1. Different currency denominations
Cash flows in the various part of a multination corporate system will be
denominated in different currencies. An analysis of exchange rate and the effect
of fluctuating currency value must be included in financial analysis.
2. Economic and legal Remifications
Each country has its own unique political and economic institutions governing
business. These institutional differences among countries may cause significant
problems for a corporation that is coordinating and controlling worldwide
operations of its subsidiaries e.g. differences in tax loss can cause a given economic
transaction to have significantly dissimilar after tax consequences depending on
where the transactions occurred.
3. Political Risk
This gives the potential discontinuity of a multinational operations in a host
country due to the host country implementation of specific rules and regulations
e.g nationalization, expropriation or confiscation. A host country exercise
sovereignty over the people and property in its territory. Hence a host nation can
place constraints on the transfer of corporate resources and even expropriate
without compensation to the firm.
This risk tend to be given and cannot be changed even with negotiation. A
joint venture with the government or a company in the host country can
reduce this risk.
4. Rates of Interest
Many rates of interest operate at any one time in different countries. Differences in the
cost of borrowing or lending across borders arise from the market expectation about
the future exchange rates. The finance manager need to study different interest rates
and exchange rates when borrowing or lending in foreign currency.
5. Exchange Controls
Some governments impose tight controls on movement of funds out of and even
into their countries. Exchange controls tend to style or reduce the trade between
countries and if the company is trading in a country which impose tight exchange
controls, the finance manager need to know or understand which exchange
control exists and how they are applied.
6. Political System (and the role of the government)
Frequently the times under which company competes, the actions that must be taken
or avoided and the terms of trades of various transactions are not freely determined
in the market place especially for countries ruled by dictatorship. They are however
negotiated directly between the host country and the multinational corporation. If the
finance manager is trading with or in the country that is ruled by dictatorship, the
rules of trading can appear to be inflexible or irrational. The finance Manager needs
to adopt its style to conclude successful negotiations in such regime.
7. Cultural and Religious Differences
Different countries have unique cultural heritages that shape values and influence
the role of business in the society. When defining the appropriate goals, attitude
towards risks dealing with employees e.t.c., considerations must be given to the
cultural differences among/ across countries.
8. The Language Differences
Communication is critical in all businesses and to penetrate another market, the
company need to have knowledge of language to communicate with managers, workers and consumers.
9. Return Considerations
Domestically, competitive pressures may be such that only a normal rate of return
can be earned. A firm may invest abroad so as to produce more efficiently due to existence of cheaper factor of production.
10. Taxation
Tax laws are different in different countries and therefore a firm may invest
abroad to minimize tax payment to the government
Kavungya answered the question on April 19, 2021 at 19:07
- Leo Plastics Limited is an all equity financed company. It had three strategic business divisions as on
1 January 2004:
1. The Polythene division
It has a capital...(Solved)
Leo Plastics Limited is an all equity financed company. It had three strategic business divisions as on
1 January 2004:
1. The Polythene division
It has a capital of Sh. 8 million and is expected to produce returns of 11% on capital for the
next five years. Thereafter, it will produce returns equal to the required rate of return of 14% for
its risk level.
2. The Paper division
It has a capital of Sh. 12 million and a planning horizon of 10 years. During this planning
horizon, it will produce a return of 12% on capital compared with a risk adjusted required rate
of return of 15%.
3. The Container division
It has a capital of Sh. 12 million and a planning horizon of 7 years. The required rate of return
on capital is 16% compared with the anticipated actual rate of 17% over the first seven years.
Required:
Calculate the present value of the company as on 1 January 2004.
Date posted: April 19, 2021. Answers (1)
- The board of directors of Masii Limited is divided on whether to adopt a high or low dividend
payout policy. One of the directors has quoted...(Solved)
The board of directors of Masii Limited is divided on whether to adopt a high or low dividend
payout policy. One of the directors has quoted the „dividend discount model as
proof that the higher the dividends, the higher the share price.
Required:
(i) Highlight two arguments for and against a high dividend payout policy.
(ii) Using a constant growth dividend discount model, evaluate the director's statement.
Date posted: April 19, 2021. Answers (1)
- Kasuku Limited has set aside Sh. 40 million for investments as on 1 January 2004. Five proposals are presented to the company's board of directors...(Solved)
Kasuku Limited has set aside Sh. 40 million for investments as on 1 January 2004. Five proposals are presented to the company's board of directors by the finance manager as shown below:
Additional information:
1. Projects D and E are mutually exclusive.
2. Each project is divisible and can only be undertaken once.
3. Variable costs are 40% of annual revenue.
4. All cash flows will occur at the end of the year commencing 31 December 2004.
5. Cost of capital is 10% (ignore tax).
Required:
i. Determine the optimal allocation of the Sh. 40 million amongst the five projects.
ii. What is the net present value resulting from this allocation?
