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Agency costs are costs incurred by the owners of the company as a result of not being directly
involved in the management of the company. The shareholders appoint the directors to run the
company on their behalf. Examples of agency costs are:-
i. Costs of the incentives given to the management
ii. Costs of external audit
iii. Costs of installing systems of internal control
iv. Restructuring costs
Financial distress costs are costs associated with Bankruptcy of the company. Examples of
financial distress costs are:-
i. Selling of valuable assets at bargaining prices to raise cash
ii. Lawyers’ fees, court costs and huge administrative expenses
iii. Rust of machinery, vandalization of buildings, obsolescence of inventories all due to
delay in the liquidation of assets as bankruptcy cases take long to settle
iv. High borrowing costs
Kavungya answered the question on March 30, 2022 at 07:06
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Additional information:
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2. Last December the company declared an interim dividend of Sh.2.50 and has now declared
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4. There has not been any significant change in the price of preference shares since they
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5. Treasury Bills are currently paying 12% interest per annum and the company is in the
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6. The inflation rate for the current year has been estimated to average 8%.
Required:
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(b) What is the minimum rate of return investors in the fast foods industry may expect to
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