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In a company, an agency problem may exist between management and shareholders on one hand and the debt holders (creditors and lenders) on the other because management and shareholders, who own and control the company have the incentive to enter into transactions that may transfer wealth from debt holders to shareholders. Hence the need for agreements by debt holders in lending contracts.
Required:
(a) State and explain any four actions or transactions by management and shareholders that could be harmful to the interests of debt holders (sources of conflict).
(b) Write short notes on any four restrictive covenants that debt holders may use to protect their wealth from management and shareholder raids.
Date posted:
December 14, 2021
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Enumerate four advantages of convertible bonds from the point of view of the borrower.
Date posted:
December 14, 2021
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List and explain five factors that should be taken into account by a businessman in making the choice between financing by short-term and long-term sources.
Date posted:
December 14, 2021
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The accountant of Mamba Sports Club has extracted the following information from the books of account for the year ended 31 March 2009
Date posted:
December 14, 2021
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Lynx Services Ltd., a debt collection agency, has estimated that the standard deviation of its daily net cash flow is Sh.22,750. The company pays Sh.120 in transaction cost every time it transfers funds into and out of the money market.
The rate of interest in the money market is 9.465%. The company uses the Miller-Orr Model to set its target cash balance. The minimum cash balance has been set at Sh.87,500.
Required:
(i) The company's target cash balance.
(ii) The lower and upper cash limit.
(iii) Lynx Services Ltd.'s decision rules.
Date posted:
December 14, 2021
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The following is the receipts and payments account of the Friendship Club for the year ended 31 December 2010
a)Prepare an income and expenditure account for the year ended 31 December 2009
(b)Prepare a balance sheet at that date
Date posted:
December 14, 2021
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Briefly describe the benefits of the Central Depository System (CDS) to the following stakeholders.
(i) Government;
(ii) Capital Markets Authority and Nairobi Stock Exchange;
(iii) Investors.
Date posted:
December 14, 2021
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Explain the benefits that are enjoyed by investors because of the existence of organized security exchanges.
Date posted:
December 14, 2021
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The CMA (Capital Markets Authority) has put in place several tax incentives to encourage investments in capital markets.
Highlight some of the tax incentives by the Capital Markets Authority.
Date posted:
December 14, 2021
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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. (5 marks)
(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:
December 14, 2021
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Format for the financial account of a non profit making organisation
Date posted:
December 14, 2021
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Explain the main difference between the financial of non-profit - oriented organizations and of profit - oriented organizations
Date posted:
December 14, 2021
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Beta Ltd is reviewing the financial statements of two companies, Zeta Ltd and Omega Ltd. The companies trade as wholesalers, selling electrical goods to retailers on credit. Their most recent financial statements appear below.
Required:
a)Calculate for each company a total of eight ratios which will assist in measuring the three aspects of profitability, liquidity and management of the elements of working capital. Show all workings.
b)Based on the ratios you have calculated in (a), compare the two companies as regards their profitability, liquidity and working capital management.
c)Omega Ltd is much more highly geared than Zera Ltd. What are the implications of this for the two companies?
Date posted:
December 14, 2021
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The Apollo Credit Collection Company Ltd. employs agents who collect hire purchase instalments and other outstanding amounts on a door to door basis from Monday to Friday. The agents bank their collections at the close of business everyday from
Monday to Thursday. At the close of business on Friday the week's bankings are withdrawn and, together with Friday's collections, are remitted to the head office. The takings are evenly spread daily and weekly. The budget for the next year
shows that total collections will amount to Sh.26 million. The bankings are used to reduce an overdraft whose interest rate is 19%.
The collection manager has suggested that instead of banking collections, they be remitted daily to the head office by the collectors.
Required:
Determine the increase in annual interest if the collection manager's suggestion was adopted.
Date posted:
December 14, 2021
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Compute the relevant ratios for ABC ltd
Date posted:
December 14, 2021
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The financial data given below shows the capital structure of Akabebi Company Limited.
The structure is considered optimum and the management would wish to maintain this level.
Akabebi Company Limited intends to invest in a new project which is estimated to cost
Sh.16,800,000 with an expected net cash flow of Sh.3,000,000 per annum for 10 years. The
management has proposed to raise the required funds through the following means:
1. Issue 100 10% debentures at the current market value of Sh.5,000 per debenture.
2. Utilize 60% of the existing retained earnings.
3. Issue 10% Sh.20 preference shares at the current market price of Sh.25 per share
4. Issue ordinary shares at the current market price of Sh.45 per share. Floatation cost per
share is estimated to be 12% of the share value.
The company's current dividend yield is 5% which is expected to continue in
the near future. Corporation tax rate is 30%.
Required:
(a) Determine the current dividend per share.
(b) Determine the number of ordinary shares to be issued.
(c) Determine the marginal cost of capital for Akabebi Company Ltd based on the above
information.
(d) Evaluate whether it is viable to invest in the proposed project (Round off your answer
for cost of capital to the nearest 1)
(e) Explain clearly the sense in which depreciation is said to be a source of funds to
business firms.