Date posted: April 19, 2021. Answers (1)
- “Total Risk Management (TRM) will become a common term in finance just like Total Quality
Management (TQM) has in production and marketing.” (Professor Andrew W. Lo....(Solved)
“Total Risk Management (TRM) will become a common term in finance just like Total Quality
Management (TQM) has in production and marketing.” (Professor Andrew W. Lo. 1999).
Required:
(i) Define risk management as used in finance.
(ii) Discuss reasons why risk management might increase shareholders wealth.
Date posted: April 19, 2021. Answers (1)
- Savanna Limited has a cost of equity of 10%. Currently it has 250,000 ordinary shares which are quoted
at the Stock Exchange of Sh. 120 per...(Solved)
Savanna Limited has a cost of equity of 10%. Currently it has 250,000 ordinary shares which are quoted
at the Stock Exchange of Sh. 120 per share. The company's earnings per share is Sh. 10
and it intends to maintain a dividend payout ratio of 50% at the end of the current financial year.
The expected net income for the current year is Sh. 3 million and the available investment
proposals are estimated to cost Sh. 6 million.
Required:
(i) Using the Modigliani and Miller (MM) model, show that the payment of dividends does not affect the value of the firm.
(ii) What are the assumptions inherent in the MM model?
Date posted: April 19, 2021. Answers (1)
- As an expert in the financial management of public projects, you have been requested to present a
seminar paper on “Project Management in the Public Sector;...(Solved)
As an expert in the financial management of public projects, you have been requested to present a
seminar paper on “Project Management in the Public Sector; challenges and dilemmas.”
Required:
Explain the main issues you would address in your paper under the following headings:
(i) Phases of a public project.
(ii) Planning and control techniques for a public project.
(iii) Causes of failure of public projects.
Date posted: April 19, 2021. Answers (1)
- The managing director of Bicdo Ltd., a company quoted on the Nairobi Stock Exchange (NSE)
has asked you to assist in estimating the firm's equity beta...(Solved)
The managing director of Bicdo Ltd., a company quoted on the Nairobi Stock Exchange (NSE)
has asked you to assist in estimating the firm's equity beta co-efficient. The firm is all equity
financed and listed in the NSE five years ago. You have gathered the following information from
the NSE for the last four years:
Required:
Use the capital asset pricing model (CAPM) to estimate the beta of Bicdo Ltd.
Date posted: April 19, 2021. Answers (1)
- Many of the underlying assumptions of CAPM are violated in the real world. Does that fact invalidate the model's conclusions? Explain.(Solved)
Many of the underlying assumptions of CAPM are violated in the real world. Does that fact invalidate the model's conclusions? Explain.
Date posted: April 19, 2021. Answers (1)
- The financial manager of Town Ltd. is concerned about the volatility of interest rates. His company
needs to borrow Sh. 100 million in six months time...(Solved)
The financial manager of Town Ltd. is concerned about the volatility of interest rates. His company
needs to borrow Sh. 100 million in six months time for a period of two years. Current interest rates
are 15% per year for the type of loan that Town Ltd. needs. The financial manager does not wish to
pay an interest rate higher than this. He is considering using different alternatives. For the following
four alternatives, briefly explain how each could be useful to the financial manager:
(i) Forward rate agreement.
(ii) Interest rate futures
(iii) Interest rate options.
(iv) Interest rate swaps.
Date posted: April 19, 2021. Answers (1)
- As a firm operating in a mature industry, Orchard Farms is expected to maintain a constant dividend
pay out ratio and constant growth rate of earnings...(Solved)
As a firm operating in a mature industry, Orchard Farms is expected to maintain a constant dividend
pay out ratio and constant growth rate of earnings for the foreseeable future. Earnings were Sh. 4.50
per share in the recently completed fiscal year. The dividend pay out ratio has been a constant 55%
in recent years and is expected to remain so. Orchard Farms' return on equity (ROE) is
expected to remain at 10% in the future, and you require an 11% return on the stock.
Required:
(i) Using the constant dividend growth model, calculate the current value of Orchard Farms‟ share.
(ii) After aggressive acquisition and marketing programme, it now appears that Orchard
Farms‟ earnings per share and ROE will grow rapidly over the next two years. Assuming
the Orchard Farms‟dividend will grow at a rate of 15% for the next two years, returning in the
third year, to the historical growth and continuing at the historical rate of the foreseeable future.
