question archive SAMOTA Uganda Ltd (SUL) is a well-known manufacturer of cosmetics since its incorporation in 1998
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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:
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:
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:
(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:
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:
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:
(c) Using trend analysis, comment on the financial strength and operating
performance of KWATA Ltd using the following ratios:
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)
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