i) Leverage level:
- A company that is highly geared may not be able to access more debt.
- Such a company will be forced to rely on other sources of finance.
ii) Company policy may determine the level of financing the company uses e.g. a company may
have a policy of relying on internal finance instead of external sources of finance
iii) Industry norm:
- The industry in which the firm operates can also affect the type of finance sought by a
company e.g. agricultural firms are likely to have a low gearing due to high business risk.
iv) Nature of the assets of the firm:
- E.g. a firm with valuable assets such as land and buildings can use these assets as collateral or
security for new debt capital.
v) Cost of capital:
- The lower the cost of capital the higher the amount of that capital component in the financial
structure.
Kavungya answered the question on March 30, 2022 at 08:32
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Bidii Ltd expects a return on investment (ROI) of 24 % on proposed investment projects whose total cost is 5,000,000. In order to finance these...
(Solved)
Bidii Ltd expects a return on investment (ROI) of 24 % on proposed investment projects whose total cost is 5,000,000. In order to finance these investment projects the company is considering two options.
Option one
Issue 500,000 ordinary shares at a par value of sh. 10 each.
Option two
Issue 250,000 ordinary shares at a par value of sh. 10 each and obtain the balance through a bank loan at an interest rate of 15% per annum.
The rate of corporation tax is 30%
Required:
Determine the effect of the two financing options on the earnings available to shareholders and hence advise the company on the best financing option.
Date posted:
March 30, 2022
.
Answers (1)
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Explain four reasons that may drive a company to raise equity finance rather than debt finance.
(Solved)
Explain four reasons that may drive a company to raise equity finance rather than debt finance.
Date posted:
March 30, 2022
.
Answers (1)
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The following information was extracted from the accounting records of Karibu Ltd. As at 31 December 2008.
(Solved)
The following information was extracted from the accounting records of Karibu Ltd. As at 31 December 2008.
Sales revenue for the year ending 31 December 2009 is expected to increase by 25% . Total assets
and accounts payable are proportional to sales and that relationship will be maintained in future.
The company raised sh. 150 million by floating new ordinary shares on 1 January 2009. The
company’s profit margin on sales is 6 percent. 60 per cent of the earnings attributable to ordinary
shareholders will be paid out as dividends.
Required:
i) Total debt for Karibu Ltd. as at 31 December 2008.
ii) The new long term – debt financing that will be needed in the year 2009.
Date posted:
March 30, 2022
.
Answers (1)
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Distinguish between "sale and lease back" transactions and "sale and manage back" transactions.
(Solved)
Distinguish between "sale and lease back" transactions and "sale and manage back" transactions.
Date posted:
March 30, 2022
.
Answers (1)
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Outline four motives of leasing an asset from the point of view of a company.
(Solved)
Outline four motives of leasing an asset from the point of view of a company.
Date posted:
March 30, 2022
.
Answers (1)
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The management of Swere Ltd wishes to establish the amount of financing needs for the next two years ending 30 June 2012 and 2013. The...
(Solved)
The management of Swere Ltd wishes to establish the amount of financing needs for the next two years ending 30 June 2012 and 2013. The statement of financial position of the company for the year ended 30 June 2011 is as follows:
Additional information;-
1. For the year ended 30 June 2011, sales amounted to Sh.360, 000,000. Sales are projected to rise
by 15% in the year ending 30 June 2012 and by 20% in the year ending 30 June 2013.
2. The after tax return on sales is 8%, which shall be maintained in future.
3. The company intends 10 maintain a dividend payout ratio of 80%.
4. Any additional financing from external sources will be affected through the issue of commercial paper by the company.
Required:
(i) Determine the amount of external financial requirements for the two years ending 30 June 2013.
(ii) A profoma statement of financial position as at 30 June 2013.
Date posted:
March 30, 2022
.
Answers (1)
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Outline five advantages of going public to a company.
(Solved)
Outline five advantages of going public to a company.
Date posted:
March 30, 2022
.
Answers (1)
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Latex Ltd. has a paid up ordinary share capital of Shs. 4,500,000 represented by 6 million shares of Sh.0.75 each. The company has no loan...
(Solved)
Latex Ltd. has a paid up ordinary share capital of Shs. 4,500,000 represented by 6 million shares of Sh.0.75 each. The company has no loan capital. During the last financial year, earnings after tax were Sh.3, 600.000.
The price earnings (P/E) ratio is 15. The company is planning to make a large investment which will cost Sh.10, 500,000 and is considering to raise this finance through a rights issue with a price of Sh.8 per share.
Required:
(i) The current market price per share.
(ii) The theoretical ex-rights price per share.
Date posted:
March 30, 2022
.
Answers (1)
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Summarize four reasons that might lead to soft capital rationing in a limited company.
(Solved)
Summarize four reasons that might lead to soft capital rationing in a limited company.
Date posted:
March 30, 2022
.
Answers (1)
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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)
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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)
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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)
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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)
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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.
(Solved)
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.
(Solved)
Executive compensation plans hinder value creation in a company. Citing three reasons, justify the above statement.
Date posted:
March 30, 2022
.
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
.
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
.
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
.
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
.
Answers (1)