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(a) (i) Matching
The traditional view is that fixed assets should be financed by term sources of
finance and current assets by a mixture of long-term and short-term sources
(ii) Cost –he company may find it easier to raise short term finance with
lowsecurity than long term finance
(iv) Security –The company may find it easier to raise short term finance with
lowsecurity than long term finance
(v) Risk –In opting for short-term debt, the company faces the risk that it may
notbe able to renegotiate the loan on such good terms. Long term loans are
thus less risky
(v) Flexibility –Short term debt is more flexible since it allows the firm to react
tointerest rate charges and avoid being locked into an expensive long term fixed
rule commitment when rates are falling.
(b) Benefits of a right issue to Malindi Leisure Industries;
The company is highly geared as rights issue would reduce the level of gearing and
reduce in the level of financial risk.
If the issue is successful it will not significantly change the voting structure.
If underwriters are raised then the amount of finance that will be known and guaranteed
If the market is high, Malindi Leisure Industries should be able to achieve a rights issue
at a relatively low cost since less shares will be issued. (Lower floatation costs)
Less administrative procedures e.g no need for prospectus.
Drawbacks of rights issue
The issue will need to be priced at a discount to the current share price in order to make
it attractive to investors. Thus will result in a dilute in earnings and a fall in price.
If the issue is not successful, a significant number of shares may be taken by
underwriters thus changing the voting structure
Administration and underwriting costs are high
Shareholders may be unable or unwilling to increase their investment in Malindi Leisure
Industries
(c) Advantages of leasing
No risk of obsolescence in the lessee
Leasing does not require a down payment to be made at the start of the contract unlike
hire purchase. (No heavy initial capital outlay required)
Lease finance can be arranged relatively, cheaply, quickly and
easily Operating leases are off-balance sheet financing
Advantages of hire purchase
Unlike leasing, hire purchase allows the user of the asset to obtain ownership at the end
of the agreement period
The interest element of the payments is allowable against tax
Tax shield on salvage value at the end of economic life of asset
marto answered the question on February 11, 2019 at 08:05
- Discuss the main factors which a company should consider when determining the appropriate mix of long-term and short-term debt in its capital structure.
(Solved)
Discuss the main factors which a company should consider when determining the appropriate mix of long-term and short-term debt in its capital structure.
Date posted: February 11, 2019. Answers (1)
- What is meant by the term 'capital flight'?
(Solved)
What is meant by the term 'capital flight'?
Date posted: February 11, 2019. Answers (1)
- P. Muli was recently appointed to the post of investment manager of Masada Ltd. a quoted
company. The company has raised Sh.8,000,000 through a rights issue.
P....(Solved)
P. Muli was recently appointed to the post of investment manager of Masada Ltd. a quoted company. The company has raised Sh.8,000,000 through a rights issue.
P. Muli has the task of evaluating two mutually exclusive projects with unequal economic lives. Project X has 7 years and Project Y has 4 years of economic life. Both projects are expected to have zero salvage value. Their expected cash flows are as follows:
The amount raised would be used to finance either of the projects. The company expects to pay a dividend
per share of Sh.6.50 in one year's time. The current market price per share is Sh.50.
Masada Ltd. expects the future earnings to grow by 7% per annum due to the undertaking of
either of the projects. Masada Ltd. has no debt capital in its capital structure.
Required:
(a) The cost of equity of the firm.
(b) The net present value of each project.
(c) The Internal Rate of return (IRR) of the projects. (Rediscount cash flows at 24% for project X and 25% for Project Y).
(d) Briefly comment on your results in (b) and (c) above.
(e) Identify and explain the circumstances under which the Net Present Value (NPV) and the Internal Rate of Return (IRR) methods could rank mutually exclusive projects in a conflicting way.
Date posted: February 11, 2019. Answers (1)
- The management of Afro Quatro Ltd. want to establish the amount of financial needs for the
next two years. The balance sheet of the firm as...(Solved)
The management of Afro Quatro Ltd. want to establish the amount of financial needs for the next two years. The balance sheet of the firm as at 31 December 2001 is as follows:
For the year ended 31 December 2001, sales amounted to Sh.240,000,000. The firm projects
that the sales will increase by 15% in year 2002 and 20% in year 2003.
The after tax profit on sales has been 11% but the management is pessimistic about future
operating costs and intends to use an after-tax profit on sales rate of 8% per annum.
The firm intends to maintain its dividend pay out ratio of 80%. Assets are expected to vary
directly with sales while trade creditors and accrued expenses form the spontaneous sources of
financing. Any external financing will be effected through the use of commercial paper.
Required:
(a) Determine the amount of external financial requirements for the next two years.
(b) (i) A proforma balance sheet as at 31 December 2003.
(ii) State the fundamental assumption made in your computations in (a) and b(i) above.
Date posted: February 11, 2019. Answers (1)
- Ngomongo Holdings Limited has investment interests in three companies. Kirinyaga
Video Limited (KVL), Kilgoris Hauliers Limited (KHL) and Turkana Fisheries Limited
(TFL). The following financial data relate...(Solved)
Ngomongo Holdings Limited has investment interests in three companies. Kirinyaga Video Limited (KVL), Kilgoris Hauliers Limited (KHL) and Turkana Fisheries Limited (TFL). The following financial data relate to these companies.
