1. Profitability (earnings and cash flow)- the capital structure chosen should ensure
maximum cash flow into the firm. The controlled use of debt may be encouraged
since debt is generally cheaper compared to equity.
2. Solvency – refers to the ability of the firm to service its debts obligation as they fall due to excessive use of debt may threaten a firm?s solvency and hence a trade off is required.
3. Flexibility- this refers to the ability of the firm to alter or modify its capital structure. Ideally, if the situation demands, then such a change should be at minimum cost and with minimum delay.
4. Control- the capital structure should involve minimum risk of loss of control by the current shareholders. This factor is especially important for small and closely held
firms.
5. Comparability- the capital structure of comparable company in the industry should
be considered because it might reflect the unique risks inherent in that industry
6. Information content signaling nature of capital structure- generally, excessive use of additional equity is perceived by investors and shareholders as indication of the
inability of the company to generate cash flows in future.
7. Stability of sales and earnings- the use of debt entails few obligations in terms of interest and principle repayment. It is therefore recommended for firms whose
sales or earnings are stable.
Kavungya answered the question on March 30, 2022 at 07:14
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In relation to the financial objectives of a business entity, distinguish between the terms “maximizing” and “satisficing”.
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In relation to the financial objectives of a business entity, distinguish between the terms “maximizing” and “satisficing”.
Date posted:
March 30, 2022
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Citing relevant examples in each case, distinguish between "agency costs" and "financial distress costs".
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Date posted:
March 30, 2022
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Date posted:
March 30, 2022
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Explain three causes of conflict of interest between shareholders and debt holders.
Date posted:
March 30, 2022
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Executive compensation plans hinder value creation in a company. Citing three reasons, justify the above statement.
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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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Explain the term "agency theory" as applied in financial management.
Date posted:
March 30, 2022
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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.
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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.
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.
Date posted:
December 15, 2021
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(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.
Date posted:
December 15, 2021
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Date posted:
December 15, 2021
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Explain the case for and against development financial institutions.
Date posted:
December 15, 2021
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(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)