(a) The objectives of the nationalized electricity supply industry are likely to be strongly influenced
by the government and may not be primarily financial. State owned enterprises exist to
provide a service and to ensure that social needs are satisfied: they are not usually profit
maximizing. The prime objective of a nationalized electricity supply industry might be to
promote the development of an efficient co-ordinated and economic system of electrical
supply with subsidiary objectives concerned with earning an acceptable return on capital
employed (acceptable being defined by the government) and achieving efficiency through cost
control. Service considerations might mean the provision of electricity facilities to remote
areas at far less than the cost price. In order to provide reasonably priced electricity for all
people a government might be prepared to subsidize the nationalized industry and set a
negative target return on capital. Alternatively the target return might be set such that the
industry is a substantial contributor to government finances.
The objectives of a private sector electrical supply company will mainly be determined by the
senior management of the company. The prime objective of a company is mainly the
maximization of shareholders wealth. In practice they might be content to achieve a "satisfying
level of shareholders wealth" and also be concerned with a number of non-financial objectives.
Such objectives include market share, growth, environmental factors, good working conditions
and to facilitate employee and corporate survival. Some of these non-financial objectives will
strongly affect the financial success of the company and shareholders wealth. A vital industry
like provision of electricity, even if privately owned, might still be subject to strong government
influence and constraints especially in provision of services and pricing.
(b) Strategic investment planning in a nationalized industry is subject to government approval.
Small scale investments will be planned and approved by the management of the nationalized
industry. However, the amount of investment undertaken is likely to be influenced by the
government and the use of external sources from the capital market will usually be limited by
the government.
Strategic investment planning in the private sector is strongly influenced by market forces with
managers considering the possible effects of investments on share prices and shareholder's
wealth. Private sector investment appraisal techniques usually assume that the company is
seeking to maximize shareholders wealth in an efficient market. As there are no share prices in
a nationalized industry and investor wealth maximization is not the assumed objective, some
private sector investment appraisal techniques will not be appropriate. However, this does not
mean that all private sector techniques cannot be used in the public sector. Discounted
cash flow for example is often used in a nationalized industry.
Kavungya answered the question on April 13, 2021 at 07:48
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List and explain the 14 principles of management
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Date posted:
March 5, 2019
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Identify the various methods of issuing new ordinary shares to shareholders.
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Identify the various methods of issuing new ordinary shares to shareholders.
Date posted:
February 12, 2019
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Why does ordinary share capital have a high cost relative to debt capital?
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Why does ordinary share capital have a high cost relative to debt capital?
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February 12, 2019
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What practical problems are faced by finance managers in capital budgeting decisions.
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What practical problems are faced by finance managers in capital budgeting decisions.
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February 12, 2019
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What are the features of a sound appraisal technique?
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What are the features of a sound appraisal technique?
Date posted:
February 12, 2019
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What are the advantages of having a farmers' bank compared with an ordinary
commercial bank in the provision of services to farmers
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What are the advantages of having a farmers' bank compared with an ordinary
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February 12, 2019
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Why do different sources of finance have different costs?
(Solved)
Why do different sources of finance have different costs?
Date posted:
February 12, 2019
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The Kitale Maize Mills is contemplating the purchase of a new high-speed grinder to replace an
existing one. The existing grinder was purchased two years ago...
(Solved)
The Kitale Maize Mills is contemplating the purchase of a new high-speed grinder to replace an
existing one. The existing grinder was purchased two years ago at an installed cost of Sh.300,000.
The grinder was estimated to have an economic life of 5 years but a critical analysis of its
performance now shows it is usable for the next five years with no resale value.
The new grinder would cost Sh.525,000 and require Sh.25,000 in installation costs. It has a five
year usable life. The existing grinder can currently be sold for Sh.350,000 without incurring any
removal costs. To support the increased business resulting from purchase of the new grinder,
accounts receivable would increase by Sh.200,000, inventories by Sh.150,000 and trade creditors
by Sh.290,000. At the end of 5 years the new grinder would be sold to net Sh.145,000 after
removal costs and before taxes. The company provides for 40% taxes on ordinary income. The
estimated profit before depreciation and taxes over the five years for both machines are given as
follows:
The company uses straight line method of depreciation for both machines.
