business law

For the year ended 30 June 2012, the audit team included a manager, two supervisors, two qualified seniors and three trainees. This audit, which lasted approximately five weeks, was very time-pressured and the team worked late into the night towards the end of the audit. The client's staff were very supportive throughout and paid for evening meals that were brought in so that the audit team could work with minimum disruption. M Limited's chief finance officer (CFO) was so impressed with the commitment of the audit staff. He requested the audit firm to pay them all a bonus through an increase in the audit fee. Except the audit manager, all the members of the team were paid a bonus amounting to two weeks' salary. The bonus was processed through the firm's payroll, in the same way as other payments, and recharged to the client as part of audit expenses.COMPLETE The CFO was happy with the audit team and went ahead to request one of the partners, Susie, that for efficiency and in order to reduce on disruption, the same personnel should be assigned to carry out next financial year's audit. However, he was not happy with the trainees whom he referred to as. The audit manager has been in-charge of this client for the last two years. During a discussion with the production manager, it was revealed that there have been some quality control problems with the sweets manufactured as some of the raw materials used had expired. The production manager explained that this was not intentional. It was a result of overstocking some items to avoid price fluctuations. He further attempted to explain that the risk of injury was 'remote'. Much as the company takes full responsibility, they had not done anything about it because the cost of correcting that mistake was much more than the benefit. Required: (a) Comment on the ethical and other professional issues raised in the above scenario. (20 marks) (b) Discuss any appropriate safeguards to reduce the threats to business and professional ethical issues raised to acceptable levels. (10 marks) (Total 30 marks) SECTION B Question 2 (a) The talk of town in the month of July 2012 was about a prominent accountant in one of the Government ministries arrested on allegations of forgery of official documents and uttering false statements. Days after his arrest, his colleagues were also arrested and a search mounted at their homes. The accountants' public image was in the limelight once again. After the arrest of more suspects, sections of the public wondered why none of his colleagues had never reported such acts to the relevant authorities. Could he have done it all alone? Required: Explain the following in regard to an accountant's public image: (i) Professional image. (2 marks)

(ii) Professional judgement and behaviour. (3 marks) (b) A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant's responsibility is not exclusively to satisfy the needs of an individual client or employer. In acting in the public interest, a professional accountant should observe and comply with the ethical requirements of the Code of Ethics. Required: Why should accountants act in public interest? (3 marks) (c) Explain the following: (i) The term 'whistle-blowing'. (2 marks) (ii) Different forms of whistle-blowing. (2 marks) (iii) Moral and ethical issues surrounding whistle-blowing. (2 marks)

(iv) Conditions under which whistle-blowing is morally justified. (4 marks)

(v) Problems associated with whistle-blowing. (2 marks) (Total 20 marks) Question 3 (a) In July 2012, the Institute of Certified Public Accountants issued a press release clarifying to the public who a professional accountant is according to the Accountants Act, Cap 266. Required: Explain the procedure one needs to follow in order to become a professional accountant in Uganda. (3 marks) (b) Certain practices have developed that threaten to damage the integrity and objectivity of an accountant and the reputation of the accountancy profession. Required: (i) Explain the following practices and associated ethical risks: Low balling. (5 marks) Opinion shopping. (5 marks) Referral fees. (3 marks)

(ii) Discuss whether current ethical guidance is sufficient to prevent the practices in

(b) (i) above. (4 marks) (Total 20 marks)

