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i. It stabilizes the export proceeds and therefore it may stimulate exports for the period in which it is
fixed.
ii. Foreign investors gauge the return on their investments in local currency vis-a-vis their own
currencies. A fixed exchange rate will assure these investors of a stable return on their investment
which may induce foreign investors, thus increasing the inflow of foreign exchange to the country.
iii. It enables the government to meet its development plans whose budgets are set in local currencies but
may be financed by foreign loans and aid.
iv. It may keep inflation under control because the prices of imported goods will remain stable as long as
the exchange rate is fixed. This is particularly true for imported inflation.
v. Long term investment plans can be worked out with substantial accuracy and may minimize budget
deficits with their negative effects.
Kavungya answered the question on April 15, 2021 at 07:02
- Define the term fixed exchange rate.(Solved)
Define the term fixed exchange rate.
Date posted: April 15, 2021. Answers (1)
- Assume that the direct quote is deuchemark is DM 1 - USD 0.5 while the general interest rate in US is
6% and general interest rate...(Solved)
Assume that the direct quote is deuchemark is DM 1 - USD 0.5 while the general interest rate in US is
6% and general interest rate in Germany is 3%.
Required:
Compute the percentage change in direct quote and the new exchange rate.
Date posted: April 15, 2021. Answers (1)
- Assume that the direct quote between the USD and £ is £1 = USD 1.5 and that the inflation rate in UK is
10% and the...(Solved)
Assume that the direct quote between the USD and £ is £1 = USD 1.5 and that the inflation rate in UK is
10% and the inflation rate in the US is 6%
Required
Compute the % change in the direct quote and determine the new exchange rate.
Date posted: April 15, 2021. Answers (1)
- Dimango Company is considering whether it would be financially advisable to retire its existing long term
debt with a cheaper loan. The current loan of Sh...(Solved)
Dimango Company is considering whether it would be financially advisable to retire its existing long term
debt with a cheaper loan. The current loan of Sh 10 million has an annual interest charge of 15% and has 10
years to maturity. The company has Sh 125,000 of unamortized loan expenses still in the books.
If the company decides to redeem the loan, there is an early payment penalty amounting to 10% of the loan.
A new Sh 10 million loan can be raised at 13% per annum for a ten year period. It is expected that
underwriting costs will amount to Sh 600,000. In addition to these costs, the company will be further
required to pay interest for the two months which would allow the normal interest payment due to be
reached for the old loan.
Dimango Company is in the 40% income tax bracket.
Required:
(a) Calculate the net amount of cash investment required for the refunding of the loan.
(b) Compute the annual cash savings which result from refunding
(c) Determine whether refunding is advantageous to the company
(PVIFA 8% = 6.71)
Date posted: April 15, 2021. Answers (1)
- XYZ Ltd has an issued share capital of 10 million ordinary shares with a par value of £1, on which it pays a
constant dividend of...(Solved)
XYZ Ltd has an issued share capital of 10 million ordinary shares with a par value of £1, on which it pays a
constant dividend of £0.4 per share. The market value per share was £2 ex-dividend.
The company then proposed a 1 for 4 rights issue with an issue price of £1.50. The money raised would be
used to finance a major new project, which was expected to increase annual profits after taxation by
£950,000. This information is released together with the announcement of rights issue.
Required:
(a) Compute the cum-right price at the eve-of the rights issue
(b) Compute the theoretical ex-rights price
(c) Calculate the market price per share at the time of the rights issue if the money raised was to be used
to redeem £3,750,000 of 8% debentures. The tax rate is 50%.
Date posted: April 15, 2021. Answers (1)
- ABC Company is being formed to make a 1 year investment in producing and marketing presidential
campaign badges. The firm requires an investment of Sh 10,000,000...(Solved)
ABC Company is being formed to make a 1 year investment in producing and marketing presidential
campaign badges. The firm requires an investment of Sh 10,000,000 of which Sh 7,500,000 will be
obtained by selling debt with a 10% interest rate and the other Sh 2,500,000 will be raised by selling
common shares. All cash distribution to debt holders and shareholders will be made at the end of the
one year. After this year is over the value of the firm will depend primarily on which candidates make
it through the primary elections. The estimated probability of distribution of the firm is:
Consider the shareholders value under the three states of nature and under the expected value.
