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output has dwindled over the past two years due to increasing labour costs. Labour unions have pressured policy makers into amending labour regulations, particularly those relating to pension and minimum wage. to provide more benefits and protection for workers. The directors of FUL believe that production and profitability of DUL will be enhanced if its production process is mechanised. The two companies have agreed to merge and form Smart Collections Uganda Ltd (SCUL). It has been agreed that DUL's shareholders will accept four shares in FUL for each share they hold. Below is a summary of nancial data for the two companies immediately before merger: FUL DUL Number of shares (million) 120 30 Annual earnings (Shs 'million') 30.0 17.4 Price-earnings ratio 10 12 Post-merger annual earnings of the merged company are expected to be 8% higher than the sum of the earnings of each of the companies before the merger due to economies of scale and other synergies. The market is expected to apply a PIE ratio of 11 to SCUL. SCUL management has approached you as a financial analyst to get a deeper understanding of the situation at hand and needs guidance on a number of issues. Required: (a) Analyse the extent to which the shareholders of DUL will benefit from the proposed merger. (13 marks) (b) Advise the shareholders of DUL and FUL on the: (i) reasons why mergers are not always successful. (6 marks) (ii) major considerations that the predator company has to take into account when deciding on how to finance a proposed takeover. (6 marks) (Total 25 marks) BUL's Business Development Manager has informed the Board that once they take on the investment, the company will face many new risks. challenges and opportunities arising from international factors. most of which will have an influence on its cash flows. The company is exploring a number of financing options including the Eurobond. Islamic finance and term loan. BUL submitted a financing proposal to Salam Bank Ltd which has agreed to give BUL a fixed-rate 5-year term loan for the full KShs 2.800 million at an interest rate of 5% below the prime lending rate. At the conclusion of the meeting between Salam Bank Ltd and BUL Board of Directors. the President of Salam Bank commented that working together would be like old times when he and BUL's Chief Executive Officer (CED) used to run a business together. You are a certified public accountant and have been earmarked as a key advisor on a number of concerns affecting BUL. Required: (a) Evaluate the proposed investment and recommend whether or not BUL should go ahead with the proiect. State clearly any assumptions you make and work out your calculations in millions rounded to nearest one million. (25 marks) (b) Advise BUL on the main risks arising from international factors which may influence cash-flows. (8 marks) (c) Assuming that there are limits on funds that can be repatriated from Kenya, discuss the steps BUL could take to get around this. if it set up a subsidiary in Kenya. (6 marks) (d) Advise BUL on the advantages and drawbacks of using Islamic finance and the Eurobonds. (8 marks) (e) Discuss the possible ethical issues likely to arise from the relationship between the Salam Bank President and BUL's CEO, with respect to the proposed term loan. (3 marks) (Total 50 marks) Question 4 A group of young graduates have formed an investment club and they have just acquired a loan from the Youth Venture Capital Fund under the Ministry of Gender. Labour and Social Development. They are considering two projects; a car washing bay (W) and poultry farming (P). The returns from these two projects vary depending on the state of economic growth. They are as follows: Returns (%) from State of the economy Probability W P Rapid 0.15 45 18 Stable 0.70 20 17 Slow 0.15 -10 16 Since there appears to be a degree of inverse correlation between demand and therefore net cashflows from the two projects it seems sensible to consider diversified development. Required: (a) Evaluate the two alternative investments and advise the group of young graduates. (15 marks) (b) Discuss the limitations of portfolio analysis. (10 marks) (Total 25 marks) Question 5 Mbale Foam Ltd (MFL), is an unlisted company and has been manufacturing mattresses and other foam products since 2010. The company is considering a new project which requires Shs 7.5 billion investment in capital expenditure and net working capital. The Finance Director, while presenting a paper to the Board of Directors on the relative costs of equity and debt as sources of finance commented \"the risk faced by each class of investor drives the required return of that investor and the required return drives the firm's cost of each source of finance\". He went on to explain that one of the most important sustainability factors requisite for the accelerated development of an economy is the existence of a dynamic financial market. Financial