(a) What are financial futures?(4 marks)
(b) Explain how financial futures could be used as a tool of foreign exchange risk management and the limitation of such strategies.(10 marks)
(Total: 14 marks)
Foreign Ventures Ltd. is a multi-national company with a head office in London and many subsidiaries in Africa and Asia. A subsidiary in Africa is considering the possibility of raising funds either in the domestic market or in the foreign market using eurocurrency and eurobond markets.
(a) What are the main features of the eurocurrency, eurobond and euroequity markets?(13 marks)
(b) What factors will be relevant to the choice for a large multinational company between borrowing funds on the domestic market or the eurocurrency and eurobond markets?(12 marks)
(Total: 25 marks)
Avilas Ltd is about to make a 1 for 3 rights issue. Its existing equity and debt in its capital structure is as follows:
6 million ordinary shares of sh 1 6,000
15% Debenture (redeemable at par in 10 years) 6,000
15% Bank loan (Repayable after 10 years) 6,000
The money raised from the rights issue would be used to do two things:
1. Buy back all the 15% debentures at their current market value. It is expected that their market value will be price to offer investors a yield of 9% on their investment since market interest rates have fallen substantially since the debenture were issued some years ago. (9% is the current market yield on debentures and bank loans with 10 years remaining to maturity).
2. Finance a new project costing Sh 1.6 million. The profitability index of this project is 1.8. The company's intention to undertake this project and its expected profitability have been made known to the investing public for some time.
The total finance required for (a) and (b) should be rounded up to the nearest Sh 100,000 for the purpose of rights issue.
The rights issue has not been formally announced. The announcement of the issue will take place on March 15th and the market value share is then expected to be Sh 6.20.
(a) Calculate the issue price per share(10 marks)
(b) The theoretical ex-rights price(6 marks)
(c) The value of the right attached to each share before being traded ex-right(4 marks)
(Total: 20 marks)
XYZ Ltd is considering whether to invest in a project which would entail immediate expenditure on capital equipment of Sh 40 million.
Expected sales from the project are as follows:
Probability Sales Volume (units)
Once sales are established at certain volumes in the first year, they will continue at that same volume in subsequent years. The unit sales price will be Sh10, the unit variable cost Sh 6 and additions fixed costs (except depreciation) Sh 20 million.
The project would have a life of 6 years, after which the equipment would be sold at Sh 4 million. The company cost of capital is 10% and it is in the 40% tax bracket.
(a) Compute the expected NPV.(12 marks)
(b) What is the minimum volume of sales per annum required to justify this project? (8 marks)
(c) Is the project acceptable? Why or why not?(4 marks)
(Total: 24 marks)
The Managing Directors of three profitable listed companies discussed their companies dividend policies at a business lunch.
Company A has deliberately paid no dividends for the last five years.
Company B always pays a low dividend per share (after adjusting for the general price index) and offer regular bonus issues.
Company C always pays a dividend of 50% of earnings after taxation.
Each Managing Director is convinced that his company policy is maximising shareholders wealth.
Discuss the dividend policies used by the three companies.(17 marks)