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- Lang Ltd is interested in measuring its overall cost of capital and has gathered the following data for the year 2011:
Debt: The firm can raise...(Solved)
Lang Ltd is interested in measuring its overall cost of capital and has gathered the following data for the year 2011:
Debt: The firm can raise an unlimited amount of debt by selling Sh. 1,000 per value 8% coupon rate, 20 year bonds on which annual interest payments will be made. To sell the issue, an average discount of Sh. 30 per bond would be given
Preference stock: The firm can sell 8% preferred stock at its Sh. 95 share per value. The cost of issuing and selling the stock is expected to be Sh. 5 per share. An unlimited amount of preferred stock can be sold under these terms.
Debt: The firm can raise all unlimited amount of debt by selling Sh. 1,000 per value 8% coupon rate, 20 year bonds on which annual interest payments will be made. To sell the issue, an average discount of Sh. 30 per bond would be given
Equity: The firm expects to have Sh. 100,000 of retained earnings in the coming year 2012. New shares can be issued at Sh 62 each with a flotation cost of Sh 2 per share. The growth rate is expected to be 6%. Expected dividend in the coming
year is Sh. 6.
The company’s estimate optimal capital structure is given below.
The company tax is at 30%
Required
(i) Compute the specific cost of each source of financing
(ii) Determine the breakpoint and the weighted average marginal cost of capital below the
breakpoint.
Date posted: April 25, 2022. Answers (1)
- Dzitsoni Ltd. is considering replacing a machine. The existing machine was bought 3 year ago at
a cost of Sh 50 million. The machine is expected...(Solved)
Dzitsoni Ltd. is considering replacing a machine. The existing machine was bought 3 year ago at
a cost of Sh 50 million. The machine is expected to have a useful life of 5 more years with no
scrap value at the end. The machine could be disposed of immediately at Sh.35 million. The new
machine will cost Sh. 80 Million with a useful life of 5 years and an expected terminal value of
Sh.5 million. With the introduction of the new machine sales are expected to increase by Sh.25
million per annum over the next five years.
The contribution margin is expected to be 40% and the corporate tax rate is 30%. The operation of
the new machine will also require an immediate investment of Sh.8 million in working capital.
Installation costs of the new machine will amount to Sh 6 million. Depreciation is to be provided
for on a straight line basis. The company's cost of capital is 12%. Capital gain taxes remain
suspended and not applicable.
Required;
(i) The initial investment for the replacement decision.
(ii) Advise the management of Dzitsoni Ltd. on whether to replace the machine.
Date posted: April 25, 2022. Answers (1)
- Tezo Ltd. is in the process of modernizing its operations. The factory manager has proposed the
replacement of the milling machine with a new fully computerized...(Solved)
Tezo Ltd. is in the process of modernizing its operations. The factory manager has proposed the
replacement of the milling machine with a new fully computerized machine. The milling machine
was purchased two years ago at a cost of Sh.4 million. The economic life of the machine was five
years. However, a management review has established that the machine has a further useful life of
five years with a zero salvage value. The machine could be disposed of immediately at Sh. 1.6 million.
The new machine has a purchase price of Sh.8 million with an additional installation cost of Sh.
1.8 million and a salvage value of Sh.2 million. The new machine will lead to increased efficiency
and annual savings in costs of Sh.2.1 million. However, electricity costs will increase by Sh.200,
000 per annum. The operation of the new machine will also require an increase of Sh.810, 000
worth of raw materials. The company uses the straight line method of depreciation. The
company's cost of capital is 10% and the corporate tax rate is 30%.
Required:
Advise the management of Tezo Ltd. on whether to replace the machine.
Date posted: April 25, 2022. Answers (1)
- ABC Ltd. has the following proposed independent projects for the year ending 31 December 2012:
Required:
(i) Assuming that there is no capital rationing, indicate which projects...(Solved)
ABC Ltd. has the following proposed independent projects for the year ending 31 December 2012:
Required:
(i) Assuming that there is no capital rationing, indicate which projects should be selected.
(ii) Total net present value (NPV) of the selected projects.
(iii) Assuming a single period internal capital constraint of Sh. 1,700,000 is imposed, indicate which projects should be selected.
Date posted: April 25, 2022. Answers (1)
- Bright Ltd. undertook project X with the following cash flow over its useful life of 3 years.
The cost of capital for the project is 10%....(Solved)
Bright Ltd. undertook project X with the following cash flow over its useful life of 3 years.
The cost of capital for the project is 10%. The abandonment values of the project have been given below:
Required
Advise the management of Bright Ltd. when to abandon project X.
Date posted: April 25, 2022. Answers (1)
- Bram Ltd. has found out that, after two years of using a machine, a more advanced model has arrived in the market. The advanced model...(Solved)
Bram Ltd. has found out that, after two years of using a machine, a more advanced model has arrived in the market. The advanced model is expected to increase output. The existing machine had cost sh. 32,000 and was being depreciated using the straight – line method over ten years. The current market value of the existing machine is sh. 15,000.