Date posted: April 14, 2021. Answers (1)
- Assume that the following information has been obtained:
P = Sh 20
X = Sh 20
t = 3 months (0.25 years)
KRF = 12%
d² = 0.16
Determine the value...(Solved)
Assume that the following information has been obtained:
P = Sh 20
X = Sh 20
t = 3 months (0.25 years)
KRF = 12%
δ² = 0.16
Determine the value of the option.
Date posted: April 14, 2021. Answers (1)
- ABC Ltd has decided to acquire a piece of equipment costing Shs 240 000 of five years. The
equipment is expected to have no salvage value...(Solved)
ABC Ltd has decided to acquire a piece of equipment costing Shs 240 000 of five years. The
equipment is expected to have no salvage value ate the end and the company uses straight-line
depreciation method on all it Fixed Assets. The company has two financing alternative methods
available, leasing or borrowing.
The loan has an interest rate of 15% requiring equal-year-end installments to be paid. The lease
would be set at a level that would amortize the cost of equipment over the lease period and would
provide the lessor with a 14% return on capital. The company’s tax rate is 40%.
Required:
a. Compute the annual lease payments.
b. Compute the PV of the cash out flow under lease financing
c. Calculate the annual loan installment payment
d. For each of the 5 years, calculate the interest and the principal component of the loan
repayment.
e. Calculate the PV of after tax cash flow under the loan alternative
f. Which alternative is better and why?
Date posted: April 14, 2021. Answers (1)
- What is a venture capital?(Solved)
What is a venture capital?
Date posted: April 14, 2021. Answers (1)
- State and explain the features of warrants.(Solved)
State and explain the features of warrants.
Date posted: April 14, 2021. Answers (1)
- A company negotiates a Sh 30 million loan for eight years from a financial institution. The interest rate is 14% per annum on the outstanding...(Solved)
A company negotiates a Sh 30 million loan for eight years from a financial institution. The interest rate is 14% per annum on the outstanding balance of the loan. The principal and interest will be repaid in eight equal year-end instalments.
Required
Prepare a loan repayment schedule
Date posted: April 14, 2021. Answers (1)
- A company currently has Shs 20 000 000, 12% debenture issue outstanding which has 20 years remaining to maturity. The company can now sell a...(Solved)
A company currently has Shs 20 000 000, 12% debenture issue outstanding which has 20 years remaining to maturity. The company can now sell a Shs 20 million 20 year bond or debenture with a normal or coupon rate of 20% that will net Shs 19.6 million, after the underwriting expenses of the old bond. The core premium and the unamortized discount of the old bond
are deductible as expenses in the year of refunding. The old issue has Shs 200 000 unamortized
discounts outstanding and unamortized legal fee of Shs 100 000. The core right of old bond is
Shs 109 and the issuing expenses on the new bond are Shs 150, 000 and there is a 30 day period
of interest overlap. Assume that the effective income tax is 50%.
Required:
Advice the company on whether to replace the old issue with the new bonds.
Date posted: April 14, 2021. Answers (1)
- State and explain the advantages of dividend reinvestment scheme.(Solved)
State and explain the advantages of dividend reinvestment scheme.
Date posted: April 14, 2021. Answers (1)
- XYZ Ltd has 900,000 shares outstanding at current market price of Sh 130 per share. The company
needs Sh 22,500,000 to finance its proposed expansion. The...(Solved)
XYZ Ltd has 900,000 shares outstanding at current market price of Sh 130 per share. The company
needs Sh 22,500,000 to finance its proposed expansion. The board of directors has decided to issue
rights for raising the required funds. The subscription price has been fixed at Sh 75 per share.
