SAMOTA Uganda Ltd (SUL) is a well-known manufacturer of cosmetics since its incorporation in 1998. SUL has been financed through bonds and ordinary shares over the years.

The Board of Directors (BOD) recently decided that more funds should be raised to finance one of the viable projects. The company treasurer was later tasked by management to ascertain the actual cost of those additional funds to be raised.

The funding options under consideration include:

1. An issue of 10% irredeemable debentures of Shs 1,000 and incur 4% floatation costs.
2. An issue of new ordinary shares with a market value of Shs 2,000 per share and expect to pay an initial dividend of Shs 100 per share. The dividends are expected to grow at a rate of 10% per annum and also 4% floatation costs will be incurred.

The funds will be used to finance either of the two projects, namely: 'MBUSH' which is a product that eliminates gray hair, or 'PIHU', another new product to bleach women's body skin. The two projects require the same initial outlay of Shs 122 million. MBUSH is expected to generate cash inflows of Shs 32 million per annum in the first two years and a 50% increment per year in the last two years. PIHU on the other hand is expected to generate annual cash inflows of Shs 41 million per year for the first two years and Shs 11 million per year for the subsequent two years. The minimum required rate of return is 15% per year.

Required:

1. (a)Determine the cost of debt, if debentures were issued at:
2. (i)par
3. (ii)a 10% discount
4. (iii)a 10% premium
5. (b)Determine the cost of equity using the Gordon growth model.
6. (c)As the treasurer of SUL, advise management on which project to
7. undertake, using the:
8. (i)net present value method.(10 marks)
9. (ii)internal rate of return method.(8 marks)
10. (d)Explain to the management of SUL the meaning of the following terms:
11. (i)Financial analysis.
12. (ii)Different methods of financial analysis.
13. (iii)Merits of trend analysis.

SECTION B

Attempt any three of the four questions in this section

Question 2

Mango (U) Ltd (MUL) is a manufacturer of fast moving consumer goods (FMCGs). The raw materials required to manufacture these unique products are imported from overseas and they are sourced from different countries. Because of the long time lag between purchase and delivery of raw materials and movements in foreign exchange rates between the shilling and major currencies like the US dollar, Japanese yen, euro and British pound, MUL usually experiences stock-outs. The fluctuation in foreign exchange rates also affects the company's profit margin.

In order to avoid these problems the finance director decided to purchase raw materials in bulk which has created the problem of storage, security and safety of the raw materials. On the other hand, there is increased demand in the region for the company's products which are unique. This demand has necessitated expansion of their operation in the whole of the East African region and beyond. Due to this expansion, more raw materials and finances are required to support it.

In the process of financing the expansion, the finance director advised management to use short-term finances like overdrafts since they are dealing in FMCGs which will pay back faster. He has also suggested that MUL should delay payment to suppliers of raw materials as a way of accessing funds which are interest free and also as a way of hedging against foreign exchange rate movements.

This form of funding has, however, caused the company a lot of problems and when the company's managing director consulted finance experts, he was informed that the cause of all the problems is overtrading. He does not know how to tackle the problem and he has sought your advice as an expert in financial management.

Required:

Advise the managing director on the:

1. (a)causes of overtrading.(5 marks)
2. (b)symptoms of overtrading and suggest to him how it can be avoided.
3. (6 marks)
4. (c)determinants of working capital requirements for an organisation like MUL.
5. (5 marks)
6. (d)internal factors that may affect an organisation in achieving its objectives.

(4 marks) (Total 20 marks)

Question 3

Sendi Uganda Ltd (SUL) deals in the importation and installation of solar equipment in areas where the national electricity grid does not reach. The company won a tender to supply and install solar power in the 10 districts in west Nile region. To effectively carry out this work, SUL requires additional funds worth Shs 1 billion and the directors intend to raise the required funds from an issue of ordinary shares either to the general public or by using rights issue offering.

The finance director advised the directors to raise the funds required through a rights issue offer, reasoning that issuing shares to the general public dilutes control, and the directors seem to be in agreement.

SUL has in issue 1 million ordinary shares currently selling at Shs 2,000 per share. The company requires Shs 1 billion to be raised from a rights issue offering. For the process to be successful, shares will be issued at a discount of 20% of their market price.