Required:
a) Calculate the initial investment associated with the replacement of the existing grinder
with the new one. Show your full workings.
b) Determine the incremental operating cash flows associated with the proposed grinder
replacement.
c) Calculate the terminal cash flow expected from the proposed grinder replacement.
Date posted:
February 12, 2019
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Answers (1)
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The valuation of ordinary shares is more complicated than the valuation of bonds and
preference shares. Explain the factors that complicate the valuation of ordinary shares.
(Solved)
The valuation of ordinary shares is more complicated than the valuation of bonds and
preference shares. Explain the factors that complicate the valuation of ordinary shares.
Date posted:
February 12, 2019
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Within a Financial Management context, discuss the problems that might exist in the
relationships (sometimes referred to as agency relationships) between:
1. Shareholders and managers, and
2. Shareholders...
(Solved)
Within a Financial Management context, discuss the problems that might exist in the
relationships (sometimes referred to as agency relationships) between:
1. Shareholders and managers, and
2. Shareholders and creditors.
Date posted:
February 12, 2019
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Answers (1)
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Distinguish between the following terms:
(i) Weighted average cost of capital and marginal cost of capital.
(ii) Finance lease and operating lease.
(Solved)
Distinguish between the following terms:
(i) Weighted average cost of capital and marginal cost of capital.
(ii) Finance lease and operating lease.
Date posted:
February 12, 2019
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Answers (1)
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The management of Biashara Ltd. is in the process of evaluating two
alternative machine models, Alpha and Beta for possible purchase in order to
increase the company's...
(Solved)
The management of Biashara Ltd. is in the process of evaluating two
alternative machine models, Alpha and Beta for possible purchase in order to
increase the company's production level.
The following additional information is available:
1. Alpha costs Shs. 3,800,000 and will have a useful life of four years.
2. Beta costs Shs. 8,000,000 and will have a useful life of six years.
3. Both machines have no salvage value after their useful lives.
4. An investment in working capital amounting to Shs. 825,000 will have to be made
at the beginning of the first year of the machine‟s life regardless of the
model purchased.
5. The estimated pre-tax cash inflows for each of the machines are shown below:
6. The cost of capital to the company is 12% and the corporation tax rate is 30%.
Required:
(i) Calculate the undiscounted pay back period for each machine model.
(ii) Calculate the net present value (NPV) for each machine model.
(iii) Using the net present values computed in
(ii) above, advise the management on
which model to purchase.
(iv) The management of the company has received an alternative offer to lease
Alpha at an annual lease charge of Shs. 1,200,000 for four years, payable at
the year end. All other details remain unchanged.
Will this offer affect your selection in part
(iii) above? Explain.
Date posted:
February 12, 2019
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Answers (1)
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Mwongozo Limited has approached you for advice on an equipment to be purchased
for use in a five year project.
The investment will involve an initial capital...
(Solved)
Mwongozo Limited has approached you for advice on an equipment to be purchased
for use in a five year project.
The investment will involve an initial capital outlay of Shs. 1.4 million and the expected
cash flows are given below:
The equipment is to be depreciated on a straight line basis over the duration of the
project with a nil residual value.
The cost of capital and the tax rate are 12% and 30% respectively.
Required:
The net present value (NPV) of the investment.
Date posted:
February 12, 2019
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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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...
(Solved)
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%.
Required:
(i) Determine the net present value (NPV) of each project.
(ii) Compute the internal rate of return (IRR) for each project.
(iii) Advise Magma Ltd. on which project to invest in, and justify your choice
Date posted:
February 11, 2019
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Answers (1)
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The following information represents the financial position and financial results of
AMETEX Limited for the year ended 31 December 2002.
(Solved)
The following information represents the financial position and financial results of
AMETEX Limited for the year ended 31 December 2002.
Required:
Determine the following financial ratios:
(i) Acid test ratio.
(ii) Operating ratio
(iii) Return on total capital employed
(iv) Price earnings ratio.
(v) Interest coverage ratio
(vi) Total assets turnover
(c) Determine the working capital cycle for the company.
Date posted:
February 11, 2019
.
Answers (1)