect of an organization financial stability.
REQUIRED:
Explain three (3) reasons for a company to hold cash. (3 marks)
(b) Goal congruence is where the conflict of interest is removed and the interests of
the agent are the same as the interests of the principal.

REQUIRED:
Discuss how the interests of the agent and the interests of the principal can be
aligned. (2 marks)
(c) It is the middle of December 2020 and A to Z Company is looking at working

capital management for January 2021.
Forecast financial information at the start of January 2021 is as follows:
Inventory TZS.
91,000,000
Trade receivables 81,670,000
Trade payables 37,340,000
Overdraft 48,050,000
All sales are credit and they are expected to be TZS.700,000,000. For 2020
monthly sales are as follows:
TZS.
November 2020 (actual) 54,175,000
December 2020 (forecast) 60,000,000
January 2021 (forecast) 70,000,000
A to Z Co. has a gross profit margin of 40%. Although A to Z Co. offers 30 days
credit, only 60% of customers pay in the month following purchase, while the
remaining customers take an additional month of credit.
Inventory is expected to increase by TZS.10,450,000 during January 2021.
A to Z Co. plans to pay 70% of trade payable in January 2021 and defer paying
the remaining 30% until the end of February 2021. All suppliers of the company
require payment within 30 days. Credit purchases from suppliers during January
2021 are expected to be TZS.50,000,000.
Interest of TZS.14,000,000 is due to be paid in January 2021 on fixed rate bank

debt. Operating cash outflows are expected to be TZS.29,300,000 in January
2021. A to Z Co. has no cash and relied on its overdraft to finance daily
operations. The company has no plans to raise long-term finance during January
2021.
Assume that each year has 360 days.
REQUIRED:
(i) Calculate the cash operating cycle of A to Z Co. at the start of January
2021. (3 marks)
(ii) Calculate the overdraft expected at the end of January 2021. (4 marks)
(iii) Calculate the current ratios at the start and end of January 2021. (3 marks)
(d) Jack Shephard wishes to save money to provide for his retirement beginning one-
year from now. He will begin depositing the same face amount each year for the
30 years into a retirement savings account. Starting one year after making his
final deposit, he will withdrawal TZS.3,000,000 annually for each of the
following 25 years (i.e. he will make 25 withdrawals in all). Assume that the
retirement funds earn 10% annually over both the period that he is depositing
money and the period he makes withdrawals.
REQUIRED:
In order for Jack Shephard to have sufficient funds in his account to fund his
retirement, how much should he deposit annually? (rounded to the nearest figure).
(5 marks)
(Total: 20 marks)
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SUGGESTED SOLUTIONS
B1 – FINANCIAL MANAGEMENT
FEBRUARY 2022
ANSWER 1
(a) Sales forecast: A good forest is an essential foundation for forecasting

requirement. This is because there is a cause-and-effect relationship between
sales and assets. Firms need assets to make sales, if sales are to be increased,
assets must also be expanded, and therefore growth of the business. A sales
forecast will also determine the level of raw materials required in production,
labour and other costs. In other words, it is a limiting factor in most cases.
(b) Debt factoring: ‘Debt factoring’ is a service provided by factor whereby the
factor collects accounts receivable on behalf of their client and often invoices
their client’s customers as well. The factor also advances, to its client, a
proportion of the money it is due to collect. They would find the service useful
because he could both receive cash early and also delegate the administration of
his invoicing, accounting and accounts receivable collection work.
There are two types of factoring agreements: ‘with recourse' and ‘without
recourse’ agreements. With the first of these agreements, although the factor
advances monies, the risk of non-payment of accounts receivable balances stays
with the client. If a balance is not recovered, the factor has 'recourse' to their
client for the money. If the agreement is 'without recourse' the factor bears the
risk of non-payment.
Debt factoring has to be paid for, usually as a percentage of the amounts

advanced and as a percentage of turnovers. Agreements without recourse to the
client obviously cost more. The client would have to compare the cost to those of
employing an individual to do his invoicing and obtaining insurance against
unpaid accounts receivable balances. In addition, there may be some stigma
attached to debt factoring as clients sometimes assume that a business using a
factor must be in financial difficulty.
(c) (i) Market Value of the Company

The market value of the geared company (VL) is calculated as VL = VU +
BT TZS.252m + TZS.60m (0.30) = TZS.270m. Thus, the market value of
the company increases by TZS.18m due to interest tax benefits.
(ii) Market Value of Equity

The market value of equity of the geared company is found as:
SL = VL – B
S = TZS.270m – TZS.60m = TZS.210m.
Thus, the market value of equity has decreased.

(d) (i) The Cost of Equity and Cost of Debt
Dividend Valuation Model
Cost of Equity
Cost of Equity, Ke = Do (1+g) + g the market value given in the question is

MV
ex-div, as the dividend has just been paid. Do = TZS.1620 and g = 0.05. Applying
the formula to these figures we have: Ke = 1620(1.05)) + 0.05 = 26%.
8100
Cost of Debt
Before Tax Cost of Debt (Kd) = I/Po. I is TZS.I6, 000. Applying the formula to
these figures:
Kd = 16000/1600, 000 = 10%

The After Tax Cost of Debt = kd (l -T)
= 10% (1 – 0.3)
= 7%
Capital Asset Pricing Model (CAPM)

Cost of Equity
Ke = Rf + (Rm – Rf) β
Ke = 10% + [18% - 10%]2 = 26% as with the Dividend Valuation Model.
Cost of Debt
The cost debt is the risk-free rate, which is 10%, as with the dividend model.
The CAMP assumes zero corporate tax.
(ii) Overall Capitalization Rate (WACC)
Dividend Valuation Model

WACC = WeKe + WdKd
= (0.6) (26%) + (0.4) (7%) = 18.4%
Capital Asset Pricing Model (CAMP)

WACC = WeKe + WdKd
= (0.6) (26%) + (0.4) (7%) = 18.4%
ANSWER 2
(a) The following are the factors which determine interest rates:
(i) The general level of interest rates in the economy:
When the general level of interest rate in the economy is high also the interest
rate of each instrument in the country will be high and when it is low make the
instruments to be charged less.

(ii) The level of the risk:
The higher the level of risk the greater return an investor will expect. For
instance, an investor in a building society is taking very little risk and hence
receives only a small return. Conversely, a purchaser of shares is taking a
significant risk and hence will expect a greater return. This is known as the
risk return trade off.
The additional return required before someone would be indifferent between
investing in an equity share or a deposit account will differ from individual to
individual, as we all have a different attitude to risk. Therefore, the
relationship between risk and return is different for each individual.
(iii) The duration of a loan:
If it is assumed that in the long-term interest rates are expected to remain
stable, then the longer the length of the loan the higher the interest rate will
be. This is quite simply because lending money in the longer term has
additional risk for the lender as for instance the risk of default increases.
(iv) The need for the financial intermediaries to make a profit:
For instance, a depositor at a building society will receive a lower rate of
interest borrower will be charged.
(v) Size:
If a large sum of money is lent or borrowed, there are administrative savings;
hence a higher rate of interest can be paid to a lender and a lower rate of
interest be charged to a borrower than would normally be the case.
(b) Trade Receivable Policy

Cost/benefit of changing trade receivables policy
Receivables paying within 30 days = 50% x TZS.15m x 30/365 = TZS.616,438
Receivables paying after 45 days = 30% x TZS.15m x 45/365 = TZS.554,795
Total receivables changing their payment patterns = TZS.616,438 + TZS.554,795
= TZS.1,171,233.
Original value of these receivables 80% x TZS2,466k = TZS.1,972,800

Reduction in receivables = TZS.801,567
Cost of early payment discount = 50% x TZS.15m x 1% TZS.75,000
Reduction in financing cost = TZS.801,567 x 6% = TZS.48,094
Net cost of changing trade receivables policy TZS.75,000 – TZS48,094 =
TZS.26,906
Conclusion
The benefit of the new trade receivables policy is outweighed by the associated
costs. KAMAZIMA Co. should not adopt the proposed policy. However, the
analysis currently excludes bad debts and assumes constant sales throughout the
year – the company may need to take these into account. Given that receivables
on average are failing to meet the credit period, KAMAZIMA Co. may still want
to consider how the trade receivables policy may be changed in order to
encourage earlier payment.

(c) MAFANIKIO LTD
Capital structure Plan I Plan II Plan III Plan IV
Equity shares 1,000 10,000,000 5,000,000 5,000,000 2,500,000
each
12% preference - - 2,500,000 2,500,000
10% debt - 5,000,000 2,500,000 5,000,000
Total capital employed 10,000,000 10,000,000 10,000,000 10,000,000
Particulars Plan I Plan II Plan III Plan IV

EBIT (ROI 15%) 5,000,000 5,000,000 5,000,000 5,000,000
Less: Interest - 500,000 250,000 500,000
EBT 5,000,000 4,500,000 4,750,000 4,500,000
Less: Tax (50%) 2,500,000 2,250,000 2,375,000 2,250,000
EAT 2,500,000 2,250,000 2,375,000 2,250,000
Less: Preferred dividend - - 500,000 300,000
Earnings to equity 2,500,000 2,250000 1,875,000 1,950,000
shareholders
No. of shares 10,000 5,000 50,000 2,500
EPS (TZS.) 250 450 415 780
In the case above, alternative IV seems to be best alternative with EPS of

TZS.780. The EPS is TZS.250 when no debt is used in the capital structure. The
EBIT of TZS.5,000,000 on investment of TZS.10,000,000 turn out to be 50%.
After tax ROI will be 25%. But the use of cheaper source of finance such as debt
at 10% cost and preference share at 12% cost will increase earnings per share.
Thus, use of more and more debt or fixed payment capital will lead to increase in
EPS to the shareholders.
Thus, we can conclude the followings:
a. Financial leverage (use of debt) has a favourable impact on the EPS only
when ROI is more than cost of debt (net of tax).
b. The EPS keeps on increasing with the use of debt content in the capital
structure till ROI is more than cost of debt.
ANSWER 3
(a) Differences between systematic and unsystematic risk

Unsystematic Systematic
Specific to individual securities Common to all
It is the extent of variability in the It is the extent of variability in the
security’s return on account of factors securities of return on account of
unique to it. overall market factors
Can be reduced or eliminated through Cannot be reduced or eliminated
diversification through diversification

(b) Prima facie it appears that the return given by NiaTel Ltd at 12% per annum on an
average is lower than that of NiaTel Ltd. We should, however, look at the Sharpe
ratio of both the companies to determine whether the decision to sell the shares of
NiaTel Ltd is correct.
The Sharpe ratio of:

TanTel Ltd is:
= 0.40 and for
NiaTel Ltd is = 0.50
The Sharpe ratio for NiaTel Ltd is higher at 0.5 compared to 0.4 of TanTel Ltd.
This means that NiaTel Ltd yielded higher returns per unit of risk which
probability will attract investor to invest on it.
(c) Sources and characteristics of Long-term Debt Finance
(i) Sources of Long-term Debt Finance
• Bank borrowing
• Loan stocks (Bonds).
(ii) Characteristics of Long-term Debt Finance

Long term debt is generally classified according to whether it is secured
by specific physical assets of the issuing company. Secured debt issues are
usually called mortgage bonds and issued not secured by specific assets
are called debentures, or occasionally debenture bonds. The term bond is
often used to denote any type of long-term debt security.
(iii) Characteristics of Long-term Debt Finance

• Indenture
An indenture is a contract between a firm that issues long term debt
securities and the lenders specifying the nature of the debt, issue,
restrictions placed on the firm by lenders (covenants).
• Maturity
The typical maturity on long term debt is about 20 to 30 years.
However any debt whose maturity is more than one year is usually
considered as long term debt.
• Lower Interest Rates

Long term debt usually comes with lower interest rates than short-
term financing.

