- City Graphics Limited is evaluating a new technology for its reproduction equipment. The technology will have a
three-year life and would cost Sh.800,000. Its impact on...(Solved)
City Graphics Limited is evaluating a new technology for its reproduction equipment. The technology will have a
three-year life and would cost Sh.800,000. Its impact on the company‟s cash flows is subject to risk.
In the first year, management estimates that there is an equal chance that the technology will either
succeed and save the company Sh.800,000 or fail saving it nothing at all.
If the technology fails in the first year, savings in the last two years will be zero. Even worse, there is a 40%
chance that additional Sh.240,000 may be required in the second year to convert back to the original process.
If the technology succeeds in the first year, the second year cash flows may be Sh.1,440,000, Sh.1,120,000 or
Sh.800,000 with probabilities of 0.20, 0.60 or 0.20 respectively. Third year cash flows are then expected to be
Sh.160,000 greater or Sh.160,000 less than cash flows in the second year, with equal chance of either
occurring.
All the cash flows above are after taxes.
Required:
a) A probability tree depicting the above cash flow possibilities.
b) Net present values for each possibility using a risk-free rate of 5%.
c) The expected net present value of the technology using a risk-free rate of 5%
Date posted: April 17, 2021. Answers (1)
- Agency problems can be resolved by proper corporate governance. Corporate governance lays emphasis on
shareholders rights and enhancement of shareholder value. In many countries including Kenya,...(Solved)
Agency problems can be resolved by proper corporate governance. Corporate governance lays emphasis on
shareholders rights and enhancement of shareholder value. In many countries including Kenya, the concept
of corporate governance has gained increasing prominence in recent times as evidenced by the issue of
corporate governance guidelines by the Capital Markets Authority (CMA).
Required:
a) Explain the reasons motivating the increasing interest in corporate governance.
b) Identify the benefits of good corporate governance to shareholders.
e) Write short notes on any five corporate governance guidelines issued by the Capital Markets
Authority (CMA) or similar authority in your country.
Date posted: April 17, 2021. Answers (1)
- The directors of ABC Electronics Ltd. are considering a takeover bid for XYZ Electronics Ltd. However,
they recognize that there are potential problems with any proposed...(Solved)
The directors of ABC Electronics Ltd. are considering a takeover bid for XYZ Electronics Ltd. However,
they recognize that there are potential problems with any proposed bid. First, the directors of ABC Ltd.
believe that any take-over bid would be resisted by the directors of XYZ Ltd.
Secondly, ABC Ltd. is short of cash and so any offer made to the shareholders of XYZ Ltd. would have to
be either in form of a share-for-share exchange or a loan capital-for-share exchange.
Required:
a) Identify and discuss four reasons why a company seeking to maximize the wealth of its shareholders
may wish to take over another company.
b) Evaluate the share-for-share exchange and loan capital-for-share exchange options as methods of
purchase consideration from the viewpoint of the shareholders of both companies.
c) Identify and discuss six defensive tactics the directors of XYZ Ltd. may employ to resist an
unwelcome bid.
Date posted: April 17, 2021. Answers (1)
- Explain with the aid of a diagram a protective put buying strategy.(Solved)
Explain with the aid of a diagram a protective put buying strategy.
Date posted: April 16, 2021. Answers (1)
- Explain and illustrate graphically the options concepts of being:
i) “at the money”
ii) “in the money”
iii) “out of the money”
for both a call and put option.(Solved)
Explain and illustrate graphically the options concepts of being:
i) “at the money”
ii) “in the money”
iii) “out of the money”
for both a call and put option.
Date posted: April 16, 2021. Answers (1)
- Using a numeric example, illustrate and explain the pay-offs of a futures option and a futures
contract.(Solved)
Using a numeric example, illustrate and explain the pay-offs of a futures option and a futures
contract.
Date posted: April 16, 2021. Answers (1)
- The table below gives the end-of-year levels of the price of an ordinary share in Kamili Ltd. and of
a representative Stock Exchange Index.
Required:
Use the information...(Solved)
The table below gives the end-of-year levels of the price of an ordinary share in Kamili Ltd. and of
a representative Stock Exchange Index.
