Stock exchange is more of a secondary market because shares held by investors are traded in the secondary market. A strong secondary market supports the primary market because investors in new issues need to know that they can sell them to someone else if the need arises.
Kavungya answered the question on December 15, 2021 at 06:11
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What is a primary market?
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What is a primary market?
Date posted:
December 15, 2021
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Answers (1)
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Insectkill Ltd. is considering whether to establish a new subsidiary in Uganda. The cost of the fixed assets would be Sh.10,000,000 in total, with Sh.7,500,000...
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Insectkill Ltd. is considering whether to establish a new subsidiary in Uganda. The cost of the fixed assets would be Sh.10,000,000 in total, with Sh.7,500,000 payable at once and the remainder payable after one year. A further investment of Sh.3,000,000 in working capital would be required immediately.
The management of Insectkill Ltd. expect all their investments to be financially justifiable within a four year planning horizon. The net disposal value of fixed assets after four years is expected to be zero.
The operation would incur fixed costs amounting to Sh.5,200,000 a year in the first year, including depreciation of Sh.2,000,000. These costs, excluding depreciation are expected to increase by 5% each year because of inflation. The operation would involve the manufacture and sale of a standard unit, with a unit selling price of Sh.12 and variable cost of sh.6 in the first year and expected annual increase because of inflation of 4% and 7% respectively. Annual sales are expected to be 1,250,000 units.
The company's cost of capital is 14%.
Required:
(a) Fixed costs for the four years.
(b) Total contribution for each of the four years.
(c) (i) Net Present Value of the project
(ii) Is the project viable?
Date posted:
December 15, 2021
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Answers (1)
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Mary Atieno owns a chain of seven clothes shops in Kisumu town. Takings at each shop are remitted once a week on Thursday afternoon to...
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Mary Atieno owns a chain of seven clothes shops in Kisumu town. Takings at each shop are remitted once a week on Thursday afternoon to the head office and are then banked at the start of business on Friday morning. As business is expanding, Mary Atieno has hired a finance assistant to help her. The finance assistant gave the following advice: “Turnover at the seven shops totaled Shs. 1,950,000 last year at a constant daily rate but you were paying bank overdraft charges at a rate of 11% per annum. You could have reduced your overdraft costs by banking the shop takings each day except Saturdays. Saturdays takings could have been banked on Mondays.
Required:
Using numbered paragraphs, comment on the significance of this advice, stating your assumptions.
(“Note” The shops are closed on Sundays).
Date posted:
December 15, 2021
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Answers (1)
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Name and briefly explain five ways in which cash flow problems may arise.
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Name and briefly explain five ways in which cash flow problems may arise.
Date posted:
December 15, 2021
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Answers (1)
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(a) Nakuru Bottlers Ltd. is a mineral water company based in Nakuru town. The company is listed on the Stock Exchange. Due to the huge...
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(a) Nakuru Bottlers Ltd. is a mineral water company based in Nakuru town. The company is listed on the Stock Exchange. Due to the huge demand for its products, the company is in the process of expanding its bottling facilities. The board of directors is undecided as to whether to have a rights issue or a placing on the stock exchange.
Required:
(i) Explain the meaning of a rights issue and list its advantages.
(ii) Explain the meaning of a stock placing and list its advantages.
(b) Nakuru Bottlers Ltd. can achieve a profit after tax of 20% on the capital employed. At present, its capital structure is as follows:
Required:
(i) Calculate the number of shares that must be issued if the rights issue price is Sh.25, Sh.23.40, Sh.21.50, Sh.26 and Sh.27.10.
(ii) Calculate the dilution in earning per share in each case.
Date posted:
December 15, 2021
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Answers (1)
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Hafix Ltd. is a manufacturing company. Its projected turnover for the year 2002 is Sh.150,000,000. At present the costs as percentages of sales are as...
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Hafix Ltd. is a manufacturing company. Its projected turnover for the year 2002 is Sh.150,000,000. At present the costs as percentages of sales are as follows:
On average:
1. Debtors will take 2½ months before payment
2. Raw materials will be in stock for three months.
3. Work-in-progress will represent two months worth of half produced goods.
4. Finished goods will represent one month's production.
5. Credit will be taken as follows:
(i) Direct materials 2 months
(ii) Direct labour 1 week
(iii) Variable overheads 1 month
(iv) Fixed overheads 1 month
(v) Selling and distribution ½ month
Work-in-progress and finished goods will be valued at material, labour and variable expense cost.
