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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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Explain four features of an ideal investment appraisal method.(Solved)
Explain four features of an ideal investment appraisal method.
Date posted: April 25, 2022.
- 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.
- Explain why capital budgeting decisions are important.(Solved)
Explain why capital budgeting decisions are important.
Date posted: April 25, 2022.
- 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.
- 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.
- 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.
- 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.
- Distinguish between Futures and forwards as used in finance.(Solved)
Distinguish between Futures and forwards as used in finance.
Date posted: April 25, 2022.
- 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.
- 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.
- Explain the relationship between risk and return.(Solved)
Explain the relationship between risk and return.
Date posted: April 25, 2022.
- 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.
- 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.
- Musa Onyango has invested in a portfolio that comprises two assets as shown below;-
Correlation coefficient between the rates of return of asset “C” and asset...(Solved)
Musa Onyango has invested in a portfolio that comprises two assets as shown below;-
Correlation coefficient between the rates of return of asset “C” and asset “S” is 0.30
Required;-
i. Portfolio expected return
ii. Portfolio risk
Date posted: April 25, 2022.
- Using a well-labelled diagram, differentiate between ‘systematic risk’ and ‘unsystematic risk’.(Solved)
Using a well-labelled diagram, differentiate between ‘systematic risk’ and ‘unsystematic risk’.
Date posted: April 25, 2022.
- Two firms. A Ltd. And B Ltd. Operate in the same industry. The two firms are similar in all aspects except for their capital structures.
The...(Solved)
Two firms. A Ltd. And B Ltd. Operate in the same industry. The two firms are similar in all aspects except for their capital structures.
The following additional information is available.
i) A ltd. Is financed using sh.100 million worth of ordinary shares.
ii) B ltd. Is financed using sh.50 million in ordinary share and sh.50 million in 7% debentures.
iii) The annual earnings before interest and tax sh.10 million for both firms. These earning are expected to remain constant indefinitely.
iv) The cost of equity in A LTD.IS 10%.
v) The corporate tax rate is 30%.
Required:
Using the Modigliani miller (mm) model, determine the following.
i) The market value of A ltd. and B ltd.
ii) The weighted average cost of capital of A ltd. And B ltd.
Date posted: April 14, 2022.
- Biashara Ltd is financed by debt and equity. The company is in the process of determining the optimal capital structure that will minimize its weight...(Solved)
Biashara Ltd is financed by debt and equity. The company is in the process of determining the optimal capital structure that will minimize its weight average cost of capital.
The cost of debt at various levels of leverage is as follows:
Date posted: April 14, 2022.
- The following balance sheet relates to Mapeo Ltd for the year ending 31 December 2006:
Additional information:
i) The company’s earnings before interest and tax average sh.16,...(Solved)
The following balance sheet relates to Mapeo Ltd for the year ending 31 December 2006:
Additional information:
i) The company’s earnings before interest and tax average sh.16, 000,000 per annum
ii) The current market price per share is sh.90
iii) The corporate tax rate is 30%
iv) All the company’s profit are distributed as dividends
v) Assuming that all the assumptions of the traditional theory of capital structure hold, except for the existence of taxes
Required:
The company’s market-weight average cost of capital using the traditional theory
Date posted: April 14, 2022.
- Maisha Ltd and Bora Ltd manufacture wall clocks. The selling price of each clock is sh.1000 with a variable cost of sh.700.Each of the company...(Solved)
Maisha Ltd and Bora Ltd manufacture wall clocks. The selling price of each clock is sh.1000 with a variable cost of sh.700.Each of the company realizes average annual sales of sh.70,000,000 and incurs average fixed costs of sh.1,700,000 per annum.
Maisha Ltd and Bora Ltd manufacture wall clocks. The selling price of each clock is sh.1000 with a variable cost of sh.700.Each of the company realizes average annual sales of sh.70,000,000 and incurs average fixed costs of sh.1,700,000 per annum.
However, the two companies differ in their capital structures as stated below:
Maisha Ltd. Is an all-equity financed company having issued 40,000 ordinary shares of sh.10 per value.
Bora Ltd is financed with 20,000 ordinary shares of sh.10 per value and a loan of sh.1600, 000 at an interest rate of 10% per annum
The corporation tax is 30%
Required:
i) The of operating leverage and financial leverage for each company
ii) The degree of combine leverage for each company
iii) The break-even point (in units) for each company. Comment on the significance of your results
iv) The earning per share (EPS) at the point of indifference between the earning of the two
companies
Date posted: April 14, 2022.
- Dawanox Ltd, an unlevered firm, generates average earnings before interest and tax (EBIT) of Sh. 20 million per annum.the market value of the company as...(Solved)
Dawanox Ltd, an unlevered firm, generates average earnings before interest and tax (EBIT) of Sh. 20 million per annum.the market value of the company as at 31 October 2007, the company’s financial year-end, was Sh.120 million.
Required:
(i) The company’s cost of equity and weight average cost of capital(WACC) as at 31 October 2007
(ii) The company’s optimal level of debt finance using the Modigliani and Miller (MM) with-tax model (excluding financial distress costs)
(iii) The company’s optimal level of debt finance using the MM with-tax model incorporating financial distress costs.
Date posted: April 14, 2022.
- The following information relates to two firms; Bora Ltd and Beta Ltd:
Required:
i) Degree of operating leverage for each firm.
ii) Comment on how the operating leverage...(Solved)
The following information relates to two firms; Bora Ltd and Beta Ltd:
Required:
i) Degree of operating leverage for each firm.
ii) Comment on how the operating leverage has impacted on the earnings available to
shareholders of each firm
Date posted: April 14, 2022.
- The following information relates to Abacus Ltd, an all equity financed company
1 The market value of a company (determine using the net income approach)...(Solved)
The following information relates to Abacus Ltd, an all equity financed company
1 The market value of a company (determine using the net income approach) is sh. 130 million
2 The cost of equity is 16 per cent
3 The management of the company intends to replace sh. 8 million worth of equity with debenture of similar value (assume all legal requirement will be fulfilled).The cost of the debenture would be 12 per cent(before tax)
4 The company’s earnings before interest and tax (EBIT) are expected to remain constant in the foreseeable future
5 All earnings after tax are paid out as dividends
6 The corporate rate of tax is 30 per cent
Required:
(i) Using the Modigliani and Miller (MM) approach, assess the effects of the change in capital
structure on the market value of the company, cost of equity and weight average cost of capital.
(ii) Advise the management of the company on whether to change the capital structure
Date posted: April 14, 2022.
- The following extract of the balance sheet of Mapato Ltd, shows the capital structure of the company as at 31 December 2007
The management of the...(Solved)
The following extract of the balance sheet of Mapato Ltd, shows the capital structure of the company as at 31 December 2007
The management of the company considers the above capital structure to be optimal
Additional information:
1. The company’s earnings before interest and tax (EBIT) average sh 75 million per annum.
These are expected to be maintained in the foreseeable future
2. the ordinary shares are currently trading at Sh 4oo per share
3. the market price of the debentures is sh525 per debenture
4. The corporate rate of tax is 30 per cent
Required:
Using the net income approach (incorporate taxes), calculate the company’s
(i) Cost of Equity
(ii) After tax cost of debt(Market value weighted)
(iii) Market-weighted average cost of capital
Date posted: April 14, 2022.