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Fanaka Ltd. a large multi- national company is in the process of determining the optimal cash balance
for the year ending 31 December 2009.
The management of the company has established the following information:
1. The company’s annual cash requirements amount to sh. 2,500 million.
2. The cost of each cash conversion transaction is sh. 500.
3. The opportunity cost of funds is 12%.
Required:
i) Optimal cash balance that the company should hold.
ii) Total cost of maintaining the cash balance determined in (b) (i) above.
Date posted:
April 28, 2022
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Modern Appliance Ltd. sells on average 2,000 units of product “Zed” per month. The purchase price per unit of the product is sh. 2. The cost of placing each order is sh. 50 and the carrying cost is 10% of the purchase price.
Required:
i) Economic order quantity.
ii) Total relevant cost per annum.
iii) Assume that the company has received a discount offer of 1% for purchases of at least 4,500 units per order
Using supporting calculations, advise the company on whether to take advantage of the discount offer.
Date posted:
April 28, 2022
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Kilimo Ltd. Manufactures a standard farm implement which it sells to distributors at sh. 100 per unit. The company intends to relax its credit policy which will result in an increase collection period from one month to two months.
The longer credit period is also expected to increase sales by 25%. Variable costs of production are sh. 85 per unit while annual sales are sh. 24,000,000. The increase in sales will result in additional stock of sh. 2,000,000 and additional creditors of sh. 200,000.
The company’s required rate of return is 20%.
Required:
Advise the company on whether or not to extend the credit period assuming:
i) All customers take longer credit period of two months.
ii) Existing customers do not change their payment habits and only the new customers take the full two months credit
Date posted:
April 28, 2022
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The following information was obtained from the financial statements of Alusa Ltd. A retail company, for the year ended 30 September 2009.
Date posted:
April 28, 2022
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Name and explain three approaches that could be used by a company to finance its working capital requirements.
Date posted:
April 28, 2022
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Mapema Ltd. manufactures and sells a product called “Rugs”. The company sells the product to its customers on credit terms. The company is considering easing the debtors collection efforts so as to increase its profitability.
The following information relates to the company:
• Average number of units sold per year 72,000,000
• Selling price per unit sh. 32.
• Variable cost per unit is sh. 28.
• Annual fixed collection expenses sh. 60,000,000.
• Average collection period is 40 day.
By easing the collection efforts. Mapema Ltd. expects to save sh. 40,000,000 per annum in collection expenses. However, this will lead to an increase in bad debts from 1% to 2% od sales and the average collection period from 40 days to 58 days. Sales will also increase by 1,000,000 units per annum. The company’s required rate of return is 24%
Assume a 360 day year.
Required:
Advice Mapema Ltd. on whether it is worthwhile to ease the collection efforts.
Date posted:
April 28, 2022
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Chogoria Ltd., a manufacturing company, has applied for working capital finance from Zed Commercial Bank Ltd. The bank's manager has requested for a working capital estimate from the company. The company has provided you with the following data for the next financial year.
Required
(i) A statement showing the working capital estimate.
(ii) Assume that production is carried on evenly throughout the year and wages and overheads also accrue evenly.
Date posted:
April 28, 2022
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The working capital policy of any business entity must address the twin issues of the level of current assets and the manner in which these current assets are financed.
Required:
In relation to the above statement, explain how business entities can adopt aggressive, moderate and conservative working capital policies.
Date posted:
April 28, 2022
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The following data relate to Store ltd, a manufacturing company.
Date posted:
April 28, 2022
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You are given the following financial statement information for Moto Ltd. for the year ended 31 December 2010:
Required;
The operating and cash conversion cycles assuming that the year has 360 days.
Date posted:
April 28, 2022
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Baren Ltd projects that cash outlays of Sh.45 million will occur uniformly throughout the year.
The company plans to meet its cash requirements by selling marketable securities from its
portfolio. The expected return from the company's marketable securities is 8 per cent per annum,
and the cost per transaction of converting securities into cash is Sh.30.
Required
(i) The optimal cash balance
(ii) The average cash balance
(iii) The number of transfers between cash and marketable securities per year.
