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Company A is considering investing in a project which has a three year life. The project would involve an initial investment of Sh.20 million. The finance manager has come up with expected probabilities for various possible economic conditions as follows:Required:Assuming a discount rate of 15% should company A invest in the project?
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Assume all things are held constant other than the item in question, for each of thecompanies below:A company with a large proportion of insider ownership all of whom are high-incomeindividuals. A growth company with an abundance of good investment opportunities.A company experiencing ordinary growth that has high liquidity and much unused borrowingcapacity. A dividend paying company that experiences an unexpected drop in earnings from a trend.A company with volatile earnings and high business risk.Required:Explain whether or not you would expect each company to have a medium/high or a low dividend paymentratio and the reasons for such categorization.
Date posted: April 16, 2021 . Answers (1)
Explain the factors that finance managers should analyze before making a dividend decision.
Highlight the limitations of using commercial paper as a form of short-term credit.
Chuma Company Ltd is considering various levels of debt. Currently it has no debt. It has a totalmarket value of Sh.30 million. By undertaking debt it believes that it can achieve a net tax advantageequal to 20% of the amount of debt. However the company will incur bankruptcy and agency costsas well as lenders increasing their interest rate if it borrows too much. The company‟smanaging director believes that the company can borrow up to Sh.10 million without incurringany of these costs. However, each additional Sh.10 million increment in borrowing is expected toresult in the three costs cited being incurred. Moreover, the three costs are expected to increase atan increasing rate with leverage. The present value cost of various levels of debt is as follows:Required:Advise the managing director on the optimal amount of debt for Chuma Company.
Mr. Mlachake is currently holding a portfolio consisting of shares of four companies quoted on the Bahati Stock Exchange as follows:The current market return is 14% per annum and the treasury bills yield is 9% per annum.Required:(i) Calculate the risk of Mlachake‟s portfolio relative to that of the market.(ii) Explain whether or not Mlachake should change the composition of his portfolio.
Briefly explain three practical uses of the capital asset pricing model.