1. Sankuru North Ltd. expects to pay a dividend of USD 5.50 next year. The shares currently sell for USD 60. The growth rate is 9%. If the company issues new shares, it will incur flotation costs of USD 3 per share.
Required:
Calculate both the cost of retained earnings(Ke) and the cost of new ordinary equity(Kn)

2. Ulele West Ltd. wants to raise USD 8 million for a new factory. The target capital structure is 35% Debt, 20% Preference Shares, and 45% Ordinary Equity.
Debt:10% coupon debentures, redeemable at par in 5 years.
Market price is USD 980 per USD 1000 face.
Tax rate 30%. (Use K_d = 7.5%).
Preference Shares:9% preference shares, USD 100 par, redeemable at par in 5 years. Market price USD 90. (Use K_p = 11.2%).
Ordinary Equity:To be raised via a new rights issue.
Expected dividend next year is USD 4.
Current market price is USD 40.
Growth rate is 5%.
Flotation cost is 5% of the issue price.

Required:
Calculate the WACC for this new financing, incorporating the flotation costs on the new equity.

3. TRUE or FALSE: The cost of irredeemable (perpetual) preference shares is calculated by dividing the annual preference dividend by the current market price of the share.

4. If a project has a Profitability Index (PI) of 0.85, what does this indicate about its Net Present Value (NPV) and acceptability?

5. Patuca’s Ltd. investment of USD 200,000 yields the following net cash inflows:
• Year 1: USD 60,000
• Year 2: USD 80,000
• Year 3: USD 100,000
• Year 4: USD 100,000.

Required:
Calculate the traditional Payback Period.

6. Tazon West Ltd., whose cost of capital is 15%, must choose between two mutually exclusive projects.
• Project A: Initial outlay USD 50,000. Inflow of USD 75,000 in Year 1.
• Project B: Initial outlay USD 100,000. Inflow of USD 130,000 in Year 1.

Required:
Calculate the IRR and NPV for both and explain which project should be chosen.

7. TRUE or FALSE: Terminal cash flows include the recovery of the net working capital that was initially invested at the start of the project.

8. A company adopts an "Aggressive" working capital financing policy. Which of the following best describes this approach?

9. Kali West Traders purchases goods on terms "3/15, net 60". The company currently pays on day 60. The firm can borrow from its bank at an overdraft rate of 18% per annum.

Required
Calculate the effective annualized cost of forgoing the cash discount and determine whether the firm should borrow from the bank to pay on day 15. Assume a 365-day year.

10. Akito West Ltd has Fixed Assets of USD 30,000 and Permanent Current Assets of USD 15,000. Its Temporary (Fluctuating) Current Assets average USD 9,000
The firm is considering two financing policies:
• Policy A (Conservative): Finance all Fixed Assets, Permanent Current Assets, and Temporary Current Assets with Long-Term funds at 12% interest.
• Policy B (Aggressive): Finance Fixed Assets and Permanent Current Assets with Long-Term funds at 12%, and Temporary Current Assets with Short-Term funds at 9%.

Required:
Calculate the total annual financing cost under both policies and identify the trade-off involved in choosing Policy B.

11. TRUE or FALSE: If a firm's Cash Conversion Cycle (CCC) is increasing over time, it indicates an improvement in working capital management efficiency.

12. When comparing two investment assets that have significantly different expected returns, which measure of risk is most appropriate to determine which asset is riskier on a "per unit of return" basis?

13. Hermit Ltd's  portfolio consists of:
• USD 500,000 invested in Asset A (Expected return = 12%) and
• USD 900,000 invested in Asset B (Expected return = 22%).

Required:
Calculate the weights of Asset A and Asset B, and the expected return of the portfolio.

14. The covariance between the returns of Stock X and Stock Y is 0.0028. The standard deviation of Stock X is 14% (0.14), and the standard deviation of Stock Y is 24% (0.24).

Required:
What is the correlation coefficient between Stock X and Stock Y, and what does it indicate?

15. TRUE or FALSE: According to the risk-return trade-off, a rational, risk-averse investor will require a higher expected return to hold a riskier asset compared to a less risky asset.

16. Jelly West Ltd has 200,000 shares outstanding and is considering two dividend policies over 3 years.
The expected earnings are:
• Year 1: USD 3 million
• Year 2: USD 6 million
• Year 3: USD 1.5 million
The company is considering:
• Policy X – Constant Payout: Pay exactly 30% of earnings every year.
• Policy Y – Stable DPS: Pay a stable dividend of USD 5.00 per share every year, adjusting only if earnings cannot sustain it.