Date posted:
April 28, 2022
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The projected monthly working capital requirements for Chasimba Ltd. for the year ending 31 December 2012 is as follows:
Date posted:
April 28, 2022
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Bahari Ltd. has the standard deviation of its daily net cash flow estimated at Sh.68, 250. The company
maintains minimum cash balance Sh.500, 000. The company's transaction cost is Sh.360 from the
money marker. The rate interest for the marketable securities is 9.865% per annum. The company
uses the Miller-Oir model to set its target cash balance.
Assume 365 days a year.
Required:
(i) The company's return point.
(ii) Upper cash limit.
(iii) The average cash balance.
Date posted:
April 28, 2022
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The following information relates to the current trading operations of Dindiri Ltd.
In an effort to improve the liquidity position of the company, the management proposed the following
strategies aimed at reducing its operating cycle.
Strategy A
To offer a 2% cash discount to customers who pay their accounts within 10 days. This will have the
following effects:
1. 50% of the cred it customers and all cash customer, will take advantage of the discount.
2. Annual sales the percentage of credit sales and the contribution to sales ratio will not change.
3. There will be savings in debt collection expenses of Sh 4,125,000 per month.
4. Bad debts will decrease to 20% of total credit sales.
5. The average collection period will be reduced to 32 days.
Strategy B
Contract the services of a factor at a cost of 2% of total credit sales while advancing Dindiri Ltd. 90%
of total credit sales invoiced at the end of each month at an interest rate of 1.5% per month.
The effects of this strategy will be:
1. No change in the level of annual sales proportion of cred it sales and contribution margin ratio.
2. Savings on debt administration expenses of Sh.2, 100,000 per month will result.
3. All bad debt losses will be eliminated.
4. The average collection period will drop to 20 days.
Required:
(i) Evaluate the financial benefits and Costs of each strategy (assume a 60 day year)
(ii) Advise the management of Dindiri Ltd. on the viable strategy to implement.
Date posted:
April 28, 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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Briefly explain three types of real options available in capital investments decisions.
Date posted:
April 25, 2022
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High Tec Electronics Ltd is considering the acquisition a new machine to replace existing machine
currently being used in the production of product “Q”.
The existing machine was acquired 5 years\ ago at a cost of Sh.40; 000,000.The machine was
originally estimated to have a useful life of 10 years with a nil salvage value at the end of its useful
life. However, following a revaluation of the machine, it is now estimated that the machine can be
used for another 15 years with a salvage value of sh.5,000,000.The current disposal value of the
machine is sh.30,000,000.
The new machine is estimated to cost sh.100, 000,000.The Company will incur an installation cost of
sh.20, 000, 000.However, the machine will require an overhaul at the end of 10 years.
The overhaul will involve the acquisition of new parts and will cost sh.20; 000,000.The new machine
is expected to have a useful life of 15 years and a salvage value of sh.30, 000,000 at the end of its
useful life. Investing in the new machine will also require an additional investment in working capital
of sh.40, 000,000 at the end of 5 years. The investment in working capital will however be recovered
at the end of the machine’s useful life.
The following information relates to the new machine and the existing machine’s expected output of
product “Q” over the 15 years period.
Additional information
1. The unit selling price and unit variable cost of product “Q” are sh.25 and sh.15 respectively.
These are expected to remain constant over the 15 years period.
2. The annual fixed costs excluding depreciation associated with the new machine are expected to
increase by sh.100,000,000 over the 15 years period.
3. The company applies a policy of straight line depreciation for all its fixed assets.
4. The overhaul cost of the new machine will be amortized separately over the remaining useful
life of the machine on straight line basis.
5. The company’s cost of capital is 20%.
6. Corporation tax rate is 30%.
Assume all cash flows, unless otherwise stated occur the end of each year.
Required;
Using the net present value (NPV) technique, advice the company on whether it should replace the existing machine with the new machine.
Date posted:
April 25, 2022
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Mavoko Ltd. manufactures a component known as “Fixit” which is used in the manufacture of locally assembled desktop computers. While the current production capacity is one million units of “Fixit”, demand for the component is expected to be as follows:
The company is planning to acquire an additional machine at a cost of sh. 8,000,000 which will have a
useful life of 4 years and a maximum output of 600,000 units. The scrap value of the machine after
four years will be sh. 300,000.