Required:

1. (a)Calculate the:
2. (i)theoretical ex-rights price.
3. (ii)value of a right.
4. (iii)new market value of the company.
5. (b)Explain to the Board of SUL the following:
6. (i)Pre-emptive rights.
7. (ii)Subscription rights.
8. (iii)Initial public offering (IPO).
9. (iv)The importance of the underwriter in issuing shares to the general

public. (4 marks) (Total 20 marks)

Question 4

According to the Management Letter issued by the auditors for the year ending 31 December, 2016 the financial controller of KWATA Ltd was found not to have complied with some international financial reporting standards.

The report revealed the following:

1. Outstanding bills were apparently inflated.
2. Stores ledger books were not up to date, and stationery seemed to have
3. been misappropriated.
4. Payments to suppliers were delayed without justifiable reasons. It was
5. found that the financial controller wanted a kickbacks before payments
6. were made.
7. The shareholders had not been paid dividends although the dividends
8. were declared two years ago. The shareholders were complaining about
9. the loss of value due to delayed payment.
10. The financial statements were not prepared according to international
11. financial reporting standards.

Following the auditors' recommendations, the comparative statements of financial position and comprehensive income for KWATA Ltd were adjusted and are presented below.

Statement of financial position as at 31 December:

Assets:

Non-current assets: Property, plant & equipment Current assets:

Cash & bank

Receivables

Inventories

Total assets Liabilities: Share capital Reserves

Long-term liabilities: Long-term debt

Current liabilities: Short-term bank borrowings Payables

Total equity & liabilities

2016 Shs '000'

12,000

6,000 8,000 800 14,800 26,800

9,600

2,400 12,000

4,800

4,800

5,200 10,000 26,800

2017 Shs '000'

15,200

6,400 8,800 1,200

16,400 31,600

9,600

4,640 14,240

5,600

5,200

6,560 11,760 31,600

Statement of comprehensive income for the year ended 31 December:

Net sales

Cost of sales

Gross profit

Operating expenses

Operating profit

Other income

Profit before interest and tax

Interest (800)

2016 Shs '000

2017 Shs '000

24,400 (18,800) 5,600 (2,000) 3,600 800 4,400 (1,200) 3,200 (960) 2,240

16,000 (12,800) 3,200 (1,600) 1,600 400 2,000

Financial Management - Paper 10

Profit before tax

Tax (30%)

Profit after tax (PAT)

1,200 (360) 840

Required:

1. (a)In reference to the above scenario, discuss anythreetypes of unethical
2. issues faced by finance managers.(6 marks)
3. (b)Explain to the shareholders of KWATA Ltd the meaning of the term 'time
4. value of money'.(2 marks)

(c) Using trend analysis, comment on the financial strength and operating

performance of KWATA Ltd using the following ratios:

1. (i)Total assets turnover.
2. (ii)Return on equity.
3. (iii)Debt-equity.
4. (iv)Earning power.

Question 5

Bank of Uganda (BOU) through its policy of optimal cash management to commercial banks recently pinned the managing director of Dicey Bank Ltd (DBL) for failure to make compulsory deposits on its reserve account for the month of January 2018.

The managing director in his defense said that DBL opened up two branches in that month and spent a lot of money such that the balance remaining was to pay suppliers and to meet the demands of the clients.

At a meeting to address those related issues, BOU official played a video that was recently featured on a popular TV program 'dust-free news'. This video revealed information that DBL had opted to undertake a cross listing instead of listing on the Uganda Securities Exchange (USE) and that it was the major reason why they were not compliant with BOU rules and regulations. This left the managing director speechless as another high profile customer at the press conference revealed that he had earlier made a withdraw request of Shs 166 million but the teller failed to effectively serve him as the former had less than what was requested.

Required:

(a)

(b) (c)

(i) Distinguish between listing and cross listing on securities exchange

(2 marks)

(ii) Explain the requirements for listing on the Main Investment Markets (MIMs) of the Uganda Securities Exchange (4 marks)

Advise the managing director of DBL on the reasons for holding cash.

(8 marks)

Describe the costs of holding too little cash. (6 marks) (Total 20 marks)