Required:
Working capital requirements of Haffix Ltd. assuming the labour force will be paid for 50 working weeks in the year 2002.
Date posted:
December 15, 2021
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Answers (1)
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List three advantages to the management of a company for knowing who their shareholders are.
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List three advantages to the management of a company for knowing who their shareholders are.
Date posted:
December 15, 2021
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Answers (1)
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Describe four non-financial objectives that a company might pursue that have the effect of limiting the achievement of the financial objectives.
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Describe four non-financial objectives that a company might pursue that have the effect of limiting the achievement of the financial objectives.
Date posted:
December 15, 2021
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Answers (1)
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The theory of company finance is based on the assumption that the objective of management is to maximize the market value of a company. To...
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The theory of company finance is based on the assumption that the objective of management is to maximize the market value of a company. To be able to do this, we need to be able to put values on a company and its shares.
Required:
Briefly explain three methods that can be used to value a company.
Date posted:
December 15, 2021
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Answers (1)
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You are trying to evaluate the economics of purchasing a van for your rental business. You expect the van to provide an annual after tax...
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You are trying to evaluate the economics of purchasing a van for your rental business. You expect the van to provide an annual after tax cash benefit of Sh.240,000 and that you can sell it for Sh.160,000 after six years. All the funds for purchasing the van will come from your savings which are currently earning 14% return after taxes.
Required:
(i) Calculate the maximum price you would be willing to pay to acquire the van.
(ii) Assume that you are of good credit standing and if you choose you could
borrow the money to purchase the van instead of using your savings. You have
two alternative sources from which to borrow.
Alternative A:
From a finance company. The finance company requires you to make six
annual installments of Sh.244,787.15 each covering both interest and principal.
Alternative B:
From an insurance company. The insurance company requires you to make a
lump sum payment of Shs. 1,880,971.90 covering both interest and principal at
the end of six years.
Which alternative would you opt for?
Date posted:
December 14, 2021
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Answers (1)
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Sunny Ltd is evaluating whether to replace an old printing machine with a new one. The following information relate to the two machines:
Required:
Using the net...
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Sunny Ltd is evaluating whether to replace an old printing machine with a new one. The following information relate to the two machines:
Required:
Using the net present value (NPV) method, analyze the replacement decision and state
whether or not the old machine should be replaced.
Date posted:
December 14, 2021
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Answers (1)
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United Steel has just been reorganized to produce industrial machinery. The company is in the process of establishing a financial policy and the following two...
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United Steel has just been reorganized to produce industrial machinery. The company is in the process of establishing a financial policy and the following two alternative plans have been suggested.
(a)Calculate the expected Earnings Per Share (EPS) for each financial plan.
(b) Which financial plan should be accepted? Why?
(c) Calculate the level of EBIT where the EPS are equal for the two plans.
Date posted:
December 14, 2021
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Answers (1)
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BCB Company is a manufacturer of bricks and concrete blocks. The company is considering replacing part of the current manual labour force by purchasing a...
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BCB Company is a manufacturer of bricks and concrete blocks. The company is considering replacing part of the current manual labour force by purchasing a small tractor with a forklift for use in loading bricks and concrete blocks. The purchase price would be Sh.570,000. The tractor will have an economic life of 5 years but would
require a Sh.20,000 overhaul at the end of 3 years. After 5 years the tractor could be sold for Sh.110,000.
The company estimates it will cost Sh.250,000 per year to operate the tractor. It will, however, save Sh.130,000 annually on labour cost. Because of increase in handling efficiency, losses caused by breakages will be cut by Sh.220,000 per year. Sales will also go up by Sh.450,000. The new sales level is expected to be maintained throughout the tractor's life. Assume the company's gross margin ratio is 40%, corporate tax rate 30%, and cost of capital 16%. Also assume straight-line method of depreciation.
Required:
Determine the NPV of the project and state whether the tractor should be purchased.
Date posted:
December 14, 2021
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Answers (1)
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Describe the characteristics of long term capital investment decisions.
