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Circumstances under which a company would prefer to use short term debt financing
(i) For family-owned business or where dilution of ownership is not required. This is because debt does not provide ownership stake in business, rather creditors.
(ii) Debt is cheaper compared to equity
(iii) where shareholder approval is not required.
(iv) It’s a cost-effective form of financing since interest is tax deductible, leading to savings
francis1897 answered the question on November 1, 2022 at 12:03
- Kikwetu Enterprise is considering purchasing a five-year sh.1,000 par value debenture which is currently trading on the securities exchange is at sh.950. The debenture has...(Solved)
Kikwetu Enterprise is considering purchasing a five-year sh.1,000 par value debenture which is currently trading on the securities exchange is at sh.950. The debenture has a coupon rate of interest of 12% per annum. Kikwetu Enterprises’ required rate of return is 16%.
Required:
(i) The intrinsic value of the debenture.
(ii) Advice Kikwetu enterprises on whether or not to purchase the debenture.
Date posted: November 1, 2022. Answers (1)
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John Juma borrowed sh.500,000 on 1 May 2022 from a local bank repayable semi-annually over a two-year period. The interest rate on the loan is 8% per annum.
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A loan repayment schedule for the two-year period.
Date posted: November 1, 2022. Answers (1)
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Date posted: November 1, 2022. Answers (1)
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Date posted: November 1, 2022. Answers (1)
- The following is the capital structure of Kenland Ltd.:
...(Solved)
The following is the capital structure of Kenland Ltd.:
Sh. "000"
Ordinary share capital (par value sh.100) 120,000
Preference share capital (par value sh.100) 52,500
Debentures (par value sh.1,000) 40,500
213,000
Additional information:
1. The company has paid ordinary dividend of sh.2.5. The dividend is expected to grow at a constant rate of 10% in the future and floatation costs of 12% of the market price.
2. The current market price of one ordinary share of Kenland Ltd. Is sh.120.
3. New preference shares can be sold at sh.140 per share with a dividend of sh.15 per share and floatation costs of sh.8 per share.
4. The company pays out all its earnings as dividends.
5. The company will sell 14% debentures with a maturity of 10 years at sh.1,100 per debenture.
6. The par value of the debenture is sh.1,000
Corporate tax rate is 30%
Required:
(i) The cost of ordinary share capital.
(ii) The cost of preference share capital.
(iii) The cost of debenture capital.
(iv) The market weighted average cost of capital.
Date posted: November 1, 2022. Answers (1)
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With reference to the above...(Solved)
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Date posted: November 1, 2022. Answers (1)
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Date posted: November 1, 2022. Answers (1)
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The following information relates to Mafuta Safi Ltd.:
Sh.
"000"
Purchase of raw materials (all on credit) 6,700
Usage of raw materials 6,500
Sales of finished goods (all on credit) 25,000
Cost of sales (finished goods) 18,000
Average creditors 1,400
Average raw materials inventory 1,200
Average work in progress 1,000
Average finished goods inventory 2,100
Average debtors 4,700
Assume a 365 days year
Required:
The length of the operating cash cycle.
Date posted: November 1, 2022. Answers (1)
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Date posted: November 1, 2022. Answers (1)
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Date posted: November 1, 2022. Answers (1)
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The following are the expected net cash flows from the projects
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Sunlight Limited intends to invest in project Y or project Z.
The following are the expected net cash flows from the projects
Project
Y Z
Year Sh. Sh.
0 (12,000,000) (10,000,000)
1 3,000,000 4,000,000
2 3,000,000 3,000,000
3 3,200,000 2,000,000
4 2,000,000 4,000,000
5 1,000,000 2,000,000
The company’s cost of capital is 12%
Required:
(i) Calculate the profitability index for each project.
(ii) Advise the management on the project to invest in.
Date posted: November 1, 2022. Answers (1)
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Date posted: November 1, 2022. Answers (1)