KIKA Ltd deals in supply of stationery for printing and scanning services in Soroti municipality. The following information was extracted from their books for years ended 31 December, 2017 and 2018.

Statement of financial position:

Particulars

Assets: Non-current assets Current assets: Inventory

Accounts receivable Cash

Total current assets Total Assets Liabilities & equity: Current liabilities: Payables

Accruals

Total current liabilities

20% long-term loan

Ordinary share capital

10% irredeemable preference shares Retained profits

Total

Statement of financial performance.

2018 Shs '000' Sales 80,000

2018 2017 Shs '000' Shs '000'

85,000 83,900

26,000 31,000 39,000 29,000 21,000 18,000 86,000 78,000

171,000 161,900

31,000 30,900 14,500 16,000 45,500 46,900 50,000 46,000 40,000 40,000 10,000 10,000 25,500 19,000

171,000 161,900

Particulars

2017 Shs '000' 72,000 (39,700) 32,300 (8,000) 24,300 (9,200) 15,100 (4,530) 10,570

Cost of sales

Gross profit

Operating expenses

Earnings before interest and tax

Interest (10,000)

(45,000) 35,000 (9,000) 26,000

Earnings before tax Tax 30%

Earnings after tax

16,000 (4,800) 11,200

Additional information:

1. Inventory on 1 January 2017 was Shs 22 million.
2. KIKA Ltd declared a dividend of Shs 2,000 per ordinary share and the
3. market value of each ordinary share is Shs 20,000.
4. The dividends are expected to grow at a rate of 7% per year.
5. KIKA Ltd wishes to raise an additional Shs 100 million to acquire a modern
6. printer which does both printing and scanning. The additional funds will be raised through; sale of new shares Shs 20 million, 12% preference shares Shs 10 million, bonds Shs 40 million and it also anticipates that Shs 30 million will be generated internally in form of retained earnings. The issue of additional shares will lower the price of these shares to Shs 19,000 per share and the growth rate of dividends will increase to 10% per year. The new bond will carry a coupon rate of 10% and the rest are expected to remain constant.
7. The modern printer is expected to generate cash flows of Shs 35 million per year for a period of 5 years.

Required:

(a) From KIKA Ltd's financial statements, compute and comment on the following financial ratios.

1. (i)Inventory turnover
2. (ii)Return on assets
3. (iii)Debt to equity ratio
4. (iv)Return on capital employed

1. (b)Discuss the limitations of using financial ratios in decision making.
2. (5 marks)
3. (c)Using book values, compute KIKA Ltd's weighted average cost of capital and marginal weighted average cost of capital.
4. (16 marks)
5. (d)Evaluate KIKA Ltd's proposal to purchase a modern printer using the net present value technique.
6. (7 marks) (Total 40 marks)

SECTION B

Attempt any three of the four questions in this section

Question 2

Prime Micro Finance Ltd (PMFL) is a Micro Finance Deposit-Taking Institution (MDI) that accepts deposits and offers credit to facilitate retail customers. Before PMFL grants credit to a customer, it ensures that the customer is creditworthy to limit occurrence of bad debts. Customers being the major stakeholders of the company are not happy with the signing of credit documents that are not in the local language, together with lack of communication from management whenever interests change.

One of the customers Mr. Zumi who is not happy with the bank, reported the matter to Capital Markets Authority (CMA) for help since this company is listed on Uganda Securities Exchange. In response, CMA advised that the matter be reported to Bank of Uganda since financial institutions are regulated by Bank of Uganda.

You have been selected by the Board of PMFL, as a finance consultant:

Required:

1. (a)Discuss any four methods that can be used by PMFL to assess the
2. creditworthiness of its customers/ borrowers.
3. (8 marks)
4. (b)Advise Mr. Zumi on the functions of CMA as stipulated in the Capital Markets Authority Act, 1996.
5. (8 marks)
6. (c)Discuss the role of management in meeting stakeholder objectives.
7. (4 marks) (Total 20 marks)

Question 3

Bongo (U) Ltd (BUL) has two types of debt stock in its capital structure and is trying to determine their cost. The details about both debt stocks are as provided below. BUL has identified you as a finance expert to provide guidance on cost of capital.

Shs '000' 10% convertible debenture 2023 100,000 15% irredeemable debenture 150,000 250,000

The following additional information is also relevant:

1. The convertible debenture currently sells at Shs 850 cum-interest.
2. The convertible debenture may be converted into 10 ordinary shares in
3. 2023 at Shs 120 per ordinary share.
4. Assume the conversion will take place and when it is done, the shares will
5. immediately be sold into equity at Shs 120 per ordinary share.
6. The irredeemable debenture currently sells at premium of 12%.
7. Assume today is 1 January 2019.

Required:

(a) (i) Calculate the cost of capital for both the convertible and irredeemable debentures.

(ii) Explain to the management of BUL the advantages of having convertible debt stock.

(4 marks)

1. (b)Explain to the management of BUL why due diligence is crucial in making capital budgeting decisions.
2. (6 marks)
3. (c)According to Mendlow, stakeholders' interests and powers to influence the decisions of the company should be assessed and addressed accordingly.
4. Required:
5. Explain to the directors of BUL the factors to consider when assessing the powers of different stakeholders.

(4 marks) (Total 20 marks)

Question 4

The Finance Manager of BIVA Property Masters Ltd (BPML) informed members in one of the stakeholders' meeting that every financial year the company retains some of the earnings to be re-invested. During the year 2017, the company retained Shs 55 million. One of the members suggested that the company should always invest Shs 20 million on fixed deposit account annually for 10 years with FDB Bank which currently offers an interest rate of 10% and the balance, if any, should be invested in real estate.

Required:

(a) (i)

Compute the value of the suggested series of deposit with FDB for 10 years.

(3 marks)

(ii) Assuming that BPM wants to earn a constant amount of Shs 10 million annually for an indefinite period of time at an interest rate of 10%; advise the company on the initial sum to be invested to achieve this objective.

(3 marks)

(b) When selecting projects for investment in capital budgeting, it is necessary to evaluate an investment project with the help of the most suitable evaluation methods. These methods are categorised as discounting and non-discounting methods.

Required:

(i) (ii) (iii)

Explain the differences between discounting and non-discounting evaluation methods.

(4 marks)

Discuss the popularity of the payback method despite its shortcomings.

(4 marks)

Explain the importance of financial analysis in corporate management.

Question 5

1. (a)The Chief Executive Officer (CEO) of KENZO (U) Ltd (KUL) attended a seminar organised by the Institute of Certified Public Accountants of Uganda (ICPAU) about cost management. In one of the presentations, there was a statement that intrigued the CEO that read as follows:
2. "Cash is the most liquid asset in any business; it is the ultimate output expected to be realized by selling a service or a product manufactured by the company. A firm must strike a balance between holding excessive and very small amount of cash. If excessive cash balance is maintained, the excess funds will be idle and if small amounts are held, it can lead to shortage of cash hence disrupting the operations of the organisation. Therefore, the major aspect of cash management is to keep proper cash balance".
3. The CEO, on return from the seminar, has tasked you, the finance manager of the company to elaborate more on the policies and practices of good cash management so as to maintain an optimum cash balance.
4. Required:
5. Explain to the CEO:
6. (i)the principles of cash management. (4 marks)
7. (ii)using illustrations, the models used to determine optimum cash
8. levels in an organization like KUL.
9. (10 marks)
10. (b)Discuss the main features of sole proprietorship as a form of business organisation where financial management is practiced.