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- Biashara Ltd. has the following capital structure:
The finance manager of Biashara Ltd. has a proposal for a project requiring Sh.45
million. He has proposed the following...(Solved)
Biashara Ltd. has the following capital structure:
The finance manager of Biashara Ltd. has a proposal for a project requiring Sh.45
million. He has proposed the following method of raising the funds:
- Utilize all the existing retained earnings
- Issue ordinary shares at the current market price.
- Issue 100,000 10% preference shares at the current market price of Sh.100 per
share which is the same as the par value.
- Issue 10% debentures at the current market price of Sh.1,000 per debenture.
Additional information:
1. Currently, Biashara Ltd. pays a dividend of Sh.5 per share which is expected to
grow at the rate of 6% due to increased returns from the intended project.
Biashara Ltd.'s price/earnings (P/E) ratio and earnings per share
(EPS) are 5 and Sh.8 respectively.
2. The ordinary shares would be issued at a floatation cost of 10% based in the
market price.
3. The debenture par value is Sh.1,000 per debenture.
4. The corporate tax rate is 30%.
Required:
Biashara Ltd.'s weighted average cost of capital (WACC).
Date posted: December 14, 2021. Answers (1)
- Examine the relative merits of leasing versus hire purchase as a means of acquiring capital assets.(Solved)
Examine the relative merits of leasing versus hire purchase as a means of acquiring capital assets.
Date posted: December 14, 2021. Answers (1)
- Malindi Leisure Industries is already highly geared by industry standards, but wishes to raise external capital to finance the development of a new beach resort.
Outline...(Solved)
Malindi Leisure Industries is already highly geared by industry standards, but wishes to raise external capital to finance the development of a new beach resort.
Outline the arguments for and against a rights issue by Malindi Leisure Industries.
Date posted: December 14, 2021. Answers (1)
- What is the impact of massive capital flight on the value of the domestic currency?(Solved)
What is the impact of massive capital flight on the value of the domestic currency?
Date posted: December 14, 2021. Answers (1)
- Why have African economies been characterized by much capital flight in the past?(Solved)
Why have African economies been characterized by much capital flight in the past?
Date posted: December 14, 2021. Answers (1)
- Clean Wash Ltd. manufactures and markets automatic washing machines. Among the hundreds of components which it purchases each year from external suppliers for assembling into...(Solved)
Clean Wash Ltd. manufactures and markets automatic washing machines. Among the hundreds of components which it purchases each year from external suppliers for assembling into the finished articles are drive belts, of which it uses 400,000 units per annum. It is considering converting its purchasing, delivery and stock control of this item to a Just-In-Time (JIT) system.
This will raise the number of orders placed but lower the administrative and other costs of placing and receiving orders. If successful, this will provide the model for switching most of its inwards supplies into this system.
Details of current and proposed ordering and carrying costs are given below:
To implement new arrangements will require a one-off reorganization costs estimated at Sh.140,000 which will be treated as revenue item for tax purposes. The rate of corporation tax is 32.5% and Clean Wash Ltd. can obtain finance at an effective cost of 18%. The life span of the new system is 8 years.
Required
(a) (i)The economic order quantity with current and proposed arrangements.
(ii) New Present Value (NPV) of the new arrangement. Is the new arrangement worthwhile?
(b) Briefly explain the nature and objectives of JIT purchasing arrangements concluded between components users and suppliers.
Date posted: December 14, 2021. Answers (1)
- In a company, an agency problem may exist between management and shareholders on one hand and the debt holders (creditors and lenders) on the other...(Solved)
In a company, an agency problem may exist between management and shareholders on one hand and the debt holders (creditors and lenders) on the other because management and shareholders, who own and control the company have the incentive to enter into transactions that may transfer wealth from debt holders to shareholders. Hence the need for agreements by debt holders in lending contracts.
Required:
(a) State and explain any four actions or transactions by management and shareholders that could be harmful to the interests of debt holders (sources of conflict).
(b) Write short notes on any four restrictive covenants that debt holders may use to protect their wealth from management and shareholder raids.
Date posted: December 14, 2021. Answers (1)
- Enumerate four advantages of convertible bonds from the point of view of the borrower.(Solved)
Enumerate four advantages of convertible bonds from the point of view of the borrower.
Date posted: December 14, 2021. Answers (1)
- List and explain five factors that should be taken into account by a businessman in making the choice between financing by short-term and long-term sources.(Solved)
List and explain five factors that should be taken into account by a businessman in making the choice between financing by short-term and long-term sources.