Question 4 To ensure that all staff get abreast with updated technical knowledge in the profession, it is a requirement in JR & Sons that whoever is sponsored for continuing professional development (CPD) has to disseminate information immediately on return. During her presentation to the rest of the team members, Rachael mentioned that one of the best kept secrets of most successful companies is having nonexecutive directors (NED). A company does not have to be well established to bring NED onto their board. In fact it is strongly advisable for start-up companies and small and medium-sized enterprises (SMEs) to search for and recruit the perfect person to be a NED for their organisation. "But why do you need one? Apart from having a great title and making your company appear soundly structured", wondered one of the staff. Joel, the chief executive officer (CEO), became even more interested and requested Rachael to explain the benefits and drawbacks of non-executive directors. Required: Explain to the CEO the benefits and drawbacks of non-executive directors (20 marks) SECTION C Question 5 Anything gained dishonestly will not belong to you for very long, there is always a price to pay for dishonesty. Advantages of good business ethics far outweigh any disadvantages in the long run. Unethical business practices, although may lead to that immediate "fast buck" result, will ultimately come back to 'bite' the business. Required: Discuss the benefits of practicing good business ethics to any business. (15 marks) Question 6 Gray, Owen and Adams (1996), provided a framework for classifying different groups of people and their views of the relationship between business organisations and society. These can be used to analyse the ethical stance of business entities and their members (managers, employees, shareholders) towards society and social relationship. The trio's seven viewpoints of social responsibility interests level gradually changes from capital (profit for shareholders) to society (social and environmental). They identified seven levels or positions on social responsibility. Required: Explain the seven viewpoints of social responsibility identified by Gray, Owen and Adams. (15 marks) Question 7 Professional codes of ethics are typically viewed as codified expectations of professional accountants. These are professional expectations providing information as to how members should address ethical problems and dilemmas in the course of their work. Recently, some promoters of accounting and auditing reform have advocated for a more principles-based form of guidance. Their assumption is that principles allow more discretion, which in turn results in more principled reasoning. However, if the most effective form of the Code of Ethics depends on the accountant's level of moral development, then it would be expected that abandoning rules in favor of principles may not serve the profession unless members of the profession generally reason at post-conventional levels. Required: Using Kohlberg's ethical theory, examine how accountants' levels of moral development influence the effectiveness of the profession's ethical standards. (15 marks)

PTN Ltd manufactures and sells two products X and Y. At an operating capacity of 75%, PTN Ltd produces and sells 80,000 units of product X and 50,000 units of product Y. The unit cost structure of PTN Ltd is as follows: Product X Product Y Shs '000' Shs '000' Direct materials 40 80 Direct labour 80 80 Factory overhead (35% fixed) 90 60 Administration and selling overhead (65% fixed) 120 90 PTN Ltd sells each unit of product X at Shs 450,000 and that of product Y at Shs 380,000. The company has received offers from Rwanda and Burundi to supply products X and Y respectively. Rwanda is offering to purchase product X at Shs 300,000 per unit, while Burundi is offering Shs 280,000 per unit for product Y. The offers will result in an additional packaging cost of Shs 9,000 per unit. PTN Ltd absorbs factory overheads on the basis of machine hours, and the hourly rate at the 75% capacity is Shs 40,000 per hour. The company can accept either offer by utilizing the 25% of its idle capacity. Required: (a) Calculate the surplus machine hours available if PTN Ltd is to take up either of the offers. (7 marks)

(b) Compute PTN Ltd's fixed costs. (2 marks)

(c) Using relevant calculations, advise the management of PTN Ltd as to which offer they should take up. (10 marks) (d) Using your answer in

(c) above, compute the number of units that can be produced with the surplus machine hours. (2 marks)

(e) Prepare statement showing the overall profitability of PTN Ltd after incorporating the offer suggested in (c) above. (9 marks) (Total 30 marks) Question 2 NIK Ltd produces five different types of beverage products (V, W, X, Y, Z), which are made by subjecting ingredients to a series of processing activities. The beverages are different and therefore need differing amounts of processing activities. Budget and actual information for May 2012 is shown below: Budgeted data: Products V W X Y Z Number of batches 60 90 45 120 75 Processing activities per batch: Activity E 12 15 6 9 3 Activity F 9 6 15 3 12 Activity G 9 9 6 12 6 Activity H 12 18 24 6 9 Cost of processing activities: Shs '000' Activity E 4,800 Activity F 390 Activity G 240 Activity H 600 All costs are expected to vary in relation to the number of the processing activities. Actual data: Products V W X Y Z Number of batches 54 99 48 105 84 Cost of processing activities: Shs '000' Activity E 474 Activity F 417 Activity G 219 Activity H 618 Required: (a) Prepare budgetary control statement that shows the original budget costs, flexible budget costs, the actual costs, and the total variance of each processing activity for May 2012. (12 marks) (b) The control statement has been circulated to managers responsible for each processing activity and the finance director has asked each of them to explain the reasons for the variances. The managers are not happy about this as they were not involved in preparing the budgets and think that they should not be held responsible for achieving targets that were merely imposed upon them. Explain briefly the reasons why managers should be involved in setting their own budgets. (4 marks)

(c) Explain the difference between fixed and flexible budgets and how each may be used to control production and non-production costs like marketing costs within NIK Ltd. (2 marks)