Required:
What are the DPS amounts under each policy, and which policy results in higher dividend volatility?

17. Octopus West Ltd follows a "Regular Plus Extra" dividend policy. It maintains a low, stable regular dividend of USD 3.50 per share. In years where earnings are exceptionally high, it pays an "extra" dividend. The policy dictates that the total dividend payout in a high-earning year should equal 48% of that year's earnings.
• Earnings for Year 1 = USD 3m.
• Earnings for Year 2 = USD 15m.
• Shares outstanding = 1,500,000

Required:
What are the Regular DPS, Total DPS, and Extra DPS for Year 2?

18. A farmer approaches an Islamic bank in January, requesting funds to plant maize, promising to deliver 100 bags of maize in July at a pre-agreed price. The bank pays the farmer upfront in January. This forward-sale financing contract is known as:

19. A fintech startup in Kenya launches “M-Pesa Halal,” offering micro-Mudarabah investments and digital Takaful to unbanked Muslim communities. Which combination best explains the Islamic finance drivers behind its business model?

20. The low entry amount of USD 50 per day most directly supports which aspect of the startup's business model?

21. TRUE or FALSE: An Islamic bank can charge a higher profit margin on a Murabaha transaction if the customer has a history of late payments, as a deterrent.

22. Under the Capital Markets Authority (CMA) Crowdfunding Regulations (2022) in Kenya, what is the maximum amount an eligible issuer is permitted to raise through equity crowdfunding within 12 months?

23. A Kenyan fintech startup needs USD 2.5 million. The founders are considering an Initial Coin Offering (ICO) issuing a "governance token" versus seeking traditional Venture Capital (VC) funding.

Required:
Which of the following correctly identifies two major advantages and two major risks/disadvantages of the ICO route compared with traditional VC funding?

24. A hardware startup launches a reward-based crowdfunding campaign on a global platform for a new solar-powered phone charger. They set the funding goal at $50,000 but end up raising $500,000 from 5,000 backers.

Required:
Beyond the capital raised, which two(2) strategic financial and business benefits does the startup gain from this outcome?

25. TRUE or FALSE: The "Network Effect" in cryptocurrency suggests that the value and utility of a specific cryptocurrency tend to increase as more people and merchants adopt and use it.

26. A__________company refers to a business owned by its investors, with each investor owning a share based on the amount of stock purchased.

27. TRUE or FALSE: A green shoe provision typically allows underwriters to sell up to 15% more shares than the original issue amount.

28. Luke deposited USD 6,250,000 million in a fixed deposit account in ABC Bank for a period of 20 years. The amount attracted annual compound interest at the rate of 14% for the first 8 years,10% for the next 7 years, and 9% for the remaining 5 years.

Required
The value of the investment at the end of 20 years.

29. The _________rate of return refers to the return on investment that an investor anticipates receiving.

30. TRUE or FALSE: Given two investment options with option A having a fixed annual return of 25% on a fixed basis, and option B a market-linked security providing a return as per market performance, a risk-averse individual will choose option B.

31. Ufanisi is considering raising an additional USD 20 million to finance an expansion programme. The firm’s capital structure, which is considered to be optimal, is given as follows:

The firm expects to raise USD 2 million from internal sources. The firm pays a constant ordinary dividend of USD 2 per share in each year. This is expected to remain so in the foreseeable future,
Additional information
(i). The firm will issue new ordinary shares at a current price of USD 30 per share and will incur a floating cost of USD 10 per share
(ii) New 9% irredeemable debentures will be issued at par of USD 100 each. The floatation cost of 10% of the par value will be incurred
(iii) New 20% preference shares will be issued at USD 60 each. Par value of each share is USD 85. Floatation cost of USD 15 per share will be incurred.
(iv). The Corporate tax rate applicable is 30%
Required
Weighted marginal cost of capital of the firm.

32. There are three(3) common approaches to project selection; the (i).________which determines how long it would take a company to see enough in cash flows to recover the original investment (ii). the _______ , which is used to calculate the expected return on a project , and (iii).________ , which show how profitable a project will be versus alternatives and is perhaps the most effective of the three methods.

33. Volta Limited's earnings and dividends over the last five years have steadily increased as shown below:

James, a prospective investor, is considering buying shares of this company, which are currently selling at USD 60 each. The investor’s minimum required rate of return is 15%

Required
Advise the investor on whether he should buy the shares of the company or not.

