QUESTION ONE 

AC ltd estimates its total cash requirements as sh 2,000,000 next year. The company’s opportunity cost of funds is 15% p.a. The company will incur sh.150 per transaction when it converts its short term securities to cash.

Required:

• i.         Determine the optimum cash balance.                                                      
• ii.         How much is the total annual cost of the demand for the optimum cash balance?                                                                                                                 
• iii.         How many deposits will have to be made during the year?                     

QUESTION TWO (7 marks)

The EPS of Lee ltd are sh.10. It has an internal rate of return of 15% and the cost of capital is 12.5%.

Required: Using Walter’s model:

• i.         What should be the optimum payout ratio of the firm                                  

• ii.         What would be the price of the share at this payout (based on (i) above)    
• iii.         How shall the price of the share be affected if a 30% payout ratio were employed?                                                                                                                        

QUESTION THREE (4 marks)

Any investment to be undertaken will need to be assessed as regards its viability using an acceptable approach. Any appraisal method to be used to assess the viability of a venture must fulfill certain requirements.

Required: Explain four salient features of any appraisal method.