(d) Give two examples of costs that are more appropriately controlled using a fixed budget, and explain why a flexible budget is less appropriate for the control of these costs. (2 marks) (Total 20 marks)

Question 3 (a) Kendal Ltd is a soft drinks company with various branches. Bango, a branch based in Jinja, had a budgeted net profit before tax of Shs 60 million per annum over the period of the foreseeable future, based on the capital employed of Shs 200 million. Plant replacement anticipated over this period is expected to be approximately equal to the annual depreciation each year. These figures compare well with the company's required rate of return of 20% before tax. Bango's management is currently considering a substantial expansion of its manufacturing capacity to cope with the forecast demand from a new customer. The customer is prepared to offer a five year contract providing Bango with annual sales of Shs 40 million. In order not to limit this contract, a total additional capital outlay of Shs 40 million is expected being Shs 30 million of the new fixed assets plus Shs 10 million working capital. A five year plant life is expected. Operating costs on the contract are estimated to be Shs 27 million per annum excluding depreciation. This is considered to be a low risk venture as the contract would be firm for five years and the manufacturing processes are well understood within Bango

. Required: As a management accountant, using return on capital employed (ROCE) and residual income (RI), advise the management of Kendal Ltd whether it would be worthwhile for Bango to take on the substantial expansion of the manufacturing capacity. (12 marks) (b) At a recent meeting held at Kendal Ltd, the managing director proposed to use a single ROCE as an index of performance of its branches which differ considerably in size and type of activities. The company is, however, concerned whether the evaluations it makes using a single ROCE would be valid in terms of measurement of performance. Required:

Write report to the managing director, mentioning to him any three circumstances in which a single ROCE might not be an adequate measure of performance, clearly explaining what should be done to supplement the interpretation of results of the single ROCE. (8 marks) (Total 20 marks)

Question 4 (a) BCN Ltd is considering the feasibility of purchasing from a jobber a component in the required quantities at a unit price of Shs 2,500. Transportation and storage of the component costs are negligible and can thus be ignored. BCN Ltd produces the component from a single raw material. The company at present orders materials in economic order quantities of 2,000 units at a unit cost of Shs 200, average annual usage is 20,000 units of the component. The annual storage cost (including rent, taxes, return on investment in inventory and so on) is estimated at Shs 100 per unit. The minimum inventory is set at 400 units. Direct labour costs for the component are Shs 600 per unit. Fixed manufacturing overhead is absorbed at Shs 400 per unit based on a normal capacity of 20,000 units. In addition to the above costs, the machine on which the components are produced is leased at Shs 20,000 per month. Required: As a management accountant, advise the director of BCN Ltd whether to make or buy the component. (14 marks) (b) Pricing strategies and product costing interact in helping to achieve competitive advantage leading to retention or increase of the company's market share and maintenance or improvement of the profit levels. Discuss the above statement in the context of: (i) cost leadership.

(ii) product differentiation. (6 marks) (Total 20 marks) Question 5 The instruments department of Dormat Ltd makes two products A and B. Standard revenues and costs per unit for these products are shown below: Product A Product B Shs Shs Shs Shs Selling price 10,000 9,000 Variable costs: Material P (Shs 500 per kg) 2,000 2,000 Direct labour (400 per hour) 1,600 800 Plating (Shs 600 per hour) 600 1,200 Other variable costs 3,800 3,500 (8,000) (7,500) Fixed overheads (allocated at Shs 350 per direct labour hour) (1,400) (700) Profit 600 800 Plating is a separate automated operation and the cost of Shs 600 per hour is for plating materials and electricity. In any week, the maximum availability of inputs is limited to the following: Material P 6,000 kg Direct labour 5,000 hours Plating time 2,500 hours A management meeting was held recently to consider ways of increasing the profitability of the instruments department. It was agreed that each of the following possible alternatives be examined independently of each other: (i) The selling price of product B be increased. (ii) A new product, H be introduced at a selling price of Shs 420,000 per unit. Each unit would require the following: Material P 250 kg Direct labour 250 hours Plating time 50 hours Other variable costs Shs 4,500 Required: (a) (i) Formulate a linear programme to determine the production policy which maximizes the profits of Dormat Ltd in the present situation. (2 marks)

ii) With the help of a graph, specify the optimal product mix and weekly profit. (5 marks)

(b) Using shadow prices, determine whether product H would be a profitable addition to the product range. (5 marks)

