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i) Debenture with floating interest rate
- A debenture whose interest rate is variable and pegged to charges in interest rate on
Treasury bill e.g. a debenture/bond may have a 3% premium above interest rate on
Treasury bill such that:-
- If interest rate on treasury bill is 7%, interest rate on the bond is 7% + 3% = 10%
- If interest rate on Treasury bill rises to 8.5%, the interest rate on the bond
rises to 8.5% + 3% = 11.5%.
- Such a bond is advantageous when market interest rates are volatile.
- If market interest rate falls the borrower pays lower interest charges and when it rises, the
lender receives more interest income.
- Since the coupon rate is matched to market interest rate, the intrinsic value of the bond is
usually stable and easy to determine.
ii) Zero coupon bonds
- The bonds do not pay periodic interest hence the words “zero coupon” bond.
They are issued at a discount and mature at par.
- Therefore, interest is accumulated and accounted for in the redemption value of the bond.
- The lender is not locked into low fixed interest rate while the borrower does not have
fixed financial obligations of paying fixed interest charges.
- The liquidity of the borrower is not affected until the redemption date.
Kavungya answered the question on May 5, 2022 at 14:00
- The following is the summarized Balance sheet of Kaka Kuona Ltd. as at 30 November 2003:(Solved)
The following is the summarized Balance sheet of Kaka Kuona Ltd. as at 30 November 2003:
Additional Information:
1. In the past Kaka Kuona ltd.’s earnings per share (EPS) averaged Sh.6 and the dividend payout
rate was 50% or Sh.3 per share. For the year ended 30 November 2003, the EPS declined to
Sh.2.50. Because it was felt that this decline was temporary, the annual dividend of Sh.3 per share
was maintained for the financial year ended 30 November 2003. As well as for the first six
months of the financial year ending 30 November 2004
2. Recent projections however have caused management to revise downwards the expected EPS. For
the financial ending 30 November 2004, the forecast of EPS has been reduced to Sh.2 per share
and for the financial year ending 30 November 2004, the forecast of EPS has been reduced to
Sh.2 per share and for the financial year ending 30 November 2005, adjusted to Sh2.20
3. Kaka Kuona Ltd. ‘s ordinary shares are currently selling in the market at Ss. 15 per share
The management of Kaka Kuona Ltd. is considering whether or not to retain the cash dividend of
Sh.3 per share for the next two financial years
Required:
a) Calculations to help determine whether it will be feasible to maintain dividends at Sh.3 Per share
for the next two financial years
b) Determine whether the company should replace the cash dividend with a bonus issue of one share
for every four ordinary shares
c) Explain the course of action that the management of Kaka Kuona Ltd should take in the light of
the declining projections in dividend payouts.
Date posted: May 5, 2022. Answers (1)
- Jambo Kenya Ltd. Has followed a policy of paying out a gradually increasing dividend per share over the past five years as shown below:(Solved)
Jambo Kenya Ltd. Has followed a policy of paying out a gradually increasing dividend per share over the past five years as shown below:
Date posted: May 5, 2022. Answers (1)
- Explain the factors that influence the dividend policy(Solved)
Explain the factors that influence the dividend policy
Date posted: May 5, 2022. Answers (1)
- Outline the reasons that may constrain a company from paying dividends to its shareholders at the end of a financial year.(Solved)
Outline the reasons that may constrain a company from paying dividends to its shareholders at the end of a financial year.
Date posted: May 5, 2022. Answers (1)
- PDS Ltd is a medium sized company quoted on the stock exchange. The company’s year-end is 31 December. The following data relate to the company’s...(Solved)
PDS Ltd is a medium sized company quoted on the stock exchange. The company’s year-end is 31 December. The following data relate to the company’s earnings per share (EPS) and dividend per share (DPS) for the last five years.
If the current dividend policy is maintained, the directors of PDS Ltd. expect that annual growth in earnings and dividend will be the same as the average growth in earnings over the past four years. PDS Ltd., which is wholly equity financed, is reluctant to obtain debt to finance its growth opportunities. The company is therefore considering a change in its dividend policy where 50% of its earnings will be retained to finance identified projects which are estimated to have an average post-tax
return of 15%.
The company's cost of capital is 12%.
Required;-
The share price of the company which might be expected by the market
(i) If the company does not announce the change of dividend policy.
(ii) If the company announces the change of dividend policy.
Date posted: May 5, 2022. Answers (1)
- Explain the arguments in favour of a stable dividend policy.(Solved)
Explain the arguments in favour of a stable dividend policy.
Date posted: May 5, 2022. Answers (1)
- MCC Enterprises Ltd. expects its earnings before interest and taxes (EBIT) to fluctuate with the economic environment as shown below. You are advised that the...(Solved)
MCC Enterprises Ltd. expects its earnings before interest and taxes (EBIT) to fluctuate with the economic environment as shown below. You are advised that the earnings distribution is expected to continue in perpetuity. The company has one million shares outstanding and no debt in the capital structure. The company pays all its earnings in dividends and shareholders require a
12% return. The company pays no taxes.
