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Four remedial measures to agency conflict between shareholders and debenture holders.
(i) Using restrictive covenants – these are agreements that limits the actions of the company. For example, cash flow covenants, liability-based covenants, asset-based covenants, etc.
(ii) Board representation – the creditors may demand to have a representative in the board of directors to take care of their interests.
(iii) Demanding security/collateral before granting credit.
(iv) Threats of not granting future credit
francis1897 answered the question on November 7, 2022 at 08:56
- The forecasted rate of return from investment in securities X and Y over the next 5 years are as follows:
...(Solved)
The forecasted rate of return from investment in securities X and Y over the next 5 years are as follows:
Forecasted returns (%)
Year Security X Security Y
2022 10 12
2023 12 8
2024 8 13
2025 15 11
2026 10 6
Required:
(i) The expected rate of return for security X and security Y.
(ii) The standard deviation of returns of security X and security Y.
(iii) The coefficient of variation of security X and security Y.
(iv) Interpret results in (c) (i) and (c) (ii) above.
Date posted: November 7, 2022. Answers (1)
- Propose three strategies a firm could use in management of cash in the context of working capital financing policies. (Solved)
Propose three strategies a firm could use in management of cash in the context of working capital financing policies.
Date posted: November 7, 2022. Answers (1)
- Explain the following forms of dividend:
(i) Stock dividend.
(ii) Scrip dividend.(Solved)
Explain the following forms of dividend:
(i) Stock dividend.
(ii) Scrip dividend.
Date posted: November 7, 2022. Answers (1)
- Zenkel Traders borrowed sh.10,000,000 at interest rate of 15% per annum from Pesa Bank. The loan is to be repaid in equal annual installments for...(Solved)
Zenkel Traders borrowed sh.10,000,000 at interest rate of 15% per annum from Pesa Bank. The loan is to be repaid in equal annual installments for the next six years.
Required:
Prepare a loan amortization schedule.
Date posted: November 1, 2022. Answers (1)
- Explain the following types of risk in relation to finance and investments.
(i) Political risk.
(ii) Technological risk.(Solved)
Explain the following types of risk in relation to finance and investments.
(i) Political risk.
(ii) Technological risk.
Date posted: November 1, 2022. Answers (1)
- Hazyl Ltd. applies the Baumol’s Model to control its cash balances. The firm’s annual cash requirements are estimated at sh.4,000,000. It incurs a cost of...(Solved)
Required:
(i) The optimal cash balance.
(ii) Assuming 360 days in a year, determine the cash conversion period.
(iii) The average cash balance.
Date posted: November 1, 2022. Answers (1)
- Identify four factors that might influence the working capital needs of a company.(Solved)
Identify four factors that might influence the working capital needs of a company.
Date posted: November 1, 2022. Answers (1)
- Delight Limited is considering its capital budgets for the year 2022. The following information relates to three mutually exclusive projects that the management is contemplating...(Solved)
Delight Limited is considering its capital budgets for the year 2022. The following information relates to three mutually exclusive projects that the management is contemplating to undertake.
Project Initial cash outflows Cash inflows
Sh. "000" Sh. "000"
Year 1 Year 2 Year 3
A (8,000) 2,000 4,000 6,000
B (10,000) 4,000 6,000 6,000
C (20,000) 8,000 12,000 10,000
Additional information:
1. The firm has a capital budget ceiling of sh.20 million.
2. The cost of capital for Delight Limited is 10% per annum.
Required:
Advise the management on the projects to undertake using each of the following investment appraisal techniques.
(i) Net present value.
(ii) Profitability Index.
Date posted: November 1, 2022. Answers (1)
- Explain four differences between “Islamic banking” and “Conventional banking”.(Solved)
Explain four differences between “Islamic banking” and “Conventional banking”.
Date posted: November 1, 2022. Answers (1)
- The following information relates to the forecasted returns of securities A and B and their probabilities during the financial year ending 30 April 2022.
Probability ...(Solved)
The following information relates to the forecasted returns of securities A and B and their probabilities during the financial year ending 30 April 2022.
Probability Forecasted returns
A (%) B (%)
0.15 10 8
0.20 12 10
0.10 8 7
0.15 15 12
0.25 14 10
0.15 9 8
Required:
(i) The expected return of security A and security B.
(ii) The standard deviation of security A and security B.
(iii) Advise a potential investor on the security to invest in using relative risk.
Date posted: November 1, 2022. Answers (1)
- Citing three reasons, justify why a firm may prefer to raise finance through equity rather than debt finance.(Solved)
Citing three reasons, justify why a firm may prefer to raise finance through equity rather than debt finance.
Date posted: November 1, 2022. Answers (1)
- 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)
- Distinguish between an “aggressive” and “conservative” working capital policy of a firm.(Solved)
Distinguish between an “aggressive” and “conservative” working capital policy of a firm.
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)
- Discuss four potential causes of conflict between shareholders and the management.(Solved)
Discuss four potential causes of conflict between shareholders and the management.
Date posted: November 1, 2022. Answers (1)
- Explain two types of financial decisions made in a company.(Solved)
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)