(d) Calculating Expected Return and Standard Deviation
(i) Investment Strategy No. 1: 50% DSM and 50% Nakuru.
Expected Return: Ṝp = aṜDSM + bṜNK
ṜDSM = 10 %( 0.3) + 20 %( 0.3) + 15 %( 0.4) = 15%

ṜNK = 10 %( 0.3) + 30 %( 0.3) + 20 %( 0.4) = 20%
Expected Return: ṜP = aṜDSM + b ṜNK = 0.5(15%) + 0.5(20%)

Expected Return = 17.5%
Standard Deviation (σp)
= 15
σp NK2 = [(10-20)2(0.3) + (30-20)2(0.3) + (20-20)2(0.3)

= 30 + 30 + 0= 60
Cov(DSM, NK)
State Pi RDSM -E(RDSM) RNR -E(RNK) [RDSM -E(RDSM) ][RNR -E(RNK)]

Boom 0.3 -5 -10 15
Recession 0.3 5 10 15
Depression 0.4 0 0 0
COV(DSM, NK) 30
= 5.81%
(ii) Investment Strategy No. 2: 75% DSM and 25% Nakuru
Expected Return:
= 16.25%
Standard Deviation (σp)

+ 2abCov (DSM, NK)
= 4.84%
(e) Better Investment Strategy

To determine the better investment strategy one compares their Coefficients
of Variation.
Investment Strategy No.1
Investment Strategy No.2
Recommendation
Investment Strategy No. 2 has the lower coefficient of variation. It is therefore
recommended.
ANSWER 4
(a) Shares and efficient market hypothesis
(i) How are shares bought and sold?
If an investor wants to buy or sell shares, he contacts a "broker". The broker
will either act as an agent and deal through a "market maker" or he may deal
himself, in which case he is known as a "broker dealer". The broker will
charge a fee for his services, whilst a market maker will generate a profit
through the "bid - offer spread", which is simply the difference between the
price he is willing to pay for a share at which he is willing to sell it.
(ii) How are shares valued?
Shares are valued by market forces at the price at which there are as many
willing sellers as there are willing buyers. For instance, if a share is
overvalued there will be more people keen to sell their holding than there
will be willing to buy, and this will inevitably depress the market price.
(iii) The Efficient Market Hypothesis
The Efficient Market Hypothesis (EMH) considers whether market prices
reflect all information about the company. Three potential levels of
efficiency are considered.
• Weak-form efficiency:
Share prices reflect all the information contained in the record of past
prices. Share prices follow a random walk and will move up or down
depending on what information about the company next reaches the
market. If this level of efficiency exists, it should not be possible to
forecast price movements by reference to past trends.

• Semi-strong form efficiency:
Share prices reflect all information currently publicly available.
Therefore, the price will alter only when new information is published.
If this level of efficiency has been reached, price movements could only
be forecast if unpublished information were known. This would be
known as insider dealing.
• Strong-form efficiency:
Share prices reflect all information, published and unpublished, that is
relevant to the company. If this level of efficiency has been reached,
share prices cannot be predicted and gains through insider dealing are
not possible as the market already knows everything! Given that there
are still very strict rules outlawing insider dealing, gains through such
dealing must still be possible and therefore the stock market is at best
only semi-strong form efficient.
(iv) The Significance of efficiency market hypothesis for Financial

Manager
If the EMH is correct and share prices are fair, there is no point. in
financial managers seeking to mislead the capital market, because such
attempts will be unsuccessful. Window-dressing financial statements, for
example, in order to show a company's performance and position in a
favourable light, will be seen through by financial analysts as the capital
market digests the financial statement - Information in pricing the
company's shares.
Another consequence of the Efficiency Market Hypothesis (EMH) for

financial managers is that there is no particular time which is best for
issuing new shares, as share prices on the stock market are always fair.
Because share prices are always fair, there are no bargains to be found on
the stock market, i.e. companies whose shares are undervalued. An
acquisition strategy which seeks to identify and exploit such stock market
bargains is pointless if the EMH is correct.
It should be noted, however, that if real-world capital markets are semi-

strong form efficient rather than strong form efficient, insider information
may undermine the strength of the points made above. for example, a
company which is valued fairly by the stock market may be undervalued
or overvalued if private or insider information is taken into account.
(b) The major advantages of a rights issue are as follows:

• Rights issues are cheaper than IPOs to the general public. This is partly
because no prospectus is not normally required, partly because the
administration is simpler and partly because the cost of underwriting will be
less.
• Rights issues are more beneficial to existing shareholders than issues to the
general public. New shares are issued at a discount to the current market
price, to make them attractive to investors. A right issue secures the discount
on the market price for existing shareholders, who may either keep the
shares or sell them if they wish.
Relative voting rights are unaffected if shareholders all take up their rights. The
finance raised may be used to reduce gearing in book value terms by increasing
share capital and/or to pay off long-term debt which will in market value terms.
Deciding the issue price for a rights issue

The offer price in a rights issue will be lower than the current market price of
existing shares. The size of the discount will vary, and will be larger for difficult
issues. The offer price must however be at or above the nominal value of the
shares, so as not to contravene company law.
A company making a rights issue must set a price which is low enough to secure
the acceptance of shareholders, who are being asked to provide extra funds, but
not too low, so as to avoid excessive dilution or the earnings per share.
(c) (i) Calculating Values of Financial Indicators – Percent of Sales Method
Value of Financial Indicator (2022) = Value of Financial Indicator (2021) S2022 x

S2021.
• Total Assets (2022) = TZS.9m/TZS.15m x TZS.18m = TZS.10.8m
• Fixed Assets (2022) = TZS.3m/TZS.15m x TZS.18m = TZS.3.6m
• Accounts Receivable (2022) = TZS.3m/TZS.15m x TZS.18m = TZS.3.6m
• Accounts Payable (2022) = TZS.3.75m/TZS.15m x TZS.18m = TZS.4.5m
• Additional Funds Needed
AFN = ∆S - ∆S – mS1b
Where: So = TZS.15m S1 = TZS.18m ∆S = TZS.3m

b = 0.5 m = 0.03
A/So = 9/15 = 0.6 L/So - 4.5/15 = 0.3

AFN = (0.6)(3m) - (0.3) (3m) - (0.03) (18m) (0.5)
= 1.8 - 0.9 - 0.27
= TZS.0.63m
(ii) External Financing Requirements – Regression Equation

Regression Equation to be estimated: Y = a + bt.

Given: = [6+7+8+10+13 = 44]
= [l +2+3+4+5] = 15
= [6+14+24+40+65] =149
b=
a= = 8.8 – 501 = 3.7
The regression equation is therefore:

Y = 3.7 + l.7t and External Financing Requirement = TZS.3.7m + I .7(6) =
TZS.13.9m
(iii) Predicted Inventory Value 2025
Regression Equation to be estimated: Y = a + bX
Given: = = [1.4+1.5+1.6+1.8+2.0 = 8.3]
= [9 +10+11+13+15] = 58
= [12.6+15+17.6+23.4+30] = 98.6
b=
a= - = 1.66 – 1.16 = 0.5
The regression equation is therefore:
Y1 = 0.5 + 0.1X, and Expected Inventory (2025) = TZS.0.5 + TZS.0.1(23) =

TZS.2.8.

ANSWER 5
(a) Operating Leases and Finance Lease: Key Differences

Finance Lease
A finance lease is an agreement between the user of the leased asset and a
provider of finance that covers the majority of the asset's useful life.
Key features of a finance lease:
• The provider of, finance is usually a third-party finance house and not the
original provider of the equipment.
• The lessee is responsible for the upkeep, servicing and maintenance of the
asset.
• The lease has a primary period, which covers all or most of the useful
economic life of the asset. At the end of the primary period the lessor would
not be able to lease the equipment to someone else because it would be worn
out.
• It is common at the end of the primary period to allow the lessee to continue
to lease the asset for an indefinite secondary period, in return for a very low
nominal rent, sometimes known as a 'peppercorn' rent.
• The lessee bears most of the risks and rewards and so the asset is shown on
the lessee's balance ‘sheet.
Operating Lease
Operating leases are rental agreements between a lessor and a lessee.
Key features of an operating lease:
• The lessor supplies the equipment to the lessee.
• The lessor is responsible for the upkeep, servicing and maintenance of the
asset.
• The lease period is fairly short, less than the expected economic life of the
asset. At the end of one lease agreement the lessor can either lease the same
equipment to someone else. and obtain a rent for it or sell it second-hand.
• The asset is not shown on the lessee's balance sheet.
(b) (i) Calculation of the Net Present Value (NPV)

Year 0 1 2 3 4 5 6
TZS.000 TZS.000 TZS.000 TZS.000 TZS.000 TZS.000 TZS.000
Capital Investment (8,000)
Working Capital (900)
Sales Revenue 16,000 16,000 16,000 16,000 16,000
Variable Costs (11,000) (11,000) (11,000) (11,000) (11,000)
Fixed Costs (1,600) (1,600) (1,600) (1,600) (1,600)
Before Tax Cf 3,400 3,400 3,400 3,400 3,400
Project Cash Flow (8,900) 3,400 2,380 2,380 2,380 2,780 (1,020)
Disc. Factor (11%) 1 0.901 0.812 0.731 0.659 0.593 0.535
Present Value (8,900) 3,063.4 1,932.6 1,739.8 1,568.4 1,648.5 (545.7)

NPV = TZS. (3,063.4+ 1,932.6+ 1,739.8+ 1,568.4+ 1,648.5- 545.7)– 8,900
= 9,407 – 8900 = TZS 507
The Net Present Value is positive and therefore the project is financially
acceptable.
(ii) Internal Rate of Return

Trial and error concept
Try 25%
Project Cash Flow (8,900) 3,400 2,380 2,380 2,380 2,780 (1,020)
Disc. Factor (25%) 1 0.8 0.640 0.512 0.410 0.328 0.262
Present Value (8,900) 2,720 1,523.2 1,218.6 975.8 911.84 267.2
IRR = (2,720 + 1,523.2 + 1,218.6+ 975.8 + 911.84 + 267.2)-8900
= 7,617- 8,900= - TZS 1,293
= 14.59%
IRR = 11 + 507 (25-11)= 14.68%
507+1283
(c) The Economic Order Quantity can be found as follows:
EOQ =
Before Reorganization
Demand = 40,000 units per annum
Ordering Cost = TZS.100 per Order
Holding cost = 20% x TZS.250
EOQ = [2 x 40,000 x 100/(0.2 x 2,500)] 1/2
= 16, 000,0001/2
= 4,000 Units
After Reorganization
Demand= 40,000 units per annum
Ordering Cost = TZS.25 per Order
Holding Cost = 20% x TZS2.50
EOQ = [2 x 40,000 x 25]/(0.2 x 2.50)]1/2
= 4,000,0001/2
= 2,000 Units
Implementation of the new system will affect both the total ordering costs per
annum and the inventory holding cost. Under the existing system these costs
are as follows:
(b) Ordering Costs

