Fundamentals of Finance KASNEB Notes

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This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply the principles of finance in business decision making.


  • Identify various sources of finance for organisations
    • Calculate non-complex risk and return measures
    • Make basic dividend decisions for a firm
    • Determine the cost of capital for an organisation
    • Apply the basic valuation models to determine value of financial securities
    • Evaluate the viability of capital investments using appropriate appraisal techniques
    • Apply basic concepts of Islamic Finance.


Overview of finance

  • Nature and scope of finance
  • Relationship between accounting and finance
  • Finance functions
  • Goals of a firm
  • Agency theory: conflicts and resolutions

Sources of finance

  • Factors to consider when choosing a source of finance
  • Internally generated and externally generated finance
  • Short term, medium and long term sources of finance

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Financial markets and systems

  • Roles and importance of financial markets and systems
  • Market participants and financial innovation
  • Types of financial markets
  • Characteristics of a good market
  • Functions of financial markets
  • The flow of funds and the financial system
  • Organisation, structure and functions of securities markets
  • Automation of securities exchanges; automated trading system (ATS), Central depository system (CDS)
  • Role of government in the financial system; capital markets authority, central bank, central depository and settlement company

Time value of money

  • Time value versus time preference for money
  • The relevance of time value of money
  • Discounting techniques
  • Compounding techniques
  • Preparation of the loan amortisation schedule

Introduction to risk and return

  • Components of risk and return
  • Sources of risk
  • Measures of risk and return for a single asset
  • Distinction between risk-free and risky assets
  • Relationship between risk and return on investments

Cost of capital

  • Significance of cost of capital to firms
  • Factors influencing a firm’s cost of capital
  • Components of cost of capital
  • Weighted average cost of capital
  • Weighted marginal cost of capital

Working capital management

  • Nature and importance of working capital management
  • Determinants of working capital
  • Working capital operating cycle
  • Working capital financing policies
  • Cash management
  • Accounts receivable management
  • Accounts payable management
  • Management of inventory, debtors and creditors

Capital budgeting decisions under certainty

  • Importance, characteristics and types of capital investment decisions
  • Capital investment cash flows; total initial cash outlay, the total terminal cash flows and annual net operating cash flows
  • Investment evaluation criteria
  • The features of an ideal capital budgeting technique
  • Investment appraisal techniques; Accounting Rate of Return (ARR), Payback period, Internal Rate of Return, Net Present Value, Profitability index

Dividend decisions

  • Factors influencing the dividend decision of a firm
  • Forms of dividend payment
  • The   dividend   policies;   pay-out   ratio    policy,   residual   policy,   stable predictable policy, low regular plus extra policy
  • Dividend payment chronology- declaration date, holder of record date, ex- dividend date and payment date

Fundamentals of Islamic finance

  • Principles and trends in Islamic banking
  • Differences between Islamic and conventional banking
  • The  concept  of interest (riba)    and how returns are made by Islamic financial securities
  • Sources of finance in Islamic financing

Emerging issues and trends

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