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A P/E ratio may be established and used as a method of valuing the shares of an
unquoted company, but it is a facility to read too much significance into the P/E ratio or
quoted companies. The EPS is determined by the success (or otherwise) of a company's
management, and the share price on the market is determined by many factors
(dividends, growth prospects, government policy, the economic situation e.t.c.) of which
the EPS is only one. The P/E ratio is therefore an interesting and useful measure of
comparison, but it does not of itself possess any inherent significance which is used by
investors to fix share prices.
marto answered the question on February 11, 2019 at 11:19
- List and briefly discuss three possible reasons why companies in the same type of business may have different price/earnings (P/E) ratios.(Solved)
List and briefly discuss three possible reasons why companies in the same type of business may have different price/earnings (P/E) ratios.
Date posted: February 11, 2019. Answers (1)
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Identify six ways in which a company could make preference shares more attractive to a
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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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Date posted: February 11, 2019. Answers (1)
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Identify any five services that financial intermediaries provide.
Date posted: February 11, 2019. Answers (1)
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Date posted: February 11, 2019. Answers (1)
- Identify and briefly explain the three main forms of agency relationship in a firm.(Solved)
Identify and briefly explain the three main forms of agency relationship in a firm.
Date posted: February 11, 2019. Answers (1)
- Dawamu Ltd., which operates in the retail sector selling a single product, is considering
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
a change of credit policy which will result in an increase in the average collection period
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)
- Briefly explain how the Miller-Orr cash management model operates.(Solved)
Briefly explain how the Miller-Orr cash management model operates.
Date posted: February 11, 2019. Answers (1)
- What is meant by the term 'matching approach' in financing fixed and current assets?(Solved)
What is meant by the term 'matching approach' in financing fixed and current assets?
Date posted: February 11, 2019. Answers (1)
- Identify and briefly explain three conditions which have to be satisfied before the use of
the weighted average cost of capital (WACC) can be justified.(Solved)
Identify and briefly explain three conditions which have to be satisfied before the use of
the weighted average cost of capital (WACC) can be justified.
Date posted: February 11, 2019. Answers (1)
- Explain the meaning of the term 'cost of capital' and explain why a company should
calculate its cost of capital with care.(Solved)
Explain the meaning of the term 'cost of capital' and explain why a company should
calculate its cost of capital with care.
Date posted: February 11, 2019. Answers (1)
- Identify four factors that have limited the development of the venture capital market in
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Identify four factors that have limited the development of the venture capital market in
your country.
Date posted: February 11, 2019. Answers (1)
- Differentiate between the following pairs of terms
(i) Market value and intrinsic value of a share.
(ii) Weighted cost of capital and marginal cost of capital....(Solved)
Differentiate between the following pairs of terms:
(i) Market value and intrinsic value of a share.
(ii) Weighted cost of capital and marginal cost of capital.
(iii) Capital structure and financial structure.
(iv) Formal markets and over-the-counter markets.
Date posted: February 11, 2019. Answers (1)
- Highlight four factors that may underlie the low rate of listing of companies in a stock
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Highlight four factors that may underlie the low rate of listing of companies in a stock
exchange you are familiar with.
Date posted: February 11, 2019. Answers (1)
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Briefly describe the three forms of capital market efficiency
Date posted: February 11, 2019. Answers (1)
- How does a company's working capital policy impact on its liquidity – profitability
position? Explain with reference to the strategies available to the firm for financing...(Solved)
How does a company's working capital policy impact on its liquidity – profitability
position? Explain with reference to the strategies available to the firm for financing its
working capital.
Date posted: February 11, 2019. Answers (1)
- Briefly explain the liquidity – profitability trade – off which a business enterprise may be
required to consider in its financial management policies.(Solved)
Briefly explain the liquidity – profitability trade – off which a business enterprise may be
required to consider in its financial management policies.
Date posted: February 11, 2019. Answers (1)
- 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...(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)
- Distinguish between financial risk and operating risk.(Solved)
Distinguish between financial risk and operating risk.
Date posted: February 11, 2019. Answers (1)