Intrinsic value: The valuation of a security is determined by a financial analyst using financial data. The value so determined objectively is called intrinsic value/ real or theoretic value.
Kavungya answered the question on April 5, 2022 at 11:53
- D. Magana’s investment portfolio comprises 490 shares in ABC Ltd. and sh. 20,000 deposited in a savings account. ABC Ltd. has declared a rights issue...(Solved)
D. Magana’s investment portfolio comprises 490 shares in ABC Ltd. and sh. 20,000 deposited in a savings account. ABC Ltd. has declared a rights issue of one share for every five shares held at an issue of sh. 20 per share. The current market price per share of ABC Ltd. is sh. 35.
D. Magana would obtain the funds required to exercise the rights issue from the savings account. Similarly, proceeds from the sale of rights issue would be credited to the savings account.
Required:
i) The value of each right
ii) Analyze the effect of the rights issue on the value of D. Magana investment portfolio and hence advise him on whether to exercise, sell or ignore the rights issue. Ignore interest on the savings account.
Date posted: April 5, 2022. Answers (1)
- Mauzo Ltd. intends to declare a rights issue of one ordinary share for every five ordinary shares held as at 31 December 2007.(Solved)
Mauzo Ltd. intends to declare a rights issue of one ordinary share for every five ordinary shares held as at 31 December 2007.
The current market price per share is sh. 16 but subscribers for the rights issue will be offered a 15%
discount. The balance sheet of the company as at 31 December 2007 was as follows:
Required:
a)
i) The theoretical ex- rights price per share.
ii) The value of rights per existing share.
b)
i) List three alternative actions available to the shareholders as regards to the rights issue.
ii) Determine the effect of each of the alternative actions listed in (b) (i) above on the wealth an
investor holding 1,000 shares in the company and hence advise the investor on the best course
of action.
Date posted: April 5, 2022. Answers (1)
- Kawaida Ltd. is currently engaged in an expansion programme. Consequently, the company has been retaining all its earnings to finance the expansion programme. The company’s...(Solved)
Kawaida Ltd. is currently engaged in an expansion programme. Consequently, the company has been retaining all its earnings to finance the expansion programme. The company’s management expects to resume the payment of dividends at the end of 3 years with a dividend payment of sh. 1 per share. The dividends will grow at an annual rate of 50% in years 4 and 5. Thereafter, the dividends will grow at a constant rate of 8% indefinitely. The required rate of return on the company’s stock is 15%.
Required:
The current value of the company’s stock.
Date posted: March 30, 2022. Answers (1)
- Ushindi Ltd. has recently issued a sh. 1,000, 9 percent convertible bond. The bond can be converted into 9 ordinary shares at the end of...(Solved)
Ushindi Ltd. has recently issued a sh. 1,000, 9 percent convertible bond. The bond can be converted into 9 ordinary shares at the end of the five years. The current market price of the shares of Ushindi Ltd. is sh. 25 per share. The price is expected to grow at a rate of 10 per cent per annum. The investors’ required rate of return is 12%.
Required:
The current value of the bond.
Date posted: March 30, 2022. Answers (1)
- Mhusika Ltd. is an all equity financed company with a market capitalization of Sh720,000,000.(Solved)
Mhusika Ltd. is an all equity financed company with a market capitalization of Sh720,000,000.
The company intends to raise Sh.120, 000,000 through a rights issue to finance a new project. The current market price per share of the company prior to announcement of the rights issue is Sh 30. The proposed offer price is Sh.25.
The new project is expected to generate cash flows of Sh.16, 800,000 per annum to perpetuity. For the year just ended, the company paid a dividend per share of Sh. 2.83. The project’s cash flows and dividends per share have an equal growth rate of 6% per annum.
Required;
(i) Outline three advantages to a company of raising capital through a right issue
(ii) The cum-right market price per share on announcement of the rights issue but just before the issue is made.
(iii) The theoretical ex-right market price share and the value of each right.