(c) Discuss the limitations of the linear programming approach to the problems of Dormat Ltd. (8 marks) (Total 20 marks)

SECTION C Question 6 Incremental budgeting and zero-based budgeting are some of the different types of budgeting used by public sector organizations in Uganda. Required: (a) Explain the terms 'incremental budgeting' and 'zero-based budgeting'. (2 marks)

(b) State the main stages involved in preparing zero-based budgets. (3 marks)

(c) Discuss the particular difficulties encountered when budgeting in public sector organizations as compared to budgeting in private sector organisations, drawing comparisons between the two given types of budgeting. (5 marks) Question 7 In many big manufacturing organisations today, there are various divisions, and with a bid to increase efficiency most of these organisations set divisional goals which divisional managers have to achieve. Thus most of the divisional managers whose outputs become inputs for the other divisions are embarking on transferring their output to other divisions at fee. This is popularly known as "transfer pricing". Required: (a) Give four reasons why divisions in a given company would use transfer pricing. (5 marks)

(b) What factors influence pricing decisions when divisions buy from and sell to one another overseas? (5 marks)

Spirits Distillers Ltd is a resident company in Uganda located in Mukono municipality. It deals in the distillation and distribution of spirits across the country. The company's statement of comprehensive income for the year ended 31 December 2011 is provided below: Notes Shs '000' Turnover 16,200,500 Cost of sales (8,500,000) Gross profit 7,700,500 Other income 1 89,000 Total operating income 7,789,500 Operating costs: Distribution costs 2 (1,800,600) Administration costs 3 (2,409,000) Finance cost 4 (156,000) Profit before tax 3,423,900 Notes Shs '000' 1 Other income: Interest earned on Treasury bills net of related expenses 65,200 Unrealised gains on fixed deposit with Standard Bank 21,600 Gains on disposal of distribution truck in Class II 2,200 89,000 2 Distribution costs include the following among other items: Bribes for overloaded distribution trucks 26,500 Billboards for marketing signage 156,400 3 Administration costs include the following among other items: Depreciation 165,400 Specific bad and doubtful debts on trade receivables 25,400 Repairs to the CEO's residence not included in his taxable benefits 6,300 Dividends paid 578,900 Life assurance for employees 96,700 Loss on disposal of CEO's old vehicle 5,600 Cost of acquisition of distribution trucks less than 7 tonnes 246,000 4 Finance cost: Finance cost of Shs 156 million is interest paid on a loan extended to the directors for personal use and this was not taxed as part of directors' remuneration Notes Shs '000' 5 Details relating to non-current assets: Written down values 1 January 2011 Class I 189,000 Class II 194,000 Class III 256,000 Class IV 74,500 Qualifying cost net of initial allowance of an industrial building acquired in 2003 980,700 Additions to depreciable assets during the year: Computers 15,500 Furniture 25,600 Mercedes Benz for CEO 180,000 Cost of new industrial building brought to into use on 1 January 2011 3,080,000 Cost of adjacent land 200,000 Others: Disposal of truck in Class II 36,500 Disposal of CEO's old vehicle which had cost Shs 130 million in 2005 28,900 6 Provisional tax paid 689,000 Withholding tax paid 64,300 VAT paid 150,640 Required: Compute the chargeable income and the tax payable by Spirits Distillers Ltd for the year ended 31 December 2011. (30 marks) SECTION B Question 2 John Kimotho is a Certified Public Accountant from Tanzania and is currently employed by Tropicana Bank as head of finance. The appointment was effective 1 January 2011 with a 3-year contract. As part of his entitlement, he is provided with a vehicle for use on both employment and private duties. The vehicle is a brand new BMW purchased from a car dealer at Shs 50 million. He is charged a monthly fee of Shs 600,000 for the benefit by the employer. He also earns the following income: (i) Basic salary Shs 5 million per month. (ii) Children's school fees at International School of Uganda at Shs 5 million per child per annum for his 2 children. (iii) His club membership at Kampala Club is also paid for the employer totaling Shs 4 million per annum. (iv) He also receives medical allowance of Shs 2 million per