EOQ is 4,000 units; Demand is 40,000 units
Number of orders per year is therefore 10
Cost per order is TZS.100
Total Ordering Cost per annum = TZS.100 x 10 = TZS.1,000

Carrying Cost
EOQ is 4,000 units
Average Inventory is therefore 4,000/2 = 2,000
Cost is 2,000 x TZS.2.50 x 20% = TZS.1,000
The Annual Cost = TZS 2,000
Under the Proposed System the costs would become as follows:

Ordering Cost
EOQ is 2,000 units; Demand is 40,000 units
Number of orders per year is therefore 20
Cost per order is TZS.25
Total Ordering Cost per annum = TZS.25 x 20 = TZS.500
Carrying Cost
EOQ is 2,000 units
Average Inventory is therefore 2,000/2 = 1,000
Cost is 1,000 x TZS.2.50 x 20% = TZS.500
The Annual Cost = TZS 1,000
The annual cost saving is therefore TZS.1,000.
ANSWER 6
(a) The following are three (3) reasons for a company to hold cash:
(i) The transactions motive

An important reason for maintaining cash balances is the transaction motive.
This refers to the holding of cash to meet routine cash requirements of the
company to finance the transactions which a firm carries on in the normal
course of business. A company enters into a variety of transactions to
accomplish its objectives which have to be paid for in the form of cash. For
example, cash payments have to be made for purchases, wages, operating
expenses, financial charges like interest, taxes, dividends and so on.
(ii) The precautionary motive

Cash is held by the company to handle emergencies (unforeseen expenses). In
addition to the non-synchronization of anticipated cash inflows and outflows in
the ordinary course of business, a company may have to pay cash for purposes
which cannot be predicted or anticipated in advance. The unexpected cash
needs at short notice may be the results of:
• Workers' strikes, and failure of important customers;

• Bills may be presented for settlement earlier than expected;
• Unexpected slowdown in collection of accounts receivable;
• Cancellation of some order for goods as the customer is not satisfied; and sharp
increase in cost of raw materials.
The cash balances held in reserve for such random and unforeseen fluctuations
in cash flows are called precautionary balances. Thus, precautionary cash
balance serves to provide a cushion to meet unexpected contingencies. The
more unpredictable are the cash flows, the larger is the need for such balance.
(iii) The speculative motive

There is always the possibility of an unexpected opportunity occurring in the
business world and a company may wish to be prepared to take advantage of
such a business opportunity if it arises. It may therefore wish to have some
cash balance available for this purpose; this is the speculative need for cash.
For example. speculative motive helps to take advantage of:
• An opportunity to purchase raw materials or other items at a reduced price

on payment of immediate cash;
• A chance to speculate on interest rate movements by buying securities
when interest rates are expected to decline.
(b) Goal congruence is where the conflict of interest is removed and the interests of
the director are the same as the interests of the principal.
The main approach to achieving this is through the remuneration Scheme. In this
approach you introduce profit-related pay, for example by awarding a bonus
based on the level of profits. However, again this may not always achieve the
desired goal congruence - directors may be tempted to use creative accounting to
boost the profit figure, and additionally are perhaps more likely to be concerned
more with short-term.
Another approach to align interest of shareholders and agent is through share

options which encourage directors to maximise the value of shares in the
company, the directors are more likely to be concerned about. The short-term
effect of decision on the share price rather than worry about the long-term effect.
The shareholders are more likely to be concerned with long-term growth.
(c) (i) The cash operating cycle can be calculated by adding inventory days and
receivable days, and subtracting payables.
Cost of sales = 700,000,000 x (1 – 0.4) = TZS.420,000,000

Inventory days = 360 x 91,000,000,000/420,000,000 = 78
days
Trade receivable days = 360 x 81,670,000,000/700,000,000 = 42
days
Trade payable days = 360 x 37,340,000,000/420,000,000 = 32
days
Cash operating cycle of A to Z = 78 + 42 – 32 = 88 days
Co.
(ii) Inventory at end of January 2020 = 91,000,000 + 10,450,000 =

TZS.101,450,000.
At the start of January 2020, 100% of December 2019 receivables will be

outstanding (TZS.60,000,000), together with 40% of November 2019

receivables (TZS.21,670,000 = 40% x 54,175,000), a total of
TZS.81,670,000 as given.
TZS.
Trade receivables at start of January 2021 81,670,000
Outstanding November 2021 receivables paid (21,670,000)
December 2020 receivables, 60% paid (36,000,000)
January 2021 credit sales 70,000,000
Trade receivables at the end of January 2021 94,000,000
TZS.
Trade payables at start of January 2021 37,340,000
Payment of 70% of trade payables (26,138,000)
January 2020 credit purchases 50,000,000
Trade payables at the end of January 2021 61,202,000
TZS.
Overdraft at start of January 2021 48,050,000
Cash received from customers (57,670,000)
Cash paid to suppliers 26,138,000
Interest payment 14,000,000
Operating cash outflows 29,300,000
Overdraft expected at the end of January 2021 59,818,000
(iii)
TZS.
Current assets at start of January = 91,000,000 + 81,670,000 = TZS.172,670,000
2021
Current liabilities at start of = 37,340,000 + 48,050,000 = TZS.85,390,000
January 2021
Current ratio at start of January = 172,670,000/85,390,000 = TZS.2.03 times
2021
Current assets at the end of = 101,202,000 + 94,000,000 = TZS.195,450,000
January 2021
Current liabilities at the end of = 61,202,000 + 59,818,000 = TZS.121,020,000
January 2021
Current ratio at the end of = 195,450,000/121,020,000 = 1.62 times
January 2021
(d)
DATA WITH DRAWALS
Savings A = TZS.300,000
N = 30 years
R = 10% N = 25 years
FVA = ? R = 10 %
PVA = ?

PVA = (I- _______I A
r r(1+r)2
= I__________I
0.1 0.1(1.1)25) 300,000
= PVA = TZS.27,231,120
= FVA = PVA
FVA = 27, 231, 120
FVA = (I+r)n-1
r
27,231,120 = (1.0)30-1
0.1
A = TZS. 165,545
Annual Deposits is TZS.165, 545
______________  ______________

T
SUBJECT : PUBLIC FINANCE AND TAXATION
CODE : B4
EXAMINATION DATE : TUESDAY, 22ND FEBRUARY, 2022
TIME ALLOWED : THREE HOURS (9:00 A.M. – 12:00 NOON)
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of SIX questions.
2. Answer question ONE in Section A.
3. Answer ANY FOUR questions in Section B.

20
6. Calculate your answers to the nearest two decimal points where necessary.
8. Applicable tax rates are provided in Appendices on page 10 of 10.
_________________

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SECTION A
Compulsory Question
----------------------------------------------------------------------------------------------------------
QUESTION 1
(a) Taka Mando is an entrepreneur engaged in commercial garbage collections

around the suburbs of Dar es Salaam region. It has a number of collection points
in each of the districts of Dar es Salaam and uses both trucks and carts in
collection of garbage. The revenue comes from the city council, municipal
councils, as well as businesses and individuals with large volumes of garbage.
Taka Mando is a resident person for the year of income 2021 and is VAT
registered. The following information has been provided regarding Taka Mando’s
business for the year of income 2021:
Income statement for the year ended 31st December 2021
Item TZS.
Revenue 401,500,000
Expenses
Direct Garbage collection costs (331,880,000)
Administration costs (90,240,000)
Duties and levies (14,440,000)
Marketing costs (28,446,000)
Profit (loss) before tax (63,506,000)
The following additional information is given:
1. The amount of revenues incudes one payment received at 31st December 2021 at
VAT inclusive price of TZS.6,800,000. The revenue figure also did not capture
invoices totaling to TZS.36,000,000 (VAT inclusive) issued at 31st December
2021 as a charge for providing sanitation services at the end of year parties
organized by the city and municipal councils in different parts of the region.
These are expected to be paid two weeks after the issue date.
2. Direct garbage collection costs include:
Item TZS.
Fuel 86,400,000
Maintenance and repairs for garbage collection trucks 50,612,000
Purchase of electric motor tricycles for access to interior 30,000,000
settlements
Wages for garbage collection and drivers 109,500,000
Overnight parking costs 7,300,000
Loss on disposal of scrapped garbage truck 6,800,000
Depreciation of trucks 41,268,000
Total 331,880,000

3. Administration costs include:
Item TZS.
Salaries and other employee benefits 54,000,000
Office rent 10,800,000
Acquisition of EFD 12,000,000
Office running expenses 13,440,000
Total 90,240,000
4. Marketing costs include:

Item TZS.
TV advertising 6,250,000
Hire of advertising van 7,815,000
Commission to municipal sanitation officer to recommend
the service 2,000,000
Facilitating street meetings to discuss sanitation matters 5,236,000
Cost of participation in exhibition 7,145,000
Total 28,446,000
The facilitation of street meetings includes amount paid to five streets chairperson
and five street executive officers amounting to TZS.100,000 each in order to
convince the community to give exclusive garbage collection business to Taka
Mando. The remaining costs include hire of public address system, venue
preparation and drinking water.
5. Duties and levies include:

Item TZS.
Street parking during garbage collection 8,640,000
Fines for breach of occupational health procedures 4,000,000
Fines for wrong parking 1,350,000
Office rates 450,000
Total 14,440,000
6. The following are the details relating to depreciable assets of the business at
1st January 2021:
Class I Class II Class III
Cost TZS. 28,685,000 684,980,000 26,480,000
Tax written down value 17,698,000 402,550,000 895,000
TZS
One of the garbage collection trucks was involved in an accident during the year
and the business disposed the scrap. The truck had a book value of
TZS.12,500,000 in the business’ accounting records up to the date of accident.
The loss on disposal in (2) above relate to this disposal.
7. In an attempt to improve the controls, the business acquired 2 computers and

related hardware to track the garbage collection trucks for TZS.8,620,000. The
truck tracking software acquired for TZS.5,450,000 and installation of the
tracking system was completed during June 2021. The system was put to use from
July 2021 and has a useful life of 5 years.
REQUIRED:
(i) Calculate depreciation allowances deductible for the Taka Mando for the
year of income 2021. (5 marks)
(ii) Calculate the chargeable income from business for Taka Mando for the
year of income 2021. (15 marks)
(Total: 20 marks)
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SECTION B
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QUESTION 2
Editha Kisecko was employed as a principal educational officer in Hanang District since
January 2018 on a permanent and pensionable terms. The following relate to her income
for the year 2021:
1. Monthly basic salary TZS.2,800,000. The amount is subject to PSSSF
contribution of 5%. The employer contributes 15%. All the salaries for the months
of 2021 were received during the year.
2. Editha and her family are freely accommodated in the council’s staff quarters
since 2019. Rent for a similar house around the area costs TZS.200,000 per
month. Editha is, however, responsible to meet monthly water and electricity
bills, which for the year 2021 amounted to monthly figure of TZS.25,000 and
TZS.40,000 respectively for each staff accommodated in the quarters, payable to
the council.
3. Editha received a honorarium of TZS.500,000 during May 2021 for successfully
supervising the budgeting for the 2021/22 for the education section of the council.
4. During the year, Editha supervised inspection of various educational activities in

the council and received a TZS.460,000 for transport (dully accounted for),
TZS.4,200,000 as accommodation (per-diem as per district circular) and
TZS.800,000 extra-duty allowance in respect of such activities.
5. Editha received a responsibility allowance at 10% of her basic salary as the

coordinator of the education section in the council.
6. By virtue of her position, Editha was invited to various graduation ceremonies in