Required:
Use the information to calculate the beta coefficient of Kamili Ltd.s ordinary shares, ignoring any
dividend payments. (Work to four decimal places only at each stage of calculation).
Using the beta calculated in the question above above, and given a risk-free rate of 5% a year and an expected return from equities generally of 8% a year, calculate the expected rate of return on Kamili
Ltd.‟s ordinary shares.
Date posted: April 16, 2021. Answers (1)
- What assumptions must be made in deriving the Capital Asset Pricing Model (CAPM)?(Solved)
What assumptions must be made in deriving the Capital Asset Pricing Model (CAPM)?
Date posted: April 16, 2021. Answers (1)
- A comparative study of the records of two oil companies, A Ltd. and B Ltd., in terms of their asset composition, capital structure and profitability...(Solved)
A comparative study of the records of two oil companies, A Ltd. and B Ltd., in terms of their asset composition, capital structure and profitability shows that they have been very similar for the past five years. The only significant difference between the two firms is their dividend policy. A Ltd. maintains a constant dividend per share while B Ltd. maintains a constant dividend pay-out ratio. Relevant data is as follows:
Required:
a) For each company, determine the dividend pay-out ratio and the price – earnings ratio for each of
the five years.
b) B Ltd‟s management is surprised that the shares of this company have not performed as well
as A Ltd‟s in the stock exchange. What explanation would you offer for this state of affairs?
c) Comment on the applicability of the Simple Price/Earnings (P/E) ratio to the typical technology
(IT) company with a high valuation and heavy losses.
Date posted: April 16, 2021. Answers (1)
- Corporate bonds have recently started gaining prominence as disintermediation financial instruments in developing countries.
i) Distinguish between financial intermediation and financial facilitation.
ii) Explain the relationship between...(Solved)
Corporate bonds have recently started gaining prominence as disintermediation financial instruments in developing countries.
i) Distinguish between financial intermediation and financial facilitation.
ii) Explain the relationship between the price of bonds and:
1. Interest rates in the market generally.
2. Term to maturity of the bonds.
iii) Explain any three theories that can help explain the term “structure of interest rates”
Date posted: April 16, 2021. Answers (1)
- Gathura Ltd. is evaluating the acquisition of a heady duty forklit. The company can either purchase
the equipment through the use of its normal financing mix...(Solved)
Gathura Ltd. is evaluating the acquisition of a heady duty forklit. The company can either purchase
the equipment through the use of its normal financing mix (30% debt and 70% equity) or lease it.
The following additional information is available:
1. Acquisition price Sh.8,000,000
2. Useful life 4 years
3. Salvage value Sh.1,600,000
Depreciation method – straight line
Annual (before tax and depreciation) cash savings Sh.2,400,000
Rate of interest on a four year period 10%
Marginal tax rate 10%
Annual lease rentals Sh.2,400,000
Annual operating expenses Sh. 400,000
Cost of capital 12%
Required:
i) Evaluate whether acquisition of the forklift through purchase is justified.
ii) Should Gathura Ltd. lease the asset?
Date posted: April 16, 2021. Answers (1)
- State the main ways of classifying leases.(Solved)
State the main ways of classifying leases.
Date posted: April 16, 2021. Answers (1)
- Outline the advantages of swaps.(Solved)
Outline the advantages of swaps.
Date posted: April 16, 2021. Answers (1)
- Large companies with significant borrowings or overseas trade often use interest rate swaps and currency swaps.
Required:
Explain how interest rate swaps and currency swaps may be...(Solved)
Large companies with significant borrowings or overseas trade often use interest rate swaps and currency swaps.
Required:
Explain how interest rate swaps and currency swaps may be used.
Date posted: April 16, 2021. Answers (1)
- A Kenyan company has agreed to sell goods to an importer in Zedland at an invoiced price of
Z 150,000 (Zed (Z) is the currency of...(Solved)
A Kenyan company has agreed to sell goods to an importer in Zedland at an invoiced price of
Z 150,000 (Zed (Z) is the currency of Zedland). Of this amount, Z 60,000 will be payable on
shipment, Z 45,000 one month after shipment and Z 45,000 three months after shipment.