month. (v) He was reimbursed Shs 4 million being cost of passage to Uganda when taking up his job. (vi) He was immediately provided with a house whose estimated market rent is Shs 600,000 per month for which he contributes Shs 100,000 per month. (vii) Travel allowance for his spouse of Shs 2 million. (viii) The company pays his housekeeper Shs 200,000 per month. (ix) He was offered a loan by the employer of Shs 100 million at an interest rate of 5%. He paid back the loan after one year on 31 December 2011. The statutory Bank of Uganda rate applicable over the 12 months was 10%. (x) The company contributes 10% of his basic salary towards the National Retirement Fund every month. Required: (a) Compute John's employment income for the year ended 31 December 2011. (16 marks) (b) Compute the PAYE that should be withheld for the year ended 31 December 2011. (4 marks) (Total 20 marks) Question 3 Mundu and Sera are in partnership dealing in transportation business with their firm located in Kampala. Their partnership deed provides for the following: Profit sharing ratio of 3:2 respectively. Each partner earns interest on capital of 6% per annum based on the opening balance of each partner's capital account. Partners' salaries are paid in respect to their profit sharing ratio. Partners are charged interest of 3% per annum on any drawings made during the year of income. The following is the income statement for the partnership for the year ended 31 December 2011: Shs '000' Shs '000' Income: Turnover 350,000 Cost of sales (106,000) Gross income 244,000 Expenses: Staff salaries 15,000 Partner's salaries 45,000 Rent for office space 7,000 Repairs to office equipment 2,500 Office upkeep 3,200 Depreciation 7,600 Bad debts written off 600 Donation to charity 900 Legal and professional fees 6,200 Rent for Mundu's residence 4,600 Bribes to traffic officers 700 93,300 Net profit 150,700 Additional information: (a) Capital accounts: Mundu Sera Shs '000' Shs '000' Balances 1 January 2011 60,000 52,000 Balances 31 December 2011 65,000 53,500 (b) Mundu made drawings from the business of Shs 3.5 million for his personal expenses. Taxation - Paper 11 30 November 2012 Page 6 of 9 (c) The capital allowances due to the partnership during the year were as follows: Shs '000' Initial allowance: 3,000 Wear and Tear: 2,640 (d) PAYE on the partners salaries paid during the year was as follows: Shs '000' Mundu: 7,170 Sera: 4,470 Required: (a) Prepare statement to determine the partnership chargeable income. (15 marks) (b) Determine the tax due for each partner for the year ended 31 December 2011. (5 marks) (Total 20 marks) Question 4 Choncod Ltd, a company resident in Uganda dealing in engineering consultancy, is fully registered for all Ugandan taxes. During the year ended 31 December 2011, the company was involved in various transactions. The managing director of Choncod Ltd is afraid of tax implications that the given transactions might generate. He has hired your services as a tax consultant. Your preliminary review reveals that all the transactions have VAT implications. Required: (a) Advise the company on the VAT implications of each of the following transactions: (i) Management has made a provision for income from technical fees of Shs 10 million. The company has not issued any invoices, and the amount is based on management estimates. (ii) VAT charged on the purchase of a private passenger motor vehicle and the related repairs. (iii) Trade bad debts written off of Shs 15 million which were more than 3 years old. (iv) In the month of February 2011, the company paid a rental invoice of Shs 94.4 million inclusive of VAT. (v) Disallowed input VAT of Shs 150 million following a URA tax audit of which the company is disputing disallowance of Shs 50 million. (vi) Disposal of improved land located in Jinja at Shs 250 million. (vii) VAT on entertainment expenses. (14 marks) (a) State the fines and penalties for the following offences as provided for under the VAT Act: (i) failure to lodge a return. (2 marks) (ii) failure to maintain proper records (2 marks) (ii) improper use of tax identification number (2 marks) (Total 20 marks)

SECTION C Question 5 (a) With examples, distinguish between direct and indirect tax systems as applied in the Uganda tax system. (6 marks)

(b) Outline any six circumstances under which the income of a person may be exempted from income tax under the Income Tax Act of Uganda. (3 marks)