different private and government schools in the district during the year. The
schools traditionally gave her a ‘handshake’ with token amounts of money. A
total of TZS.1,200,000 was received during the year, out of which TZS.800,000
was from private schools.
7. Editha and the council contribute 3% each towards her health insurance under the
National Health Insurance Fund.
REQUIRED:
(i) Calculate the chargeable employment income of Editha for the year of
income 2021. (7 marks)
(ii) State the differences you would have in the computations above if Editha
was employed in an educational NGO and calculate the resultant
chargeable income. (11 marks)
(iii) State and justify whether or not Editha is required to file a return of
income assuming that the data above reflect all her income for the year of
income 2021. (2 marks)
(Total: 20 marks)
(NB: In your deductions, show, the item not chargeable as ‘NIL’ figures)
QUESTION 3
(a) Tanzania income tax law utilizes a self-assessment system.
REQUIRED:
Explain the meaning of self-assessment system and state any three (3) arguments
to justify the use of such system. (5 marks)
(b) On 30th December 2020, G&K Limited furnished its statement of estimated tax
payable for the year ended 31st December 2020 declaring estimated taxable
income of TZS.102,000,000. For the year ended 31st December 2020, the
company did not receive any non-final withholding payment. The full taxes
(including their respective penalties and interests) on the statement of estimated
tax payable were paid on the same date of furnishing provisional return.
On the 1st December 2020, the commissioner served a notice on the company
requiring it to furnish its return of income for the year of income 2020 within 14
days of that notice. On 23rd of December 2021, the company filed return of
income declaring annual taxable income of TZS.180,000,000. On the same date,
the company settled all taxes due (including penalties and interests).
REQUIRED:
(i) Determine provisional tax paid on 30th December 2020 (excluding

penalties and interests). (3 marks)
(ii) Would your answer in (i) change had the company received non-final
withholding payment on 29th September 2020? If yes why? (4 marks)
(iii) Compute penalty for failure to file provisional return. (3 marks)
(c) A fellow student asserted that “of all types of government budget, a surplus is an
indicator of the government determination and commitment towards improving
the economy and will being of the people of developing countries in particular”.
REQUIRED:
Explain whether this statement is true or not. (5 marks)

(Total: 20 marks)
QUESTION 4
(a) Explain the main role of customs and excise department. (2 marks)
(b) Explain the following terms as used in customs.
(i) Manufacturing under bond
(ii) Duty draw back
(iii) Green channel
(iv) Smuggling
(8 marks)

(c) One of the duties that an importer of used vehicles to Tanzania is subjected to is
the excise duty due to age, and another one is railway development levy.
REQUIRED:
Comment on how each of the two can serve as a means of redistribution of
income. (8 marks)
(d) Discuss on the extent to which import duties can be used to discourage
importation of commodities that the state considers undesirable. (2 marks)
(Total: 20 marks)
QUESTION 5
(a) A good tax system can be used to achieve a number of government objectives.
For this to be realized, a tax system in terms of laws, administration and policies
has to be shaped by the canons/principles of taxation. This is supported by the
argument made by Adam Smith in 1776 that, a tax system should follow four
principles of taxation. However, they are not always followed.
REQUIRED:
(i) Briefly explain four (4) canons of taxation according to Adam Smith.
(4 marks)
(ii) With reference to any tax law in Tanzania, explain the extent to which
canons/principles of taxation have shaped tax system in Tanzania.(4 marks)
(iii) Discuss two (2) factors which indicate that principles of taxation are not
always followed in Tanzania. (2 marks)
(b) Discuss three (3) arguments against foreign aids in developing countries.(3 marks)
(b) Explain any five (5) determinants of the size of government expenditure.(5 marks)
(c) Explain any two (2) objectives of fiscal policy. (2 marks)
(Total: 20 marks)
QUESTION 6
(a) After a letter of engagement was signed on 20th November 2021, a taxable person
received an advance payment equal to 60% of the total payments from her client.
This payment was received on 30th November 2021 for the one-day consultancy
assignment which was rendered on 5th December 2021. The final payment was
effected on 20th December 2021 after a full report was dully submitted to the
customer.
REQUIRED:
(i) Based on the above scenario, what is the tax point for Value added Tax
(VAT) purpose? (1 marks)
(ii) Briefly explain the significance of determining tax point from both
consultant and client perspectives. (3 marks)
(b) KM is a general trading enterprise which was registered for VAT purpose in
November 2020. During the preparation of October 2021 VAT return, the
accountant of KM realized that the company did not claim input tax credit
incurred in January 2021. He, therefore, decided declaring and claiming the
amount in the October 2021 VAT return. However, this treatment was denied by
Tanzania Revenue Authority (TRA).
REQUIRED:
(i) With reasons, explain if Tanzania Revenue Authority (TRA) was right to
deny KM from claiming the input tax credit which was actually incurred
by KM in January 2021. (2 marks)
(ii) The following information is provided by KM for the month of November
2021.
Purchases* for November 2021

Items TZS.
Unprocessed food stuffs for dogs & cats 13,800,000
Electricity 112,000
Logs purchased from unregistered trees farmer 78,900,000
Stationaries 200,000
Fertilizers 12,000,000
Bottled water to entertain customers 1,020,000
Salaries 2,790,000
4 Refrigerators (One refrigerator costing TZS.2,500,000
was acquired for the purpose of storing meat) 10,000,000
Other soft drinks (for the purpose of selling) 3,150,000
*Unless stated otherwise, all purchases were made from registered suppliers.
Sales for November 2021

Items TZS.
Unprocessed food stuffs for Dogs & Cats 8,500,000
Soft drinks sold to unregistered person 2,100,000
1 Refrigerator 3,200,000
Fresh fruits sold to both registered and unregistered
persons 100,000
Unprocessed milk sold to a registered person 4,200,000
Consultancy fee (net of 5% withholding tax) 950,000
Fertilizers 3,150,000
All figures are exclusive of VAT.
REQUIRED:
Compute net VAT payable for November 2021. (14 marks)

(Total: 20 marks)

Appendices
(1) Applicable resident individual income tax rates:
Monthly income Tax rate
Where total income does NIL
not exceed TZS.270,000
Where total income exceeds TZS.270,000 9% of the amount in excess of TZS.270,000
but does not exceed TZS.520,000
Where total income exceeds TZS.520,000 TZS.22,500 plus 20% of the amount in excess
but does not exceed TZS.760,000 of TZS.520,000
Where total income exceeds TZS.760,000 TZS.70,500 plus 25% of the amount in excess
but does not exceed TZS.1,000,000 of TZS.760,000
Where total income exceeds TZS.1,000,000 TZS.130,500/ plus 30% of the amount in excess
of TZS.1,000,000
(2) Applicable presumptive income tax rates:
Annual turnover Tax payable when Tax payable when section 80
section 80 is not is complied with
complied with
Where turnovers does not exceed NIL NIL
TZS.4,000,000
Where turnover exceeds TZS.4,000,000 but TZS.100,000 3% of the turnover in excess
does not exceed TZS.7,000,000 of TZS.4,000,000
Where turnover exceeds TZS.7,000,000 but TZS.250,000 TZS.90,000 + 3% of the
does not exceeds TZS.11,000,000 turnover in excess of
TZS.7,000,000
Where turnovers exceeds TZS.11,000,000 TZS.450,000 TZS.230,000 + 3% of the
but does not exceed TZS.14,000,000 turnover in excess of
TZS.11,000,000
Where turnover exceeds TZS.14,000,000 but Not applicable TZS.450,000 + 3.5% of the
does not exceed TZS.100,000,000 turnover in excess of
TZS.14,000,000
(3) Car benefit quantification table as per the 5th Schedule
QUANTITY OF PAYMENT PER YEAR
ENGINE SIZE OF VEHICLE Vehicle up to 5 years old Vehicle more than 5 years old
Not exceeding 1000cc TZS.250,000 TZS.125,000
Above 1000cc but not exceeding
2000cc TZS.500,000 TZS.250,000
Above 2000cc but not exceeding
3000cc TZS.1,000,000 TZS.500,000
Above 3000cc TZS.1,500,000 TZS.750,000
(4) Statutory rate to be used is 5%
(5) 1 currency point = TZS.15,000
(6) Standard rate of VAT = 18%
(7) Capital gain rates for resident is 10% and for non-resident is 20%.
(8) Unless otherwise specified, Corporate tax rate = 30%
___________▲____________

SUGGESTED SOLUTIONS
B4 – PUBLIC FINANCE AND TAXATION
FEBRUARY 2022
ANSWER 1
(a) Calculation of depreciation allowance

Class I Class II Class III Class VII Class VIII
37.5% 25% 12.5% 1/n 100%
Depreciation basis at 1/1/2021 17,698,000 402,550,000 895,000
Additions
Electric Motor tricycles 30,000,000
Acquisition of EFD 12,000,000
Computer and related hardware 8,620,000
Software for trucks tracking 5,450,000
systems
26,318,000 432,550,000 895,000 5,450,000 12,000,000
Incomings (Disposal) (5,700,000)
Depreciation basis 31/12/2021 26,318,000 426,850,000 895,000 5,450,000 12,000,000
Depreciation allowance 9,869,250 106,712,500 895,000 1,090,000 12,000,000 130,566,750
(b) Calculation of chargeable income for the year

Taxpayer: Taka Mando
Residential status: Resident
Year of Income: 2021
TZS. TZS.
Profit before Tax (63,506,000)
Add: end of year invoice 30,508,475
Add back:
Depreciation 41,268,000
Loss on disposal 6,800,000
Acquisition of new EFDs 12,000,000
Purchase of electric motor tricycles for access to interior 30,000,000
settlements
Meetings facilitation 1,000,000
Commission 2,000,000
Fines for breach of Occupational health procedures 4,000,000
Fines for wrong parking 1,350,000 98,418,000
TZS. TZS.
65,420,475
Less:
Depreciation allowance (130,566,75
0)
VAT adjustment (1,037,288)
Chargeable income for the year (66,183,563
)
ANSWER 2
(a) Calculation of chargeable employment income

Taxpayer: Editha Kisecho
Source of Income: Employment
Item TZS.
Salary 33,600,000
Housing benefit NIL
Honorarium NIL
Transport allowance NIL
Accommodation NIL
Extra-duty allowance NIL
Responsibility allowance NIL
Handshake 1,200,000
34,800,000
Less: PSSSF employee deduction (1,680,000)
Chargeable employment income 33,120,000
(b) Differences it would make if Editha was an employee in an educational NGO

and resulting calculation.
The following items would have been included as chargeable: Housing benefits,
honorarium, responsibility allowance and extra-duty allowance
The calculation of chargeable employment income would thus be:

Taxpayer: Editha Kisecho
Source of Income: Employment

Item TZS.
Salary 33,600,000
Housing benefits 2,400,000
Honorarium 500,000
Transport allowance NIL
Accommodation NIL
Extra-duty allowance 800,000
Responsibility allowance 3,360,000
Handshake 1,200,000
39,460,000
Less: PSSSF employee deduction (1,680,000)
Less: Health insurance (3% x 33,600,000) (1,008,000)
Chargeable employment income 39,172,000
Housing benefits calculation
15% of emoluments without the benefits 5,667,000
Market value of rental 2,400,000
Lesser = Housing benefit 2,400,000
(c) Requirement for Editha to file a return

Editha is not required to file a return.
Reasons
• She is a resident individual
• her income is derived exclusively from employment.
ANSWER 3
(a) Meaning and arguments for self-assessment system.

