(a) Tax benefit
When a shareholder receives cash dividend from the company, he pays tax but a bonus issue
does not attract taxes. The shareholder can sell the new shares received to generate cash and
thereby realize a capital gain which is currently not taxable.
(b) Indication of higher profits in future
The issue of bonus shares is normally interpreted by shareholders as an indication of higher
profitability especially in an inefficient market. This is because a bonus issue is declared by
management when they expect a rise in earnings to offset additional outstanding shares. The
bonus issue thus convey important information to the market.
(c) Increase in future dividends
If a company has been following a policy of paying fixed dividend per share and continues it
after the declaration of the bonus issue, the total cash dividend the shareholder receives will
increase because of the increase in the number of shares.
(d) Conservation of cash
A company that issues bonus shares conserves cash that would otherwise have been paid as
dividend. This is particularly important if the company is facing cashflow or liquidity
problems.
Kavungya answered the question on April 14, 2021 at 20:04
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XYZ Ltd has 900,000 shares outstanding at current market price of Sh 130 per share. The company
needs Sh 22,500,000 to finance its proposed expansion. The...
(Solved)
XYZ Ltd has 900,000 shares outstanding at current market price of Sh 130 per share. The company
needs Sh 22,500,000 to finance its proposed expansion. The board of directors has decided to issue
rights for raising the required funds. The subscription price has been fixed at Sh 75 per share.
Required:
(a) How many rights are required to purchase one new share?
(b) What is the price of one share after the rights issue (Ex-right price)?
(c) Compute the theoretical value of each right
(d) Consider the effect of the rights issue on the shareholders' wealth under the three options
available to the shareholders (Assume he owns 3 shares and has Sh 75 cash on hand).
Date posted:
April 14, 2021
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Answers (1)
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ABC Ltd will elect six directors at the AGM. There are 100,000 shares outstanding and
entitled to vote. If a group desires to elect two directors,...
(Solved)
ABC Ltd will elect six directors at the AGM. There are 100,000 shares outstanding and
entitled to vote. If a group desires to elect two directors, how many shares must it have?
Date posted:
April 14, 2021
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Answers (1)
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Companies U and L are identical in every respect except that U is unlevered while L has Sh 10 million of 5% bonds outstanding. Assume
(a)...
(Solved)
Companies U and L are identical in every respect except that U is unlevered while L has Sh 10 million of 5% bonds outstanding. Assume
(a) That all of the MM assumptions are met
(b) That there are no corporate or personal taxes
(c) That EBIT is Sh 2 million
(d) That the cost of equity to company U is 10%
Required:
i. Determine the value MM would estimate for each firm
ii. Determine the cost of equity for both firms
iii. What is the overall cost of capital for both firms
iv. Suppose the value of U is Sh 20 million and that of L is Sh 22 million. Explain the arbitrage process for a shareholder who owns 10% of company L's shares.
Date posted:
April 14, 2021
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Answers (1)
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A company's current EPS is KSh 12. The firm pays out 40% of its earnings as dividend and has a growth
rate of 6% p.a. which...
(Solved)
A company's current EPS is KSh 12. The firm pays out 40% of its earnings as dividend and has a growth
rate of 6% p.a. which is expected to continue into perpetuity. The company has a beta value of 1.4 and the
risk free rate is 10%. The expected market return is 15%.
Required:
(a) Using CAPM, compute the expected return on the company's equity.
(b) What implications does CAPM bring if it is used to determine a firm's cost of equity?
Date posted:
April 14, 2021
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Answers (1)
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Company A and B are in the same risk class and are identical in every respect except that Company A is
geared while B is not....
(Solved)
Company A and B are in the same risk class and are identical in every respect except that Company A is
geared while B is not. Company A has Sh 6 million in 5% bonds outstanding. Both companies earn 10%
before interest and taxes on their Sh 10 million total assets. Assume perfect capital markets, rational
investors, a tax rate of 60% and a capitalization rate of 10% for an all equity company.
Required:
(a) Compute the value of firms A and B using the net income (NI) approach and Net operating income
(NOI) approach.
(b) Using the NOI approach, calculate the after tax weighted average cost of capital for firms A and B.
Which of these firms has the optimal capital structure according to NOI approach? Why?
(c) According to the NOI approach, the values of firms A and B computed in (a) are not in equilibrium.
Assuming that you own 10% of A's shares, show the process which will give you the same amount of
income but at less cost. At what point would this process stop?
Date posted:
April 14, 2021
.
Answers (1)
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State and explain three theories explaining the term structure of interest rates.
(Solved)
State and explain three theories explaining the term structure of interest rates.
Date posted:
April 14, 2021
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Answers (1)
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Assume XYZ ltd is considering a project which costs sh.100 000 to be financed by 50% equity with a cost
of 21.6% and 50% debt with...
(Solved)
Assume XYZ ltd is considering a project which costs sh.100 000 to be financed by 50% equity with a cost
of 21.6% and 50% debt with a pre-tax cost of 12%.
The financing method would maintain the company’s overall cost of capital to remain unchanged. The
project is estimated to generate cash flows of sh.36 000 p.a. before interest charges and corporate tax at
33%.
Required:
Evaluate the project using:
NPV method
APV method
Date posted:
April 14, 2021
.
Answers (1)
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Assume that the finance manager of ABC Ltd expects to generate sales of £50 000 in the current financial
year. Analysis of the firms operating cost...
