• No transaction costs.
• Firms that pay too much dividends can issue stock again at no floatation cost.
• Investment decisions are unaffected by its dividend decisions.
• The firm’s operating cash flows are the same, no matter the dividend policy applied.
• Managers with large free cash flows do not waste them to invest in bad projects.
Kavungya answered the question on May 5, 2022 at 13:35
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Baraka Ltd. has a cost of equity of 10%. Currently, the company has 250,000 shares which are quoted at the securities exchange at Sh.120 per...
(Solved)
Baraka Ltd. has a cost of equity of 10%. Currently, the company has 250,000 shares which are quoted at the securities exchange at Sh.120 per share. The company's earnings per share is Sh.10 and it intends to maintain a dividend pay-out ratio of 50% at the end of the current financial year. The expected net income for the current year is Sh.3 million and the available investment proposals are estimated to cost Sh.6 million.
Required;-
Using the Modigliani and Miller (MM) model, show that the payment of dividends does not affect the value of the firm.
Date posted:
May 5, 2022
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Answers (1)
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Describe two types of dividends which a corporate entity could pay its shareholders.
(Solved)
Describe two types of dividends which a corporate entity could pay its shareholders.
Date posted:
May 5, 2022
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Answers (1)
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Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd.,...
(Solved)
Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd., a company quoted on the stock exchange. The dividend payments from this investment makes up a significant position of Mrs Waziri’s income. She was alarmed when ABC Ltd. dropped its year 2001 dividend to Sh.1.25 per share from Sh.1.75 per share which it had paid in the previous two years.
Mrs Waziri has approached you for advice and you have gathered the information given below regarding the financial condition of ABC Ltd. and the finance sector as a whole.
ABC Ltd. Balance Sheets as at 31 October
Notes:
1. Industry ratios have been roughly constant for the past four years.
2. Inventory turnover, total assets turnover and fixed assets turnover are based on the year-end
balance sheet figures.
Required:
(a) The financial ratios for ABC Ltd for the past three years corresponding to industry ratios given above.
(b) Arrange the ratios calculated in (a) above in columnar form and summarise the strengths and weaknesses revealed by these ratios based on:
(i) Trends in the firm’s ratios
(ii) Comparison with industry averages.
(The summary should focus on the liquidity, profitability and turnover ratios).
Date posted:
May 5, 2022
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Answers (1)
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The management of Afro Quatro Ltd. want to establish the amount of financial needs for the next two years. The balance sheet of the firm...
(Solved)
The management of Afro Quatro Ltd. want to establish the amount of financial needs for the next two years. The balance sheet of the firm as at 31 December 2001 is as follows:
Date posted:
May 5, 2022
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Answers (1)
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The following information represents the financial position and financial results of AMETEX limited for the year ended 31 December 2002.
(Solved)
The following information represents the financial position and financial results of AMETEX limited for the year ended 31 December 2002.
Additional Information
1. The company’ ordinary shares are selling at sh. 20 in the stock market
2. The company has a constant dividend payout of 10%
Required:
i) Acid test ratio
ii) Operating Ratio
iii) Return on total capital employed
iv) Price earnings ratio
v) Interest coverage ratio
vi) Total assets turnover
Determine the working capital cycle for the company.
Date posted:
May 5, 2022
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Answers (1)
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Mijengo Ltd. And Vyumba ltd are medium-sized companies dealing in the sale of new residential houses. The following information was extracted from the financial records...
(Solved)
Mijengo Ltd. And Vyumba ltd are medium-sized companies dealing in the sale of new residential houses. The following information was extracted from the financial records of the two companies for the year ended 31st December 2005:
Required:
i) Gearing ratio for each company
ii) Earnings per share for each company
iii) Price earnings ratio for each company
iv) Interpret your result obtained in (i) and (ii) above
Date posted:
May 5, 2022
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Answers (1)
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The following is an extract of the balance sheet of Shauri Moyo limited as at 31 December 2005
(Solved)
The following is an extract of the balance sheet of Shauri Moyo limited as at 31 December 2005
Date posted:
May 5, 2022
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Answers (1)
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Sunrise Limited presented the following financial statements for the year ended 31 December 2008:
(Solved)
Sunrise Limited presented the following financial statements for the year ended 31 December 2008:
Assume a 360 – day year.
Required:
i) Operating cash style
ii) Quick ratio
iii) Current ratio
iv) Debt to equity ratio
v) Operating margin ratio
vi) Debt turnover ratio
Date posted:
May 5, 2022
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Answers (1)
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The following statement of financial position relates to Mageuzi Ltd. as a t 31 December 2009.
(Solved)
The following statement of financial position relates to Mageuzi Ltd. as a t 31 December 2009.
Additional information:
1. Sales in the in the year ended 31 December 2009 amounted to sh. 20 million. The sales for the
current year ending 31 December 2010 are expected to increase by sh. 4 million.
2. The net profit margin and retention ratio for the year ended 31 December 2009 were 8 % and 30%
respectively. These ratios are expected to be maintained in the foreseeable future.
3. All assets and current liabilities are expected to change in the current year ending 31 December
2010 at the same percentage as the change in sales.
Required:
i) The amount of external financial requirements for the year ending 31 December 2010.
ii) A proforma statement of financial position as at 31 December 2010.
Date posted:
May 5, 2022
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Answers (1)
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The following statement of financial position was extracted from the books of XYZ Ltd. for the year ended 31 March 2011 and 31 March 2012.
(Solved)
The following statement of financial position was extracted from the books of XYZ Ltd. for the year ended 31 March 2011 and 31 March 2012.
Date posted:
May 5, 2022
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Answers (1)
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The current credit terms of Fredcom Ltd. are 2/15- net 45 days. The company's total annual sales are Sh.200 million with an average collection period...
