Financial management - Assignment Example

Days payable out is too high beyond the working days allowed for 90days. The company should aim to reduce the number of days either by increasing the payables or number of purchases. The manager should be able to know where the cash is tied up. PART B Question three a) Price earnings ratio This is a ratio that is used to determine the value of a share or stock taking into consideration the earnings of a share of the company. By analyzing different price earnings ratios of companies, an investor can be able to determine where to purchase shares.

A P/E ratio of 21.1 of Spikiri Company depicts that high returns can be expected. This is followed by Papi and Akanani Companies with 14.2 and 13.0 respectively. It is wise to purchase shares from Spikiri Company. The P/E ratio is also used to depict the amount of money investors are willing to pay for each dollar earned in a company. b) Dividend cover prices dividend paid P/E current high low dividend yield current high low Akanani 291 317 187 0.021 6.111 6.657 3.927 13 spikiri 187 201 151 0.023 4.301 4.623 3.473 21.

1 Earnings per share current high low 22.38462 24.38462 14.38462 8.862559 9.526066 7.156398 dividend cover = earnings per share/ dividend paid per share current high low Akanani 3.663004 3.663004 3.663004 spikiri 2.060581 2.060581 2.060581 Dividend cover shows the ability of a company to pay dividends to ordinary shareholders from the profits that have earned. An investor is able to determine how much dividends are paid out of profits before making any investments in the company. Akanani pays more dividends from its profits as compared to Spikiri.

Question three i. Cost of debt of bond A Kd = interest rate *(1-tax) = 9% (note taxes are ignored) ii. Different bonds in the same may have different costs of capital. This is explained towards the time period required to clear the payment. A bond with longer duration to payment will have a lower cost of capital. The yield to maturity also affects the cost of debt. Bonds have different yields to maturity which in turn determine the bond’s interest rates to be paid. The coupon rate may differ with each bond hence the cost of each debt. C i. Cost of equity 4+ (11-4)1.2= 10% ii. Ex-dividend share price = old share price/ (1+ dividend) = 1/(1+0.2) = 0.83 iii.

Capital gearing (debt dividend by debt plus equity) = 30/90 = 0.33 iv. Market value weighted average cost of capital Cost of debt 9% + 7.82%= 16.82% WACC = kd * weight of debt + ke * weight of equity = 16.82 *30/90 + 10*60/90 = 12.27% d. change in dividend policy Dividend policy is explained as the long term decision that will show how cashflows will be deployed from the company’