ATTEMPT ALL QUESTIONS

QUESTION ONE

Family Bank is extending a job offer for the position of an accountant. The proposed compensation

package includes a constant base salary of sh$.35,000,$ to remain unchanged until the employee's

retirement. Additionally, there is an immediate joining bonus of sh$.10,000.$ The first annual salary

payment will be made one year from the start of employment, and the employee is expected to

work for $25$ years. To evaluate the present value of this job offer, the company intends to use a

discount rate of $12\%.$ How does the company calculate the present value of the entire job offer?

QUESTION TWO

$($a$)$ Capital structure decision remains a central role of management in pursuit of the maximization

of the shareholders wealth. Analyze four factors that influence the financing decision of a firm

$($b$)$ Consider two firms $L$ and $U$ which are identical in all aspects and risk class except for capital

structure. The earnings before interest tax and cost of equity for each firm are expected to be

Sh$.1000,000$ and $10\%$ respectively. Firm $U$ is an all$-$equity financed firm while firm $L$ has $9\mathrm{.}0$

$\%$ debt of Sh$\mathrm{.}5,000,000.$ All the assumptions of traditional capital structure theory apply.

Required

$($i$)$ Estimate the value of levered firm $($L$)$ and Unlevered firm $($U$)$ using Net Income $($NI$)$

approach;

$($ii$)$ Estimate the average cost of capital for each firm

$($iii$)$Based on values for firm $L$ and firm $U$ computed in $($i$)$ above, comment whether there is

an arbitrage opportunity

QUESTION THREE

$($a$)$ The concept of a goal is indispensable in organizational theory. In this regard, it could be said

that "Shareholder wealth maximization is NOT only the best way but it is the only way of

Maximizing the economic interest of all stakeholders in a firm". In reference to the foregoing

statement and assuming that the stakeholder view is parallel to the Shareholder wealth

maximization goal, provide evidence based justifications $($using examples and or illustrations$)$

that makes shareholder value maximization a central and superior objective

$($b$)$ Briefly discuss three effective measures that management of a company can employ in order

to accelerate availability of cash from credit customers