Question 1

Polo Uganda Ltd (PUL) is a subsidiary of Polo (UK) Ltd and deals in the manufacture of sports gear and other sports items.PUL has just been registered in Uganda and is in the process of evaluating a capital investment project to acquire a machine that will be used to manufacture the sports uniforms and footballs required by Mbamu Sports Club (MSC).

PUL has also applied for funding from one of the local banks but the finance director is unsure of the current cost of capital. PUL has approached you as an expert in financial management for advice. You have been provided with the forecast and estimates of the proposed project and operations.

The following details on the proposed project are availed to you to evaluate its viability:

1. PUL will require a machine to produce uniforms and footballs for MSC.The machine will be imported from the UK at 800,000. 2. Shs 200 million installation costs will be incurred.3. The company will incur transportation cost of 50,000 from UK to Uganda. 4. Import taxes for the machine will amount to Shs 500 million. 5. The machine will have a scrap value of Shs 5 million at the end of its life of 5 years. 6. The machine will be depreciated on a straight-line basis over its useful economic life. 7. MSC requires 20,000 pairs of sports uniforms and 500 footballs per year for the next five years. 8. For the entire project life, production of each pair of uniform will require Shs 100,000 for raw materials, Shs 50,000 for labour while one football will require Shs 30,000 for materials and Shs 20,000 for labour. 9. Other variable costs attributable to the manufacture of both sports uniforms and footballs include Shs 10 million in electricity and Shs 5 million for water per year. These costs are constant throughout the project life and are shared between uniforms and footballs in the ratio of 4:1 10. Each pair of sports uniform is expected to be sold at Shs 236,000, and each football is quoted at Shs 100,000. These prices are expected to remain constant for the next five years. 11. PUL currently has 50 permanent staff and the company incurs Shs 100 million on salaries and wages per month.

Financial Management - Paper 10

22 August, 2018Page 3 of 10

12. The average exchange rate between the Uganda shilling and UK pound is 4,500:1. 13. The minimum required rate of return by the shareholders of PUL is 15%.The following additional information was provided to you in regard to the current capital structure of PUL:Shs 'million' Ordinary shares Shs 20,000 per share 10,000 15% bonds 30,000 10% debenture 50,000 Bank loan 20,000 Total capital 110,000

Note:

1. The ordinary share currently sells at Shs 30,000 cum-div. 2. The 15% bonds sell at par. 3. The 10% debenture sells at premium of 5% ex-interest. 4. The interest rate on the bank loan is currently at 10% market rate. 5. The company expects to pay a dividend of Shs 5,000 per share. 6. The bonds and debentures are irredeemable.

Required:

(a) Using the internal rate of return (IRR) method, evaluate the viability of the project above. (20 marks)(b)Determine the weighted average cost of capital of the existing funds of PUL. (15 marks) (c) Explain to the management of PUL the advantages of debt finance in contrast with equity capital. (5 marks) (Total 40 marks)

SECTION B

Attempt any three questions from this section

Question 2

(a) Tot Services Ltd (TSL), a road construction company operating in Northern Uganda, has its main camp site in Gulu Municipal Council. The company on average requires 2,000 litres of fuel per day to run all their machines and equipment.Their fuel supplier is Fuel Masters, a petrol station based in Gulu. A fixed cost of Shs 30,000 is incurred for placing an order of 2,000 litres and Shs 500 to carry a 20-litre jerrycan to its fuel depots.The lead time is 2 days.

In January 2018, Uganda was hit by fuel shortage and this affected all fuel stations including Fuel Masters which caused inability to supply fuel to their clients including TSL.During the weekly management meeting, the finance manager of TSL suggested that TSL should think of buying shares in one of the big fuel companies in Uganda that are listed on the Securities Exchange in order to ensure reliable fuel supply.