Self-assessment system is a system whereby taxpayers are required to do their
own calculation of income chargeable and the tax payable, and file a return
containing the details of such calculations to the tax authorities in prescribed time
and market.
The justifications for such system are:

• Promotion of understanding of tax laws and obligations.
• Minimization of tax disputes
• Promotion of voluntary tax compliance
(b) (i) Provisional tax paid on 30th December 2020

Installment taxes
Installment tax = (A-C)/B

Where
A = Estimated income tax = 30,600,000(TZS.102,000,000*30%)
B = Number of installments remaining including the current installment 1
C = Nil
Therefore, installment tax = 30,600,000
(ii) Yes, receipts of any non-final withholding tax would affect the
computation of installment tax. This is because, among the items
constituting ‘C’ in the formula used to compute installment tax, non-final
withholding tax/defaulted non final withholding tax are mentioned.
Therefore, receipt of any non-final withholding payment would have

reduced the amount of tax paid on 30th December 2021.
(iii) Penalty for failure to file provisional return

The provisional return was due to be filed on 31st March 2020, but G & K
Ltd submitted it on 30th December 2020 (9 months delay).
Penalty for Penalty (per month) Delays Total Total Penalty

(Higher of a
and b)
Failure to file (a) 2.5% x (30.6m-Nil) = 765,000 9 6,885,000
provisional return
(b) 15CP(15,000 x 15) = 225,000 9 2,025,000 6,885,000
(c) Since developing countries have so many to undertake (e.g. to build schools,
hospitals, roads etc), to reach the ‘developed country’ status, it is obvious that
budget deficit (as opposed to the budget surplus) is the appropriate type of
government budget to bring this economic revolution and consequently social
well-being of its people. (4 marks)
However, budget surplus can still be used by developing countries to achieve other
objective like repayment of loan as in most cases; the surplus obtained is used to
repay loans.
(1 mark)
ANSWER 4
(a) The role of customs and excise department
(1) Revenue administration.
(2) Trade facilitation
(3) Border control
(4) Data collection
(5) Regulate customs broker
(b)
(i) Manufacturing under bond
This is a facility extended to manufacturers to import plant, machinery,
equipment and raw materials tax free, for exclusive use in the manufacture
of goods for export.
(ii) Duty drawback
A refund of all or part of any import duty paid in respect of goods exported
or used in a manner or for a purpose prescribed as a condition for granting
duty drawback.
(iii) Green channel

This channel is used as clearance procedures for passengers arriving from
foreign destination at the airport of arrival. under this procedure, a person
passing through this channel is treated as having made declaration of not
having dutiable goods. (Refer report for updated definitions).
(iv) Smuggling
The importation, exportation, or carriage coastwise, or the transfer or
removal into or out of a Partner States, of goods with intent to defraud the
Customs revenue, or to evade any prohibition of, restriction on, regulation
or condition as to, such importation, exportation, carriage coastwise
transfer, or removal, or any goods.
(c) Excise duty due to age and railway development levy.
Excise Duty due to age

As for excise duty due to age, it would look like a two-edged sword, since when
one relates persons who buy ‘new’ against those buying ‘older’ vehicles, then
there would be greater inequality, since newer vehicles are more likely to be
bought by persons with higher income.
However, when one compares vehicle owners with those who cannot afford to
buy vehicles, then any attempt to tax such vehicles may work towards addressing
income inequalities.
However, if such vehicles are used for offering public transportation services,
then there could be attempts to try recovering the costs from the same poor
persons in terms of higher fares, unless there is a strong price control.
Railway development levy

This one is supposed to address inequality. it must, however, be assumed that
majority of railway users (travelling to destinations that have railway connections)
are low-income earners. it must further be assumed that such levy is actually used
for the same purpose as intended.
(d) Import duties and discouraging importation of undesirable commodities

Import duties trend to add to the cost of commodities. Literally a higher import
duty makes the product more expensive.

Making a product more expensive would going by the law of demand, reduce the
demand for such product, but this will not be at the same rate for all kinds of
persons.
Whether or not excise duties would discourage undesirable commodities would

still depend on the elasticity of demand for the commodity in question.
ANSWER 5
(a) (i) Canons of taxation
Equality
This is the most important principle of taxation. It means that the tax system
should be framed depending on the ability of the people to pay tax that is the
richer sections or the high- income group should be subjected to higher tax
while relatively less tax should be imposed on the low-income group.
Economy
A good tax system will ensure that the cost of collecting and paying tax as
well the compliance cost is minimum. For example, if there are many
procedures for payment of tax and filing of related documents or if a number
of visits are required by the tax payer to the tax office, then the tax system is
said to be uneconomical. In a broader sense, if very high tax is levied on the
income of the tax payer, it will discourage savings and the productive capacity
of the economy will go down, which will be uneconomical for the country.
Certainty
It means that tax that each tax payer is required to pay should be certain and
there should be no ambiguity. The amount to be paid, timing of payment,
procedure for payment should all be certain and known to the tax payer. There
should be no element of ambiguity in the taxation provisions as this may lead
to corruption (if any element of taxation can be controlled by the will of the
government authorities). Certainty is also required from the point of view of
the government in terms of the estimated amount to be collected from various
taxes and the time frame when the same will be collected.
Convenience
The tax system should be so designed that it pauses minimum inconvenience
to the tax payers in respect to payment of tax, record- keeping, filing of
returns, audits etc.
(ii) How canons of taxation have shaped tax system in Tanzania

• Withholding tax system is a reflection of convenient way of collecting
tax.
• Instalment tax system is a reflection of convenience principle in
Tanzania where a tax payer is required to start paying tax based on
estimates and by instalments before the year ends. This reduces the

burden and pinch which could be experienced by the tax payer if the
whole tax was supposed to be paid at once.
• The principal of equity is reflected under Section 4 of the income tax
Act which requires income tax to be paid by any person who has
total income or who receives final withholding payments. Therefore,
any person who is not able to pay income tax (who has no total
income or who has not received final withholding payments) is not
subject to income tax.
• Online filing of returns has tremendously improved convenience of
tax administration in Tanzania.
• Generally indirect taxes like VAT are convenient to the consumers
because a consumer pays for them when he makes purchases and at a
time when he can afford to because he chooses his own time of
purchasing.
• Self-assessment system is also a reflection of certainty principle.
(One marks for each of any four points explained)
(iii) Factors indicating violation of canons of taxation

• Although some supplies are exempted to allow low-income earners to
purchase the tax free, VAT is still criticized because it leaves those who
are able to pay tax untouched and allow them to pass the burden to the
final consumer whose wealth may be low as compared to the supplier.
• Sometimes Tanzania Revenue Authority does not, or cannot, apply

regulations or prosecute those who evade taxes in a cost-effective manner.
(One marks for each point explained)
(b) Arguments against foreign aids

• Aids create economic dependency
• Some aids are accompanied with some conditions which may be harmful
to the economic and social interest of a country
• Some aids are in poor quality and therefore useless.
• Aids may be a disincentive for domestic production.
(One marks for each of the three points explained)
(c)
• Growing Population
• Maturity of public debts and Interest Payments
• Subsidies offered by the government
• Urbanization
• Inflation
• Ambitious development projects
(d) Objectives of fiscal policy

• To achieve full employment fiscal policy, aim to reduce unemployment
• Price stability
• To accelerate the rate of economic growth
Taxation, government expenditure and public borrowings should be used
to encourage consumption, production and distribution.
ANSWER 6
(a) (i) Tax point is on 30th November 2021 because the event (receipt of
consideration) comes earlier than render of a service.
(ii) Tax point helps the supplier of the service to know in which month to
account for VAT. In this case, the supplier of the consultancy service is
required to account for the resultant output tax in November 2021.
On the client side, tax point helps to know in which month to claim the
input tax incurred (if it is really claimable). From the given scenario, the
input tax paid is supposed to be claimed in November 2021
(b) TRA was right to deny KM from claiming January 2021 input tax credit in
October 2021 because a taxable person is required to claim any input tax credit
not later than six months after the date of incurring it.
(c) Net VAT payable

TZS.
Total output tax (WI) 2,664,000
Less: Total input tax credit (W2) 4,735,066
Add/Less Increasing/decreasing adjustment (W3) -
Net VAT payable (2,071,066
WI: Total output tax

Output tax
Details TZS.
Unprocessed food stuffs for dogs & Cats 1,530,000
Soft drinks 378,000
Refrigerator 576,000
Fresh fruits Nil
Unprocessed milk Nil
Consultancy fee (18% *(950,000* 100/95) 180,000
Fertilizers Nil
Total output tax 2,664,000

W2: Total input tax
Details Input tax Input tax Partial Non-
attributable attributable input tax claimable
to taxable to exempt input tax
supplies supplies
Unprocessed food stuffs 2,484,000
for dogs and cats
Electricity 20,160
Logs - - -
Stationeries for using 36,000
Fertilizers - - -
Bottled water 183,600
Salaries - - -
Refrigerators 1,350,000 - 450,000 -
Other soft drinks (for the 567,000
purpose of selling)
4,401,000 - 506,160 183,600
Summary of the Input tax claimable
Input Tax TZS.
Input tax attributable to taxable supplies 4,401,000
Input tax attributable to exempt supplies -
Partial input tax (W3) 334,066
Non claimable input tax -
Total input tax credit 4,735,066
W3: Partial input
T/A = 14.8M/22.25*100 = 66%
Claimable partial input tax = 73.5%*506,160 = 334,066
T = 8.5M + 2.1M + 3.2M + 1M = 14.8M
A = 14.8M + 100K + 4.2M + 3.15M = 22.25M
______________  ______________

SUBJECT : PERFORMANCE MANAGEMENT
CODE : B5
EXAMINATION DATE : WEDNESDAY, 23RD FEBRUARY, 2022
TIME ALLOWED : THREE HOURS (9.00 A.M. – 12.00 NOON)
------------------------------------------------------------------------------------------------------------
of SIX questions.
4. Answer question ONE in Section A
5. Answer ANY FOUR questions in Section B.
7. State clearly any assumptions made in your answers.
8. Graph papers will be provided, where applicable.
_________________

----------------------------------------------------------------------------------------------------------
SECTION A
Compulsory Question
----------------------------------------------------------------------------------------------------------
QUESTION 1
(a) Kitenge Company Limited (KICOLI) is a manufacturing company incorporated in

Tanzania several years ago. KICOLI is managed by three Directors (Managing
Director, Finance Director and Production Director). Due to the successful
operation, the company has an opportunity of expanding its customer base
through purchase of the patent and manufacturing right of any of the following
products:
TZS.
Product X 3,250,000
Product Y 4,750,000
Product W 5,000,000
At the meeting of the Board of Directors, the production director stated: “We are
all agreed on the facts. Each venture is a very short-term project.”
The fixed manufacturing and advertising cost of each venture will be:
Product X Product Y Product W
Fixed manufacturing costs 3,000,000 500,000 500,000
TZS.
Advertising costs 1,250,000 750,000 500,000
TZS.
Sales and production levels will, once known, be the same and there will
therefore, be no stock build up. The sales prices and variable costs per unit are:

Sales price per unit 8,500 4,750 3,250
TZS/Unit
Variable cost per unit TZS/Unit 3,500 2,750 1,750
However, the sales volume is the crunch question. We do not know what the sales
level will be, but we do know various possibilities of what sales level could be.
Product X could be a complete failure, it could sell well, or might sell very well.
Product Y is also quite variable whereas with Product W the range of outcomes is
quite small. The various sales volumes and their associated probabilities are
detailed below:

