• Incur monitoring expenditures
Firms incur expenditure on audit and control procedures aimed at assessing and limiting managerial behaviour to those actions that sub serve the interest of shareholders.
• Incur bonding expenditures
Firms may seek protection against dishonest acts of managers by obtaining a fidelity bond from a third party bonding company which agrees to compensate the firm up to a certain amount if a certain manager’s dishonest acts entail financial losses to the firm.
• Structuring expenditures
To promote greater congruence between the goals of the managers and shareholders, managers are offered monetary and stock incentives such as stock options and performance shares.
• Incurring opportunity costs
The structures of a company are arranged in a manner that decision making is slower and therefore firms may not be able to seize profitable opportunities because of bureaucratic procedures and control mechanisms that stifle managerial initiatives.
Kavungya answered the question on March 30, 2022 at 07:04
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Explain three causes of conflict of interest between shareholders and debt holders.
(Solved)
Explain three causes of conflict of interest between shareholders and debt holders.
Date posted:
March 30, 2022
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Answers (1)
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Executive compensation plans hinder value creation in a company. Citing three reasons, justify the above statement.
(Solved)
Executive compensation plans hinder value creation in a company. Citing three reasons, justify the above statement.
Date posted:
March 30, 2022
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Answers (1)
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Explain the term "agency theory" as applied in financial management.
(Solved)
Explain the term "agency theory" as applied in financial management.
Date posted:
March 30, 2022
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Answers (1)
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Explain how the objective of wealth maximization differs from that of profit maximization for a company listed at the securities exchange.
(Solved)
Explain how the objective of wealth maximization differs from that of profit maximization for a company listed at the securities exchange.
Date posted:
March 30, 2022
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Answers (1)
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State the different types of bond covenants which bondholders may impose on shareholders to protect themselves.
(Solved)
State the different types of bond covenants which bondholders may impose on shareholders to protect themselves.
Date posted:
December 15, 2021
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Answers (1)
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State any 5 stakeholders of the firm and identify their financial objectives.
(Solved)
State any 5 stakeholders of the firm and identify their financial objectives.
Date posted:
December 15, 2021
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Answers (1)
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Westwood Ltd. has projected its working capital for the next 12 months as follows:
Required:
(a) Prepare a schedule showing the amount of permanent and seasonal funds...
(Solved)
Westwood Ltd. has projected its working capital for the next 12 months as follows:
Required:
(a) Prepare a schedule showing the amount of permanent and seasonal funds requirements each month.
(b) What is the average amount of long-term and short-term financing that will be required each month?
(c) Calculate the total cost of working capital financing if the firm adopts:
(i) An aggregate financing strategy
(ii) A conservative financing strategy.
Date posted:
December 15, 2021
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Answers (1)
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State and explain two Theories used to explain when to time investment in the stock exchange.
(Solved)
State and explain two Theories used to explain when to time investment in the stock exchange.
Date posted:
December 15, 2021
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Answers (1)
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What advantages do investors derive from investment in shares?
(Solved)
What advantages do investors derive from investment in shares?
Date posted:
December 15, 2021
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Answers (1)
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Explain the case for and against development financial institutions.
(Solved)
Explain the case for and against development financial institutions.
Date posted:
December 15, 2021
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Answers (1)
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Define development financial institutions and justify their existence in the economy concerns.
(Solved)
Define development financial institutions and justify their existence in the economy concerns.
Date posted:
December 15, 2021
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Answers (1)
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The Pesa Company Unlimited is using a machine whose original cost was Sh.720,000. The machine is two years old, and it has a current market...
(Solved)
The Pesa Company Unlimited is using a machine whose original cost was Sh.720,000. The machine is two years old, and it has a current market value of Sh.160,000. The asset is fully being depreciated over a twelve-years period. At the end of the twelve-years the asset will have a zero salvage value. Depreciation is on a straight line basis.
The Management is contemplating the purchase of a new machine to replace the old one. The new machine costs Sh.750,000 and has an estimated salvage value of Sh.100,000. The new machine will have a greater technological capacity, and therefore annual sales are expected to increase from Sh.10,000,000 to Sh.10,100,000. Operating efficiencies with the new machine will produce an expected saving of Sh.100,000 a year. Depreciation would be on a straight line basis over a ten-year life. The cost of capital is 12%, and a 40% tax rate is applicable. In addition, if the new machine is purchased, inventories will increase by sh.150,000 and payables by Sh.50,000
during the life of the project.
Required:
(a) Should the new machine be purchased? (Use Net Present Value (NPV) approach).
(b) What factors in addition to the quantitative ones above are likely to require consideration in a practical situation?
Date posted:
December 15, 2021
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Answers (1)
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RITE Ltd. maintains an average monthly balance of Sh.320,000 in accounts receivable throughout the year. The company is in need of additional working capital and...
(Solved)
RITE Ltd. maintains an average monthly balance of Sh.320,000 in accounts receivable throughout the year. The company is in need of additional working capital and is considering two alternative methods of raising it.
METHOD 1 Factoring accounts receivable
METHOD 2 A commercial bank loan secured by accounts receivable.
The company's bankers have agreed to lend the firm 80% of its average accounts receivable at an interest of 30% per annum. The amount will be made available in a series of 30 day advances. The advances would be discounted and a 6% compensating balance will be required.