Required:

As a management consultant, compute and advise TSL on the:(i) economic order quantity. (4 marks) (ii) total ordering costs. (2 marks) (iii) total carrying costs. (2 marks) (iv) re-order level. (2 marks)

(b) Discuss the:

(i) roles of a finance manager in an organisation. (5 marks) (ii) various sources of finance for capital investment projects. (5 marks) (Total 20 marks) Question 3

When India's Prime Minister, Mr. Narendra Modi visited Uganda in July 2018, he was happy to learn that 60% of the major companies in Uganda are owned by Indians. He was, however, saddened to learn that most of these companies are neither listed on the Uganda Securities Exchange (USE) nor the Indian Stock Market in form of international cross listing.During his presentation to the Indian community in Uganda, he emphasised the benefits of companies getting listed on stock markets.He advised them to seek listing not only on the USE but also on regional and overseas stock markets.

The directors of one of the companies, who organised Mr. Narendra's welcome party, M/S Tembo Steel Ltd, picked interest and wants to list their company on the USE but they are not familiar with the procedures and requirements.

You have been contacted by M/S Tembo Ltd to provide professional services on the listing process.

Required:

Advise the directors of Tembo Steel Ltd on:(a) the listing procedures on the USE. (5 marks) (b) the contents of a prospectus. (5 marks) (c) why companies may wish to be listed on more than one stock market. (5 marks) (d) the challenges faced by stock markets in Uganda. (5 marks) (Total 20 marks) Question 4

Goodwill Enterprise Ltd (GEL) was incorporated in Uganda in 2015 and deals in estates management. GEL is entirely financed by equity but can use other sources of finance as stipulated in its Memorandum and Articles of Association.Because of the current economic hardships, low occupancy is expected and management is concerned.A survey has been conducted on how the business will fare for the first half of the year 2019 and the real estate business is projected to be negatively affected.At a recent Board meeting, the Chief Executive Officer (CEO), proposed that "bonds or preference shares should be issued in order to generate more funds for growth." This was in support of the proposal by one of the directors to diversity and buy land for re-sale since land appreciates in value whereas buildings depreciate.

The following information was also obtained during the survey in regard to projected rental payments and business operations in general:1. Projected rentals for the period January to June 2019. Month Jan. Feb. Mar. April May June Shs 'million' 100 200 250 400 600 800

It was estimated that (i) 50% of the tenants will pay cash every month. (ii) 40% of the tenants will pay after a month. (iii) 10% of the tenants are doubtful.

2. Purchases: Two estates are still under construction and during the period January to June 2019, building materials will be purchased as follows: Month Jan. Feb. Mar. April May June Shs 'million' 50 60 80 280 380 450

The suppliers of these building materials can be paid in the month following delivery. 3. Wages for management and contractors of Shs 50 million will be paid per month. 4. Maintenance costs at all sites are estimated at Shs 10 million in January 2019 and are expected to increase to 15 million in June 2019. 5. Utility bills are expected to be Shs 3 million per month and paid a month in arrears. 6. Purchase of land worth Shs 100 million is to be made in March 2019 in line with the director's proposal. 7. Cash balance at the end of December 2018 will be Shs 10 million.

Required:

(a) Prepare cash budget for the period of January to June 2019, and advise management on the performance of the business. (10 marks) (b) Explain to management the key features of:

(i) bonds. (5 marks) (ii) shares. (5 marks) (Total 20 marks) Question 5

One of the leading banks in Uganda has recently been in the media encouraging the public to form investment clubs and access funds for investment and plan for retirement when it is still early enough. A group of employees from Mapambano Grain Millers formed KPC Investment Club.They saved Shs 120 million and they expect to get 150% of their savings as loan from the bank. They plan to invest these funds in projects that bring returns in the shortest possible time but their worry is the risk. They have identified three projects and their possible returns given the state of the economy but they are unable to determine the risk associated with these projects.You have been hired as a financial consultant to advise on risk management and the following information is provided:

Financial Management - Paper 10

22 August, 2018Page 7 of 10

Possible returns (%) from: Economic condition Probability Real estates Bonds Bakery Boom 0.20 30 45 20 Normal 0.70 15 30 30 Recession0.10 10 25 20

Required:

(a) Determine the risk and return of the three projects and advise the employees of Mapambano Grain Millers in which project to invest their funds.(12 marks)

(b) Explain to the members of KPC Investment Club the risks that may affect the realisation of the expected returns from their investment. (4 marks)

(c) Discuss the strategies that can be employed to deal with risk in the real business world. (4 marks)