(c) Mr. Wampamba is dissatisfied with the income tax assessed on his business income. He has sought your advice as a tax consultant. Required: Advise Mr. Wampamba on the objection and appeal procedure under the Income Tax Act. (6 marks) (Total 15 marks) Question 6 (a) Distinguish between an operating lease and a finance lease for income tax purposes. In your discussion include the resulting tax implications. (5 marks) (b) Discuss the opportunities and challenges presented by the customs union for the East African countries. (10 marks) (Total 15 marks) Question 7 Mr. Grant is a citizen of the United Kingdom (UK) and has lived in Uganda since 1998. He has progressively acquired several assets including a residential house in Ntinda, a warehouse in Nakawa, land at Kiwatule, a flat in UK and three commercial trucks in Uganda. Mr. Grant would like to return to his homeland, UK and has approached you as a tax consultant to advise him on the following: He has no intentions of disposing of the warehouse, trucks and all movable belongings in his residential house at Ntinda. He intends to enter into an agreement with his friend Speke who will run the operations of the warehouse and manage the trucks. Speke will remit the proceeds from the warehouse and the trucks to Mr. Grant's account in UK on a monthly basis. Required: (a) (i) Discuss how the proposed relocation will affect the residence status of Mr. Grant in Uganda for tax purposes. (3 marks) (ii) Discuss the tax implications of Mr. Grant's relocation on his assets both personal and business and whether he is liable for any taxes in Uganda. (4 marks)

(iii) Advise Mr. Grant on any requirement to file income tax returns with the Uganda Revenue Authority when he has left the country. (2 marks) (iv) In light of your answer in (a)

(iii) above, under what circumstances would this requirement change? (2 marks)

(b) State persons not required to file income tax returns to Uganda Revenue Authority in accordance with the Income Tax Act. (4 marks) (Total 15 marks)

The management of Bungho Insurmountable Ltd (BIL) has contacted you to prepare for them a four year financial plan. BIL's performance for the last two years is summarised in their financial statements below; Statement of Comprehensive Income for the year ended 30 June: 2012 2011 Shs million Shs million Sales turnover 1,639 1,504 Operating costs before depreciation (1,225) (1,124) EBITDA 414 380 Tax allowable depreciation (152) (139) EBIT 262 241 Net interest payable (57) (52) Profit before tax 205 189 Tax at 30% (62) (57) Dividends (80) (73) Amount transferred to reserves 63 59 Statement of Financial Position as at 30 June: 2012 2011 Shs million Shs million Shs million Shs million Non-current assets: Land and buildings 310 284 Plant and machinery (net) 1,012 928 Investments 32 1,354 29 1,241 Current assets: Inventories 448 411 Trade receivables 564 517 Cash 20 1,032 18 946 2,386 2,187 Equity and liabilities: Short term loans and overdrafts 230 209 Other Payables 472 433 Borrowings (8% fixed rate) 580 1,282 532 1,174 Called up share capital (10 cents par) 240 1,104 220 1,013 2,386 2,187 For your analysis, the following assumptions have been agreed by management of BIL and approved by the Finance Committee of the board; (i) Historically sales growth has been 9% per annum and is expected to remain the same for the next four years after 2012 due to uncertainty about future economic prospects.

(ii) Cash operating costs are estimated to be approximately 68% of sales.

(iii) Tax allowable depreciation for last year was approximately 15% of the net book value of plant and machinery at year end. This is expected to continue for the next four years.

(iv) Inventories, trade receivables, cash in hand and other payables are assumed to increase in proportion to the increase in sales.

(v) Investment in, and net book value of, plant and machinery is expected to increase in line with sales. No investment is planned in other non-current assets other than a refurbishment of buildings at an estimated cost of Shs 40 million in 2015. (vi) Any change in interest paid as a result of changes in borrowing may be assumed to be effective in the next year. BIL plans to meet any changes in financing needs, with the exception of the repayment of the fixed rate loan, by adjusting its overdraft.

vii) BIL currently pays 7% per annum interest on its short-term borrowing and short-term borrowings are expected to increase by 15% for two years after 2012 increasing to 26% in 2015 and reducing by 14% in 2016. (viii) Income tax is expected to continue at its present rate over the next four years. (ix) The company plans to maintain its dividend policy of paying a constant percentage of earnings after tax. (x) Existing borrowing covenants prevent BIL's gearing ratio (book value of total loans to book value of total loans plus equity) exceeding 40% for a period of more than one year. (xi) The investment yield small interest and borrowings are scheduled to be repaid at the end of 2014 and will be refinanced with a similar type of loan in 2014. The company's current share price is Shs 2.1, and the weighted average cost of capital is 11%. Required: (a) Prepare statement of financial position and statement of comprehensive income for each of the next four years after 2012. Clearly state any assumptions that you make. (16 marks) (b) Using financial ratios, highlight any potential financial problems for the company after 2012 and discuss what actions might be taken with respect to these problems. (12 marks) (c) Distinguish between stock 'split and repurchase' and give reasons why companies do stock repurchase. (6 marks) (d) Give advantages and disadvantages of a centralised treasury management system to an organisation like BIL. (6 marks) (Total 40 marks)

