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Since debt capital is cheaper than equity, companies should resort to one hundred
percent use of debt to finance their investments.
Discuss the limitations of the above financing policy.
Date posted:
February 12, 2019
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Explain three key roles of a capital markets regulator in your country.
Date posted:
February 11, 2019
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Although profit maximization has long been considered as the main goal of a firm,
shareholder wealth maximization is gaining acceptance among st most companies as the
key goal of a firm.
Required:
(i) Distinguish between the goals of profit maximization and shareholder wealth
maximization.
(ii) Explain three limitations of the goal of profit maximization
Date posted:
February 11, 2019
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Mapato Limited is a company involved in the processing of cooking oil. The
management is considering whether to replace an existing cooler with a new one.
The old cooler is fully depreciated and has no salvage value. If not replaced, the
company will continue to incur Sh.1.8 million as annual operating expenses and an
additional Sh.500,000 in repair costs per annum over the next fifteen years.
The new cooler costs Sh.3,150,000. Its annual operating expenses and repair costs are
estimated at Sh.1.3 million and Sh.350,000 respectively over its estimated economic life
of fifteen years. It is expected to be worthless after the expiry of this period.
The cost of capital is 10% and the company depreciates its assets using the straight-line
method.
Assume a 30% corporation tax rate.
Required:
(i) Compute the incremental net annual cash flows if the old cooler is replaced.
(ii) Using the net present value (NPV) method, advise the management on whether
or not to replace the old cooler.
Date posted:
February 11, 2019
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The management of Faulu Limited intends to change the company‟s credit
policy, from 'net 30' to '3/10 net 45'. If this change is effected, annual sales
will increase by 12% from the current level of Sh.12 million while the proportion of
bad debts will increase from 1% to 1.4% of credit sales. A new credit assistant will also
have to be employed at a salary of Sh.260,000 per annum. It is expected that 40% of the
credit customers will benefit from the cash discount.
The inventory level and the variable costs will however remain constant at 20% and
75% of the annual credit sales respectively. The rate of return on investment is 14% per
annum. All sales are on credit.
Assume a 360 days financial year and ignore the effects of taxation.
Required:
Advise the management of Faulu Limited on whether or not to adopt the new credit
policy.
Date posted:
February 11, 2019
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List four factors that should be considered in establishing an effective credit policy.
Date posted:
February 11, 2019
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Distinguish between a credit policy and a working capital policy.
Date posted:
February 11, 2019
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List and briefly discuss three possible reasons why companies in the same type of business may have different price/earnings (P/E) ratios.
Date posted:
February 11, 2019
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What are the determinants of the price of a bond?
Date posted:
February 11, 2019
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What are the differences between an 'operating lease' and a 'finance lease'?
Date posted:
February 11, 2019
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Identify any five services that financial intermediaries provide.
Date posted:
February 11, 2019
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What is financial intermediation?
Date posted:
February 11, 2019
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Identify and briefly explain the three main forms of agency relationship in a firm.
Date posted:
February 11, 2019
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Dawamu Ltd, which operates in the retail sector selling a single product, is considering
a change of credit policy which will result in an increase in the average collection period
of debts from one to two months. The relaxation of the credit policy is expected to
produce an increase in sales in each year, amounting to 25% of the current sales
volume. The following information is available.
1. Selling price per unit of product – Sh.1,000
2. Variable cost per unit of product – Sh.850
3. Current annual sales of product – Sh.240,000,000
4. Dawamu Ltd.'s required rate of return on investments is 20%.
5. It is expected that increase in sales would result in additional stock of
Sh.10,000,000 and additional creditors of Sh.2,000,000.
Required:
Advise Dawamu Ltd. on whether or not to extend the credit period offered to
customers, if
(i) All customers take the longer credit period of two months.
(ii) Existing customers do not change their payment habits and only the new
customers will take a full two months' credit.
Date posted:
February 11, 2019
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Briefly explain how the Miller-Orr cash management model operates.
Date posted:
February 11, 2019
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What is meant by the term 'matching approach' in financing fixed and current assets?
Date posted:
February 11, 2019
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Identify and briefly explain three conditions which have to be satisfied before the use of
the weighted average cost of capital (WACC) can be justified.
Date posted:
February 11, 2019
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Identify four factors that have limited the development of the venture capital market in
your country.
Date posted:
February 11, 2019
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Briefly describe the three forms of capital market efficiency
Date posted:
February 11, 2019
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Briefly explain the liquidity – profitability trade – off which a business enterprise may be
required to consider in its financial management policies.
Date posted:
February 11, 2019
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Swaleh Ltd. has been in operation for the last eight years. The company is all equity
financed with 6 million ordinary shares with a par value of Sh.5 each. The current
market price per share is Sh.8.40, which is in line with the price/earnings (P/E) ratio in
the industry of 6.00. The company has been consistent in paying a dividend of Sh.1.25
per share during the last five years of its operations, and indications are that the current
level of operating income can be maintained in the foreseeable future. Tax has been at a
rate of 30%.
The management of Swaleh Ltd. is contemplating the implementation of a new project
which requires Sh.10 million. Since no internal sources of funds are available,
management is to decide on two alternative sources of finance, namely:
Alternative A
To raise the Sh.10 million through a rights issue. Management is of the opinion that a
price of Sh.6.25 per share would be fair.
Alternative B
To obtain the Sh.10 million through a loan. Interest is to be paid at a rate of 12% per
annum on the total amount borrowed.
