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Mwamba Limited is considering replacing a production machinery at its Mtwapa plant.
The existing machinery at the plant was bought 3 years ago at a cost...
(Solved)
Mwamba Limited is considering replacing a production machinery at its Mtwapa plant.
The existing machinery at the plant was bought 3 years ago at a cost of Sh.50 million. It
is expected to have a useful life of 5 more years with no scrap value at the end of this
period. The machinery could be disposed of immediately with net proceeds of Sh.35
million after tax.
The new machinery will cost Sh.80 million, with a useful life of 5 years and expected
terminal value of Sh.5 million. With the introduction of the new machinery, sales are
expected to increase by Sh.25 million per annum over the next 5 years. Variable costs
are 60 per cent of sales and the corporate tax rate is at 30 per cent per annum.
The operation of the new machinery will also require an immediate investment of Sh.8
million in working capital which will be recovered at the end of its useful life.
Installation costs of the new machinery will amount to Sh.6 million.
Assume that capital allowances are to be provided for on a straight-line basis and
Mwamba Limited's cost of capital is 12 per cent per annum.
Required:
(i) The initial cash outflow for the replacement decision.
(ii) The annual incremental after tax operating cash flows.
(iii) The NPV of the replacement decision and advise Mwamba Limited on whether
to replace the machinery.
(iv) The minimum after tax annual operating cash flows that will make the
replacement feasible
Date posted:
February 11, 2019
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)