Operating lease and finance lease
- Operating leases are short term but finance/capital leases are long term
- Operating leases are cancel able/revocable but finance leases are not
- In operating leases maintenance and operating costs are borne by lessor (owner) but not
for finance lease.
- At end of lease period, a lessee is given an option to buy the asset under finance under
finance lease unlike under operating lease.
marto answered the question on February 11, 2019 at 11:13
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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
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Date posted: February 11, 2019. Answers (1)
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Date posted: February 11, 2019. Answers (1)
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(ii) Weighted cost of capital and marginal cost of capital....(Solved)
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Date posted: February 11, 2019. Answers (1)
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Date posted: February 11, 2019. Answers (1)
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financed with 6 million ordinary shares with a par value...(Solved)
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.
(iv) 'It is always better for a company to use debt finance since lower cost of debt
results in higher earnings per share'.
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
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Required:
(i) Determine the net present value (NPV) of each project.
(ii) Compute the internal rate of return (IRR) for each project.
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Date posted: February 11, 2019. Answers (1)
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to be 20 and the current earnings per share are Sh.4. The required rate of return for this
share is 15%.
Required:
Compute the market price of Bidii Ltd's ordinary share
Date posted: February 11, 2019. Answers (1)
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(b) Identify and briefly explain the...(Solved)
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Date posted: February 11, 2019. Answers (1)
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should be if there is any chance than the issue may be unsuccessful'. Briefly comment
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Date posted: February 11, 2019. Answers (1)