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- Dove Construction Company Ltd made a Sh.100 million bondage 5 years ago when interest rates were
substantially high. The interest rates have now fallen and the...(Solved)
Dove Construction Company Ltd made a Sh.100 million bondage 5 years ago when interest rates were
substantially high. The interest rates have now fallen and the firm wishes to retire this old debt and replace it with a new and cheaper one. Given here below are the details about the two bond issues:
Old Bonds: The outstanding bonds have a nominal value of Sh.1,000 and 24% coupon interest rate. They
were issued 5 years ago with a 15-year maturity. They were initially sold a their nominal value of Sh.1,000 and the firm incurred Sh.390,000 in floatation costs. They are callable at Sh.1,120.
New Bonds: The new bonds would have a Sh.1,000 nominal value and a 20% coupon interest rate. They
would have a 10-year maturity and could be sold at their par value. The issuance cost of the new bonds
would be Sh.525,000.
Assume the firm does not expect to have any overlapping interest and is in the 35% tax bracket.
Required:
a) Calculate the after-tax cash inflows expected from the unamortized portion of the old bond's
issuance cost.
b) Calculate the annual after-tax cash inflows from the issuance of the new bonds assuming the 10-year
amortization.
c) Calculate the after-tax cash outflow from the call premium required to retire the old bonds.
d) Determine the incremental initial cash outlay required to issue the new bonds.
e) Calculate the annual cash-flow savings, if any, expected from the bond refunding.
f) If the firm has a 14% after-tax cost of debt, would you recommend the proposed refunding and
reissue? Explain.
Date posted: April 20, 2021. Answers (1)
- Explain the types of political risks that face multi-national firms in foreign countries.(Solved)
Explain the types of political risks that face multi-national firms in foreign countries.
Date posted: April 20, 2021. Answers (1)
- Your firm is considering the acquisition of a new fork lift truck. It is uncertain about whether to purchase the truck outright or to finance...(Solved)
Your firm is considering the acquisition of a new fork lift truck. It is uncertain about whether to purchase the truck outright or to finance it through a leasing arrangement with Kasneb Bank Ltd. The purchase price is Sh.5,200,000 and it will have a salvage value of Sh.400,000 at the end of its 8-year useful life. The annual lease cost would be Sh.996,000 for 8 years.
The company uses the straight-line method for analysis investment decisions.
The company can borrow funds (to purchase the forklift) at 22% and it has an effective tax rate of
35%. Its after tax cost of capital is 12%.
Required:
a) Analyze the decision situation and advise the firm about the appropriate acquisition method.
b) If the company could get a 20% investment allowance on this investment, how would this affect
your answer in (a) above?
Date posted: April 20, 2021. Answers (1)
- Mr. Upendo, a director of Yote Limited met Mr. Mapenzi, a director of Toa Limited during a conference
in Mombasa. They had some discussion about their...(Solved)
Mr. Upendo, a director of Yote Limited met Mr. Mapenzi, a director of Toa Limited during a conference
in Mombasa. They had some discussion about their various companies. After flying back to Nairobi, Mr.
Upendo proposed to his board of directors acquisition of Toa Limited.
During his presentation to the board he stated that: “As a result of this takeover we will diversify
our operations and our earnings per share will rise by 13%, bringing great benefits to our shareholders.
No bid has yet been made and Yote Limited currently owns only 2% of Toa Limited.
A bid would be based on an exchange of shares between the two companies which would be one Yote
share for every six Toa shares. Financial data for the two companies include the following:
Required:
a) Explain whether you agree with Mr. Upendo when he says that the takeover would bring great benefits to our shareholders. Support your explanation with relevant calculations. State clearly any
assumptions made.
b) On the basis of information provided, calculate the likely post acquisition price of a share of Yote
Limited if the bid is successful.
c) What alternative forms of payment are available in a bid?
Date posted: April 20, 2021. Answers (1)
- EMC Ltd has a paid up share capital of 1.2 million shares of Sh.20 each. The current market price per share
is Sh.36. The company has...(Solved)
EMC Ltd has a paid up share capital of 1.2 million shares of Sh.20 each. The current market price per share
is Sh.36. The company has no loan capital. Maintainable earnings before tax are forecast at Sh.4.8 million.