Date posted: December 14, 2021. Answers (1)
- Lynx Services Ltd., a debt collection agency, has estimated that the standard deviation of its daily net cash flow is Sh.22,750. The company pays Sh.120...(Solved)
Lynx Services Ltd., a debt collection agency, has estimated that the standard deviation of its daily net cash flow is Sh.22,750. The company pays Sh.120 in transaction cost every time it transfers funds into and out of the money market.
The rate of interest in the money market is 9.465%. The company uses the Miller-Orr Model to set its target cash balance. The minimum cash balance has been set at Sh.87,500.
Required:
(i) The company's target cash balance.
(ii) The lower and upper cash limit.
(iii) Lynx Services Ltd.'s decision rules.
Date posted: December 14, 2021. Answers (1)
- Briefly describe the benefits of the Central Depository System (CDS) to the following stakeholders.
(i) Government;
(ii) Capital Markets Authority and Nairobi Stock Exchange;
(iii) Investors.(Solved)
Briefly describe the benefits of the Central Depository System (CDS) to the following stakeholders.
(i) Government;
(ii) Capital Markets Authority and Nairobi Stock Exchange;
(iii) Investors.
Date posted: December 14, 2021. Answers (1)
- Explain the benefits that are enjoyed by investors because of the existence of organized security exchanges.(Solved)
Explain the benefits that are enjoyed by investors because of the existence of organized security exchanges.
Date posted: December 14, 2021. Answers (1)
- You have been retained by the management of an international group to advise on the management of its
foreign exchange exposure.
Required:
(a) Explain the main types of...(Solved)
You have been retained by the management of an international group to advise on the management of its
foreign exchange exposure.
Required:
(a) Explain the main types of foreign exchange exposure
(b) Advise on policies which the corporate treasurer could consider to provide valid and relevant methods of reducing exposure to foreign exchange risk.
Date posted: April 15, 2021. Answers (1)
- What economic benefits might countries gain from forming a common market?(Solved)
What economic benefits might countries gain from forming a common market?
Date posted: April 15, 2021. Answers (1)
- State the differences between free trade areas, customs unions and common markets.(Solved)
State the differences between free trade areas, customs unions and common markets.
Date posted: April 15, 2021. Answers (1)
- Explain the features of structural adjustment programmes.(Solved)
Explain the features of structural adjustment programmes.
Date posted: April 15, 2021. Answers (1)
- State and explain the types of euro-currency loans.(Solved)
State and explain the types of euro-currency loans.
Date posted: April 15, 2021. Answers (1)
- ABC Ltd a UK firm has been invited to tender for a contract in Blueland with the local currency of Blues
(B). The company thinks that...(Solved)
ABC Ltd a UK firm has been invited to tender for a contract in Blueland with the local currency of Blues
(B). The company thinks that the contract should cost £1 850, 000 and is prepared to price the contract
at £2 million. The current exchange rate for Blues and £ is £1: B2.80. The company therefore bids for
B5.6 million. The contract will not be awarded until after six months. A 6 month currency option to sell
B5.6 million at an exchange rate of £1: B2.8 is currently costing £40 000.
ABC Ltd can either buy the option or enter into forward Exchange contract at a rate of £1: B 2.80,
Assume that the company fails to win the contract and the spot rate in 6 months time is £1:B2.50.
Required:
Advice the company on which alternative is better.
Date posted: April 15, 2021. Answers (1)
- XYZ Ltd, a UK firm has bought goods from a US supplier and must pay USD 4 million in 3 months time.
The company finance...(Solved)
XYZ Ltd, a UK firm has bought goods from a US supplier and must pay USD 4 million in 3 months time.
The company finance director wishes to hedge against the foreign exchange risk and is considering 3
methods:
- Using the forward exchange contract
- Using the money market hedge
- Using a lead payments
Annual interest rate and foreign exchange rate are given below:
Required
Advise the company on the best method to use.
Date posted: April 15, 2021. Answers (1)
- Assume that the following quotation is given:
Spot rate £1: USD1.635 - USD 1.6385
One month forward...(Solved)
Assume that the following quotation is given:
Spot rate £1: USD1.635 - USD 1.6385
One month forward 0.5 – 0.47 cents premium
Required:
Compute the cost of the forward cover for a customer
Buying dollars 1 month forward.
Selling dollars one month forward.
Date posted: April 15, 2021. Answers (1)