-
Dove Construction Company Ltd made a Sh.100 million bondage 5 years ago when interest rates were
substantially high. The interest rates have now fallen and the...
(Solved)
Dove Construction Company Ltd made a Sh.100 million bondage 5 years ago when interest rates were
substantially high. The interest rates have now fallen and the firm wishes to retire this old debt and replace it with a new and cheaper one. Given here below are the details about the two bond issues:
Old Bonds: The outstanding bonds have a nominal value of Sh.1,000 and 24% coupon interest rate. They
were issued 5 years ago with a 15-year maturity. They were initially sold a their nominal value of Sh.1,000 and the firm incurred Sh.390,000 in floatation costs. They are callable at Sh.1,120.
New Bonds: The new bonds would have a Sh.1,000 nominal value and a 20% coupon interest rate. They
would have a 10-year maturity and could be sold at their par value. The issuance cost of the new bonds
would be Sh.525,000.
Assume the firm does not expect to have any overlapping interest and is in the 35% tax bracket.
Required:
a) Calculate the after-tax cash inflows expected from the unamortized portion of the old bond's
issuance cost.
b) Calculate the annual after-tax cash inflows from the issuance of the new bonds assuming the 10-year
amortization.
c) Calculate the after-tax cash outflow from the call premium required to retire the old bonds.
d) Determine the incremental initial cash outlay required to issue the new bonds.
e) Calculate the annual cash-flow savings, if any, expected from the bond refunding.
f) If the firm has a 14% after-tax cost of debt, would you recommend the proposed refunding and
reissue? Explain.
Date posted:
April 20, 2021
.
Answers (1)
-
Your firm is considering the acquisition of a new fork lift truck. It is uncertain about whether to purchase the truck outright or to finance...
(Solved)
Your firm is considering the acquisition of a new fork lift truck. It is uncertain about whether to purchase the truck outright or to finance it through a leasing arrangement with Kasneb Bank Ltd. The purchase price is Sh.5,200,000 and it will have a salvage value of Sh.400,000 at the end of its 8-year useful life. The annual lease cost would be Sh.996,000 for 8 years.
The company uses the straight-line method for analysis investment decisions.
The company can borrow funds (to purchase the forklift) at 22% and it has an effective tax rate of
35%. Its after tax cost of capital is 12%.
Required:
a) Analyze the decision situation and advise the firm about the appropriate acquisition method.
b) If the company could get a 20% investment allowance on this investment, how would this affect
your answer in (a) above?
Date posted:
April 20, 2021
.
Answers (1)
-
MK Ltd is comprised of 4 major projects, details of which as follows:
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:
The risk free rate is 5% and the market return is 14% p.a. The standard deviation or the market return is 13%.
Required:
a) Evaluate whether or not the share price of MK Ltd is overvalued or undervalued.
b) Discuss why your results in (a) above might not correctly identify whether or not the share price of MK Ltd is undervalued or overvalued.
Date posted:
April 20, 2021
.
Answers (1)
-
Mr. K. Patel has an investment capital of Sh.1,000,000. He wishes to invest in two securities, A and B in
the following proportion; Sh.200,000 in security...
(Solved)
Mr. K. Patel has an investment capital of Sh.1,000,000. He wishes to invest in two securities, A and B in
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:
i) Compute the expected portfolio return
ii) Determine the correlation coefficient between security A and security B
iii) Calculate the portfolio risk
iv) Calculate the reduction in risk due to portfolio diversification
Date posted:
April 20, 2021
.
Answers (1)
-
With the help of a diagram show the difference between an efficient portfolio and an optimum portfolio.
(Solved)
With the help of a diagram show the difference between an efficient portfolio and an optimum portfolio.
Date posted:
April 20, 2021
.
Answers (1)
-
Distinguish between one-period rationing and multi-period rationing with specific reference to capital rationing.
(Solved)
Distinguish between one-period rationing and multi-period rationing with specific reference to capital rationing.
