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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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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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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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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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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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Discuss the conflicts that might arise among the objectives of working capital management.
Date posted:
April 26, 2022
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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 useful life of six years.
Date posted:
April 25, 2022
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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 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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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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Explain four features of an ideal investment appraisal method.
Date posted:
April 25, 2022
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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 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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Using a well-labelled diagram, differentiate between ‘systematic risk’ and ‘unsystematic risk’.
Date posted:
April 25, 2022
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Two firms. A Ltd. And B 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.
i) A ltd. Is financed using sh.100 million worth of ordinary shares.
ii) B ltd. Is financed using sh.50 million in ordinary share and sh.50 million in 7% debentures.
iii) The annual earnings before interest and tax sh.10 million for both firms. These earning are expected to remain constant indefinitely.
iv) The cost of equity in A LTD.IS 10%.
v) The corporate tax rate is 30%.
Required:
Using the Modigliani miller (mm) model, determine the following.
i) The market value of A ltd. and B ltd.
ii) The weighted average cost of capital of A ltd. And B ltd.
Date posted:
April 14, 2022
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Maisha Ltd and Bora Ltd manufacture wall clocks. The selling price of each clock is sh.1000 with a variable cost of sh.700.Each of the company realizes average annual sales of sh.70,000,000 and incurs average fixed costs of sh.1,700,000 per annum.
Maisha Ltd and Bora Ltd manufacture wall clocks. The selling price of each clock is sh.1000 with a variable cost of sh.700.Each of the company realizes average annual sales of sh.70,000,000 and incurs average fixed costs of sh.1,700,000 per annum.
However, the two companies differ in their capital structures as stated below:
Maisha Ltd. Is an all-equity financed company having issued 40,000 ordinary shares of sh.10 per value.
Bora Ltd is financed with 20,000 ordinary shares of sh.10 per value and a loan of sh.1600, 000 at an interest rate of 10% per annum
The corporation tax is 30%
Required:
i) The of operating leverage and financial leverage for each company
ii) The degree of combine leverage for each company
iii) The break-even point (in units) for each company. Comment on the significance of your results
iv) The earning per share (EPS) at the point of indifference between the earning of the two
companies
Date posted:
April 14, 2022
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Dawanox Ltd, an unlevered firm, generates average earnings before interest and tax (EBIT) of Sh. 20 million per annum.the market value of the company as at 31 October 2007, the company’s financial year-end, was Sh.120 million.
Required:
(i) The company’s cost of equity and weight average cost of capital(WACC) as at 31 October 2007
(ii) The company’s optimal level of debt finance using the Modigliani and Miller (MM) with-tax model (excluding financial distress costs)
(iii) The company’s optimal level of debt finance using the MM with-tax model incorporating financial distress costs.
Date posted:
April 14, 2022
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Millennium Investments Ltd. wishes to raise funds amounting to Sh.10 million to finance a project in the following manner:
Sh.6 million from debt; and Sh.4 million from floating new ordinary shares.
The present capital structure of the company is made up as follows:
1) 600,000 fully paid ordinary shares of Sh.10 each
2) Retained earnings of Sh.4 million
3) 200,000, 10% preference shares of Sh.20 each.
4) 40,000 6% long term debentures of Sh.150 each.
The current market value of the company’s ordinary shares is Sh.60 per share. The expected ordinary share dividends in a year’s time is Sh.2.40 per share. The average growth rate in both dividends and earnings has been 10% over the past ten years and this growth rate is expected to be maintained in the foreseeable future.
The company’s long term debentures currently change hands for Sh.100 each. The debentures will mature in 100 years. The preference shares were issued four years ago and still change hands at face value.
Required:
(i) Compute the component cost of:
Ordinary share capital;
- Debt capital
- Preference share capital
(ii) Compute the company’s current weighted average cost of capital.
(iii) Compute the company’s marginal cost of capital if it raised the additional Sh.10 million as envisaged. (Assume a tax rate of 30%).
Date posted:
April 13, 2022
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Explain the term “agency costs” and give any three types of such costs.
Date posted:
April 13, 2022
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Biashara Ltd, has the following capital structure
The finance manager of Biashara Ltd. has a proposal for a project requiring Sh.45 million. He has
proposed the following method of raising the funds.
• Utilise all the existing retained earning.
• Issue ordinary share at the current market price.
• Issue 100,000 10% preference shares at the current market price of Sh.100 per share which
is the same as par value.
• Issue 10% debentures at the current market price of Sh.1,000 per debenture
Additional Information:
1. Currently Biashara Ltd. Pays a dividend of Sh5 per share which is expected to grow at the rate of
6% due to increased returns from the intended project. Biashara Ltd.’s. price/earnings (P/E) ratio
and earnings per share (EPS) are Sh5 and Sh.8 respectively.
2. The ordinary share would be issued at a floatation cost of 10% based on the market price
3. The debenture par value is Sh.1,000 per debenture
4. The corporate tax rate is 30%
Required:
Biashara Ltd.’s weighted average cost of capital (WACC)
Date posted:
April 13, 2022
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Zatex ltd, had the following capital structure as at 31 March 2005
Additional Information;-
1. The market price of each of ordinary share as at 31 March 2005 was Sh.20
2. The company paid a dividend of Sh.2 for each ordinary share for the year ended 31 March 2005
3. The annual growth rate in dividends is 7%
4. The corporation tax rate is 30%
Required:
i) Compute the weighted average cost of capital of the company as at 31 March 2005.
ii) The company intends to issue a 15% Sh.2 million debenture during the year ending 31 March
2006. The existing debentures will not be affected by this issue. The dividend per share for the
year ending 31 March 2006 is expected to be Sh.3 While the average market price per share
over the same period is estimated to be Sh.15. The average annual growth rate in dividend is
expected to remain at 7%.
