High level of transaction costs
Need to reduce agency costs
Existing opportunities to increase liquidity of assets e.g. factoring of debtors
Regulatory and legislative changes hence volatility of interest rate and exchange rates
Use of interest rate swaps
Volatility of securities prices hence the use of futures and options
Tax asymmetric that can be exploited to produce tax savings for the investors and Issues of securities.
Technological advancement and related factors.
Academic work that results in advance in financial theories or better understanding of the risk – return characteristics of existing securities.
Kavungya answered the question on April 20, 2021 at 09:55
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Date posted: April 20, 2021. Answers (1)
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The risk free rate is 5% and the market return is 14% p.a....(Solved)
MK Ltd is comprised of 4 major projects, details of which as follows:
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Required:
a) Evaluate whether or not the share price of MK Ltd is overvalued or undervalued.
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The following information is provided:
1. The company paid Sh.1.2 million as...(Solved)
The management of Viwanda Ltd. is in the process of evaluating the company's dividend policy.
The following information is provided:
1. The company paid Sh.1.2 million as dividends in the last financial year.
2. The profit after tax for the last financial year was Sh.3.6 million.
3. The company has not issued any preference shares
4. The earnings growth rate has been consistent at 10% per annum for the past ten years.
5. The expected profit after tax for the current financial year is Sh.4.8 million
6. The company anticipates investment opportunities worth Sh.1.4 million in the current financial year.
7. The capital structure of the company consists of sixty per cent equity and forty per cent debt.
Required:
Determine the optimal total dividends for the current financial year if the company wishes to adopt each of the following independent dividend policies
i) Pure residual policy
ii) Constant payout ratio policy
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Required:
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the following proportion; Sh.200,000 in security A and Sh.800,000 in security B.
The returns on these two securities depend on the state of the economy as shown below:
Required:
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Additional Information:
1. None of the five projects can be...(Solved)
The management of Dawanu Ltd. is evaluating five investment projects whose expected cash flows are shown below:
Additional Information:
1. None of the five projects can be delayed or bought forward.
2. All the projects are divisible
3. The required rate of return on investments is 15%
Required:
i) Using the net present value (NPV) approach, determine which project(s) should be undertaken assuming
capital will be available when required.
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Proton Ltd. has a capital structure consisting of Sh.250 million in 12% debentures and Sh.150 million in
ordinary shares of Shs.10 par value. The company distributes all its net earnings as dividends.
The finance manager of Proton Ltd. intends to raise an additional Sh.50million to finance an
expansion programme and is considering three financing options.
Option one: Issue an 11% debenture stock
Option two: Issue 13% cumulative preference shares
Option three: Issue additional ordinary shares of Sh.10 par value.
The corporation tax rate is 30%.
Required:
Calculate the earnings before interest and tax (EBIT ) and the earnings per sharee (EPS)at the
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The following...(Solved)
Two firms, A Ltd and B Ltd. operate in the same industry. The two firms are similar in all aspects
except for their capital structures.
The following additional information is available:
1. A Ltd is financed using Sh.100 million worth of ordinary shares.
2. B Ltd is financed using Sh.50 million in ordinary shares and Sh.50 million in 7% debentures
3. The annual earnings before interest and tax are Sh.10million for both firms. These earnings are
expected to remain constant indefinitely.
4. The cost of equity in A Ltd is 10%
5. The corporate tax rate is 30%
Required:
Using the Modigliani and Miller (MM) model, determine the following:
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Huge Ltd. is contemplating a complete share acquisition of Tiny Ltd. Huge Ltd is offering three of its
shares for every two shares of Tiny Ltd. The data is relating to the two companies are shown below:
The corporate tax rate is 30%
Required:
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ii) Compute the premium payable to the shareholders of Tiny Ltd
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Details on the possible future economic states, their probabilities of occurrence and the expected return
for each of the sectors are presented below:
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A company is considering whether it is necessary to purchase equipment to increase its production and
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sold as scrap for Sh.80,000. For each of the three years of usage, the equipment is expected to increase
both sales revenue and operating costs by Sh.600,000 and Sh.390,000 respectively. The company's cost
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Required:
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Ridges Company Ltd. is the process of preparing its capital budget for the financial year ending 30 June 2005. The company's capital structure as at 1 July 2004 and which the management considers as optimal
is presented below:
The following additional information is available:
1. The company can borrow a Sh.200 million long to on loan at a pre-tax cost 13. Any additional
debt can be obtained at a pre-tax cost of 16%.
2. The company can raise Sh.400 million through a bond issue. Each bond will have a face value of
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3. Preferred stock can be-issued at a pre-tax cost of 16.5%.
4. The company expects to generate Sh.700 million in net income before tax for the year ending 30
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ending 30 June 2005.
6. The following investment proposals will be available to the company in the year ending 30
June 2005.
Assume a corporation tax rate of 30%
Required:
a) Determine the cost of capital for each of the following sources of finance:
i) Long-term loan
ii) Bonds
iii) Additional Debt
iv) Preference share capital
v) Retained earnings
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Date posted: April 19, 2021. Answers (1)