The quoted foreign exchange rates (Z per KSh.) at the date of shipment as as follows:
Spot 1.690 - 1.692
One month 1.687 - 1.690
Three months 1.680 - 1.684
The company decides to enter into appropriate forward exchange contracts through a bank in
order to hedge these transactions.
Required:
i) State the advantages of hedging in this way.
ii) Calculate the amount in Kenya Shillings that the Kenyan Company would receive.
iii) Comment with hindsight on the wisdom of hedging in this instance, assuming that the spot rates at
the dates of receipt of the two instalments of Z 45,000 were as follows:
Fist instalment 1.69 - 1.69
Second instalment 1.700 - 1.704
Date posted: April 16, 2021. Answers (1)
- The Lakeside Company Limited is considering investing in a project requiring an initial outlay of Sh.100
million. The project life is two years after which there...(Solved)
The Lakeside Company Limited is considering investing in a project requiring an initial outlay of Sh.100
million. The project life is two years after which there would be no expected salvage value. The possible
incremental after-tax cash flows and associated probabilities of occurrence as as follows:
The company‟s required rate of return for this investment is 12%.
Required:
a) i) The expected net present value of the project.
ii) Suppose that the possibility of abandonment exists and that the abandonment value of the project at
the end of the first is Sh.50 million after taxes is abandonment the right choice?
iii) Calculate the new expected net present value assuming that the company would abandon the project if it
is advantageous to do so. What are the implications of this calculation to you as a Finance Manager?
b) Identify the case for and against Sensitivity Analysis as a method of handling risk in capital budgeting.
Date posted: April 16, 2021. Answers (1)
- The Kenyan economy has been performing poorly in the recent past and many companies have
retrenched workers while yet others have closed their operations. Many product...(Solved)
The Kenyan economy has been performing poorly in the recent past and many companies have
retrenched workers while yet others have closed their operations. Many product and skilled people
are having to start their own small enterprises.
As a consultant for small and medium size firms, write a brief report, explaining the various ways
in which small and medium size enterprises can raise capital for investment.
Date posted: April 16, 2021. Answers (1)
- In the recent past, the government has been aggressively wooing multinational companies to
come and invest their resources in Kenya.
Analyze the key decision areas that a...(Solved)
In the recent past, the government has been aggressively wooing multinational companies to
come and invest their resources in Kenya.
Analyze the key decision areas that a financial analyst would have to advise a company that
is considering making direct investment in Kenya and discuss the risks involved.
Date posted: April 16, 2021. Answers (1)
- The governments of many less developed countries have experienced problems in recent years as their
debt levels have risen leading to what has been called a...(Solved)
The governments of many less developed countries have experienced problems in recent years as their
debt levels have risen leading to what has been called a “global debt crisis”.
Required:
a) Explain briefly why these problems amount to a “crisis.
b) Discuss the approaches that have been used to overcome the problems.
c) Outline the benefits to multinational business enterprises of resolving the current global debt problems.
Date posted: April 16, 2021. Answers (1)
- KK Ltd. and KT Ltd. are two companies in the printing industry. The companies have the same business
risk and are almost identical in all respects...(Solved)
KK Ltd. and KT Ltd. are two companies in the printing industry. The companies have the same business
risk and are almost identical in all respects for their capital structures and total market values. The companies
capital structures are summarized below:
KT‟s ordinary shares are trading at Sh.170 and debentures at Sh.100. Annual earnings
before interest and tax for each company is Sh.50 million.
Corporate tax is at the rate of 30%.
Required:
a) If you owned 4% of the ordinary shares of KT Ltd. and you agreed with the arguments of
Modigliani and Miller, explain what action you would take to improve your financial position.
b) Estimate by how much your financial position is expected to improve. Personal taxes may be
ignored and assumptions made by Modigliani and Miller may be used.
c) If KK Ltd. was to borrow Sh.40 million, compute and explain the effect this would have on the
company‟s cost of capital according to Modigliani and Miller. What implications would this suggest
for the company‟s choice of capital structure?
Date posted: April 16, 2021. Answers (1)