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The management of Faulu Limited intends to change the company's credit
policy, from 'net 30' to 3/10 net 45'. If this change is effected, annual sales
will...
(Solved)
The management of Faulu Limited intends to change the company‟s credit
policy, from 'net 30' to '3/10 net 45'. If this change is effected, annual sales
will increase by 12% from the current level of Sh.12 million while the proportion of
bad debts will increase from 1% to 1.4% of credit sales. A new credit assistant will also
have to be employed at a salary of Sh.260,000 per annum. It is expected that 40% of the
credit customers will benefit from the cash discount.
The inventory level and the variable costs will however remain constant at 20% and
75% of the annual credit sales respectively. The rate of return on investment is 14% per
annum. All sales are on credit.
Assume a 360 days financial year and ignore the effects of taxation.
Required:
Advise the management of Faulu Limited on whether or not to adopt the new credit
policy.
Date posted:
February 11, 2019
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Answers (1)
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List four factors that should be considered in establishing an effective credit policy.
(Solved)
List four factors that should be considered in establishing an effective credit policy.
Date posted:
February 11, 2019
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Answers (1)
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Distinguish between a credit policy and a working capital policy.
(Solved)
Distinguish between a credit policy and a working capital policy.
Date posted:
February 11, 2019
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Answers (1)
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List and briefly discuss three possible reasons why companies in the same type of business may have different price/earnings (P/E) ratios.
(Solved)
List and briefly discuss three possible reasons why companies in the same type of business may have different price/earnings (P/E) ratios.
Date posted:
February 11, 2019
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Answers (1)
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What are the determinants of the price of a bond?
(Solved)
What are the determinants of the price of a bond?
Date posted:
February 11, 2019
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Answers (1)
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What are the differences between an 'operating lease' and a 'finance lease'?
(Solved)
What are the differences between an 'operating lease' and a 'finance lease'?
Date posted:
February 11, 2019
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Answers (1)
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Identify any five services that financial intermediaries provide.
(Solved)
Identify any five services that financial intermediaries provide.
Date posted:
February 11, 2019
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Answers (1)
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What is financial intermediation?
(Solved)
What is financial intermediation?
Date posted:
February 11, 2019
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Answers (1)
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Identify and briefly explain the three main forms of agency relationship in a firm.
(Solved)
Identify and briefly explain the three main forms of agency relationship in a firm.
Date posted:
February 11, 2019
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Answers (1)
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Dawamu Ltd., which operates in the retail sector selling a single product, is considering
a change of credit policy which will result in an increase in...
(Solved)
Dawamu Ltd, which operates in the retail sector selling a single product, is considering
a change of credit policy which will result in an increase in the average collection period
of debts from one to two months. The relaxation of the credit policy is expected to
produce an increase in sales in each year, amounting to 25% of the current sales
volume. The following information is available.
1. Selling price per unit of product – Sh.1,000
2. Variable cost per unit of product – Sh.850
3. Current annual sales of product – Sh.240,000,000
4. Dawamu Ltd.'s required rate of return on investments is 20%.
5. It is expected that increase in sales would result in additional stock of
Sh.10,000,000 and additional creditors of Sh.2,000,000.
Required:
Advise Dawamu Ltd. on whether or not to extend the credit period offered to
customers, if
(i) All customers take the longer credit period of two months.
(ii) Existing customers do not change their payment habits and only the new
customers will take a full two months' credit.
Date posted:
February 11, 2019
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Answers (1)
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Briefly explain how the Miller-Orr cash management model operates.
(Solved)
Briefly explain how the Miller-Orr cash management model operates.
Date posted:
February 11, 2019
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Answers (1)
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What is meant by the term 'matching approach' in financing fixed and current assets?
(Solved)
What is meant by the term 'matching approach' in financing fixed and current assets?
Date posted:
February 11, 2019
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Answers (1)
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Identify and briefly explain three conditions which have to be satisfied before the use of
the weighted average cost of capital (WACC) can be justified.
(Solved)
Identify and briefly explain three conditions which have to be satisfied before the use of
the weighted average cost of capital (WACC) can be justified.
Date posted:
February 11, 2019
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Answers (1)
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Identify four factors that have limited the development of the venture capital market in
your country.