The project is expected to increase annual operating income by Sh.5.6 million in the
foreseeable future.
Irrespective of the alternative selected in financing the new project, corporation tax is
expected to remain at 30%.
Required:
(i) Determine the current level of earnings per share (EPS) and the operating
income of the company.
(ii) If Alternative A is selected, determine the number of shares in the rights issue
and the theoretical ex-rights price.
(iii) Calculate the expected earnings per share (EPS) for each alternative, and advise
Swaleh Ltd. on which alternative to accept.
(iv) 'It is always better for a company to use debt finance since lower cost of debt
results in higher earnings per share'.
Briefly comment on this statement.
Date posted:
February 11, 2019
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Distinguish between financial risk and operating risk.
Date posted:
February 11, 2019
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Magma Ltd. wishes to make a choice between two mutually exclusive projects. Each of
these projects requires Sh.400,000,000 in initial cash outlay. The details of the two
projects are as follows:
Project A
This project is made up of two sub-projects. The first sub-project will require an initial
outlay of Sh.100,000,000 and will generate Sh.25,600,000 per annum in perpetuity. The
second sub-project will require an initial outlay of Sh.300,000,000 and will generate
Sh.85,200,000 per annum for the 8 years of its useful life. This sub-project does not
have a residual value at the end of the 8 years. Both sub-projects are to commence
immediately.
Project B
This project will generate Sh.87,000,000 per annum in
perpetuity. The company has a cost of capital of 16%.
Required:
(i) Determine the net present value (NPV) of each project.
(ii) Compute the internal rate of return (IRR) for each project.
(iii) Advise Magma Ltd. on which project to invest in, and justify your choice
Date posted:
February 11, 2019
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Joseph Kimeu is trying to determine the value of Bidii Ltd.'s ordinary shares. The
earnings growth rate over his planned six-year holding period is estimated to be 10%,
and the dividend payout ratio is 60%. The ending price earnings (P/E) ratio is expected
to be 20 and the current earnings per share are Sh.4. The required rate of return for this
share is 15%.
Required:
Compute the market price of Bidii Ltd's ordinary share
Date posted:
February 11, 2019
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(a) Outline the factors which contributed to the popularity of commercial papers over bank
overdrafts among large corporations in the 1990s.
(b) Clearly distinguish between 'factoring' and 'invoice discounting' in the context of the
management of debtors.
(c) 'Not all new issues of shares are underwritten, but it is clearly better to arrange that they
should be if there is any chance than the issue may be unsuccessful'. Briefly comment
on this statement.
Date posted:
February 11, 2019
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(a) Ujuzi Limited wishes to raise finance to cater for the purchase of new fixed assets, as its
sales level has greatly increased in the recent years, and the demand for its products is
expected to increase for the foreseeable future. The company has 900,000 outstanding
shares which are currently trading in the stock exchange at Sh.130 a share. The finance
manager estimates that the fixed assets will cost Sh.22,500,000 and he has convinced the
board of directors to raise the money through a rights issue. The board has set the
subscription price at Sh.75 per share.
Required:
(i) The number of rights required to purchase a new share.
(ii) The price of one share after the rights issue.
(iii) The theoretical value of the rights if the shares are sold ex-right.
(iv) The effect on a shareholder's wealth if he decides neither to exercise nor sell
the right.
(b) PKG Ltd. maintains a minimum cash balance of Sh.500,000. The deviation of the
company's daily cash changes is Sh.200,000. The annual interest rate is
14%. The transaction cost of buying or selling securities is Sh.150 per transaction.
Required:
Using the Miller-Orr cash management model, determine the following:
(i) Upper cash limit
(ii) Average cash balance
(iii) The return point.
(c) Explain briefly the meaning of the term 'over trading'.
Date posted:
February 11, 2019
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The following information represents the financial position and financial results of
AMETEX Limited for the year ended 31 December 2002.
Required:
Determine the following financial ratios:
(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
(c) Determine the working capital cycle for the company.
Date posted:
February 11, 2019
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Outline four limitations of the use of ratios as a basis of financial analysis.
Date posted:
February 11, 2019
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Alima Ltd., a manufacturer of edible oils, is contemplating the purchase of a new oil processing machine to replace the existing one. The existing machine was acquired two years ago at a cost of Sh.4,000,000. the useful life of this machine was originally
expected to be five years with no salvage value, but after a critical analysis, the financial analyst has now estimated that the machine will have an economic life of ten years with a salvage value of Sh.500,000. The new machine is estimated to cost Sh.8,000,000 and Sh.400,000 would be incurred in installing the machine. The new machine is estimated to have a useful life of ten years. An expert in asset valuation estimates that the existing machine can be sold at Sh.2,500,000 in the open market. The new machine is expected to lead to increased sales. To support the increased sales, debtors would increase by Sh.320,000, stock by Sh.140,000 and creditors by Sh.300,000. The estimated profit before depreciation and tax over the next ten years for the two machines is as given below.
The company's cost of capital is 10%. Corporation tax applicable is 30%.
The company uses the straight line method of depreciation.
Required:
(i) Initial investment required replacement of the old machine.
(ii) An evaluation of whether it is worthwhile for to undertake the replacement of the machine.
Date posted:
February 11, 2019
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Briefly explain the importance of capital budgeting in a business organization.
Date posted:
February 11, 2019