The factor is willing to establish a factoring arrangement on a continuing basis. It charges 2% for servicing the accounts and 15% per annum on any advances taken. Both charges are made on discount basis. In addition, the factor requires a 5% reserve to cover returned items. RITE Ltd. sells its merchandise on terms of net 30.
Required:
(a) Calculate the amount of advances RITE Ltd. can expect to have under each alternative.
(b) Calculate the effective rate of interest for each financing alternative.
(c) Which alternative would you recommend and why?
Date posted:
December 15, 2021
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Answers (1)
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Gopher Ltd has issued 300,000 ordinary shares of £1 each, which are at present selling for £4 per share. The company plans to issue rights...
(Solved)
Gopher Ltd has issued 300,000 ordinary shares of £1 each, which are at present selling for £4 per share. The company plans to issue rights to purchase one new equity share at a price of £3.20 per share for every 3 shares held. A shareholder who owns 900 shares thinks that he will suffer a loss in his personal wealth because the new shares are being offered at a price lower than market value. On the assumption that the actual market value of shares will be equal to the theoretical ex-rights price, what would be the effect on the shareholder's wealth if:
(a) He sells all the rights;
(b) He exercises one half of the rights and sells the other half;
(c) He does nothing at all?
Date posted:
December 15, 2021
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Answers (1)
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What is rights issue and what are the advantages?
(Solved)
What is rights issue and what are the advantages?
Date posted:
December 15, 2021
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Answers (1)
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How can a firm overcome capital rationing problems?
(Solved)
How can a firm overcome capital rationing problems?
Date posted:
December 15, 2021
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Answers (1)
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Distinguish between 'Hard' and 'soft' capital rationing clearly indicating the causes of each.
(Solved)
Distinguish between 'Hard' and 'soft' capital rationing clearly indicating the causes of each.
Date posted:
December 15, 2021
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Answers (1)
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Explain how tax treatment of capital expenditure can affect investment decision.
(Solved)
Explain how tax treatment of capital expenditure can affect investment decision.
Date posted:
December 15, 2021
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Answers (1)
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The Independent Film Company plc is a film company which purchases distribution rights on films from small independent producers, and sells the films on to...
(Solved)
The Independent Film Company plc is a film company which purchases distribution rights on films from small independent producers, and sells the films on to cinema chains for national and international screening. In recent years the company has found it difficult to source sufficient films to maintain profitability. In response to the problem, the Independent Film Company has decided to invest in commissioning and producing films in its own right. In order to gain the expertise for this venture, the Independent Film Company is considering purchasing an existing
filmmaking concern, at a cost of Sh.400,000. The main difficult that is anticipated for the business is the increasing uncertainty as to the potential success/failure rate of independently produced films. Many cinema chains are adopting a policy of only buying films from large international film companies, as they believe that the market for independent films is very limited and specialist in nature. The Independent Film Company is prepared for the fact that they are likely to have more films that fail than that succeed, but believe that the proposed film
production business will nonetheless be profitable.
Using data collection from the existing distribution business and discussions with industry
experts, they have produced cost and revenue forecasts for the five years of operation of the
proposed investment. The company aims to complete the production of three films per year.
The after tax cost of capital for the company is estimated to be 14%.
Year 1 sales for the new business are uncertain, but expected to be in the range of Sh.4-10
million. Probability estimates for different forecast values are as follows:
Sales are expected to grow at an annual rate of 5%.
Anticipated costs related to the new business are as follows:
Additional Information
(i) No capital allowances are available.
(ii) Tax is payable one year in arrears, at a rate of 33% and full use can be made of tax
refunds as they fall due.
(iii) Staff wages (technical and non-production staff) and actors‟ salaries, are
expected to rise by 10% per annum.
(iv) Studio hire costs will be subject to an increase of 30% in Year 3.
(v) Screenplay costs per film are expected to rise by 15% per annum due to a shortage of
skilled writers.
(vi) The new business will occupy office accommodation which has to date been let out for
an annual rent of Sh.20,000. Demand for such accommodation is buoyant and the
company anticipates in finding future tenants at the same annual rent.
(vii) A market research survey into the potential for the film production business cost Sh.25,000.
Required:
Using DCF analysis, calculate the expected Net Present Value of the proposed investment.
(Workings should be rounded to the nearest Sh.‟000‟)
Date posted:
December 15, 2021
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Answers (1)
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A working capital policy of any business is critical to its viability as a going concern. The board of directors would ignore the information of...
(Solved)
A working capital policy of any business is critical to its viability as a going concern. The board of directors would ignore the information of such a policy to its great disadvantage.
The finance director of Watu Limited is formulating the company's capital policy for next year.
Sales have been protected at Sh.240 million next year. Three alternative policies are under
consideration as follows:
1. Maintain current asset level at 40 per cent of projected sales.
2. Maintain current asset level at 50 per cent of projected sales.
3. Maintain current asset level at 60 percent of projected sales.
Required:
(a) Discuss the expected impact of policies (1) and (3).
(b) The fixed assets of Watu Limited are Sh.100 million and the company wishes to
maintain a 60 percent debt ratio. The cost of capital for Watu Limited is currently 12
percent on both short-term and long-term debt. This is the rate which the firm also
applies on its permanent capital structure. The company earns 15 percent on sales.
What is the expected return on equity under each of the three policies above?
(c) Are earnings and level of sales independent of current asset policy in real life? Explain.
(d) What is meant by “maturity matching”, in finance?
Date posted:
December 15, 2021
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Answers (1)