Calculate Orchard Farms‟ current market rate.
Date posted: April 19, 2021. Answers (1)
- The Better Shoe Company is considering a major investment in a new product area, novelty
umbrellas. It hopes that this product will become a fashion icon....(Solved)
The Better Shoe Company is considering a major investment in a new product area, novelty
umbrellas. It hopes that this product will become a fashion icon. The following information has
been collected:
1. The project will have a limited life of 11 years.
2. The initial investment in plant and machinery will be Sh. 10 million and a marketing budget
of Sh. 2 million will be allocated to the first year.
3. The net cash flows before depreciation of plant and machinery and before
marketing expenditure for each umbrella will be Sh. 100.
4. The products will be introduced both in Kenya and Uganda.
5. The marketing costs in years 2 to 11 will be Sh. 5 million per annum.
6. If the product catches the imagination of the customers in both countries, then sales in the
first year are anticipated at 1 million umbrellas.
7. If the fashion press ignores the new products in one country but become enthusiastic in
the other, sales ill be 700,000 umbrellas in year 1.
8. If the marketing launch is unsuccessful in both countries, first year sales will be 200,000
umbrellas.
The probability of each of these events occurring is:
1 million sales = 0.3
0.7 million sales = 0.4
0.2 million sales = 0.3
9. If the first year is successful in both countries then two possibilities are envisages.
Sales levels are maintained at 1 million units per annum for the next 10 years – probability of 0.3.
The product is seen as a temporary fad and sales fall to 100,000 units for the remaining 10 years
– probability of 0.7.
10. If success is achieved in only one country in the first year, then for the remaining 10 years
there is:
A 0.4 probability of maintaining the annual sales at 700,000 units and
A 0.6 probability of sales immediately falling to 50,000 units per year.
If the marketing launch is unsuccessful in both countries, the production will cease and the
project will be scraped with zero value. The annual cash flows and marketing costs will be payable
at each year end.
Assume:
Cost of capital is 10 per cent per annum.
No inflation or taxation.
No exchange rate charges.
Required:
(i) Calculate the expected net present value for the project.
(ii) Calculate the standard deviation for the project.
(iii) If the project produces a net present value of less that Sh. 10 million, the directors fear that the
company will be vulnerable to a hostile takeover. Calculate the probability of the firm avoiding a
hostile takeover. Assume normal distribution.
Date posted: April 19, 2021. Answers (1)
- Bara Ltd. is contemplating a bid for the share capital of Pwani Ltd. with an intention of buying the whole company. The following data for...(Solved)
Bara Ltd. is contemplating a bid for the share capital of Pwani Ltd. with an intention of buying the whole company. The following data for the two companies have been provided.
After acquisition, Bara Ltd. intends to sell a division of Pwani Ltd. which accounts for Sh.20 million
annually in equity earnings. The division does not form part of the core business of the intended group. The
division has a current market price of Sh. 50 million.
Bara Ltd.'s management believes that by introducing better management, earnings of Pwani Ltd. could
be permanently increased by 25% although the price/earnings multiple will remain the same. To avoid duplication,
some of Bara Ltd.'s own property could be disposed of at an estimated price of Sh. 130 million.
Rationalization costs are estimated at Sh. 100 million, these comprise retrenchment and legal costs
among others.
Required:
(a) Highlight the advantages of growth by acquisition.
(b) Calculate the effect on the current share price of each company, all other things being equal, of a two for
ten share offer by Bara Ltd., assuming that Bara Ltd.'s estimates are in line with those of the market.
(c) Assume that Bara Ltd. is proposing to offer Pwani Ltd.'s shareholders the choice of a two for ten
share exchange or a cash alternative. Giving reasons, advise Bara Ltd. whether the cash alternative
should be more or less that the current value of the share exchange.
Date posted: April 19, 2021. Answers (1)
- The Minister for Finance has stated that he wants to put a limit to the Public Sector Borrowing
Requirements. What difficulties and economic problems are likely...(Solved)
The Minister for Finance has stated that he wants to put a limit to the Public Sector Borrowing
Requirements. What difficulties and economic problems are likely to arise due to this?
Date posted: April 19, 2021. Answers (1)
- You have just finished reading the budget speech by the Minister of Finance where you came
across the term “Public Sector Borrowing Requirements.” What is meant...(Solved)
You have just finished reading the budget speech by the Minister of Finance where you came
across the term “Public Sector Borrowing Requirements.” What is meant by this term?
