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- Hisa Limited has 1 million ordinary shares outstanding at the current market price of
Sh.50 per share. The company requires Sh.8 million to finance a proposed...(Solved)
Hisa Limited has 1 million ordinary shares outstanding at the current market price of
Sh.50 per share. The company requires Sh.8 million to finance a proposed expansion
project. The board of directors has decided to make a one for five rights issue at a
subscription price of Sh.40 per share.
The expansion project is expected to increase the firm's annual cash inflow by
Sh.945,000. Information on this project will be released to the market together with the
announcement of the rights issue.
The company paid a dividend of Sh.4.5 in the previous financial year. This dividend,
together with the company's earnings is expected to grow by 5% annually
after investing in the expansion project.
Required:
(i) Compute the price of the shares after the commencement of the rights issue
but before they start selling ex-rights.
(ii) Compute the theoretical ex-rights price of the shares.
(iii) Calculate the theoretical value of the rights when the shares are selling rights
on.
(iv) What would be the cum-rights price per share if the new funds are used to
redeem a Sh.8 million 10% debenture at par? (Assume a corporation tax rate of
30%).
Date posted: February 11, 2019. Answers (1)
- List three advantages of a rights issue from the point of view of:
(i) The issuing company.
(ii) The shareholder.(Solved)
List three advantages of a rights issue from the point of view of:
(i) The issuing company.
(ii) The shareholder.
Date posted: February 11, 2019. Answers (1)
- Mapato Limited is a company involved in the processing of cooking oil. The
management is considering whether to replace an existing cooler with a new one.
The...(Solved)
Mapato Limited is a company involved in the processing of cooking oil. The
management is considering whether to replace an existing cooler with a new one.
The old cooler is fully depreciated and has no salvage value. If not replaced, the
company will continue to incur Sh.1.8 million as annual operating expenses and an
additional Sh.500,000 in repair costs per annum over the next fifteen years.
The new cooler costs Sh.3,150,000. Its annual operating expenses and repair costs are
estimated at Sh.1.3 million and Sh.350,000 respectively over its estimated economic life
of fifteen years. It is expected to be worthless after the expiry of this period.
The cost of capital is 10% and the company depreciates its assets using the straight-line
method.
Assume a 30% corporation tax rate.
Required:
(i) Compute the incremental net annual cash flows if the old cooler is replaced.
(ii) Using the net present value (NPV) method, advise the management on whether
or not to replace the old cooler.
Date posted: February 11, 2019. Answers (1)
- Several methods exist for evaluating investment projects under capital budgeting.
Identify and explain three features of an ideal investment appraisal method(Solved)
Several methods exist for evaluating investment projects under capital budgeting.
Identify and explain three features of an ideal investment appraisal method
Date posted: February 11, 2019. Answers (1)
- The management of Faulu Limited intends to change the company's credit
policy, from 'net 30' to 3/10 net 45'. If this change is effected, annual sales
will...(Solved)
The management of Faulu Limited intends to change the company‟s credit
policy, from 'net 30' to '3/10 net 45'. If this change is effected, annual sales
will increase by 12% from the current level of Sh.12 million while the proportion of
bad debts will increase from 1% to 1.4% of credit sales. A new credit assistant will also
have to be employed at a salary of Sh.260,000 per annum. It is expected that 40% of the
credit customers will benefit from the cash discount.
The inventory level and the variable costs will however remain constant at 20% and
75% of the annual credit sales respectively. The rate of return on investment is 14% per
annum. All sales are on credit.
Assume a 360 days financial year and ignore the effects of taxation.
Required:
Advise the management of Faulu Limited on whether or not to adopt the new credit
policy.
Date posted: February 11, 2019. Answers (1)
- List four factors that should be considered in establishing an effective credit policy.(Solved)
List four factors that should be considered in establishing an effective credit policy.
Date posted: February 11, 2019. Answers (1)
- Distinguish between a credit policy and a working capital policy.(Solved)
Distinguish between a credit policy and a working capital policy.
Date posted: February 11, 2019. Answers (1)
- Comment on the view that the price/earnings (P/E) ratio is an “attempt to
value a company in terms of its earnings'.(Solved)
Comment on the view that the price/earnings (P/E) ratio is an “attempt to
value a company in terms of its earnings'.
Date posted: February 11, 2019. Answers (1)
- 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)
- Identify six ways in which a company could make preference shares more attractive to a
potential investor.(Solved)
Identify six ways in which a company could make preference shares more attractive to a
potential investor.
Date posted: February 11, 2019. Answers (1)
- What are the determinants of the price of a bond?(Solved)
What are the determinants of the price of a bond?
Date posted: February 11, 2019. Answers (1)
- What are the differences between an 'operating lease' and a 'finance lease'?(Solved)
What are the differences between an 'operating lease' and a 'finance lease'?
Date posted: February 11, 2019. Answers (1)
- Identify any five services that financial intermediaries provide.(Solved)
Identify any five services that financial intermediaries provide.
Date posted: February 11, 2019. Answers (1)
- What is financial intermediation?(Solved)
What is financial intermediation?
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)