Date posted:
December 14, 2021
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Define what trend/industrial analysis is and state the critical issues to be taken note of when carrying it out
Date posted:
December 14, 2021
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Andreas Company Ltd. currently pays a dividend of Sh.2 per share and this dividend is expected to grow at an annual rate of 15% for the first 3 years then at a rate of 10% for the next 3 years after which it is expected to grow at a rate of 5% thereafter.
(i) What value would you place on the stock if an 18% rate of return were required?
(ii) Would your valuation change if you expected to hold the stock for only 3 years?
Explain.
Date posted:
December 14, 2021
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Mwomboko Company Ltd currently operates with terms of net 30 days. The company has sales of Sh.12 million and its average collection period is 45 days. To stimulate demand, the company is considering the possibility of offering terms of net 60 days. If
it offers these terms sales will increase by 20%. After the change the average collection period is expected to increase to 75 days with no difference in payments habits between old and new customers.
The company has variable costs of Sh.70 for every Sh.100 of sales. The required rate of return on receivables is 20%.
Required:
Should the company extend its credit period? (Assume a year has 360 days).
Date posted:
December 14, 2021
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Briefly describe what a stock market/valuation ratio is
Date posted:
December 14, 2021
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Briefly describe what a profitability ratio is
Date posted:
December 14, 2021
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Briefly describe what a gearing/capital structure ratio is
Date posted:
December 14, 2021
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Briefly describe what a turnover/asset management ratio is
Date posted:
December 14, 2021
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Briefly describe what a liquidity ratio is
Date posted:
December 14, 2021
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Explain two types of a basic financial statement
Date posted:
December 14, 2021
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Nyumbani group has prepared the following income statement for the year ended 30 September 2010:
Date posted:
December 12, 2021
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Viwanda Industries Limited operates a defined benefit post-retirement plan for its employees. The plan is reviewed annually. The company's actuaries have provided the following information:
Additional information
1. The expected return on plan assets as at 1 November 2011 was 12%.
2. The discount rate for plan liabilities as at I November 2011 was 10%.
3. The average remaining working lives of Viwanda Industries Ltd's employees as at 31 October 2011 was ten years.
Required:
Extracts of Viwanda Industries Ltd’s financial statements for the year ended 31 October 2012.
Date posted:
December 12, 2021
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Wabunge Ltd. operates a defined benefits plan for its employees. Both employees and the employer contribute to the plan. Details of the defined benefits plan for the year ended 30 November 2013 were as follows:
The interest rate on high quality corporate debt (constant during the year) was 4.75% per annum.
Additional information:
1. Benefits paid employer contributions and employee contributions were all spread evenly over the year.
2. The past service cost arose as a result of an improvement to benefits offered to all plan members effective from 1 November 2012. In order to receive the benefit, plan members must have remained in employment until at least 30 November 2013. The figure above is the total expected cost as calculated by the actuary.
Required:
(i) The notes to the financial statements required by IAS 19: Employee Benefits (revised 2011) in respect or changes in plan assets, changes in the defined benefits plan obligation and amounts recognized in profit or loss and other comprehensive income
(ii) Statement of changes in net assets available for benefits for the plan itself as required by IAS 26 (Accounting and Reporting by Retirement Benefit Plans).
(NB: Round off all figures to the nearest shilling).
Date posted:
December 12, 2021
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A company has granted 10,000 cash-settled awards to each of its 500 employees on condition that the employees remain in its employment for the next three years. Cash is payable at the end of the three years based on the share price of the company's shares on such a date.
35 employees leave during year 1. The company estimates that 60 additional employees will leave during years 2 and 3. The share price at the end of year 1 is Sh.14.40.
40 employees leave during year 2. The company estimates that 25 additional employees will leave during year 3. The share price at the end of year 2 is Sh. 15.50.
22 employees leave during year 3. The share price at the end of year 3 is Sh. 18.20
Required:
Computations to show how the company would recognize the above awards.
Date posted:
December 11, 2021
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Baobab Ltd. was incorporated on 1 April 2000. In the year ended 31 March 2001, the company made a profit before taxation of Sh.10, 000,000 (depreciation charged being Sh.1, 000,000). The company had made the following capital additions:
Plant - Sh.4,800,000
Motor vehicles - Sh.1,200,000
Corporation tax is chargeable at the rate of 30%. Capital deductions are computed at the rate of 25% per annum on written-down value.
The company has prepared capital expenditure budgets as at 31 March 2001 which reveal the following patterns:
From 1 April 2007, capital allowances are expected to exceed depreciation charges each year.
Required:
(i). Compute the corporation payable for the year ended 31 March 2001
(ii). Compute the deferred tax charge for the year ended 31 March 2001 on:
- Full-provision basis
- Partial-provision basis
(Show the profit and loss account and balance sheet extracts with respect to the provisions under each method).
Date posted:
December 11, 2021