Kindly Answer the questions below;
Three years ago, Mrs Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd. a company quoted on the stock exchange. The dividend payments from this investment makes up a significant portion of Mrs. Waziri's income. She was alarmed when ABC Ltd, dropped its year 2001 dividend to Sh.1.25 per share from Sh.1.75 per share which it had paid in the previous two years. Mrs Waziri has approached you for advice and you have gathered the information given below regarding the financial condition of ABC Ltd. and the finance sector as a whole. 1999 2000 2001 Sh'000' Sh'000' Sh'000' Cash 15,250 14,400 8,000 Accounts receivable 80,320 87,800 134,400 Inventory 98.600 158.800 254.000 Total current assets 194,170 261,000 396,400 Land and buildings 25,230 27,600 25,000 Machinery 33,800 36,400 30,600 Other fixed assets 14.920 18.200 16.400 Total assets 268,120 343,200 468,400 Accounts and notes payable 34.220 73,760 135,848 Accruals 15.700 34.000 67.000 Total current liabilities 49,920 107,760 202,848 Long term debt 60,850 60,858 81,720 Ordinary share capital 115,000 115,000 115,000 Retained earnings. 42.350 59.582 68.832 268,120 343,200 468,400ABC Ltd. Income Statement for the year ending 31 October 1999 2000 2001 Sh'000' Sh'000' Sh'000' Sales (all on credit) 827,000 858,000 890,000 Cost of sales (661,600 (710.000) (712,000) Gross profit 165,400 148,000 178,000 General administrative and selling expenses (63,600) (47,264) (51,200) Other operating expenses (25.400) (31.800) (38.200) Earnings before interest and tax (EBIT) 76,400 68,936 88,600 Interest expense (12,800) (26.800 (63.600) Net income before taxes 63,600 42,136 25,000 Taxes (25.400) (16.854) (10.000) Net income 38.200 25.282 15.009 Number of shares issued 4,600,000 4,600,000 4,600,000 Per share data: Earnings per share (EPS) Sh.8.30 Sh.5.50 Sh.3.26 Dividend per share Sh.1.75 Sh.1.75 Sh.1.25 Market price (average) Sh.48.90 Sh.25.50 Sh. 13.25Industry Financial ratios (2001) Quick ratio 1.0 Current ratio 2.7 Inventory turnover 7 times Average collection period 32 days Fixed asset turnover 13.0 times Total assets turnover 2.6 times Net income to net worth 18% Net profit margin on sales 3.5% Price-Earnings (P/E) ratio 6 times Debt/Equity ratio 50% Notes Industry ratios have been roughly constant for the past four years. Inventory turnover, total assets turnover and fixed assets turnover are based on the year-end balance sheet figures. Required a ) The financial ratios for ABC Ltd. for the past three years corresponding to industry ratios given above. b) Arrange the ratios calculated in (a) above in columnar form and summarise the strengths and weaknesses revealed by these ratios based on: Trends in the firm's ratios. Comparison with industry averages. (The summary should focus on the liquidity, profitability and turnover ratios).In a company, an agency problem may exist between management and shareholders on one hand and the debt holders (creditors and lenders) on the other because management and shareholders, who own and control the company, have the incentive to enter into transactions that may transfer wealth from debt holders to shareholders. Hence, the need for agreements by debt holders is lending contracts. Required a) State and explain any four actions or transactions by management and shareholders that could be harmful to the interests of debt holders (sources of conflict). b) Write short notes on any four restrictive covenants that debt holders may use to protect their wealth from management and shareholder raids
