QUESTION ONE

(a) Distinguish between the following terms:

(i) Cum-dividend and ex-dividend. (4 marks)

(ii) Cum-all and ex-all. (4 marks)

(b) Akili Limited has issued a debenture whose par value is Shs. 1,000. The debenture can be redeemed at par after four years or converted to ordinary shares at a conversion rate of Shs. 100 per share. The projected market price of the share after the four year period could either be Shs. 90 or Shs. 120 based on the companys performance. The investors required rate of return is 10%.

Required:

The value of the debenture based on each of the expected share prices. (8 marks)

(c) Motor Works Limited intends to raise additional capital through an issue of ordinary shares of Shs. 80 par value. The company promises to pay dividend at the rate of Shs. 8 per annum and the expected market price of the shares after six years is Shs. 120.

An investor whose required rate of return is 10% intends to hold the shares for six years.

Required:

The intrinsic value of the shares (4 marks)

(Total: 20 marks)

QUESTION TWO

(a) Highlight four uses of the cost of capital to a limited liability company. (4 marks)

(b) The Finance Manager of Mapato Limited has compiled the following information regarding the companys capital structure. (4 marks)

Ordinary shares

The companys equity shares are currently selling at Shs. 100 per share. Over the past five years, the companys dividend pay-outs which have been approximately 60% of the earnings per share were as follows:

Year ended 30 September	Dividend per share
	Shs.
2004	6.60
2003	6.25
2002	5.85
2001	5.50
2000	5.23

The dividend for the year ended 30 September 2004 was recently paid.

The average growth rate of dividend is 6% per annum.

To issue additional ordinary shares, the company would have to issue at a discount of Shs. 3 per share and it would cost Shs. 5 in floatation cost per share.

The company can issue unlimited number of shares under the above terms.

Preference shares

The company can issue an unlimited number of 8% preference shares of Shs. 10 par value at a floatation cost of 5% of the face value per share.

Debt

The company can raise funds by selling Shs. 100, 8% coupon interest rate, 20 year bonds, on which annual interest will be made.

The bonds will be issued at a discount of Shs. 3 per bond and a floatation cost of an equal amount per bond will be incurred.

Capital structure

The companys current capital structure, which is considered optimal, is:

	Shs.
Long term debt	30,000,000
Preference shares	20,000,000
Ordinary shares	45,000,000
Retained earnings	5,000,000
	100,000,000

The company is in the 30% tax bracket.

Required:

(i) The specific cost of each source of financing. (12 marks)

(ii) The level of total financing at which a break even point will occur in the companys weighted marginal cost of capital. (4 marks)

(Total: 20 marks)

QUESTION THREE

(a) Distinguish between the following terms as used in the management of working capital:

(i) Overtrading and overcapitalization. (4 marks)

(ii) Factoring and pledging of debtors (4 marks)

(b) The following information relates to Mafuta Safi Limited:

	Shs. 000
Purchase of raw materials	6,700
Usage of raw materials	6,500
Sale of finished goods (all on credit)	25,000
Cost of sales (finished goods)	18,000
Average creditors	1,400
Average raw materials stock	1,200
Average work in progress	1,000
Average finished goods stock	2,100
Average debtors	4,700

Assume a 365 days year.

Required:

The length of the operating cash cycle (12 marks)

(Total: 20 marks)