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• Management may be reluctant to raise more capital for investment by issuing new shares due to fear of loss of control.
• Management might be unwilling to issue additional share capital if it will lead to dilution of earnings per share (EPS)
• Management might not want to issue shares to avoid large fixed interest payments
• Desire to limit investment to a level that can be financed solely from retained earnings.
• The capital expenditure budget might set a restriction on capital spending.
Kavungya answered the question on March 30, 2022 at 07:22
- Discuss any four factors that a company should consider when choosing between equity and debt as sources of finance.(Solved)
Discuss any four factors that a company should consider when choosing between equity and debt as sources of finance.
Date posted: March 30, 2022. Answers (1)
- Two firms, Alpha Ltd. and Beta Ltd., operate in the same industry. The two firms are similar in all aspects except for their capital structures.
The...(Solved)
Two firms, Alpha Ltd. and Beta 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. Alpha Ltd. is financed using Sh. 120 million worth of ordinary shares.
2. Beta Ltd. is financed using Sh.70 million in ordinary shares and Sh.50 million in 8% debentures.
3. The annual earnings before interest and tax are Sh.10 million for both firms. These earnings
are expected to remain constant indefinitely.
4. The cost of equity of Alpha Ltd. is 10%.
5. The corporate tax rate is 30%.
Required;-
Using the Modigliani and Miller (MM) model, compute:
i) The market values of Alpha Ltd. and Beta Ltd.
ii) The weighted average cost of capital (WACC) of Alpha Ltd. and Beta Ltd.
Date posted: March 30, 2022. Answers (1)
- Explain three factors that might influence the capital structure decision.(Solved)
Explain three factors that might influence the capital structure decision.
Date posted: March 30, 2022. Answers (1)
- In relation to the financial objectives of a business entity, distinguish between the terms “maximizing” and “satisficing”.(Solved)
In relation to the financial objectives of a business entity, distinguish between the terms “maximizing” and “satisficing”.
Date posted: March 30, 2022. Answers (1)
- Citing relevant examples in each case, distinguish between "agency costs" and "financial distress costs".(Solved)
Citing relevant examples in each case, distinguish between "agency costs" and "financial distress costs".
Date posted: March 30, 2022. Answers (1)
- Describe four ways that could be used to mitigate agency conflict between managers and shareholders.(Solved)
Describe four ways that could be used to mitigate agency conflict between managers and shareholders.
Date posted: March 30, 2022. Answers (1)
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Explain three causes of conflict of interest between shareholders and debt holders.
Date posted: March 30, 2022. Answers (1)
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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. Answers (1)
- 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. Answers (1)
- 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. Answers (1)
- 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. Answers (1)
- 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. Answers (1)
- The Salima company is in the fast foods industry. The following is the company's balance sheet for the year ended 31 March 1995:
Additional information:
1. The...(Solved)
The Salima company is in the fast foods industry. The following is the company's balance sheet for the year ended 31 March 1995:
Additional information:
1. The debenture issue was floated 10 years ago and will be due in the year 2005. A similar
debenture issue would today be floated at Sh.950 net.
2. Last December the company declared an interim dividend of Sh.2.50 and has now declared
a final dividend of Sh.3.00 per share. The company has a policy of 10% dividend growth
rate which it hopes to maintain into the foreseeable future. Currently the company's
shares are trading at Sh.75 per share in the local stock exchange.
3. A recent study of similar companies in the fast foods industry disclose their average beta as 1.1.
4. There has not been any significant change in the price of preference shares since they
were floated in mid 1990.
5. Treasury Bills are currently paying 12% interest per annum and the company is in the
40% marginal tax rate.
6. The inflation rate for the current year has been estimated to average 8%.
Required:
(a) Determine the real rate of return.
(b) What is the minimum rate of return investors in the fast foods industry may expect to
earn on their investment? Show your workings.
(c) Calculate Salina's overall cost of capital.
(d) Discuss the limitations of using a firm's overall cost of capital as an investment discount rate.
Date posted: December 15, 2021. Answers (1)
- 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. Answers (1)
- 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. Answers (1)
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What advantages do investors derive from investment in shares?
Date posted: December 15, 2021. Answers (1)
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Explain the case for and against development financial institutions.
Date posted: December 15, 2021. Answers (1)
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Define development financial institutions and justify their existence in the economy concerns.
Date posted: December 15, 2021. Answers (1)
- 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. Answers (1)
- 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. Answers (1)