A firm may prefer to raise finance through equity rather than debt finance due to reasons such as;
(i) less risky compared to debt. This is because you don’t have fixed monthly repayments as in the case of debt.
(ii) For startup business – who may not be given debt finances easily as they are deemed risky
(iii) When a firm as credit problems, equity finance is the best option
(iv) when a business wants to minimize on cash outflows. This is because no mandatory cash outflows are required for equity compared to debt where interest must be paid.
francis1897 answered the question on November 1, 2022 at 12:44
- Explain two applications of time value of money concept.(Solved)
Explain two applications of time value of money concept.
Date posted: November 1, 2022. Answers (1)
- Samama Limited’s capital structure as at 1 October 2020 was as follows:
...(Solved)
Samama Limited’s capital structure as at 1 October 2020 was as follows:
Sh.
"000"
Ordinary share capital (par value sh.10) 373,000
Retained earnings as at 1 October 2020 27,000
18% Debentures 400,000
800,000
The above capital structure is considered optimal. The company is considering the acquisition of an investment project that will costs sh.270 million. In order to finance the investment project, the company would be required to raise additional capital.
Additional information:
1. The company can obtain additional debentures at an interest rate of 18% per annum.
2. The dividend for the year ended 30 September 2021 is expected to be sh.2.40 per share.
3. Additional ordinary shares can be issued on the Securities Exchange at a price of sh.54 per share net of floatation cost amounting to sh.6 per share.
4. Dividend are expected to grow at a rate of 8% each year for the foreseeable future.
5. Corporation tax is 30%.
Required:
(i) Cost of debentures.
(ii) Cost of retained earnings.
(iii) Cost of ordinary shares.
(iv) Amount of money for the investment project to be financed through the issue of new ordinary shares if the company is to maintain the optimal capital structure.
(v) Amount of money for the investment project to be raised through debentures.
Date posted: November 1, 2022. Answers (1)
- Master Ltd. is a private company which intends to be listed in the Securities Exchange. The company recently paid a dividend of sh.2.50 per share....(Solved)
Master Ltd. is a private company which intends to be listed in the Securities Exchange. The company recently paid a dividend of sh.2.50 per share. This dividend is expected to grow at the rate of 20% for 2 years and then drop to a growth rate of 15% per annum for the next 3 years. Thereafter, the dividend will grow at 10% per annum indefinitely. The required rate of return is 12%.
Required:
The intrinsic value of the company’s share.
Date posted: November 1, 2022. Answers (1)
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Date posted: November 1, 2022. Answers (1)
- The management of Daylight Ltd. is in the process of evaluating the company’s dividend policy.
The following information is provided:
1. The company paid sh.1,300,000 million as...(Solved)
The management of Daylight Ltd. is in the process of evaluating the company’s dividend policy.
The following information is provided:
1. The company paid sh.1,300,000 million as dividend in the last financial year
2. The profit after tax for the last financial year was sh.3,900,000 million
3. The company has not issued any preference shares.
4. The earnings growth rate has been constant at 10% per annum for the past 10 years.
5. The expected profits after tax for the current financial year is hs.5,200,000 million.
6. The company anticipates investment opportunities worth sh.2,800,000 million in the current financial year.
7. The capital structure of the company consists of 70% equity and 30% debt.
Required:
The optimal total dividend for the current financial year if the company wishes to adopt each of the following dividend policies:
(i) Residual dividend policy.
(ii) Constant payout ratio policy.
(iii) Stable predictable dividend policy.
(iv) Regular plus extra dividend policy.
Date posted: November 1, 2022. Answers (1)
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Discuss four potential causes of conflict between shareholders and the management.
Date posted: November 1, 2022. Answers (1)
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Explain two types of financial decisions made in a company.
Date posted: November 1, 2022. Answers (1)
- The following information relates to returns of two securities under three states of the economy as follows:
...(Solved)
The following information relates to returns of two securities under three states of the economy as follows:
Return on Return on
State of economy Probability security X security Y
Boom 0.40 18% 24%
Normal 0.50 14% 22%
Recession 0.10 12% 21%
Required:
(i) Expected returns on security X and Y.
(ii) Standard deviation of returns on security X and security Y.
(iii) Kalama Chivuva has invested 20% in security X and 80% in security Y. Determine his expected portfolio return.
(iv) Calculate covariance of returns of security X and Y.
(v) Determine the portfolio risk as measured by standard deviation.
Date posted: November 1, 2022. Answers (1)
- Explain three differences between a firm’s “value maximization” and “Profit maximization goal”.(Solved)
Explain three differences between a firm’s “value maximization” and “Profit maximization goal”.
Date posted: November 1, 2022. Answers (1)
- Outline four circumstances under which a company would prefer to use short term debt financing compared to other sources of finance.(Solved)
Outline four circumstances under which a company would prefer to use short term debt financing compared to other sources of finance.
Date posted: November 1, 2022. Answers (1)
- 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)
- 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...(Solved)
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.
Required:
A loan repayment schedule for the two-year period.
Date posted: November 1, 2022. Answers (1)
- Islamic finance and investment have experienced substantial and unprecedented growth in recent years.
With reference to the above statement, discuss for Islamic finance drivers.(Solved)
Islamic finance and investment have experienced substantial and unprecedented growth in recent years.
With reference to the above statement, discuss for Islamic finance drivers.
Date posted: November 1, 2022. Answers (1)
- Explain the following terms as used in finance:
(i) Crypto-currency.
(ii) Block chain technology.(Solved)
Explain the following terms as used in finance:
(i) Crypto-currency.
(ii) Block chain technology.
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)
- In a finance and investment seminar, one of the facilitators noted that, “Management of debtors is crucial in working capital management”.
With reference to the above...(Solved)
In a finance and investment seminar, one of the facilitators noted that, “Management of debtors is crucial in working capital management”.
With reference to the above statement, discuss three factors that might influence the level of debtors in a firm.
Date posted: November 1, 2022. Answers (1)
- Explain the following terms as used in the valuation of securities
(i) Fair value.
(ii) Investment value.(Solved)
Explain the following terms as used in the valuation of securities
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(ii) Investment value.
Date posted: November 1, 2022. Answers (1)
- The following information relates to Mafuta Safi Ltd.:
...(Solved)
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)
- Citing three reasons, justify the time preference value for money.(Solved)
Citing three reasons, justify the time preference value for money.
Date posted: November 1, 2022. Answers (1)
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Explain three causes of conflict between shareholders and external auditors.
Date posted: November 1, 2022. Answers (1)