(Solved)
Assume that the finance manager of ABC Ltd expects to generate sales of £50 000 in the current financial
year. Analysis of the firms operating cost structure reveals that variable operating cost is 40% of sales and fixed operating cost at £250 000.
The manager wishes to explore the effect of changes in sales and has developed 2 scenarios.
Sales revenue is 10% less than expected
Sales revenue is 10% greater than expected
Required:
Compute EBIT for each of the scenarios and the degree of operating gearing.
Date posted:
April 14, 2021
.
Answers (1)
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financial year and pays interest of 10% as long-term loan of £200 000. The company has 100 000
ordinary shares and the tax rate is 20%....
(Solved)
financial year and pays interest of 10% as long-term loan of £200 000. The company has 100 000
ordinary shares and the tax rate is 20%. The finance manager is currently examining 2 scenarios.
A case where EBIT is 25% less than expected.
A case where EBIT is 25% more than expected.
Required.
Compute the EPS under the 3 cases and the degree of financial gearing for both scenario 1 and 2.
Date posted:
April 14, 2021
.
Answers (1)
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State the assumptions of net operating income approach.
(Solved)
State the assumptions of net operating income approach.
Date posted:
April 14, 2021
.
Answers (1)
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The problem with selling off profitable publicly owned undertakings is that in the long term government,
and therefore the taxpayer, loses out by forfeiting the future...
(Solved)
The problem with selling off profitable publicly owned undertakings is that in the long term government,
and therefore the taxpayer, loses out by forfeiting the future stream of profits.
Required:
Discuss briefly the validity of the above statement.
Date posted:
April 14, 2021
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Answers (1)
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Discuss and give examples of how governments assist companies in their financing requirements.
(Solved)
Discuss and give examples of how governments assist companies in their financing requirements.
Date posted:
April 14, 2021
.
Answers (1)
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In a mixed economy, two of the objectives of a government could be;
(a) To minimize its borrowing requirements; and
(b) To reduce the taxation of incomes.
Required
(a)...
(Solved)
In a mixed economy, two of the objectives of a government could be;
(a) To minimize its borrowing requirements; and
(b) To reduce the taxation of incomes.
Required
(a) Identify the general economic effects of these policies on private sector businesses.
(b) Discuss what particular effects might result from attempts to achieve these objectives by each of:
(i) Reductions in public expenditure;
(ii) Increases in charges made for the products or services of nationalized industries;
(iii) Selling nationalized assets.
Date posted:
April 14, 2021
.
Answers (1)
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State and explain the short-term instruments used to generate cash to meet expected spending needs.
(Solved)
State and explain the short-term instruments used to generate cash to meet expected spending needs.
Date posted:
April 14, 2021
.
Answers (1)
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Outline the reasons why financial management in government departments is different from financial management in an industrial or commercial company.
(Solved)
Outline the reasons why financial management in government departments is different from financial management in an industrial or commercial company.
Date posted:
April 14, 2021
.
Answers (1)
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X Ltd intends to take-over Y Ltd by offering two of its share for every five shares in Y Company Ltd.
Relevant financial data is as...
(Solved)
X Ltd intends to take-over Y Ltd by offering two of its share for every five shares in Y Company Ltd.
Relevant financial data is as follows:
Required.
a. Compute the combined EPS & MPS
b. Has wealth been created for shareholders?
Date posted:
April 14, 2021
.
Answers (1)
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The following data are pertinent for companies A and B.
a. If the two companies were to merge and the exchange ratio were one share of...
(Solved)
The following data are pertinent for companies A and B.
a. If the two companies were to merge and the exchange ratio were one share of Company A for each share of Company B, what would be the initial impact on earnings per share of the two companies? what is the market value exchange ratio? Is the merger likely to take place?
b. If the exchange ratio were two shares of Company A for each share of Company B what would happen with respect to the above?
c. If the exchange ratio were 1.5 shares of Company A for each share of Company B, what would happen?
d. What exchange ratio would you recommend?
Date posted:
April 14, 2021
.
Answers (1)
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Outline the roles of investment bankers in mergers.
(Solved)
Outline the roles of investment bankers in mergers.
Date posted:
April 14, 2021
.
Answers (1)
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XYZ Ltd. is considered acquiring ABC Ltd. The following information relates to ABC Ltd. for the next five years. The projected financial data are for...
(Solved)
XYZ Ltd. is considered acquiring ABC Ltd. The following information relates to ABC Ltd. for the next five years. The projected financial data are for the post-merger period. The corporate tax rate is 40% for both companies.
Other information
a. After the fifth year the cashflows available to XYZ from ABC is expected to grow by 10% per
annum in perpetuity.
b. ABC will retain Shs 40,000 for internal expansion every year.
c. The cost of capital can be assumed to be 18%.
REQUIRED:
i. Estimate the annual cash flows.
ii. Determine the maximum amount XYZ would be willing to acquire ABC at.
Date posted:
April 14, 2021
.
Answers (1)
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Company A is considering the acquisition by shares of Company B. The following information is also available.
Company B has agreed to an offer of Shs...
(Solved)
Company A is considering the acquisition by shares of Company B. The following information is also available.
Company B has agreed to an offer of Shs 35 a share to be paid in Company A shares.
Consider the effect of the acquisition to the earnings per share.
Date posted:
April 14, 2021
.
Answers (1)