Compute the expected weighted average cost of capital as at 31 March 2006.
Date posted:
April 13, 2022
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The following information was extracted from the books of Faida Limited as at 31 December Required:
i. Cost of ordinary share capital.
ii. Cost of 8% preference share capital.
iii. Cost of 10% preference share capital.
iv. Cost of 10% debentures.
v. Market –weighted average cost of capital2005.
Date posted:
April 13, 2022
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Explain the advantages of using market value weights over book value weights in computing the weighted average cost of capital.
Date posted:
April 13, 2022
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Mount Elgon Ltd. is considering the launch of a new product. Exel, for which an investment of Sh.6,000,000 in plant and machinery will be required. The production of Exel is expected to last five years after which the plant and machinery would be sold for Sh. 1,500,000.
Additional Information:
1) Exel would be sold at Sh.600 per unit with a variable cost of Sh240 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 units of Exel expected to be sold per annum for the next five years as shown below
Year: Units expected to be sold
1 : 8,000
2 : 7,000
3 : 7,000
4 : 5,000
5 : 3,000
6) The corporation tax rate is 30%
Required:
i. Calculate the net present value (NPV) of the project and advise the management on the
appropriate course of action.
ii. Calculate the internal rate of return (IRR) of the project and advise the management on the
appropriate course of action.
iii. Outline the main drawbacks of the IRR method of investment.
Date posted:
April 13, 2022
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Upendo Ltd. is in the process of raising additional finance. The company’s financial structure
comprises ordinary share capital, reference share capital, debenture capital and retained earnings.
Each of these sources of finance is analyzed below:
Ordinary Share Capital
• The current market price per share is Sh.80
• The company expects to pay a cash dividend of Sh.6 per share in the next financial year
• The annual rate of growth in dividend per share is 6%
• Flotation costs amounting to Sh8 per share
11% Preference Share Capital
• The par value per share is Sh.100
• The share are currently trading at par
• Flotation costs amounting to Sh.4 per share 10% Debenture Capital
• The per value is Sh1,000 for each debenture stock
• The debenture have ten-year maturity period
• The flotation cost for each debenture stock is Sh.50 Retained Earnings
• The company expects to have Sh.225,000 of retained earnings available for the next financial year.
• Should the retained earnings balance to exhausted, the company will use common stock as the form of equity financing
Required:
i) Calculate the cost of Capital for ordinary share capital, preference share capital, debenture
capital and retained earnings
ii) Calculate the marginal cost of capital applying the target capital proportions and using
retained earnings to represent equity finance
iii) Comment on the relevance of the marginal cost of capital in (ii) above to Upendo Ltd.
Date posted:
April 13, 2022
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Karatasi Ltd. had the following capital structure as at 31 December 2008.
Additional information:
1. The current market price per ordinary share, preference share and debenture is sh.. 50, sh. 24 and sh. 1,200 respectively.
2. For the year ended 31 December 2008, the company paid an ordinary dividend of sh. 6.00 per share. Analysts estimate that the company’s earnings and dividends will grow at an annual rate of 15 per cent indefinitely.
3. The corporation tax rate is 30 per cent.
Required;-
The company’s market weighted average cost of capital.
Date posted:
April 11, 2022
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Highlight three reasons why accounting profit might not be the best measure of a company's achievement.
Date posted:
April 11, 2022
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An investor received a dividend of Sh.1.50 in the current financial year on each of his ordinary shares. The par value per share is Sh.20. The annual growth rate in dividends is 8%. The current market price per share is Sh1.50 while the investor’s required rate of return is 20%.
Calculate the intrinsic value of each ordinary share.
Date posted:
April 5, 2022
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Kawaida Ltd. is currently engaged in an expansion programme. Consequently, the company has been retaining all its earnings to finance the expansion programme. The company’s management expects to resume the payment of dividends at the end of 3 years with a dividend payment of sh. 1 per share. The dividends will grow at an annual rate of 50% in years 4 and 5. Thereafter, the dividends will grow at a constant rate of 8% indefinitely. The required rate of return on the company’s stock is 15%.
Required:
The current value of the company’s stock.
Date posted:
March 30, 2022
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Ushindi Ltd. has recently issued a sh. 1,000, 9 percent convertible bond. The bond can be converted into 9 ordinary shares at the end of the five years. The current market price of the shares of Ushindi Ltd. is sh. 25 per share. The price is expected to grow at a rate of 10 per cent per annum. The investors’ required rate of return is 12%.
Required:
The current value of the bond.
Date posted:
March 30, 2022
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The 10% convertible loan stock of Nalyaka Ltd. is quoted at Sh.142 per Sh.100 par value. The earliest date of conversion is in 4 years’ time, at the rate of 30 ordinary shares per Sh.100 nominal loan stock. The share price is currently Sh.4.15. Annual interest on the stock has just been paid.
Required:
(i) The average annual growth rate in the share price that is required for the stockholders to achieve an overall rate of return of 12% a year compounded over the next 4 years, including the proceeds of conversion.
(ii) The implicit conversion premium on the stock.
Date posted:
March 30, 2022
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Max Enterprises Ltd. had the following pattern of earnings per share (EPS) over the last five years:
The company maintained a constant dividend payout ratio of 40%. The company's required rate of return is 13%.
Required:
The company's theoretical value of the share
Date posted:
March 30, 2022