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At initial stages of debt capital the WACC will be declining up to a point where
the WACC will be minimal. This is because.
(i) Debt capital provides tax shield to the firm and after tax cost of debt is low.
(ii) The cost of debt is naturally low because it is contractually fixed and certain.
Beyond the optimal gearing level, WACC will start increasing as cost of debt increases
due to high financial risk.
marto answered the question on February 8, 2019 at 09:39
- Rafiki Hardware Tools Company Limited sells plumbing fixtures on terms of 2/10 net 30. Its
financial statements for the last three years are as follows:(Solved)
Rafiki Hardware Tools Company Limited sells plumbing fixtures on terms of 2/10 net 30. Its
financial statements for the last three years are as follows:
Required:
(a) For each of the three years, calculate the following ratios:
Acid test ratio, Average collection period, inventory turnover, Total debt/equity, Net
profit margin and return on assets.
(b) From the ratios calculated above, comment on the liquidity, profitability and gearing
positions of the company
Date posted: February 8, 2019. Answers (1)
- The management of Furaha Packers Ltd. is planning to carry out two activities at the
same time to:
(i) determine the best credit policy for its customers
(ii)...(Solved)
The management of Furaha Packers Ltd. is planning to carry out two activities at the
same time to:
(i) determine the best credit policy for its customers
(ii) find out the optimal level of ordering orange juice from its suppliers.
The following data have been collected to assist in making the decisions:
1. Annual requirements of orange juice are 2,100,000 litres
2. The carrying cost of the juice is Sh.8 per litre per year
3. The cost of placing an order is Sh.1,400.
4. The required rate of return for this type of investment is 18% after tax.
5. Debtors currently are running at Sh.60 million and have an average collection
period of 40 days.
6. Sales are expected to increase by 20% if the credit terms are relaxed and to
result in an average collection period of 60 days.
7. 60% of sales are on credit.
8. The gross margin on sales is 30% and is to be maintained in future.
FINANCIAL
Required:
(i) Use the inventory (Baumol) model to determine the economic order quantity
and the ordering and holding costs at these levels per annum.
(ii) Determine if the company should switch to the new credit policy.
Date posted: February 8, 2019. Answers (1)
- The dividend per share of Mavazi Limited as at 31 December 2000 was Sh.2.50.
The company's financial analyst has predicted that dividends would grow at
20% for...(Solved)
The dividend per share of Mavazi Limited as at 31 December 2000 was Sh.2.50.
The company's financial analyst has predicted that dividends would grow at
20% for five years after which growth would fall to a constant rate of 7%. The
analyst has also projected a required rate of return of 10% for the equity market.
Mavazi's shares have a similar risk to the typical equity market.
Required:
The intrinsic value of shares of Mavazi Ltd. As at 31 December 2000.
Date posted: February 8, 2019. Answers (1)
- Briefly discuss the disadvantages of the constant growth dividend model as a valuation model.(Solved)
Briefly discuss the disadvantages of the constant growth dividend model as a valuation model.
Date posted: February 8, 2019. Answers (1)
- State the circumstances under which it would be advantageous to lenders and to
borrowers from the issue of:
(i) Debentures with a floating rate of interest.
(ii)...(Solved)
State the circumstances under which it would be advantageous to lenders and to
borrowers from the issue of:
(i) Debentures with a floating rate of interest.
(ii) Zero-coupon bonds.
Date posted: February 8, 2019. Answers (1)
- Highlight the various measures that would minimize agency problems between the
owners and the management.(Solved)
Highlight the various measures that would minimize agency problems between the
owners and the management.
Date posted: February 8, 2019. Answers (1)
- Define agency relationship from the context of a public limited company and briefly
explain how this arises.(Solved)
Define agency relationship from the context of a public limited company and briefly
explain how this arises.
Date posted: February 8, 2019. Answers (1)
- Mumias Milling Company purchased a grinder 3 years ago at a cost of Sh.3.5 million.
The grinder had a life of 8 years at the time...(Solved)
Mumias Milling Company purchased a grinder 3 years ago at a cost of Sh.3.5 million.
The grinder had a life of 8 years at the time of purchase. It is being depreciated at 15%
per year on a declining balance. The company is considering replacing it with a new
grinder costing Sh.7 million with an expected useful life of 5 years.
Due to increased efficiency, the profit before depreciation is expected to increase by
Sh.400,000 a year. The old and new grinders will now be depreciated at 25% per year on
a declining balance for tax purposes.
The salvage value of the new grinder is estimated at Sh.210,000. The market value of the
old grinder, today, is Sh.4 million. It is estimated to have a zero salvage value after 5
years.
The company's tax is 30% and the after tax cost of capital is 12%.
Required
Should the new grinder be bought? Explain.
Date posted: February 8, 2019. Answers (1)
- Describe in brief the greatest difficulties faced in capital budgeting in the real world.(Solved)
Describe in brief the greatest difficulties faced in capital budgeting in the real world.
Date posted: February 8, 2019. Answers (1)
- (i) What is a Commercial Paper?
(ii) State and explain the advantages of using commercial paper by businesses to
raise funds(Solved)
(i) What is a Commercial Paper?
(ii) State and explain the advantages of using commercial paper by businesses to
raise funds
Date posted: February 8, 2019. Answers (1)
- i) What is a stock exchange index? (ii) Outline four drawbacks of the Nairobi Stock Exchange...(Solved)
i) What is a stock exchange index?
(ii) Outline four drawbacks of the Nairobi Stock Exchange index
Date posted: February 8, 2019. Answers (1)
- You are given the following price quotations on a Treasury Bond for the close of
trading on May 31 and June 30, 2000. As on June...(Solved)
You are given the following price quotations on a Treasury Bond for the close of
trading on May 31 and June 30, 2000. As on June 30 this Treasury Bond has a 90-day
remaining life.
(i) On May 31, the Treasury Bond had a 120-day remaining life. On that day what
percentage of par value would you pay to purchase the Treasury Bond?
(ii) Assume you purchased the Treasury Bond on May 31 and later sold it on June
30. What rate of return did you earn during this one-month period
Date posted: February 7, 2019. Answers (1)
- Explain how the Capital Authority can ensure:
(i) faster growth and development of the Nairobi Stock Exchange or Stock
Exchange in your country.
(ii) development of other...(Solved)
Explain how the Capital Authority can ensure:
(i) faster growth and development of the Nairobi Stock Exchange or Stock
Exchange in your country.
(ii) development of other stock exchanges in Kenya or in your country.
Date posted: February 7, 2019. Answers (1)
- What economic advantages are created by the existence of:
(i) Primary markets.
(ii) Secondary markets
(iii) Portfolio management firms(Solved)
What economic advantages are created by the existence of:
(i) Primary markets.
(ii) Secondary markets
(iii) Portfolio management firms
Date posted: February 7, 2019. Answers (1)