(i)Financial intermediation
Financial markets promote savings and investment by providing mechanisms by
which the financial requirements of lenders (suppliers of funds) and borrowers
(users of funds) can be met. Financial institutions (such as pension funds,
insurance companies, banks, building societies, unit trusts and specialist
investment institutions). These collect funds from savers to lend to their
corporate and other customers through the money and capital markets or directly
through loans, leasing and other forms of financing.
marto answered the question on February 11, 2019 at 11:11
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Date posted: February 11, 2019. Answers (1)
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a change of credit policy which will result in an increase in...(Solved)
Dawamu Ltd, which operates in the retail sector selling a single product, is considering
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of debts from one to two months. The relaxation of the credit policy is expected to
produce an increase in sales in each year, amounting to 25% of the current sales
volume. The following information is available.
1. Selling price per unit of product – Sh.1,000
2. Variable cost per unit of product – Sh.850
3. Current annual sales of product – Sh.240,000,000
4. Dawamu Ltd.'s required rate of return on investments is 20%.
5. It is expected that increase in sales would result in additional stock of
Sh.10,000,000 and additional creditors of Sh.2,000,000.
Required:
Advise Dawamu Ltd. on whether or not to extend the credit period offered to
customers, if
(i) All customers take the longer credit period of two months.
(ii) Existing customers do not change their payment habits and only the new
customers will take a full two months' credit.
Date posted: February 11, 2019. Answers (1)
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Differentiate between the following pairs of terms:
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- Swaleh Ltd. has been in operation for the last eight years. The company is all equity
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Swaleh Ltd. has been in operation for the last eight years. The company is all equity
financed with 6 million ordinary shares with a par value of Sh.5 each. The current
market price per share is Sh.8.40, which is in line with the price/earnings (P/E) ratio in
the industry of 6.00. The company has been consistent in paying a dividend of Sh.1.25
per share during the last five years of its operations, and indications are that the current
level of operating income can be maintained in the foreseeable future. Tax has been at a
rate of 30%.
The management of Swaleh Ltd. is contemplating the implementation of a new project
which requires Sh.10 million. Since no internal sources of funds are available,
management is to decide on two alternative sources of finance, namely:
Alternative A
To raise the Sh.10 million through a rights issue. Management is of the opinion that a
price of Sh.6.25 per share would be fair.
Alternative B
To obtain the Sh.10 million through a loan. Interest is to be paid at a rate of 12% per
annum on the total amount borrowed.
The project is expected to increase annual operating income by Sh.5.6 million in the
foreseeable future.
Irrespective of the alternative selected in financing the new project, corporation tax is
expected to remain at 30%.
Required:
(i) Determine the current level of earnings per share (EPS) and the operating
income of the company.
(ii) If Alternative A is selected, determine the number of shares in the rights issue
and the theoretical ex-rights price.
(iii) Calculate the expected earnings per share (EPS) for each alternative, and advise
Swaleh Ltd. on which alternative to accept.
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Briefly comment on this statement.
Date posted: February 11, 2019. Answers (1)
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Magma Ltd. wishes to make a choice between two mutually exclusive projects. Each of
these projects requires Sh.400,000,000 in initial cash outlay. The details of the two
projects are as follows:
Project A
This project is made up of two sub-projects. The first sub-project will require an initial
outlay of Sh.100,000,000 and will generate Sh.25,600,000 per annum in perpetuity. The
second sub-project will require an initial outlay of Sh.300,000,000 and will generate
Sh.85,200,000 per annum for the 8 years of its useful life. This sub-project does not
have a residual value at the end of the 8 years. Both sub-projects are to commence
immediately.
Project B
This project will generate Sh.87,000,000 per annum in
perpetuity. The company has a cost of capital of 16%.
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Date posted: February 11, 2019. Answers (1)
- Joseph Kimeu is trying to determine the value of Bidii Ltd.'s ordinary shares. The
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Date posted: February 11, 2019. Answers (1)
- (a) Briefly explain how the 'Dow Theory' views the movement of the market prices of
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central depository system (CDS) in a stock market? (4 marks)
Date posted: February 11, 2019. Answers (1)
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(a) Ujuzi Limited wishes to raise finance to cater for the purchase of new fixed assets, as its
sales level has greatly increased in the recent years, and the demand for its products is
expected to increase for the foreseeable future. The company has 900,000 outstanding
shares which are currently trading in the stock exchange at Sh.130 a share. The finance
manager estimates that the fixed assets will cost Sh.22,500,000 and he has convinced the
board of directors to raise the money through a rights issue. The board has set the
subscription price at Sh.75 per share.
Required:
(i) The number of rights required to purchase a new share.
(ii) The price of one share after the rights issue.
(iii) The theoretical value of the rights if the shares are sold ex-right.
(iv) The effect on a shareholder's wealth if he decides neither to exercise nor sell
the right.
(b) PKG Ltd. maintains a minimum cash balance of Sh.500,000. The deviation of the
company's daily cash changes is Sh.200,000. The annual interest rate is
14%. The transaction cost of buying or selling securities is Sh.150 per transaction.
Required:
Using the Miller-Orr cash management model, determine the following:
(i) Upper cash limit
(ii) Average cash balance
(iii) The return point.
(c) Explain briefly the meaning of the term 'over trading'.
Date posted: February 11, 2019. Answers (1)