Required:
(a) How many rights are required to purchase one new share?
(b) What is the price of one share after the rights issue (Ex-right price)?
(c) Compute the theoretical value of each right
(d) Consider the effect of the rights issue on the shareholders' wealth under the three options
available to the shareholders (Assume he owns 3 shares and has Sh 75 cash on hand).
Date posted: April 14, 2021. Answers (1)
- ABC Ltd will elect six directors at the AGM. There are 100,000 shares outstanding and
entitled to vote. If a group desires to elect two directors,...(Solved)
ABC Ltd will elect six directors at the AGM. There are 100,000 shares outstanding and
entitled to vote. If a group desires to elect two directors, how many shares must it have?
Date posted: April 14, 2021. Answers (1)
- Companies U and L are identical in every respect except that U is unlevered while L has Sh 10 million of 5% bonds outstanding. Assume
(a)...(Solved)
Companies U and L are identical in every respect except that U is unlevered while L has Sh 10 million of 5% bonds outstanding. Assume
(a) That all of the MM assumptions are met
(b) That there are no corporate or personal taxes
(c) That EBIT is Sh 2 million
(d) That the cost of equity to company U is 10%
Required:
i. Determine the value MM would estimate for each firm
ii. Determine the cost of equity for both firms
iii. What is the overall cost of capital for both firms
iv. Suppose the value of U is Sh 20 million and that of L is Sh 22 million. Explain the arbitrage process for a shareholder who owns 10% of company L's shares.
Date posted: April 14, 2021. Answers (1)
- A company's current EPS is KSh 12. The firm pays out 40% of its earnings as dividend and has a growth
rate of 6% p.a. which...(Solved)
A company's current EPS is KSh 12. The firm pays out 40% of its earnings as dividend and has a growth
rate of 6% p.a. which is expected to continue into perpetuity. The company has a beta value of 1.4 and the
risk free rate is 10%. The expected market return is 15%.
Required:
(a) Using CAPM, compute the expected return on the company's equity.
(b) What implications does CAPM bring if it is used to determine a firm's cost of equity?
Date posted: April 14, 2021. Answers (1)
- Company A and B are in the same risk class and are identical in every respect except that Company A is
geared while B is not....(Solved)
Company A and B are in the same risk class and are identical in every respect except that Company A is
geared while B is not. Company A has Sh 6 million in 5% bonds outstanding. Both companies earn 10%
before interest and taxes on their Sh 10 million total assets. Assume perfect capital markets, rational
investors, a tax rate of 60% and a capitalization rate of 10% for an all equity company.
Required:
(a) Compute the value of firms A and B using the net income (NI) approach and Net operating income
(NOI) approach.
(b) Using the NOI approach, calculate the after tax weighted average cost of capital for firms A and B.
Which of these firms has the optimal capital structure according to NOI approach? Why?
(c) According to the NOI approach, the values of firms A and B computed in (a) are not in equilibrium.
Assuming that you own 10% of A's shares, show the process which will give you the same amount of
income but at less cost. At what point would this process stop?
Date posted: April 14, 2021. Answers (1)
- State and explain three theories explaining the term structure of interest rates.(Solved)
State and explain three theories explaining the term structure of interest rates.
Date posted: April 14, 2021. Answers (1)
- Assume XYZ ltd is considering a project which costs sh.100 000 to be financed by 50% equity with a cost
of 21.6% and 50% debt with...(Solved)
Assume XYZ ltd is considering a project which costs sh.100 000 to be financed by 50% equity with a cost
of 21.6% and 50% debt with a pre-tax cost of 12%.
The financing method would maintain the company’s overall cost of capital to remain unchanged. The
project is estimated to generate cash flows of sh.36 000 p.a. before interest charges and corporate tax at
33%.
Required:
Evaluate the project using:
NPV method
APV method
Date posted: April 14, 2021. Answers (1)