ANSWER ALL QUESTIONS

1. A project requires initial investment of sh 850,000 and is expected to give the following
cash inflows:
Year Cash inflows
1 180,000
2 250,000
3 100,000
4 250,000
5 300,000
The project has a salvage value of shs 100,000 and the company’s required rate
of return is 10%. The depreciation is on straight line method and tax is 40%
Calculate:
i) Average rate of return
ii) Payback period
iii) Net present value

2. Mr John has the following capital structure as at 31st Dec 2020

Kshs.
Ordinary share capital (50,000 shares) 20,000,000
10% preference share capital 5,000,000
14% loan capital 16,000,000
Additional information
The market price of each ordinary share as at 31st Dec 2020 was sh 40
The firm paid a dividend of sh 4 for each ordinary share for the year
The annual growth rate in dividends is 12%
The corporation tax rate 40%
Required: Compute the WACC of the firm as at 31st Dec 2019

3. Discuss the reasons that may constrain a company from paying dividends to its
shareholders at the end of a financial year

4. Explain the factors that finance managers should analyze before making a dividend
decision

5. Explain fully the effect of the use of debt capital on the weighted average cost of capital
of a company

6. Discuss the reasons why gearing may be significant to a company