Shabet Limited has found out that, after two years of using a machine, a more advanced model has arrived in the market. The advanced model is expected to increase output.
• The existing machine had cost USD 80,000 and was being depreciated using the straight-line method over ten(10) years.
• The current market value of the existing machine is USD 37,500.
• Shabet Limited is considering the acquisition of the advanced model, which costs USD 1,235,00,0 including installation costs, and has a savage value of USD 51,250
At the end of its useful life. The following data has been provided:

34.

The required rate of return is 16%. Ignore taxation.

Required: Compute the following with respect to the new machine
i. Payback period(PB)
ii. Net Present Value (NPV)
iii. Internal rate of return (IRR)

35. TRUE or FALSE: A firm’s value depends on its growth opportunities, which rely on its ability to attract capital.

36. The return on capital employed is used to measure:

37. Calculate the expected return E(R) and the standard deviation (SD)of returns for a stock having the following probability distributions of returns:

Rhine Limited is considering investing in a plant that is expected to operate for the next four years, after which it will have no salvage value.
i.The plant will cost USD 7.5 million.
ii. Annual tax depreciation of 20% will be allowed in respect of the expenditure.
iii. Revenue from the plant will be as follows:

38.

iv. Incremental costs will be USD 6 million throughout.
v. Rhine Limited pays corporate tax at 30% and has a cost of capital of 10%.
Assume that all cash flows occur at the end of the year to which they relate.

Required
Advise Rhine Limited on whether to proceed with the investment.

39. The share capital of Matex Limited consisted of 125,000 ordinary shares of US$0.50 each and US$65,000 of 8% preference shares. The directors proposed dividends on the preference shares and a US$0.20 dividend per ordinary share. Total proposed dividends were equivalent to one-quarter of profits before appropriation.

Required: Calculate the amount of retained profits for the year.

40. TRUE or FALSE: Under Islamic Banking, the use of money for the purposes of making more money is forbidden only if the interest is above an agreed rate.

41. Fedha Company Limited has on its books the following amounts and specific costs for each type of capital:

Required: Determine the weighted average cost of capital using:
i. Book value weights (Bv-WACC)
ii. Market value weights(Mv-WACC)

John borrowed USD 5 million from a Rafiki Bank at the rate of 2.5% per month. The loan is to be repaid monthly over a period of 6 months. Interest on the loan is to be paid on a reducing balance basis.
42. Required: Prepare a loan amortization schedule and calculate the total interest paid.

43. Billy has USD 15,000 in savings and expects to earn 6% interest on that sum annually for the next two years. Assuming the interest rate is only computed annually, what is the future value of his USD 15,000?

44. TRUE or FALSE: If a USD 1,000 investment is held for five years in a savings account with 10% simple interest paid annually, the FV of the USD 1,000 investment is USD 1,100.

45. A four-year bond was issued at a face value of USD 50,000 on January 1, 2025. The coupon rate is 8%. The market price is 9%.

Required: Calculate
i. The bond’s issue price(Bp)
ii. The discount amount(Ds)
iii. The interest expense(Ie)

The Padex publishers specialize in writing and printing various educational publications. It is a small but publicly traded company. Padex currently has a capital structure of USD 18 million in bonds that pay an 8% coupon, USD 7.5 million in preferred stock with a par value of USD 45 per share, and an annual dividend of USD 2 per share. The company has common stock with a book value of USD 9 million. The cost of capital associated with the common stock is 15%.
The marginal tax rate for the firm is 30%.

46. Required: Calculate Padex’s cost of capital on a weighted average basis

47. If Safari Limited has 360,000 shares of common stock authorized, 225,000 shares of common stock issued, and 18,000 shares of common stock as treasury stock, what is the total number of outstanding common shares?

48. TRUE or FALSE: If Mary expects to receive USD 25,000 in 2 years and the interest rate is 8% per year, compounded annually, the present value is USD 21,000

49. A company has capital employed of US$375,000 and a long-term debt-equity ratio of 30%. Debt carries a 9%  interest rate. If the profit before interest amounts to US$37,500, what is the return on shareholders’ funds?

Triad Limited is considering the launch of a new product for which an investment of USD 9 million in plant and machinery will be required. The production of the product is expected to last for five years, after which the plant and machinery will be sold for USD 2.25 million.
50. Additional information
 The product would be sold for USD 900 per unit with a variable cost of USD 360 per unit.
 Fixed production costs (excluding depreciation) would amount to USD 900,000 per annum.
 The company applies the straight-line method of depreciation.
 The cost of capital is 12% per annum
 The corporation tax is 30%
 The number of units of expected to be produced and sold per annum for the next five years is shown below:

Required: Advise the management of Triad Limited on the appropriate course of action using:
i. The net present value(NVP) approach.
ii. The internal rate of return (IRR) approach.