Date posted: May 5, 2022. Answers (1)
- Explain three ways in which a company could pay dividends to its shareholders.(Solved)
Explain three ways in which a company could pay dividends to its shareholders.
Date posted: May 5, 2022. Answers (1)
- Enumerate four ways in which the dividend decision affects the wealth maximization goal of a company quoted in the securities exchange of your country.(Solved)
Enumerate four ways in which the dividend decision affects the wealth maximization goal of a company quoted in the securities exchange of your country.
Date posted: May 5, 2022. Answers (1)
- Discuss the effect of the following concepts on the firm's dividend policy:
(i) Clientele effect
(ii) "Homemade" dividend.(Solved)
Discuss the effect of the following concepts on the firm's dividend policy:
(i) Clientele effect
(ii) "Homemade" dividend.
Date posted: May 5, 2022. Answers (1)
- Nazitum Ltd. has current earnings per share of sh. 4.00. The company’s dividend for the previous year was sh. 1.50 per share and it has...(Solved)
Nazitum Ltd. has current earnings per share of sh. 4.00. The company’s dividend for the previous year was sh. 1.50 per share and it has a target payout ratio of 0.60. The management of the company adjusts its dividend over two years.
Required:
The dividend per share for the current year.
Date posted: May 5, 2022. Answers (1)
- Davirex Ltd’s share has a nominal value of sh. 80. The company pays 10% of the nominal value of the share as dividend for the...(Solved)
Davirex Ltd’s share has a nominal value of sh. 80. The company pays 10% of the nominal value of the share as dividend for the year. The current market price of the share is sh. 160 with 15% earnings yield.
Required:
i. Earnings per share.
ii. Dividend cover.
iii. Price – earnings ratio.
Date posted: May 5, 2022. Answers (1)
- Outline four advantages of paying scrip dividends(Solved)
Outline four advantages of paying scrip dividends
Date posted: May 5, 2022. Answers (1)
- Highlight four assumptions necessary for the dividend irrelevance theory to hold.(Solved)
Highlight four assumptions necessary for the dividend irrelevance theory to hold.
Date posted: May 5, 2022. Answers (1)
- The following data was obtained from the financial statements of Nemax Ltd. for the year ended 30 September 2013:
Required:
Using the Lintner's model, determine the dividend...(Solved)
The following data was obtained from the financial statements of Nemax Ltd. for the year ended 30 September 2013:
Required:
Using the Lintner's model, determine the dividend per share (DPS) of Nemax Ltd. for the year ended 30 September 2013.
Date posted: May 5, 2022. Answers (1)
- Baraka Ltd. has a cost of equity of 10%. Currently, the company has 250,000 shares which are quoted at the securities exchange at Sh.120 per...(Solved)
Baraka Ltd. has a cost of equity of 10%. Currently, the company has 250,000 shares which are quoted at the securities exchange at Sh.120 per share. The company's earnings per share is Sh.10 and it intends to maintain a dividend pay-out 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;-
Using the Modigliani and Miller (MM) model, show that the payment of dividends does not affect the value of the firm.
Date posted: May 5, 2022. Answers (1)
- Describe two types of dividends which a corporate entity could pay its shareholders.(Solved)
Describe two types of dividends which a corporate entity could pay its shareholders.
Date posted: May 5, 2022. Answers (1)
- Rafiki Hardware Tools Company Limited sells plumbing fixtures on terms of 2/10 net 30. Its financial statements for the last three years are as follows:(Solved)
Rafiki Hardware Tools Company Limited sells plumbing fixtures on terms of 2/10 net 30. Its financial statements for the last three years are as follows:
Date posted: May 5, 2022. Answers (1)
- Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd.,...(Solved)
Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd., a company quoted on the stock exchange. The dividend payments from this investment makes up a significant position of Mrs Waziri’s income. She was alarmed when ABC Ltd. dropped its year 2001 dividend to Sh.1.25 per share from Sh.1.75 per share which it had paid in the previous two years.
Mrs Waziri has approached you for advice and you have gathered the information given below regarding the financial condition of ABC Ltd. and the finance sector as a whole.
ABC Ltd. Balance Sheets as at 31 October
Notes:
1. Industry ratios have been roughly constant for the past four years.
2. Inventory turnover, total assets turnover and fixed assets turnover are based on the year-end
balance sheet figures.
Required:
(a) The financial ratios for ABC Ltd for the past three years corresponding to industry ratios given above.
(b) Arrange the ratios calculated in (a) above in columnar form and summarise the strengths and weaknesses revealed by these ratios based on:
(i) Trends in the firm’s ratios
(ii) Comparison with industry averages.
(The summary should focus on the liquidity, profitability and turnover ratios).
Date posted: May 5, 2022. Answers (1)
- The management of Afro Quatro Ltd. want to establish the amount of financial needs for the next two years. The balance sheet of the firm...(Solved)
The management of Afro Quatro Ltd. want to establish the amount of financial needs for the next two years. The balance sheet of the firm as at 31 December 2001 is as follows:
Date posted: May 5, 2022. Answers (1)