The current selling price of “Fixt” is sh. 80 per unit and the variable cost is sh. 50 per unit. Other
variable costs of production are sh. 19. Fixed costs of production associated with the new machine
would be sh. 2,400,000 in the first year of production increasing by sh. 200,000 per year in each
subsequent year of operation.
Mavoko Ltd. pays tax one year in arrears at an annual rate of 30% and can claim capital allowance on
a 25% reducing balance basis. A balancing allowance is claimed in the final year of operation.
The cost of equity for mavoko Ltd. is 10% while it pays an interest of 8.6% on its debts. Its long term
fiancé is made up 80% equity and 20% debt.
Required:
i) Calculate the net present value (NPV) of buying the new machine.
ii) Calculate the internal rate of return (IRR) of the new machine.
iii) Advise the management of Mavoko Ltd. on whether to buy the new machine.
Date posted:
April 25, 2022
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Three options are available to the investment manager of Maendeleo Ltd. as follows:
− Project Weka may yield a return of Sh.20 million with a probability of 0.3, or a return of Sh.40 million with a probability of 0.7.
− Project Leta may earn a return of Sh.20 million with a probability of 0.3 or a return of Sh.55 million with a probability of 0.7
− Project Pato yields a return of Sh.30 million with a probability of 0.5 or Sh.40 million with a probability of 0.5
Required:
By applying the mean-variance rule, advise Maendeleo Ltd investment manager on the best investment option.
Date posted:
April 25, 2022
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Briefly describe the mean-variance rule.
Date posted:
April 25, 2022
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Lang Ltd is interested in measuring its overall cost of capital and has gathered the following data for the year 2011:
Debt: The firm can raise an unlimited amount of debt by selling Sh. 1,000 per value 8% coupon rate, 20 year bonds on which annual interest payments will be made. To sell the issue, an average discount of Sh. 30 per bond would be given
Preference stock: The firm can sell 8% preferred stock at its Sh. 95 share per value. The cost of issuing and selling the stock is expected to be Sh. 5 per share. An unlimited amount of preferred stock can be sold under these terms.
Debt: The firm can raise all unlimited amount of debt by selling Sh. 1,000 per value 8% coupon rate, 20 year bonds on which annual interest payments will be made. To sell the issue, an average discount of Sh. 30 per bond would be given
Equity: The firm expects to have Sh. 100,000 of retained earnings in the coming year 2012. New shares can be issued at Sh 62 each with a flotation cost of Sh 2 per share. The growth rate is expected to be 6%. Expected dividend in the coming
year is Sh. 6.
The company’s estimate optimal capital structure is given below.
The company tax is at 30%
Required
(i) Compute the specific cost of each source of financing
(ii) Determine the breakpoint and the weighted average marginal cost of capital below the
breakpoint.
Date posted:
April 25, 2022
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Tezo Ltd. is in the process of modernizing its operations. The factory manager has proposed the
replacement of the milling machine with a new fully computerized machine. The milling machine
was purchased two years ago at a cost of Sh.4 million. The economic life of the machine was five
years. However, a management review has established that the machine has a further useful life of
five years with a zero salvage value. The machine could be disposed of immediately at Sh. 1.6 million.
The new machine has a purchase price of Sh.8 million with an additional installation cost of Sh.
1.8 million and a salvage value of Sh.2 million. The new machine will lead to increased efficiency
and annual savings in costs of Sh.2.1 million. However, electricity costs will increase by Sh.200,
000 per annum. The operation of the new machine will also require an increase of Sh.810, 000
worth of raw materials. The company uses the straight line method of depreciation. The
company's cost of capital is 10% and the corporate tax rate is 30%.
Required:
Advise the management of Tezo Ltd. on whether to replace the machine.
Date posted:
April 25, 2022
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ABC Ltd. has the following proposed independent projects for the year ending 31 December 2012:
Required:
(i) Assuming that there is no capital rationing, indicate which projects should be selected.
(ii) Total net present value (NPV) of the selected projects.
(iii) Assuming a single period internal capital constraint of Sh. 1,700,000 is imposed, indicate which projects should be selected.
Date posted:
April 25, 2022
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Bright Ltd. undertook project X with the following cash flow over its useful life of 3 years.
The cost of capital for the project is 10%. The abandonment values of the project have been given below:
Required
Advise the management of Bright Ltd. when to abandon project X.
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