Products
Sales Probability Sales Probability Sales Probability
volume volume volume
(Units) (Units) (Units)
0 0.1 3,000 0.1 7,000 0.8
2,500 0.4 4,000 0.3 8,000 0.1
4,000 0.5 6,000 0.3 9,000 0.1
8,000 0.3
“Based on the assumption that the above facts are all completely accurate, and we
agree with this, all we need to do is to make the decision as to which product we
undertake. What are your views, Ladies and Gentlemen?” commented the
Managing Director of KICOLI.
REQUIRED:
(i) Calculate the expected money value of each product and on the basis of
this, advise KICOLI on the appropriate course of action. (10
marks)
(ii) Comment on three (3) factors which may be relevant in a practical

situation to the final choice between the three (3) available courses of
actions.
(4 marks)
(b) Some commentators argue that: ‘With continuing pressure to control costs and
maintain efficiency, the time has come for all public sector organizations to
embrace Zero-Based Budgeting. There is no longer a place for incremental
budgeting in any organization, particularly public sector ones, where Zero-Based
Budgeting is far more suitable anyway.
REQUIRED:
Discuss the difficulties encountered when budgeting in public sector
organizations compared with budgeting in private sector organizations.
(6 marks)
(Total: 20 marks)

----------------------------------------------------------------------------------------------------------
SECTION B
----------------------------------------------------------------------------------------------------------
QUESTION 2
Shani makes a home decoration product – ‘Pambo’. It has a wide market amongst the
coastal people and attracts the interests of tourists in Bagamoyo and Zanzibar as a
traditional decoration.
For the period under consideration budgeted fixed costs were TZS.6,000,000 and
budgeted production and sales were 1,300 units.
Pambo has the following standard selling price and cost:
TZS.
Selling price 50,000
Material 5kg at TZS.4,000 per kg 20,000
Labour 3hrs at TZS.4,000 per hr 12,000
Variable overheads 3hrs at TZS.3,000 per hr 9,000
Actual results for the period were as follows:

1. 1,100 units were made and sold, earning revenue of TZS.57,200,000.
2. 6,600kg of materials were bought at a cost of TZS.29,700,000 but only 6,300kg
were used.
3. 3,600 hours of labour were paid for at a cost of TZS.14,220,000.
4. The total cost for variable overheads was TZS.11,700,000 and fixed costs were
TZS.4,000,000.
The company uses marginal costing and values all inventory at standard cost.
REQUIRED:
(a) Produce an operating statement reconciling actual and budgeted profit using
appropriate variances. (12 marks)
(b) Assuming now that the company uses absorption costing, recalculate the fixed
production overhead variances in sufficient details. (4 marks)
(c) Discuss possible causes for the labour variances you have calculated. (4 marks)
(Total: 20 marks)

QUESTION 3
Deliciosa Pizza Company (DPC) is a fast-food company owns and operates several fast-
food outlets in the Country of Bazaga. It is a well-established company and its outlets
have gained a favourable reputation for the quality of the meals that range from Italian
pizza, cheese burgers and their famous vegetable hamburger. DPC’s outlets are all set at
rural locations where there is limited competition and this enabled them to develop a
loyal customer base. Outlets design their own menus and décor to fit with the
requirements of their local market. DPC has been consistently profitable, however, as is
the case across the outlet industry, profit margins are quite low and there is still a
constant need for DPC to monitor costs. One of the DPC’s outlet is located in the small
town in Sanawa. Sanawa has recently been the location for the filming of a popular
television series and visitor numbers to the town have increased significantly as a result.
DPC’s outlet in Sanawa has noticed a similar increase in customer numbers.
At the start of the current month a new outlet is opened in Sanawa. The Manager of
DPC’s outlet in Sanawa has expressed concerns about the impact of this new competitor
on their ability to achieve profit targets for the rest of the year.
Budgets for all DPCs’ outlets are prepared by the head office. At the start of each year
outlet managers are given an annual budget which is split into months. At the end of each
month the manager receives a statement comparing actual monthly performance against
budget.
The statement for the Sanawa outlet for the most recent completed month is as
follows:
Actual Budget Variance
Number of customers 1,800 1,500 -
TZS. ‘000’ TZS. ‘000’ TZS. ‘000’
Revenue 130,950 112,500 18,450F
Costs
Food and drinks 39,150 33,750 5,400A
Staff wages 57,375 47,250 10,125A
Heat, light and power 12,150 11,250 900A
Rent, rates and other overheads 18,900 18,000 900A
Profit 3,375 2,250 1,125F
Notes:
1. Rent, rates and other overheads are apportioned to outlets by the DPC’s head
office, based on a fixed annual charge.
2. All other budgeted costs are treated as variable costs, based on the expected
number of customers.
Currently, DPC adopts an incremental approach to budgeting, with the annual budget
figures for each year being based on the previous year’s figures. However, a new Finance
Director who recently joined the company has questioned whether this is suitable for all
DPCs’ outlets. The new Finance Director has also suggested that the company should
adopt a more participative approach to budgeting.

REQUIRED:
(a) (i) Prepare a flexed budget for the Sanawa outlet. (4 marks)
(ii) With reference to your answer from part (i), explain the main weaknesses in
the current monthly budget statements issued to the outlets as a basis for
managing performance. (3 marks)
(b) Discuss whether an incremental approach to budgeting is appropriate for DPC.
(6 marks)
(c) Explain participative approach to budgeting and potential advantages and
disadvantages of introducing this approach at DPC. (7 marks)
(Total: 20 marks)
QUESTION 4
(a) Obonyi Limited, which manufactures a single product is considering whether to

use marginal or absorption costing to report its budgeted profit in its management
accounts. The following information is available:
Item TZS/Units
Direct materials 400
Direct labour 1,500
Total cost 1,900
Selling price 5,000
Fixed production overheads are budgeted to be TZS.30,000,000 per month and

are absorbed on an activity level of 100,000 units per month. For the month in
question, sales are expected to be 100,000 units although production units will be
120,000 units. Fixed selling costs of TZS 15,000,000 per month will need to be
included in the budget as will be the variable selling costs of TZS.200 per unit.
There are no opening stocks.
REQUIRED:
(i) Prepare the budgeted profit and loss account for the month for Obonyi
Limited using absorption costing. Clearly show the valuation of any stock
figures. (8 marks)
(ii) Prepare the budgeted profit and loss account for the month for Obonyi
Limited using marginal costing. Clearly show the valuation of any stock
figure. (6 marks)
(b) Matikiti Division of Matunda Company Limited has capital employed of

TZS.10,000,000 and earns an annual profit after depreciation of TZS.1,800,000.
The Divisional Manager is considering an investment of TZS.1,000,000 in an
asset which will have a ten-year life with no residual value and will earn a
constant annual profit after depreciation of TZS.100,600. The cost of capital is
15%.

REQUIRED:
Calculate and comment on the return on divisional investment, before and after
the new investment. (6 marks)
(Total: 20 marks)
QUESTION 5
(a) Good Samarian Charitable Clinic (GSCC) is a charity based in Mazimbwe and
offers medical treatment to prevent and cure blindness caused by cataracts, to
underprivileged people in poor countries. This disease is relatively easy to cure
when treatment is available, but the majority of people who need treatment cannot
afford to pay for it. For over 10 years, GSCC has provided free treatment from 12
treatment centres based in fixed locations worldwide. GSCC employs a small
number of paid permanent staff who consist of medical practitioners, medical
administrators and fundraisers, but the majority of its workforce is voluntary. The
charity has built relationships with several teaching hospitals in Mazimbwe, from
where it recruits newly qualified doctors and nurses. These doctors and nurses
volunteer to work unpaid for a year in GSCC’s treatment centres before returning
home to ‘work in one of Mazimbwe’s many hospitals’. GSCC believes that using
newly qualified medical staff will promote the use of the most effective and up-
do-date techniques and procedures.
Financial donations are sourced from large businesses in Mazimbwe and most of
the equipment and other medical ‘supplied needed are donated by hospitals and
manufacturers. Thus, it is rare for the treatment centres to run short of supplies.
GSCC keeps accounts with a year-end of 31st August as well as detailed operating
data. Data extracts from its management accounts for the current year 2021 and
from 2020 and 2019 are as follows:
Details 2021 2020 2019
Average size of donations (TZS.000,000) 900 802.5 750
Number of donations 2,850 3,000 2,950
Total operating costs (TZS.000,000) 2,595 2,325 2,145
New procedures as a percentage of total 20% 5% 5%
procedures (Note)
Number of treatments performed 5,600 5,000 4,600
Number of successful treatments 4,312 4,300 4,002

Average number of days taken to deliver 7 7 7
drugs and equipment to treatment centres
GSCC is about to introduce a balanced scorecard to help implement its strategy

and measure performance. The Critical Success Factors (CSF), which relate to
the four perspectives of the balanced scorecard have been identified as: Positive
cash flow; innovation, medical effectiveness and functional efficiency.

REQUIRED:
For each perspective of a balanced scorecard, select the appropriate Critical

Success Factors (CSF) which relate to the perspective, suggest ONE Key
Performance Indicator (KPI) which will help to measure the CSF and use the KPI
to analyze GSCC’s performance from 2019 to 2021. (12
marks)
(b) Explain benefits to an organization such as GSCC for using balanced scorecard to
measure performance instead of relying solely on financial measures like
profitability. (8 marks)
(Total: 20 marks)
QUESTION 6
(a) While budgets can be used to achieve a number of objectives, it is strongly argued
that simultaneously achievement of such objectives is difficult in practice due to
conflicting roles of budgets.
REQUIRED:
Briefly explain any six (6) functions of a budget. (6 marks)
(b) With practical examples, explain how can a Non-Profit Organization (NPO) use
Cost-Volume-Profit (CVP) analysis model. (4 marks)
(c) Briefly explain any seven (7) factors influencing pricing decision in a typical
organization. (7 marks)
(d) Explain how controllability principle is used in the divisional performance

measurement. (3 marks)
(Total: 20 marks)
_______________ _______________

SUGGESTED ANSWERS
B5 – PERFORMANCE MANAGEMENT
FEBRUARY 2022
ANSWER 1:
(a) Calculations
(i) Expected money value for each product.
Product Unit Total Total Fixed Profit Probability EMV

sales Contribution costs
volume
X 0 0 (7,500,000) (7,500,000) 0.1 (750,000)
2,500 12,500,000 (7,500,000) 5,000,000 0.4 2,000,000
4,000 20,000,000 (7,500,000) 12,500,000 0.5 6,250,000
Expected monetary Value (EMV) 7,500,000
Y 3,000 6,000,000 (6,000,000) 0 0.1 0
4,000 8,000,000 (6,000,000) 2,000,000 03 600,000
6,000 12,000,000 (6,000,000) 6,000,000 0.3 1,800,000
8,000 16,000,000 (6,000,000) 10,000,000 0.3 3,000,000
Expected monetary value (EMV) 5,400,000
W 7,000 10,500,000 (6,000,000) 4,500,000 0.8 3,600,000
8,000 12,000,000 (6,000,000) 6,000,000 0.1 600,000
9,000 13,500,000 (6,000,000) 7,500,000 0.1 750,000
Expected monetary value (EMV) 4,950,000
Therefore, on EMV decision rule/criterion, select Product X
Working
Calculation of contribution per unit
Product X Product Y Product Z
Sales price per unit 8,500 4,750 3,250
Variable cost per unit 3,500 2,750 1,750
Contribution per unit 5,000 2,000 1,500
Fixed costs
Product X Product Y Product Z
Right 3,250,000 4,750,000 5,000,000
Manufacturing costs 3,000,000 500,000 500,000
Advertising cost 1,250,000 750,000 500,000
Total fixed costs 7,500,000 6,000,000 6,000,000