Date posted:
April 20, 2021
.
Answers (1)
-
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...
(Solved)
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
point of indifference between the following financing options:
i) Option one and option three
ii) Option two and option three
Date posted:
April 20, 2021
.
Answers (1)
-
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...
(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:
i) The market value of A Ltd. and B Ltd.
ii) The weighted average cost of capital of A Ltd and B Ltd.
Date posted:
April 20, 2021
.
Answers (1)
-
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....
(Solved)
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:
i) Determine the maximum offer price that will not dilute the EPS of Huge Ltd.
ii) Compute the premium payable to the shareholders of Tiny Ltd
iii) Given that the growth rate of Huge Ltd. is 8% while that of Tiny Ltd is 12%, compute the combined
growth rate of the two companies
Date posted:
April 19, 2021
.
Answers (1)
-
Discuss the Modigliani and Miller's (MM) dividend irrelevancy proposition.
(Solved)
Discuss the Modigliani and Miller's (MM) dividend irrelevancy proposition.
Date posted:
April 19, 2021
.
Answers (1)
-
Distinguish between the residual dividend theory and clientele preference theory as they relate to dividend policy formulation.
(Solved)
Distinguish between the residual dividend theory and clientele preference theory as they relate to dividend policy formulation.
Date posted:
April 19, 2021
.
Answers (1)
-
Mr. Charles Kabazi has a capital of Sh.1,000,000 which he wishes to invest in three sectors of
the economy; agriculture, service and manufacturing. The funds will...
(Solved)
Mr. Charles Kabazi has a capital of Sh.1,000,000 which he wishes to invest in three sectors of
the economy; agriculture, service and manufacturing. The funds will be allocated as follows:
Details on the possible future economic states, their probabilities of occurrence and the expected return
for each of the sectors are presented below:
Required:
i) Determine the risk associated with the investment in each of the three sectors above.
ii) Determine the expected portfolio return
Date posted:
April 19, 2021
.
Answers (1)
-
A company is considering whether it is necessary to purchase equipment to increase its production and
sales volumes. The equipment costs Sh.500,000 and has a useful...
(Solved)
A company is considering whether it is necessary to purchase equipment to increase its production and
sales volumes. The equipment costs Sh.500,000 and has a useful life of three years after which it can be
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
of capital is 10%
Required:
i) Calculate the project's net present value (NPV)
ii) Compute the percentage changes required in the cost of the equipment, the scrap value and the sales
revenue for the project to be rejected.
Date posted:
April 19, 2021
.
Answers (1)
-
The following details relating to Bidii Limited show how the level of gearing affects the
company's cost of debt.
Required:
Determine the company's optimal capital structure.
(Solved)
The following details relating to Bidii Limited show how the level of gearing affects the
company's cost of debt.
Required:
Determine the company's optimal capital structure.
Date posted:
April 19, 2021
.
Answers (1)
-
Distinguish between a currency option and a currency swap.
(Solved)
Distinguish between a currency option and a currency swap.
Date posted:
April 19, 2021
.
Answers (1)
-
Highspeed Electronics Limited has taken delivery of 50,000 electronic devices from an American
company. The seller is in a strong bargaining position and has priced the...
(Solved)
Highspeed Electronics Limited has taken delivery of 50,000 electronic devices from an American
company. The seller is in a strong bargaining position and has priced the devices in American dollars
at USD12.00 each.
Highspeed Electronics Limited has been granted three months credit. Assume that interest rates in
America are 3% per quarter (three months). Highspeed electronics Limited has all its money tied up
in its operations but it could borrow in dollars at 3% per quarter if necessary.
Foreign exchange rates
USD = Sh. 1
Spot 0.013
Three month forward 0.0154
A three month dollar call option for USD 600,000 is available at a premium of USD15,000.
Required:
Using suitable computations, illustrate two hedging strategies available to Highspeed
Electronics Limited.
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)
-
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)
-
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)