Date posted: March 30, 2022. Answers (1)
- Pentagon Ltd. issued a 10 year bond two years ago. The bond has a coupon rate of 13% per annum payable semi- annually. Upon maturity,...(Solved)
Pentagon Ltd. issued a 10 year bond two years ago. The bond has a coupon rate of 13% per annum payable semi- annually. Upon maturity, it will be redeemed at sh. 102 for every Sh. 100 par.
Required:
The highest amount you can pay to acquire the bond today if the required rate of return is 14%.
Date posted: March 30, 2022. Answers (1)
- Ufanisi Ltd. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at the rate of 5% per annum during the...(Solved)
Ufanisi Ltd. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at the rate of 5% per annum during the next two years, 13% in the third year and at a constant rate of 6% per annum thereafter. The last dividend paid by the company was sh. 11.50. The company’s required rate of return is 12%.
Required:
i) The value of the equity shares of the company today.
ii) The dividend yield and capital gains yield and total return for year 1 and year 2.
Date posted: March 30, 2022. Answers (1)
- The 10% convertible loan stock of Nalyaka Ltd. is quoted at Sh.142 per Sh.100 par value. The earliest date of conversion is in 4 years’...(Solved)
The 10% convertible loan stock of Nalyaka Ltd. is quoted at Sh.142 per Sh.100 par value. The earliest date of conversion is in 4 years’ time, at the rate of 30 ordinary shares per Sh.100 nominal loan stock. The share price is currently Sh.4.15. Annual interest on the stock has just been paid.
Required:
(i) The average annual growth rate in the share price that is required for the stockholders to achieve an overall rate of return of 12% a year compounded over the next 4 years, including the proceeds of conversion.
(ii) The implicit conversion premium on the stock.
Date posted: March 30, 2022. Answers (1)
- XYZ Ltd. is planning to absorb three other companies so as to realized its sales projection of Sh.50, 000,000 per annum. The company accountant has...(Solved)
XYZ Ltd. is planning to absorb three other companies so as to realized its sales projection of Sh.50, 000,000 per annum. The company accountant has advised the management to maintain such a size as will enable its shares to sell at minimum price of Sh. 16. The Company’s last published statement of financial position indicates the following:
The price earnings (P/E) ratio applicable is 12:1
Required;-
Compute the value of the business using the:
i) Price-earnings (P/E) ratio method
ii) Asset method
Date posted: March 30, 2022. Answers (1)
- Naziri investment Ltd. currently sells bonds at Sh.1,200 with an 11% coupon rate and Sh.1,000 par value. The bond agreement provides for payment of interest...(Solved)
Naziri investment Ltd. currently sells bonds at Sh.1,200 with an 11% coupon rate and Sh.1,000 par value. The bond agreement provides for payment of interest on annual basis with 18 years maturity period.
Required:
The bond yield to maturity (YTM)
Date posted: March 30, 2022. Answers (1)
- MNM Ltd. has a current dividend of sh. 2.00 per share. The following are the expected annual growth rates for the dividend:(Solved)
MNM Ltd. has a current dividend of sh. 2.00 per share. The following are the expected annual growth rates for the dividend:
The required rate of return for the ordinary share is 10%.
Required:
The intrinsic value of the ordinary share.
Date posted: March 30, 2022. Answers (1)
- Evarex Ltd. has bonds which currently sell for sh. 1,150 with an 11% coupon interest rate and at sh. 1,000 par value. The bonds pay...(Solved)
Evarex Ltd. has bonds which currently sell for sh. 1,150 with an 11% coupon interest rate and at sh. 1,000 par value. The bonds pay interest annually and have 18 years to maturity. The company’s tax rate is at 30%
Required:
i. The current yield of the bond
ii. The yield to maturity (YTM) of the bond.
iii. Explain the relationship between the calculated yield to maturity, current yield and coupon rate of the bond.
Date posted: March 30, 2022. Answers (1)
- Richy Ltd. intends to raise Sh.50 million to finance a new project through a rights issue. The project has a 10-year economic life with zero...(Solved)
Richy Ltd. intends to raise Sh.50 million to finance a new project through a rights issue. The project has a 10-year economic life with zero scrap value. The project is expected to generate annual cash inflows of Sh.l4 million. The company has 10 million issued and fully paid up ordinary shares. The market price of the company's ordinary shares before the announcement of the rights issue was Sh.35 per share. The company's cost of capital is 14%.