Date posted: April 19, 2021. Answers (1)
- The management of Wambu Limited wants to make a decision whether to change its policy
of purchasing raw material stocks.
The current policy is to purchase raw...(Solved)
The management of Wambu Limited wants to make a decision whether to change its policy
of purchasing raw material stocks.
The current policy is to purchase raw materials monthly, on the last day of each month, for
consumption in the following month. Suppliers are paid at the end of the following month –
purchases at the end of January would be paid for at the end of February.
The proposed policy is to purchase raw materials every 3 months; suppliers would then allow an extra 2
months‟ credit. The extra cost of stock holding under the proposed policy would be
Sh.600,000 per annum.
The decision about which policy to adopt will be made in time to affect purchases at the end
of December 2004, when the cost of materials for January 2005 would be Sh. 20,000,000.
A growth rate of 0.75% per month is expected in purchases into the indefinite future from
January 2005 onwards.
The cost of capital is 1% per month compound.
Required:
Which policy should be preferred? (ignore taxation)
Date posted: April 19, 2021. Answers (1)
- On the basis of a one-factor model, Mwangi assumes that the risk free rate is 6% and the expected return on a portfolio work unit...(Solved)
On the basis of a one-factor model, Mwangi assumes that the risk free rate is 6% and the expected return on a portfolio work unit sensitivity to the factor is 8.5%. Consider a portfolio of two securities with the following characteristics:
According to the arbitrage pricing theory, what is the portfolio‟s equilibrium expected return?
Date posted: April 19, 2021. Answers (1)
- As a senior financial analyst of an investment bank, you are charged with the responsibility of
estimating the expected returns of various securities. One o the...(Solved)
As a senior financial analyst of an investment bank, you are charged with the responsibility of
estimating the expected returns of various securities. One o the securities you want to estimate is
expected return in Alpha Steel works Ltd.
You have decided to use arbitrage pricing model and you have derived the following estimates
for the factor betas and risk premiums.
Required:
(i) Identify the risk factor for Alpha Steel Works Ltd.
(ii) If the risk free rate is 5%, estimate the expected return on Alpha Steel Works Ltd.
Date posted: April 19, 2021. Answers (1)
- The Moon Company Ltd. has issued 10,000,000, Sh. 10 par equity shares which are at present selling for
Sh. 30 per share. It has also issued...(Solved)
The Moon Company Ltd. has issued 10,000,000, Sh. 10 par equity shares which are at present selling for
Sh. 30 per share. It has also issued 5,000,000 warrants, each entitling the holder to buy one equity share.
The warrants are protected against dilution.
(a) The company has plans to issue rights to purchase one new equity share at a price of Sh. 20 per
share for every four shares held.
Required:
(i) Calculate the theoretical ex-rights price of Moon Company Ltd.'s equity shares.
(ii) The theoretical value of a right of the Moon Company Ltd. before the shares sell ex rights.
(b) The chairman of the company receives a phone call from an angry shareholder who owns 100,000
shares. The shareholder argues that he will suffer a loss in his personal wealth due to this rights issue,
because the new shares are being offered at a price lower than the current market value.
The chairman assures him that his wealth will not be reduced because of the rights issue, as long
as the shareholder takes appropriate action.
Required:
(i) Explain whether the chairman is correct. What should the shareholder do?
(ii) A statement showing the effect of the rights issue on this particular
shareholder's wealth, assuming:
He sells all the rights.
He exercises one half of the rights and sells the other half.
He does nothing at all.
(iii) Are there any real circumstances which might lend support to the shareholder's claim?
Date posted: April 19, 2021. Answers (1)
- The following data currently exist for the ordinary shares of four companies quoted on a stock exchange for the period between 1 July 1998 to...(Solved)
The following data currently exist for the ordinary shares of four companies quoted on a stock exchange for the period between 1 July 1998 to 1 July 2003.
During the same time period (1 July 1998 to 1 July 2003), the four companies:
Issued no additional shares
Had no stock dividends or split
Paid no cash dividend.
Required:
(i) A four-stock index that is value-weighted.
(ii) A four-stock index that is price-weighted.
(iii) A four-stock index that is equally weighted.
Date posted: April 19, 2021. Answers (1)
- Highlight the limitations of the following methods of dealing with risk in capital budgeting:
(i) Simulation analysis.
(ii) Sensitivity analysis.(Solved)
Highlight the limitations of the following methods of dealing with risk in capital budgeting:
(i) Simulation analysis.
(ii) Sensitivity analysis.
Date posted: April 19, 2021. Answers (1)