markets can be found in nearly every nation in the world. Some are very small, with only a few participants, while others, like the New York Stock Exchange (NYSE) and the foreign exchange markets, trade trillions of dollars daily. Question 2 Chamuka (U) Lid (CUL) is planning to invest in a new production plant costing Shs 30 billion. The following is financial data related to the investment project: Shs 'million' Revenue/ turnover 7,500 Variable cost of sales 3,300 Other operating expenses 960 CUL plans to use debt capital to finance the project through a fresh issue of 6 % 5 year debentures. CUL's recent summarised accounts before taking into account the effects of the new investment are set out below: Statement of financial position as at 31 December, 2017 Shs 'million' Shs 'million' Non-current assets: Property, plant & equipment 60,000 Good will 15,000 75,000 Current assets: Inventories 12,000 Trade receivables 18,000 30,000 Total assets 105,000 Equity & liabilities: Equity: Share capital 48,000 Retained earnings 24,000 Total equity 72,000 Non-current liabilities: 10% debentures 24,000 Payables falling due within one year: Trade and other payables 6,000 Short-term borrowings 3,000 Total liabilities 33,000 Total equity & liabilities 105,000Question 1 Bamasaba Uganda Lid (BUL), a Ugandan based company, is considering whether to start manufacturing in Kenya. A suitable local factory has been identified which would cost KShs 2.8 billion including all machinery and fittings. The project is expected to last five years and then BUL would sell the machinery for an estimated KShs 1.2 billion. The historical cost of the machinery is KShs 1.5 billion. The market values of other assets are likely to increase in line with inflation in Kenya. BUL may deduct tax allowable depreciation on machinery on the value of KShs 1.5 billion on a straight-line basis at a rate of 10% per annum. No tax allowable depreciation is available on other assets. At the start of each year, the factory would require working capital equal to 10% of that year's sales revenues. Production schedule: Annual production is projected at 140,000 units and all units produced would be sold. Each unit from the Uganda parent which is sold at a fixed price of UShs 20,000 contributes UShs 5,000 to the parent's cash flows. Kenya costs and prices: Variable costs KShs 4, 800 per unit in year 1. Fixed costs KShs 140 million in year 1 Selling price KShs 12,000 per unit in year 1 Prices and costs (except for the Ugandan parent) are expected to increase in line with inflation in Kenya. Corporation tax rate in Uganda and Kenya is 30%, payable one year in arrears. A bilateral tax treaty exists between Uganda and Kenya which allows tax paid in Kenya to be offset against any Uganda tax liability. Given the prevailing political situation in Kenya, inflation is expected to be 8% per annum for the next five years. The Kenya Shilling is expected to depreciate by 4% per annum against the Uganda shilling. The current spot UShs / KShs: 34.00-36.00 BUL believes the appropriate risk adjusted discount rate for the project is 17%.Required: (a) (b) Prepare a presentation to the Board of Directors of MFL, discussing the relationship between the relative costs of sources of finance and the creditor hierarchy. (12 marks) Discuss the relevance of the following markets in the economic development of Uganda: (i) Stock markets. (6 marks) (ii) Inter-bank markets. (3 marks) (iii) Debt markets. (4 marks) (Total 25 marks) Statement of prot or loss for the period ended 31 December, 2017 Shs 'million' Sales 48.000 Cost of sales 1.28.3001 Gross profit 19,200 Operating expenses (40% variable) (8.500) Operating profit 10,800 Financing costs (2.400) Profit before tax 8,400 Income tax (30%) (2.520) Profit for the period 5,880 Dividends (ordinary dividends) (23311) Retained earnings M Additional information: (i) The company does not intend to allow its financial gearing level measured by prior charge capital as a prOportion of total capital employed exceed 50%. (ii) Average industry times interest earned ratio: 3 times Required: (a) Analyse and discuss the implications of the new investment on: (i) times interest earned ratio. (5 marks) (ii) operating leverage (0L). (5 marks) (iii) financial Leverage (FL). (5 marks) Hint: ( O L = Contribution ) Prot Before Interest 8?. Tax (b) Discuss the circumstances under which debt finance may be more appropriate for financing growth. (10 marks) (Total 25 marks) Question 3 Two clothing companies. Fashions (U) Ltd (FUL) and Designers (U) Ltd (DUL) have enjoyed a steady growth in recent years using an internal growth strategy. FUL is now seeking to merge with other companies to speed up its growth drive. It has identified DUL as a suitable candidate for merger. Both companies have the same level of risk. DUL produces high quality designer clothes, with which it has earned several awards. The company has recorded considerable profits in the past. but its