(ii) Factors that need to be considered are: -
• Accuracy of cost estimates.
• Accuracy of revenue estimates.
• Accuracy of probability – this is very subjective.
• Accuracy of volume estimates – if the management is risk averse-EMV
does not account for it. Product Z always produces a profit, Product X
could lose heavily; B may only break-even.
(b) Difficulties when budgeting in the public sector
The main objective for most companies is to maximize profit. Effective

budgeting can assist in meeting this objective by focusing efforts on reducing
certain costs and increasing revenue by a certain amount or percentage. The
objectives of public sector organizations are more difficult to define in a
quantifiable way. The objectives of public sector organizations such as hospitals
are likely to be largely qualitative. For example, ensuring that ambulances reach
patient within 20 minutes from an emergency call being received. Such
objectives are difficult to define in a quantifiable way, whilst identifying how the
objective is actually achieved can also be problematic.
Another problem why budgeting is so difficult in public sector organizations is

that outputs in the public sector can seldom be measured in a way that is generally
agreed to be meaningful. Whilst outputs for private companies can be measured
in terms of sales revenue, outputs in the public sector are harder to pin down. For
example, in the education sector, are good exam results alone an adequate
measure of the quality of teaching? In the public sector, comparisons are often
made between the funds available and the funds actually required. Therefore,
public sector budgeting naturally focuses on inputs, rather than the relationship
between inputs and outputs.
Public sector organizations are under constant pressure to prove that they are
economical, efficient and effective (offering value for money). Resources are
always kept to a minimum and each item of expenditure must be justified. This
makes the budgeting process more difficult.
ANSWER 2:
(a) Operating statement reconciling actual and budgeted profit using appropriate
variances.
Operating statement reconciling budgeted and actual profit/loss

Item TZS TZS
Budgeted profit/(loss) 5,700,000
Sales margin volume variance (1,800,000)
Sales margin price variance 2,200,000 6,100,000
Cost Variances
Materials price variance (3,300,000)
Materials usage variance (3,200,000)
Labor rate variance 180,000
Labor efficiency variance (1,200,000)
Variable overheads expenditure variance (900,000)
Variable overheads efficiency variance (900,000)
Fixed overhead variance 2,000,000 (7,320,000)
Actual profit/(loss) (1,220,000)
Workings:
1. Calculation of Budgeted Profit

Budgeted contribution 11,700,000
Budgeted fixed overheads (6,000,000)
5,700,000
2. Calculation of Actual Profit

Sales 57,200,000
Materials cost (purchase cost – closing stock at standard 28,500,000
price)
Labor cost 14,220,000
Variable overheads 11,700,000
Total variable costs 54,420,000
Contribution 2,780,000
Fixed overheads 4,000,000
Actual loss (1,220,000)
3. Calculation of Variances:
Material Price Variance
Actual quantity 6,600
Standard price 4,000
Actual price 4,500
Variance AQ*(SP-AP) (3,300,000) Adverse
Material Usage Variance

Standard Quantity 5,500
Actual Quantity 6,300
Variance SP*(SQ-AQ) (3,200,000) Adverse
Late Rate Variance

Actual hour 3,600
Standard rate 4,000
Actual rate 3,950
Variance AH*(SR-AR) 180,000 Favorable

Labor Efficiency Variance
Standard rate 4,000
Standard hours 3,300
Actual hours 3,600
Variance SR*(SH-AH) (1,200,000) Adverse
Variable Overhead Spending Variance

Actual hour 3,600
Standard rate 3,000
Actual rate 3,250
Variance AH*(SR-AR) (900,000) Adverse
Variable Overhead Efficiency Variance

Standard rate 3,000
Actual hours 3,600
Variance SR*(SH-AH) (900,000) Adverse
Fixed Overhead Expenditure Variance

Budgeted fixed overhead costs 6,000,000
Actual fixed overhead costs 4,000,000
Fixed overhead expenditure variance 2,000,000 Favorable
Sales Margin Price Variance

Actual price 52,000
Variance AQ*(SP-AP) (2,200,000) Favorable
Sales Margin Volume Variance

Standard Margin 9,000
Standard (budgeted) Quantity 1,300
Variance SM*(SQ-AQ) (1,800,000) Adverse
(b) Fixed Overhead Variances
Fixed Overhead Spending Variance

Budgeted Fixed Overheads 6,000,000
Actual Fixed overheads 4,000,000
Variance 2,000,000

Fixed Overhead Volume Variance
Budgeted Overheads 6,000,000
Budgeted output 1,300
Standard overhead absorption per unit 4,615.38
Actual volume 1,100
Volume variance = (Budgeted volume – Actual volume) *standard per unit

= 923,070 Adverse.
Fixed Overhead Volume Capacity Variance

Budgeted hours 3,900.00
Actual hours 3,600
Standard rate per hour 1,538.46
Efficiency variance = (Budgeted hours – Actual hours) *standard absorption rate

= 461,538 Adverse.
Fixed Overhead Volume Efficiency Variance

Actual hours 3,600
Standard rate per hour 1,538
Efficiency variance = (Standard hours – Actual hours) *standard absorption rate

= 461,538 Adverse.
(c) Possible causes for the labor cost variances

Labour rate variance
The labour rate variance is favorable indicating a lower rate per hour was paid than
expected.
This is perhaps resulting from:

• More junior or less experienced staff being used during production or that
staff had a pay cut imposed upon them.
• An incorrect or outdated standard could have been used.
Labour efficiency variance
This is significantly adverse, indicating staff took much longer than expected to
complete the output.
• This may relate to the favorable labour rate variance, reflecting employment
of less skilled or experienced staff.
• Staff demotivated by a pay cut are also less likely to work efficiently.
• It may also relate to the reliability of machinery as staff may have been
prevented from reaching full efficiency by unreliable equipment.

ANSWER 3:
(a)(i) Flexed budget for Sanawa outlet
Original Flexed Actual Variance
Budget Budget
Number of customers 1,500 1,800 1800
TZS.000 TZS.000 TZS.000 TZS.000
Revenue 112,500 135,000 130,950 4,050A
Food and drink costs (33,750) (40,500) (39,150) 1,350F
Staff costs (47,250) (56,700) (57,375) 675A
Heat, light and power (11,250) (13,500) (12,150) 1,350F
Rent, rates and other overheads (18,000) (18,000) (18,900) 900A
Profit 2,250 6,300 3,375 2,925A
Notes:
- Revenue: TZS.112, 500,000/1,500 = TZS.75, 000 per customer: TZS.75, 000 x
1,800 = TZS.135, 000,000
- Food and drink: TZS.33, 750,000/1,500 = TZS.22, 500 per customer: TZS.22,
500 x 1,800 = TZS.40, 500,000
- Staff costs: TZS.47, 250,000/1,500 = TZS.31, 500 per customer: TZS.31, 500 x
1,800 = TZS.56, 700,000
- Heat, light and power: TZS.11, 250,000/1,500 = TZS.7, 500 per customer: TZS.7,
500 x 1,800 = TZS.13, 500,000
(ii) The most significant weakness in the current performance report is that the original
budget is not flexed to adjust for the actual numbers of customers served. The
existing report shows that the Sanawa outlet has overspent on all its costs which
could be a concern given the importance of cost control in DPC. However, the
main reason for the revenue variance and the costs variances is the fact that the
number of customers the outlet served was 20% higher than budgeted (1,800 v
1,500). If the budget is flexed for the actual number of customers, this allows a
more meaningful assessment of the outlet’s performance to be made. Once the
flexed budget is prepared, it can be seen that revenues were actually lower than
would have been expected, given the number of customers served with average
spend per head being TZS.72, 750 instead of TZS.75, 000. Food and drink costs
were also less than budget. Taken together with the reduction in average customer
spending, this might suggest that some of the items on the menu had been changed
since the budget was originally set. ✓ (1.5 marks)
Another weakness in DPC’s budgetary control report is the fact that staff costs and heat,
light and power costs are assumed to be purely variable costs - dependent on the number of
customers. However, although the outlet may recruit some temporary staff in busy periods,
is likely that at least some of the staff will be permanent, meaning that it would be more
appropriate to treat staff costs as semi-variable rather than variable. Similarly, it
seems likely that there will be a significant fixed element within heat, light and
power costs, so treating these as wholly variable costs does not seem appropriate.

(b) Under an incremental budgeting approach, the current year’s budget and results are
taken as the starting point for preparing the next year’s budget. The budget is then
adjusted for any expected changes, such as the impact of inflation on costs and
prices, and sales growth or decline.
The main advantage of the incremental approach is that it is a relatively

straightforward way of preparing a budget, appropriate for organizations which are
operating in relatively stable environments. The locations of DPC’s outlets, away
from significant competition, suggest that the operating environment is relatively
stable, meaning incremental budgeting is appropriate.
Similarly, the fact that DPC appears to have a relatively well-established brand and
customer base suggests that using an incremental approach to budgeting future
revenues appears reasonable, even if it is difficult to identify some changes which
need to be adjusted for in the next year’s budget. However, one of the major
disadvantages of incremental budgeting is that it does not provide any incentive to
make operations more efficient or economical. If the current year figures include
slack or inefficiencies, then using them as the start-point for the next year’s figures
means that inefficiency is automatically perpetuated into the next year.
Such an approach seems somewhat inconsistent with the focus on cost control
within DPC. If the company is worried about its relatively low margins, then an
approach to budgeting which challenges costs more critically (such as zero-based
budgeting or activity-based budgeting) might be more suitable for helping to drive
down costs. For example, the highest cost is staff wages which could be analyzed
and DPC could investigate making changes to its staffing model to reduce costs
and/or improve efficiency.
As mentioned in part (a), whether labour costs and heat, light and power vary
proportionately with the number of customers appears debatable. If DPC’s
incremental budgets ignore the relationship between activities and costs, then
ultimately the budgets will provide DPC’s management with little relevant
information for managing costs. this could become an increasingly important issue
if competition in DPC’s markets intensifies. √
(c) Participative approach to budgeting is a budgeting process in which the people

who are in the lower levels of management are involved in the budget preparation
process. Unlike the imposed budgeting process, participative budgeting shares the
responsibility with lower-level managers to give them a sense of ownership in the
business.
Advantages of participative approach to budgeting at DPC

(i) Transfer of information upwards
One of the advantages of participative budgeting is the sharing of information from
managers of Sanawa Outlets to top management. It means that subordinate
managers are given the opportunity to present their views on certain organizational
issues. The managers of Sanawa Outlets also get a chance to discuss the difficulties
that they encounter in budget preparation and brainstorm ways of solving the
problems. Both the top managers and the subordinates are also able to share their
points of view on certain issues of interest.
(ii) Employee motivation
When employees are involved in the budget preparation process, they get to own a
part of the budgeting process. It gives them a sense of ownership when their
suggestions are taken into account by senior management. They also feel
appreciated by management when they are given an opportunity to sit down with
the top managers and share their views on certain points of interest. Employee
involvement in the process improves their morale, providing them with a greater
urge to work harder towards the attainment of the goals that they helped set.
(iii) Goal congruence

Goal congruence refers to the agreement between the employee’s goals and the
overall company goals. In order for the company to create a budget that is
achievable, both the management and the staff must set goals that move in the same
direction.
For example, if the goal of the company is to double the production capacity in the
next year, it should be shared with the employees since they are the people tasked
with implementing the proposal. If there is no agreement between the company’s
goals and the subordinate managers’ goals, it will be impossible to attain the set
targets.
This budget is more realistic. The reason is that it is prepared by the people who
have sound technical knowledge of the Sanawa Outlets
Disadvantages of participative approach to budgeting at DPC
(i) Time-consuming
The most common limitation of a participative budget is that it is time-consuming
compared to an imposed budget. Since the budget preparation starts from the
Sanawa Outlets to the top, too much participation may occur that may derail the
process. Involving all employees in each department will mean that the negotiations
may take too long before the staff reaches an agreement. If there is no agreement,
the management will need to make the final decision, which means that the staff
will need to accept an imposed decision.
(ii) Budgetary slack

The employees may overestimate the costs and/or underestimate the revenue
projections as a way of manipulating the budget to their advantage. It means that the
subordinate managers of Sanawa Outlets will set targets that they are sure to
achieve and even exceed in the next financial year. This mostly happens when the
manager’s performance is measured on the basis of the attainment of the budget. By
making the budget easy to achieve, the managers will be seen as exceeding their
targets.