(Solved)
Describe the characteristics of long term capital investment decisions.
Date posted:
December 14, 2021
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Answers (1)
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XYZ Ltd is intending to raise capital to finance a new project. The current M.P.S is Sh.43 cum div of year 2001 declared but not...
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XYZ Ltd is intending to raise capital to finance a new project. The current M.P.S is Sh.43 cum div of year 2001 declared but not yet paid. For the part 5 years, the company has paid the following stream of dividends.
The debentures are currently selling at Sh.95 ex-interest. The corporate tax rate is 30%.
Required:
(a) Distinguish between cum-div and ex-div M.P.S.
(b) Compute the ex-div M.P.S
(c) Compute the overall cost of capital. Use dividend growth model to determine the cost
of equity.
(d) The company wants to raise additional Sh.20 million as
follows: 50% from retained earnings
30% from issue of debentures at the current market value
20% from issue of new ordinary shares with 10% floatation costs
(i) Compute the number of ordinary shares to issue to raise the amount required.
(ii) Compute the marginal cost of capital.
Date posted:
December 14, 2021
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Answers (1)
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The following information relates to Mafuta Safi Limited:
Required:
The length of the operating cash cycle
(Solved)
The following information relates to Mafuta Safi Limited:
Required:
The length of the operating cash cycle
Date posted:
December 14, 2021
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Answers (1)
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Distinguish between the following terms:
(i) Cum-dividend and ex-dividend.
(ii) Cum-all and ex-all.
(Solved)
Distinguish between the following terms:
(i) Cum-dividend and ex-dividend.
(ii) Cum-all and ex-all.
Date posted:
December 14, 2021
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Answers (1)
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Ushindi Limited presented the following financial statements on 30 June 2004.
Required:
(a) Compute the following ratios for Ushindi Limited:
(Solved)
Ushindi Limited presented the following financial statements on 30 June 2004.
Required:
(a) Compute the following ratios for Ushindi Limited:
(i) Return on capital employed
(ii) Turnover of capital
(iii) Operating expenses ratio.
(iv) Accounts receivable turnover in days
(v) Dividend yield.
(vi) Price earnings ratio
(vii) Market value to book value ratio
(viii) Current ratio
(b) Compare the company's liquidity performance with that of the industry.
Date posted:
December 14, 2021
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Answers (1)
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The following is the summarized balance sheet of Kaka Kuona Ltd. as at 30 November 2003:
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The following is the summarized balance sheet of Kaka Kuona Ltd. as at 30 November 2003:
Additional information:
1. In the past, Kaha Kuona Ltd.'s earnings per share (EPS) averaged Sh.6 and the
dividend payout rate was 50% or Sh.3 per share. For the year ended 30 November 2003,
the EPS declined to Sh.2.50. Because it was felt that this decline was temporary, the annum
dividend of Sh.3 per share was maintained for the financial year ended 30 November
2003, as well as for the first six months of the financial year ending 30 November 2004.
2. Recent projections, however, have caused management to revise downwards the
expected EPS. For the financial year ending 30 November 2004, the forecast of EPS as
been reduced to Sh.2 per share and for the financial year ending 30 November 2005,
adjusted to Sh.2.20.
3. Kaka Kuona Ltd.'s ordinary shares are currently selling in the market at Sh.15 per share.
Management of Kaka Kuona Ltd. is considering whether or not to retain the cash dividend of
Sh.3 per share for the next two financial years.
Required:
(a) Calculations to help determine whether it will be feasible to maintain dividends at Sh.3
per share for the next two financial years.
(b) Determine whether the company should replace the cash dividend with a bonus issue of
one share for every four ordinary shares.
(c) Explain the course of action that the management of Kaka Kuona Ltd. should take in
the light of the declining projections in dividend payouts.
Date posted:
December 14, 2021
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Answers (1)
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The finance manager of Bidii Industries Ltd., which manufactures edible oils, has identified the following three projects for potential investment:
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The finance manager of Bidii Industries Ltd., which manufactures edible oils, has identified the following three projects for potential investment:
Required:
(i) Evaluate each project using the net present value (NPV) method.
(ii) Which of the three projects should Bidii Industries Ltd. accept?
Date posted:
December 14, 2021
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Answers (1)