(Solved)
Identify four factors that have limited the development of the venture capital market in
your country.
Date posted:
February 11, 2019
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Answers (1)
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Briefly describe the three forms of capital market efficiency
(Solved)
Briefly describe the three forms of capital market efficiency
Date posted:
February 11, 2019
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Answers (1)
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Briefly explain the liquidity – profitability trade – off which a business enterprise may be
required to consider in its financial management policies.
(Solved)
Briefly explain the liquidity – profitability trade – off which a business enterprise may be
required to consider in its financial management policies.
Date posted:
February 11, 2019
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Answers (1)
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Swaleh Ltd. has been in operation for the last eight years. The company is all equity
financed with 6 million ordinary shares with a par value...
(Solved)
Swaleh Ltd. has been in operation for the last eight years. The company is all equity
financed with 6 million ordinary shares with a par value of Sh.5 each. The current
market price per share is Sh.8.40, which is in line with the price/earnings (P/E) ratio in
the industry of 6.00. The company has been consistent in paying a dividend of Sh.1.25
per share during the last five years of its operations, and indications are that the current
level of operating income can be maintained in the foreseeable future. Tax has been at a
rate of 30%.
The management of Swaleh Ltd. is contemplating the implementation of a new project
which requires Sh.10 million. Since no internal sources of funds are available,
management is to decide on two alternative sources of finance, namely:
Alternative A
To raise the Sh.10 million through a rights issue. Management is of the opinion that a
price of Sh.6.25 per share would be fair.
Alternative B
To obtain the Sh.10 million through a loan. Interest is to be paid at a rate of 12% per
annum on the total amount borrowed.
The project is expected to increase annual operating income by Sh.5.6 million in the
foreseeable future.
Irrespective of the alternative selected in financing the new project, corporation tax is
expected to remain at 30%.
Required:
(i) Determine the current level of earnings per share (EPS) and the operating
income of the company.
(ii) If Alternative A is selected, determine the number of shares in the rights issue
and the theoretical ex-rights price.
(iii) Calculate the expected earnings per share (EPS) for each alternative, and advise
Swaleh Ltd. on which alternative to accept.
(iv) 'It is always better for a company to use debt finance since lower cost of debt
results in higher earnings per share'.
Briefly comment on this statement.
Date posted:
February 11, 2019
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Answers (1)
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Distinguish between financial risk and operating risk.
(Solved)
Distinguish between financial risk and operating risk.
Date posted:
February 11, 2019
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Answers (1)
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Magma Ltd. wishes to make a choice between two mutually exclusive projects. Each of
these projects requires Sh.400,000,000 in initial cash outlay. The details of the...
(Solved)
Magma Ltd. wishes to make a choice between two mutually exclusive projects. Each of
these projects requires Sh.400,000,000 in initial cash outlay. The details of the two
projects are as follows:
Project A
This project is made up of two sub-projects. The first sub-project will require an initial
outlay of Sh.100,000,000 and will generate Sh.25,600,000 per annum in perpetuity. The
second sub-project will require an initial outlay of Sh.300,000,000 and will generate
Sh.85,200,000 per annum for the 8 years of its useful life. This sub-project does not
have a residual value at the end of the 8 years. Both sub-projects are to commence
immediately.
Project B
This project will generate Sh.87,000,000 per annum in
perpetuity. The company has a cost of capital of 16%.
Required:
(i) Determine the net present value (NPV) of each project.
(ii) Compute the internal rate of return (IRR) for each project.
(iii) Advise Magma Ltd. on which project to invest in, and justify your choice
Date posted:
February 11, 2019
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Answers (1)
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Joseph Kimeu is trying to determine the value of Bidii Ltd.'s ordinary shares. The
earnings growth rate over his planned six-year holding period is estimated to...
(Solved)
Joseph Kimeu is trying to determine the value of Bidii Ltd.'s ordinary shares. The
earnings growth rate over his planned six-year holding period is estimated to be 10%,
and the dividend payout ratio is 60%. The ending price earnings (P/E) ratio is expected
to be 20 and the current earnings per share are Sh.4. The required rate of return for this
share is 15%.
Required:
Compute the market price of Bidii Ltd's ordinary share
Date posted:
February 11, 2019
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Answers (1)