ANSWER 4:
(a) Obonyi Limited

Fixed production overhead per unit = TZS.300 (TZS.30, 000,000/100,000 units)
(i) Budgeted Profit and Loss Account: Absorption Costing
TZS.000 TZS.000
Sales (TZS.5,000 x 100,000) 500,000
Cost of sales: Opening stock -
Production costs Variable (TZS1,900 x 228,000
120,000) 36,000
Fixed (TZS.300 x 120,000)
264,000
Closing stock (TZS.2,200 x 20,000) (44,000)
Over-absorption (20,000 units x TZS.300) (6,000) 214,000
Gross profit 286,000
Selling costs:
Fixed 15,000
Variable (TZS.200 x 100,000) 20,000
NET PROFIT 251,000
(ii) Budgeted Profit and Loss Account: Marginal Costing

TZS.000 TZS.000
Sales (TZS5,000 x 100,000) 500,000
Cost of sales: Opening stock -
Production costs Variable) TZS.1,900 x 120,000) 228,000
228,000
Closing stock (TZS.1,900 x 20,000) (38,000)
Variable selling costs 20,000 (210,000)
Contribution 290,000
Fixed Costs:
Production (30,000)
Selling (15,000)
NET PROFIT 245,000
(b) Return on divisional investment (ROI)

Before investment After investment
Divisional profit TZS.1,800,000 TZS.1,900,600
Divisional investment TZS.10,000,000 TZS.11,000,000
Divisional ROI 18.0% 17.3%
The ROI will fail in the short term if the new investment is undertaken. This is a
problem which often arises with ROI. Rigid adherence to the need to maintain ROI
in the short term can discourage managers from investing in new assets, since
average divisional ROI tends to fall in the early stages of a new investment.

ANSWER 5
(a) The balanced scorecard uses four perspectives: financial, customer, learning and
growth and internal business process.
Financial CSF:
The critical success factor identified for this perspective is most likely to be
positive cash flow.
KPI:
The most appropriate performance indicator is total donations less operating costs.
Performance analysis:
Total donation is 2021, 2020 and 2019 and TZS.2,565,000,000, TZS.2,407,500,000
and TZS.2,212,500,000 respectively and when the operating costs are deducted, the
net cash flows are TZS. (30,000,000), TZS.82, 500,000 and TZS.67, 500,000
respectively. This shows that for the current year GSCC is not achieving a positive
cash flow. However, this is a relatively small cash deficit for the year and does not
suggest that the charity has any real problems. The size of the donations has risen
considerably over the years and the number of businesses donating has fallen. This
could indicate that the fundraisers have focused their efforts on a smaller number of
more affluent businesses.
Customer CSF:
medical effectiveness
KPI:
The best performance indicator for this perspective is the percentage of successful
treatments.
For the year 2021, 2020 and 2019 these are 77%, 86% and 87% respectively. As
treatment for cataracts is a relatively simple procedure, a high success rate would
be expected but the results in 2021 show a significant deterioration. The reasons
for the recent fall in effectiveness could be the result of factors outside the control
of GSCC, such as variations in the disease or the advanced condition of the disease
when presented. However, it could be also linked to the lack of efficiency of the
new treatments.
Internal Business Process CSF:

functional efficiency.
KPI:
The performance indicator for his perspective could be: “average number of days to
deliver drugs and equipment to treatment centres.

This has remained at seven days since 2019 and in some ways this can be expected
as the 12 treatment centres have been at the same location for many years and the
logistics of the delivery well established. It should be noted that this measure is an
average lead time and will also vary on location. However, as GSCC rarely
experiences shortages at the treatment centres, it can be surmised that transport
costs are managed as efficiently as possible and this means an average seven-day
lead time.
Learning and Growth CSF:

innovation.
KPI:
The performance indicator for this perspective is the new procedures as a
percentage of total procedures from the table.
It is clear that GSCC has made several changes to the existing protocol in 2021.
One in five procedures administered are new and have been introduced within the
past 12 months. This is a clear improvement on 2020 and 2019 as the CSF is for
new treatments. However, the new treatments have not improved the efficiency of
the treatment, as evidenced by the percentage of successful treatments, and this will
need to be monitored.
(b) The benefits to an organization f using the balanced scorecard to assess

performance instead of relying solely on financial measures are as follows:
- Not all organizations have profit or financial return as the main objective. In an
altruistic not-for-profit charity such as GSCC, the objectives are based on
delivering a service which can be measured in benefit to people who are unable to
pay for the service. Therefore, it is necessary to have measures which are not
purely financial to reflect the different emphasis of the mission and supporting
objectives.
- Financial performance indicators are “lagging” indicators. This means that the
events and decisions which caused these indicators occurred long ago. The
balanced scorecard includes “leading” indicators. For example, the learning and
growth perspective may encourage spending on training or techniques which will
depress; profits or increase costs in the short term, but will have much greater
benefits in the future.
- The balanced scorecard helps to align key performance measures with strategy at
all levels. This means that all employees will be able to link their individual
goals to those of the organization as a whole. The benefit of this is that it ensures
that what gets measured is important the organization.
- Financial measures used in isolation are relatively easy to manipulate in the short
term. For example, a high return on investment figure may be considered an
indicator of good performance whereas it may have been caused by a manager

delaying the purchase of a necessary asset. The balanced scorecard provided a
range of indicators which makes this type of manipulation more difficult to
conceal.
ANSWER 6:
(a)(i) Functions of budgeting

✓ To compel planning
✓ To communicate ideas and pans
✓ To co-ordinate activities
✓ To provide a framework for responsibility accounting
✓ To establish a system of control (“budgetary control”)
✓ To motivate employees to improve their performance
(b) Non-profit organizations operate with no profit motive. For these motives, the
intention of planning may be to determine the funds to be raised in order to finance
the programmes selected for implementation. Alternatively, non-profit
organizations may focus on the volume of activities they will finance if they
already know the funds that will be at their disposal in the coming year. CVP model
may assist non-profit organizations to achieve this by setting profit at zero
(Revenue – Variable cost – Fixed cost = 0). Or at point where the total cost will be
equal to total revenue.
From this relationship, the organization will be able to determine the number of
products/services to offer so as to yield zero profit. For instance, how many
patients should a church hospital invite for eye operation? In addition, CVP model
may help non-profit organizations to determine selling price to be charged if other
variables are known.
(c) Factors that influence pricing decisions
✓ The objectives and strategies of the organization
✓ The market conditions in which the firm operates
✓ The customers of the firm
✓ The costs of the product
✓ Demand for the firm’s products
✓ Elasticity of demand
✓ Stages of the product life cycle
✓ Capacity utilization.
(d) The controllability principle requires only costs and revenue that are significantly
influenced by the manager of a particular responsibility Centre to be considered for
performance evaluation purposes.
The controllability principle can be implemented by either eliminating the

uncontrollable costs/revenue during the performance measurement or calculating
and separating their effects in such a way that the report makes a clear distinction
between controllable and uncontrollable items.
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EXAMINATION : INTERMEDIATE LEVEL

SUBJECT : FINANCIAL MANAGEMENT

TIME ALLOWED : THREE HOURS (09:00 A.M. – 12:00 NOON)

2. Answer question ONE in section A.

3. Answer any FOUR questions in Section B.

4. In total answer FIVE questions.

5. Marks are shown at the end of each question.

7. Show clearly all your workings in respective answers where applicable.

8. This question paper comprises 10 printed pages.

A5, February 2022 Page 17 of 161

(a) Financial forecasting is defined as a systematic process of analyzing the economic

(b) Explain the meaning of ‘debt factoring’ (accounts receivable factoring),

Madeni Company Summarized Capital Structure: TZS.

The company’s current share price is TZS.12,600 and up to TZS.60,000,000 of

(i) Market Value of the Company. (2 marks)

A5, February 2022 Page 18 of 161

Market value of shares TZS.8,100 per share

The company maintains a Debt-Equity ratio of 4:6.

A5, February 2022 Page 19 of 161

(a) Different financial instruments offer different interest rates.

In order to encourage customers to pay on time, KAMAZIMA Co. proposes

(c) Mafanikio Ltd is expecting an EBIT of TZS.5,000,000 per annum on investment

A5, February 2022 Page 20 of 161

(a) Before making an investment decision, a prudent investor always considers

(d) Kaswaki, a newly established Japanese-based car manufacturer, is evaluating two

A5, February 2022 Page 21 of 161

(ii) Investment Strategy No.2

(c) TRIPLE D Enterprise is planning to raise external funds to finance increase in

Selected Financial Indicators: 31st December 2021

A5, February 2022 Page 22 of 161

Year Inventory Sales External Financing

A5, February 2022 Page 23 of 161

To implement the new arrangement will require one-off re-organization costs

A5, February 2022 Page 24 of 161

(c) It is the middle of December 2020 and A to Z Company is looking at working

Forecast financial information at the start of January 2021 is as follows:

Inventory is expected to increase by TZS.10,450,000 during January 2021.

Interest of TZS.14,000,000 is due to be paid in January 2021 on fixed rate bank

Assume that each year has 360 days.

A5, February 2022 Page 26 of 161

(a) Sales forecast: A good forest is an essential foundation for forecasting

Debt factoring has to be paid for, usually as a percentage of the amounts

(c) (i) Market Value of the Company

(ii) Market Value of Equity

Thus, the market value of equity has decreased.

A5, February 2022 Page 27 of 161

Cost of Equity, Ke = Do (1+g) + g the market value given in the question is

Kd = 16000/1600, 000 = 10%

Capital Asset Pricing Model (CAPM)

Ke = 10% + [18% - 10%]2 = 26% as with the Dividend Valuation Model.

(ii) Overall Capitalization Rate (WACC)

Dividend Valuation Model

Capital Asset Pricing Model (CAMP)

A5, February 2022 Page 28 of 161

(b) Trade Receivable Policy

Original value of these receivables 80% x TZS2,466k = TZS.1,972,800

A5, February 2022 Page 29 of 161