Required:
The cum-rights price of the shares.
Date posted: March 30, 2022. Answers (1)
- Mongo Ltd. currently pays a dividend of Sh.4 per share. The dividend is expected to grow at 15% per annum for the first 3 years,...(Solved)
Mongo Ltd. currently pays a dividend of Sh.4 per share. The dividend is expected to grow at 15% per annum for the first 3 years, then at 10% per annum for the next 3 years, after which the dividend will grow at 5% per annum to perpetuity. The required rate of return for the ordinary share is 18%.
Required:
The intrinsic value of the ordinary share.
Date posted: March 30, 2022. Answers (1)
- Max Enterprises Ltd. had the following pattern of earnings per share (EPS) over the last five years:(Solved)
Max Enterprises Ltd. had the following pattern of earnings per share (EPS) over the last five years:
The company maintained a constant dividend payout ratio of 40%. The company's required rate of return is 13%.
Required:
The company's theoretical value of the share
Date posted: March 30, 2022. Answers (1)
- Summit Ltd. issued a new bond five years ago.
The bond was sold at par (Sh 1,000) and has a coupon rate of 12% and a...(Solved)
Summit Ltd. issued a new bond five years ago.
The bond was sold at par (Sh 1,000) and has a coupon rate of 12% and a maturity of 30 years.
Coupon payments are made semi-annually. The interest rate has currently gone down to 10%.
Required:
(i) The current price of the bond.
(ii) The current yield to maturity of the bond.
(iii) The capital gain on the bond.
Date posted: March 30, 2022. Answers (1)
- Zedi Ltd. is forecasting a growth rate of 12% per annum for the next 2 years. The growth rate is likely to fall to 10%...(Solved)
Zedi Ltd. is forecasting a growth rate of 12% per annum for the next 2 years. The growth rate is likely to fall to 10% for the third and fourth years. After that, the growth rate is expected to stabilise at 8% per annum. The company has just paid a dividend of Sh.1.50 per share and the investors' required rate of return is 16%.
Required:
The intrinsic value per share of Zedi Ltd.
Date posted: March 30, 2022. Answers (1)
- Malikia Guyo borrowed Sh.1, 000,000 from Huduma Bank at an annual compound interest of 14% on the reducing balance. The loan was repayable in annual...(Solved)
Malikia Guyo borrowed Sh.1, 000,000 from Huduma Bank at an annual compound interest of 14% on the reducing balance. The loan was repayable in annual instalments over a period of four years. The installments were payable at end of the year.
Required:
A loan amortisation schedule.
Date posted: March 30, 2022. Answers (1)
- At the beginning of year 2008, James Chiro deposited Sh.1,000,000 in an investment account which earned compound interest at 15% per annum. At the beginning...(Solved)
At the beginning of year 2008, James Chiro deposited Sh.1,000,000 in an investment account which earned compound interest at 15% per annum. At the beginning of each subsequent year, James Chiro deposited a further Sh.500,000 in the same account.
Required:
(i) The amount of money in the investment account by the end of year 2012
(ii) The percentage interest earned over the investment period.
Date posted: March 30, 2022. Answers (1)
- Bamba Ltd. has constructed a commercial building in an upmarket location in your capital city which the management intends to sell at Shs .8,400,000. However,...(Solved)
Bamba Ltd. has constructed a commercial building in an upmarket location in your capital city which the management intends to sell at Shs .8,400,000. However, a prospective tenant has offered to rent the offices for 8 years at a fixed annual rent of Sh. 160,000. At the end of the eighth year, the building will be sold.
A real estate adviser estimated that the price of the building will increase by 3% per annum. The company's cost of capital is 5%.
Required:
Advise the management of Bamba Ltd. on whether to sell the building now or rent out the offices.
Date posted: March 30, 2022. Answers (1)