Required:
(i) For Kirinyaga Video Ltd. (KVL) and Kilgoris Hauliers Ltd. (KHL),
determine and compare:
- Dividend yields
- Price/Earnings ratios
-Dividend covers.
(ii) Using the dividends growth model, determine the market value of 1,000 shares
held in Turkana Fisheries Ltd. (TFL) as at 31 December 2001.
Date posted: February 11, 2019. Answers (1)
- Discuss the drawbacks of using the following approaches in estimating a
security's value:
(i) Book value;
(ii) Replacement value;
(iii) Substitution value;
(iv) Intrinsic value.
(Solved)
Discuss the drawbacks of using the following approaches in estimating a
security's value:
(i) Book value;
(ii) Replacement value;
(iii) Substitution value;
(iv) Intrinsic value.
Date posted: February 11, 2019. Answers (1)
- Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested
substantially all her terminal benefits in the shares of ABC Ltd., a...(Solved)
Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd., a company quoted on the stock exchange. The dividend payments from this investment makes up a significant position of Mrs Waziri's income. She was alarmed when ABC Ltd. dropped its year 2001 dividend to Sh.1.25 per share from Sh.1.75 per share which it had paid in the previous two years. Mrs Waziri has approached you for advice and you have gathered the information given below regarding the financial condition of ABC Ltd. and the finance sector as a whole.
Notes:
1. Industry ratios have been roughly constant for the past four years.
2. Inventory turnover, total assets turnover and fixed assets turnover are based on the year-end balance sheet figures.
Required:
(a) The financial ratios for ABC Ltd for the past three years corresponding to industry ratios given above.
(b) Arrange the ratios calculated in (a) above in columnar form and summarize the strengths and weaknesses revealed by these ratios based on:
(i) Trends in the firm's ratios
(ii) Comparison with industry averages.
(The summary should focus on the liquidity, profitability and turnover ratios).
Date posted: February 8, 2019. Answers (1)
- Magharibi Cane Millers Ltd. is a company engaged in the pressing and processing of sugar cane
juice into refined sugar. For some time, the company has...(Solved)
Magharibi Cane Millers Ltd. is a company engaged in the pressing and processing of sugar cane
juice into refined sugar. For some time, the company has been considering the replacement of
its three existing machines.
The production manager has learnt from a professional newsletter on sugar of the availability of
a new and larger machine whose capacity is such that it can produce the same level of output per
annum currently produced by the three machines. Furthermore, the new machine would cut
down on the wastage of juice during processing. If the old machines are not replaced, an
extraordinary overhaul would be immediately necessary in order to maintain them in operational
condition. This overhaul would at present cost Sh.5,000,000 in total.
The following additional information is available:
Required:
(a) (i)Net present values of the proposed replacement decision using discount rates
of 10% and 20%.
(ii) The estimated internal rate of return (IRR) of the replacement decision using
the values determined in (i) above.
(iii) Advice management on the proposal based on your answer in (ii) above.
(b) Decision as to whether the project meets the financial viability test.
(c) Comment on any other qualitative considerations that could influence this decision.
Date posted: February 8, 2019. Answers (1)
- Multi-Link Ltd., a trading company, currently has negligible cash holdings but expects
to make a series of cash payments totaling Sh.150 million over the forthcoming year.
These...(Solved)
Multi-Link Ltd., a trading company, currently has negligible cash holdings but expects
to make a series of cash payments totaling Sh.150 million over the forthcoming year.
These payments will become due at a steady rate. Two alternative ways have been
suggested of meeting these obligations.
Alternative I
The company can make periodic sales from existing holdings of short-term securities.
The average percentage rate of return on these securities is 12 over the forthcoming
year. Whenever Multi-Link Ltd. sells the securities, it will incur a transaction fee of
Sh.15,000. The proceeds from the sale of the securities are placed on short-term deposit
at 7% per annum interest until needed.
Alternative II
The company can arrange for a secured loan amounting to Sh.150 million for one year
at an interest rate of 18% per annum based on the initial balance of the loan. The lender
also imposes a flat arrangement fee of Sh.50,000 which would be met out of existing
balances. The sum borrowed could be placed in a notice deposit at 9% per annum and
drawn down at no cost as and when required. Multi-Link Ltd.'s treasurer believes that
cash balances will be run down at an even rate throughout the year.
Required:
Explain the weaknesses of the Baumol model in the management of
cash.
Date posted: February 8, 2019. Answers (1)
- In relation to the stock exchange
(i) Explain the role of the following members:
- Floor brokers
-Market makers
-Underwriters
(ii) Explain the meaning of the...(Solved)
In relation to the stock exchange
(i) Explain the role of the following members
- Floor brokers
- Market makers
- Underwriters
(ii) Explain the meaning of the following terms:
-Bull and bear markets
- Bid-ask spread
- Short selling
Date posted: February 8, 2019. Answers (1)
- Highlight four advantages and disadvantages to a company of being listed on a stock
exchange.(Solved)
Highlight four advantages and disadvantages to a company of being listed on a stock
exchange.
Date posted: February 8, 2019. Answers (1)
- Explain fully the effect of the use of debt capital on the weighted average cost of capital of a company. (Solved)
Explain fully the effect of the use of debt capital on the weighted average cost of capital of a company.
Date posted: February 8, 2019. Answers (1)
- 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)