The company‟s effective tax rate is 40%. The company requires to raise a further Sh.15
million in order to achieve additional earnings of Sh.2.2 million per annum and proposes doing this by
means of a rights issue. Suggested alternative prices for the rights issue are Sh.32 and Sh.25 per share.
Required:
a) Calculate, when the price is Sh.32 per share, the theoretical market price per share of the enlarged capital after the issue (the ex-rights price) and also the market value of a right.
b) Calculate as in (a) above when the price is Sh.25 per share.
c) Suggest, with reasons, what issue price is most likely to be adopted by the company.
d) What factors might, in practice, invalidate your calculations?
Date posted: April 20, 2021. Answers (1)
- Explain the factors responsible for financial innovations.(Solved)
Explain the factors responsible for financial innovations.
Date posted: April 20, 2021. Answers (1)
- Define the term “Financial Engineering” and explain 3 main components of financial engineering.(Solved)
Define the term “Financial Engineering” and explain 3 main components of financial engineering.
Date posted: April 20, 2021. Answers (1)
- MK Ltd is comprised of 4 major projects, details of which as follows:
The risk free rate is 5% and the market return is 14% p.a....(Solved)
MK Ltd is comprised of 4 major projects, details of which as follows:
The risk free rate is 5% and the market return is 14% p.a. The standard deviation or the market return is 13%.
Required:
a) Evaluate whether or not the share price of MK Ltd is overvalued or undervalued.
b) Discuss why your results in (a) above might not correctly identify whether or not the share price of MK Ltd is undervalued or overvalued.
Date posted: April 20, 2021. Answers (1)
- The management of Viwanda Ltd. is in the process of evaluating the company's dividend policy.
The following information is provided:
1. The company paid Sh.1.2 million as...(Solved)
The management of Viwanda Ltd. is in the process of evaluating the company's dividend policy.
The following information is provided:
1. The company paid Sh.1.2 million as dividends in the last financial year.
2. The profit after tax for the last financial year was Sh.3.6 million.
3. The company has not issued any preference shares
4. The earnings growth rate has been consistent at 10% per annum for the past ten years.
5. The expected profit after tax for the current financial year is Sh.4.8 million
6. The company anticipates investment opportunities worth Sh.1.4 million in the current financial year.
7. The capital structure of the company consists of sixty per cent equity and forty per cent debt.
Required:
Determine the optimal total dividends for the current financial year if the company wishes to adopt each of the following independent dividend policies
i) Pure residual policy
ii) Constant payout ratio policy
iii) Stable predictable dividend policy, the growth rate being equivalent to the earnings growth rate.
iv) Regular plus extra dividend policy. The regular dividends would be based on the long run growth
rate of earnings while the extra dividends would be based on the residual income
Date posted: April 20, 2021. Answers (1)
- Securitization may be the wave for the future, as it appears to be a more efficient mechanism for bringing borrowers and investors together than traditional...(Solved)
Securitization may be the wave for the future, as it appears to be a more efficient mechanism for bringing borrowers and investors together than traditional financing through intermediaries (Fabozzi and Modigliani).
Required:
i) Explain the term “securitization”.
ii) Discuss the benefits that may accrue to a company that uses securitization in preference to traditional
financing through intermediaries.
Date posted: April 20, 2021. Answers (1)
- Mr. K. Patel has an investment capital of Sh.1,000,000. He wishes to invest in two securities, A and B in
the following proportion; Sh.200,000 in security...(Solved)
Mr. K. Patel has an investment capital of Sh.1,000,000. He wishes to invest in two securities, A and B in
the following proportion; Sh.200,000 in security A and Sh.800,000 in security B.
The returns on these two securities depend on the state of the economy as shown below:
Required:
i) Compute the expected portfolio return
ii) Determine the correlation coefficient between security A and security B
iii) Calculate the portfolio risk
iv) Calculate the reduction in risk due to portfolio diversification
Date posted: April 20, 2021. Answers (1)
- With the help of a diagram show the difference between an efficient portfolio and an optimum portfolio.(Solved)
With the help of a diagram show the difference between an efficient portfolio and an optimum portfolio.