(Solved)
The current credit terms of Fredcom Ltd. are 2/15- net 45 days. The company's total annual sales are Sh.200 million with an average collection period of 30 days. Variable cost is 80% of the annual sales. 50% of customers take advantage of the current discount. The company is considering relaxing its discount terms to 3/15 net 45 days. This relaxation of discount terms is expected to increase annual sales by Sh.10 million, reduce average collection period to 27 days and increase the proportion of customers who will take advantage of the discount to 60%. The company's cost of capital is 12%.
Corporate tax rate is 30%.
Assume 360 days in a year.
Required:
Advise the management of Fredcom Ltd. on whether to relax its discount terms.
Date posted:
April 28, 2022
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Answers (1)
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The board of directors of Rand Mills Limited have requested you to prepare a statement showing the working capital requirements for a level of activity...
(Solved)
The board of directors of Rand Mills Limited have requested you to prepare a statement showing the working capital requirements for a level of activity of 30,000 units of output for the year.
The cost structure for the company's product for the above mentioned activity level is given below:
Additional information:
1. Past experience indicates that raw materials are held in stock on average for 2 months.
2. Work in progress (100% complete in regard to materials and 50% for labour and overheads) will
be half a month's production.
3. Finished goods are in stock on average for 1 month.
4. Credit allowed to suppliers is 1 month.
5. Credit allowed to debtors is 2 months.
6. A minimum cash balance of Sh.250, 000 is expected to be maintained.
Required:
Prepare a statement of working capital requirements.
Date posted:
April 26, 2022
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Answers (1)
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Wanga Ltd. maintains a minimum cash balance of Sh. 1,500,000. The standard deviation of the daily cash is Sh.800, 000. The annual interest rate is...
(Solved)
Wanga Ltd. maintains a minimum cash balance of Sh. 1,500,000. The standard deviation of the daily cash is Sh.800, 000. The annual interest rate is 12%. The transaction cost of buying and selling of marketable securities is Sh.200 per transaction. Assume
that one year has 365 days.
Required:
Using the Miller-Orr cash management model, determine:
i) The return point.
ii) Average cash balance.
iii) The upper cash limit.
Date posted:
April 26, 2022
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Answers (1)
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Discuss the conflicts that might arise among the objectives of working capital management.
(Solved)
Discuss the conflicts that might arise among the objectives of working capital management.
Date posted:
April 26, 2022
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Answers (1)
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Aruna Ltd. is evaluating an investment project which requires the importation of a new machine at a cost of sh. 2,700,000. The machine has a...
(Solved)
Aruna Ltd. is evaluating an investment project which requires the importation of a new machine at a cost of sh. 2,700,000. The machine has a useful life of six years.
Date posted:
April 25, 2022
.
Answers (1)
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Bram Ltd. has found out that, after two years of using a machine, a more advanced model has arrived in the market. The advanced model...
(Solved)
Bram Ltd. has found out that, after two years of using a machine, a more advanced model has arrived in the market. The advanced model is expected to increase output. The existing machine had cost sh. 32,000 and was being depreciated using the straight – line method over ten years. The current market value of the existing machine is sh. 15,000.
Bram Ltd. is considering the acquisition of the advanced model which costs sh. 123,500 including installation costs and has a salvage value of sh. 20,500 at the end of 8 years of its useful life. The following data has been provided:
The required rate of return is 15%. Ignore taxation.
Required:
Compute the following in respect of the new machine:
i. Payback period.
ii. Net present Value (NPV).
iii. Internal rate of return (IRR).
Date posted:
April 25, 2022
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Answers (1)
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Kiwanda Ltd. is considering the launch of a new product "M" for which an investment of Sh.6
million in plant and machinery will be required. The...
(Solved)
Kiwanda Ltd. is considering the launch of a new product "M" for which an investment of Sh.6
million in plant and machinery will be required. The production of "M" is expected to last for five
years after which the plant and machinery would be sold for Sh.1.5 million.
Additional information:
1. "M" would be sold at Sh.600 per unit with a variable cost of Sh.240 per unit.
2. Fixed production costs (excluding depreciation) would amount to Sh.600,000 per annum.
3. The company applies the straight line method of depreciation.
4. The cost of capital is 10% per annum.
5. The number of units of "M" expected to be produced and sold per annum for the next five
years is shown below:
6. The corporation tax rate is 30%.
Required:
Advise the management of Kiwanda Ltd. on the appropriate course of action using:
(i) The net present value (NPV) approach.
(ii) The internal rate of return (IRR) approach.
Date posted:
April 25, 2022
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Answers (1)
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Explain four features of an ideal investment appraisal method.
(Solved)
Explain four features of an ideal investment appraisal method.
Date posted:
April 25, 2022
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Answers (1)
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Bidii Ltd. is considering investing in a plant which is expected to operate for the next four years after which it will have no salvage...
(Solved)
Bidii Ltd. is considering investing in a plant which is expected to operate for the next four years after which it will have no salvage value. The plant will cost Sh.5 million. Annual tax depreciation of 25% will be allowed in respect of the expenditure.
Revenue from the plant will be Sh.7 million per annum for the first two years and Sh.5 million per annum thereafter. Incremental costs will be Sh.4 million throughout. Bidii Ltd. pays corporation tax at 30% and has a cost of capital of 10%. Assume that all cash flows occur at the end of the year to which they relate.
Required:
Advise Bidii Ltd. on whether to proceed with the investment.
Date posted:
April 25, 2022
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Answers (1)
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Using a well-labelled diagram, differentiate between ‘systematic risk’ and ‘unsystematic risk’.
(Solved)
Using a well-labelled diagram, differentiate between ‘systematic risk’ and ‘unsystematic risk’.
Date posted:
April 25, 2022
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Answers (1)