SECTION B Question 2 You have been appointed as finance manager for Fumigator Limited (FL), one of the largest cleaning firms in Gabor city of Banana Republic. As one of your first tasks, the executive director asked you to produce a briefing memo to the board of directors on the subject of mergers and acquisitions and the subsequent stakeholder's conflict. Required: Prepare memo, identifying and discussing: (a) the key stakeholders and their stake in an organisation like FL. (4 marks)

(b) the likely conflicts that might exist between shareholders and bond holders in mergers and acquisitions. (4 marks)

(c) examples of covenants that might be attached to bonds to avoid the above conflicts. (6 marks)

(d) the possible synergies that might occur in mergers and acquisitions. (6 marks) (Total 20 marks) Question 3 The executive director of Muhavura Ltd (ML) wishes to estimate the impact which the introduction of debt financing is likely to have on the company's overall cost of capital. ML is currently financed only by equity. ML summarised capital structure Shs million Ordinary shares (5 Shs par value) 1,000 Reserves 1,100 2,100 Notes: (a) The company's current share price is Shs 300. (b) ML has the capacity to raise up to Shs 400 million of fixed rate five year debt at an interest rate of 10% per annum. (c) The income tax rate is 30%. (d) ML's current earnings before interest and tax are Shs 72.5 million. These earnings are not expected to change significantly for the foreseeable future. The company is considering raising either: (i) Shs 200 million in debt financing or; (ii) Shs 400 million in debt financing. In either case, debt financing will be used to repurchase ordinary shares. Required: (a) Using Miller and Modigliani's model in a world with corporate tax, estimate the impact on LM's cost of capital of raising the finances in either (i) and / or

(ii) above. State clearly any assumptions that you make. (12 marks)

(b) Critically evaluated whether or not the estimates produced in part (a) above are likely to be accurate. (8 marks) (Total 20 marks) Question 4 At the end of December 2012 the finance manager of Uganda National Pension Fund (UPUF) will be reviewing strategy regarding their fund management. Currently, at UPUF over 50% of the funds are invested in fixed rate long-term bonds and the interest rates are expected to be quite volatile for the next few years. Among the pension fund's current investments are two AA rated bonds: 1 Zero coupons December 2027. 2 12% gilt June 2027 (interest is payable semi-annually). The current annual redemption yield (yield to maturity) on both bonds is 6%. The semi-annual yield may be assumed to be 3%. Both bonds have a par value and redemption value of Shs 100. Required: (a) Distinguish between the terms 'coupon rate' and 'yield to maturity'. (4 marks)

(b) Briefly discuss possible reasons for an upward sloping yield curve. (6 marks)

(c) Estimate the market price of each of the bonds if interest rates (yields): (i) increase by 1%.

(ii) decrease by 1%. The changes in interest rates may be assumed to be parallel shifts in the yield curve (yield changes by an equal amount at all points of the yield curve). (10 marks) (Total 20 marks) Question 5 Kisoro Impers Ltd (KIL) is the parent of a group of companies controlled from Uganda with branches in Kenya, Tanzania and South Sudan. The treasury department of KIL has forecasted that by the end of the month, intercompany indebtedness will be as follows; The Tanzanian branch will be owed TShs 144,381,000 by the Kenyan branch and will owe the South Sudan branch $ 1,060,070. On the other hand, the Kenyan branch will be owed Kshs 14,438,000 by the South Sudan branch and will owe it $ 800,000 in turn. It is the function of KIL central treasury department to net off intercompany balances as far as possible and to issue instructions for settlement of the net balance. The following currencies are used in the respective branch's countries; Tanzania - Tanzanian shilling (TShs) Kenya - Kenyan shilling (KShs) South Sudan - South Sudanese dollar ($) The exchange rates in terms of 1 Ugandan shilling are: $ 1.415 KShs 10.215 and TShs 68.10 Required: (a) Calculate the net payments to be made in respect of the above balances. (8 marks) (b) With examples, explain the meaning of the following terms in relation to hedge accounting: (i) leading and lagging. (ii) matching. (iii) economic exposure. (iv) transaction exposure. (v) translation accounting exposure. (12 marks) (Total 20 marks)