Bram Ltd. is considering the acquisition of the advanced model which costs sh. 123,500 including installation costs and has a salvage value of sh. 20,500 at the end of 8 years of its useful life. The following data has been provided:
The required rate of return is 15%. Ignore taxation.
Required:
Compute the following in respect of the new machine:
i. Payback period.
ii. Net present Value (NPV).
iii. Internal rate of return (IRR).
Date posted: April 25, 2022. Answers (1)
- Kiwanda Ltd. is considering the launch of a new product "M" for which an investment of Sh.6
million in plant and machinery will be required. The...(Solved)
Kiwanda Ltd. is considering the launch of a new product "M" for which an investment of Sh.6
million in plant and machinery will be required. The production of "M" is expected to last for five
years after which the plant and machinery would be sold for Sh.1.5 million.
Additional information:
1. "M" would be sold at Sh.600 per unit with a variable cost of Sh.240 per unit.
2. Fixed production costs (excluding depreciation) would amount to Sh.600,000 per annum.
3. The company applies the straight line method of depreciation.
4. The cost of capital is 10% per annum.
5. The number of units of "M" expected to be produced and sold per annum for the next five
years is shown below:
6. The corporation tax rate is 30%.
Required:
Advise the management of Kiwanda Ltd. on the appropriate course of action using:
(i) The net present value (NPV) approach.
(ii) The internal rate of return (IRR) approach.
Date posted: April 25, 2022. Answers (1)
- Explain four features of an ideal investment appraisal method.(Solved)
Explain four features of an ideal investment appraisal method.
Date posted: April 25, 2022. Answers (1)
- Bidii Ltd. is considering investing in a plant which is expected to operate for the next four years after which it will have no salvage...(Solved)
Bidii Ltd. is considering investing in a plant which is expected to operate for the next four years after which it will have no salvage value. The plant will cost Sh.5 million. Annual tax depreciation of 25% will be allowed in respect of the expenditure.
Revenue from the plant will be Sh.7 million per annum for the first two years and Sh.5 million per annum thereafter. Incremental costs will be Sh.4 million throughout. Bidii Ltd. pays corporation tax at 30% and has a cost of capital of 10%. Assume that all cash flows occur at the end of the year to which they relate.
Required:
Advise Bidii Ltd. on whether to proceed with the investment.
Date posted: April 25, 2022. Answers (1)
- Explain why capital budgeting decisions are important.(Solved)
Explain why capital budgeting decisions are important.
Date posted: April 25, 2022. Answers (1)
- The following information relates to the forecast returns of securities A and B and their probabilities during the financial year ending 30 June 2010.
Required;-
i) The...(Solved)
The following information relates to the forecast returns of securities A and B and their probabilities during the financial year ending 30 June 2010.
Required;-
i) The expected return and standard deviation
ii) Based on the relative risk, which security would you recommend
Date posted: April 25, 2022. Answers (1)
- Briefly explain the following:
(i) Financial risk
(ii) Asset risk(Solved)
Briefly explain the following:
(i) Financial risk
(ii) Asset risk
Date posted: April 25, 2022. Answers (1)
- An investor has two securities, A and B. with the following return characteristics
Required
Assess the riskiness of securities A and B.(Solved)
An investor has two securities, A and B. with the following return characteristics
Required
Assess the riskiness of securities A and B.
Date posted: April 25, 2022. Answers (1)
- Differentiate between Business risk and financial risk as used in finance.(Solved)
Differentiate between Business risk and financial risk as used in finance.
Date posted: April 25, 2022. Answers (1)
- Distinguish between Futures and forwards as used in finance.(Solved)
Distinguish between Futures and forwards as used in finance.
Date posted: April 25, 2022. Answers (1)
- Distinguish between Perfect markets and efficient markets as used in finance.(Solved)
Distinguish between Perfect markets and efficient markets as used in finance.
Date posted: April 25, 2022. Answers (1)
- West Limited has forecasted the following end of period prices for its shares.
The current price per share is Sh.50.
Required:
(i) Expected return.
(ii) Variance of end of...(Solved)
West Limited has forecasted the following end of period prices for its shares.
The current price per share is Sh.50.
Required:
(i) Expected return.
(ii) Variance of end of period returns.
Date posted: April 25, 2022. Answers (1)
- Explain the relationship between risk and return.(Solved)
Explain the relationship between risk and return.
Date posted: April 25, 2022. Answers (1)
- The following data relate to price and related financial details of three ordinary shares for the year 2012.
Required:
i) Total expected return for each of the...(Solved)
The following data relate to price and related financial details of three ordinary shares for the year 2012.
Required:
i) Total expected return for each of the three ordinary shares.
ii) Relative return for each of the three ordinary shares.
Assuming an investor combines all the three ordinary shares X, Y, Z in a portfolio in the ratio of 4:2:4 respectively. Determine the expected return of the portfolio.
Date posted: April 25, 2022. Answers (1)
- The following information relates to two potential investments namely; A and B.
Required:
The standard deviation of each of the two investments.(Solved)
The following information relates to two potential investments namely; A and B.
Required:
The standard deviation of each of the two investments.
Date posted: April 25, 2022. Answers (1)