Date posted: April 20, 2021. Answers (1)
- The management of Dawanu Ltd. is evaluating five investment projects whose expected cash flows are shown below:
Additional Information:
1. None of the five projects can be...(Solved)
The management of Dawanu Ltd. is evaluating five investment projects whose expected cash flows are shown below:
Additional Information:
1. None of the five projects can be delayed or bought forward.
2. All the projects are divisible
3. The required rate of return on investments is 15%
Required:
i) Using the net present value (NPV) approach, determine which project(s) should be undertaken assuming
capital will be available when required.
ii) Using the NPV approach, determine which project(s) should be undertaken assuming capital available on
1 January 2006 is limited to Sh.100 million
Date posted: April 20, 2021. Answers (1)
- Distinguish between one-period rationing and multi-period rationing with specific reference to capital rationing.(Solved)
Distinguish between one-period rationing and multi-period rationing with specific reference to capital rationing.
Date posted: April 20, 2021. Answers (1)
- Proton Ltd. has a capital structure consisting of Sh.250 million in 12% debentures and Sh.150 million in
ordinary shares of Shs.10 par value. The company distributes...(Solved)
Proton Ltd. has a capital structure consisting of Sh.250 million in 12% debentures and Sh.150 million in
ordinary shares of Shs.10 par value. The company distributes all its net earnings as dividends.
The finance manager of Proton Ltd. intends to raise an additional Sh.50million to finance an
expansion programme and is considering three financing options.
Option one: Issue an 11% debenture stock
Option two: Issue 13% cumulative preference shares
Option three: Issue additional ordinary shares of Sh.10 par value.
The corporation tax rate is 30%.
Required:
Calculate the earnings before interest and tax (EBIT ) and the earnings per sharee (EPS)at the
point of indifference between the following financing options:
i) Option one and option three
ii) Option two and option three
Date posted: April 20, 2021. Answers (1)
- Two firms, A Ltd and B Ltd. operate in the same industry. The two firms are similar in all aspects
except for their capital structures.
The following...(Solved)
Two firms, A Ltd and B Ltd. operate in the same industry. The two firms are similar in all aspects
except for their capital structures.
The following additional information is available:
1. A Ltd is financed using Sh.100 million worth of ordinary shares.
2. B Ltd is financed using Sh.50 million in ordinary shares and Sh.50 million in 7% debentures
3. The annual earnings before interest and tax are Sh.10million for both firms. These earnings are
expected to remain constant indefinitely.
4. The cost of equity in A Ltd is 10%
5. The corporate tax rate is 30%
Required:
Using the Modigliani and Miller (MM) model, determine the following:
i) The market value of A Ltd. and B Ltd.
ii) The weighted average cost of capital of A Ltd and B Ltd.
Date posted: April 20, 2021. Answers (1)
- Explain two ways in which a firm can hedge against a currency transaction exposure.(Solved)
Explain two ways in which a firm can hedge against a currency transaction exposure.
Date posted: April 19, 2021. Answers (1)
- Define the following types of foreign currency risk exposure:
i) Transaction exposure
ii) Translation exposure
iii) Economic exposure(Solved)
Define the following types of foreign currency risk exposure:
i) Transaction exposure
ii) Translation exposure
iii) Economic exposure
Date posted: April 19, 2021. Answers (1)
- Huge Ltd. is contemplating a complete share acquisition of Tiny Ltd. Huge Ltd is offering three of its
shares for every two shares of Tiny Ltd....(Solved)
Huge Ltd. is contemplating a complete share acquisition of Tiny Ltd. Huge Ltd is offering three of its
shares for every two shares of Tiny Ltd. The data is relating to the two companies are shown below:
The corporate tax rate is 30%
Required:
i) Determine the maximum offer price that will not dilute the EPS of Huge Ltd.
ii) Compute the premium payable to the shareholders of Tiny Ltd
iii) Given that the growth rate of Huge Ltd. is 8% while that of Tiny Ltd is 12%, compute the combined
growth rate of the two companies
Date posted: April 19, 2021. Answers (1)
- Discuss the Modigliani and Miller's (MM) dividend irrelevancy proposition.(Solved)
Discuss the Modigliani and Miller's (MM) dividend irrelevancy proposition.
Date posted: April 19, 2021. Answers (1)