Polo UgandaLtd (PUL) is a subsidiary of Polo (UK) Ltd and deals in the manufacture of sportsgear and other sports items. PUL has just been registered...
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Polo UgandaLtd (PUL) is a subsidiary of Polo (UK) Ltd and deals in

the manufacture of sportsgear and other sports items. PUL has just been registered in Uganda and is in the process of evaluating a capital investment projectto acquire a machinethat will be used to manufacture the sports uniforms and footballs required by Mbamu Sports Club(MSC).PUL has also applied for funding from one of the local banks butthefinance director is unsure of the current cost of capital. PUL has approached you as an expert in financial managementfor advice. You have been provided with theforecast and estimates of the proposed projectandoperations.The following details onthe proposed project are availedto you to evaluate its viability:1.PULwill require a machine to produce uniforms and footballs forMSC. Themachine will be imported from the UKat £800,000.2.Shs 200 million installation costswill be incurred.3.The company will incur transportation cost of £50,000 from UK to Uganda.4.Import taxes for themachine will amount to Shs 500 million.5.The machine will have a scrap value of Shs5 million at the end of its life of 5 years.6.The machine will be depreciated on a straight-linebasisover its useful economic life.7.MSCrequires 20,000 pairs of sports uniformsand 500 footballs per year for the next five years.8.For the entire project life, production of each pair of uniform will requireShs100,000 forraw materials, Shs50,000 for labour whileone football will require Shs30,000 for materials and Shs20,000 for labour.9.Other variable costs attributableto the manufacture of both sports uniforms and footballs include Shs10 million in electricity andShs5 million for waterper year. These costs are constant throughout the project life and are shared betweenuniforms and footballsin the ratio of 4:110.Each pair of sports uniform is expected to be sold at Shs236,000,and each football is quoted atShs100,000. These prices are expected to remain constant for the next five years.11.PUL currently has 50 permanent staff and the company incurs Shs100 million on salaries and wages permonth.The average exchange rate between the Uganda shillingand UK pound is 4,500:1.13.The minimum required rate of return by the shareholders of PUL is 15%.The following additional information wasprovided to you in regard to the current capital structure of PUL:Shs 'million'Ordinary shares Shs 20,000per share10,00015% bonds30,00010% debenture50,000Bank loan20,000Total capital110,000Note: 1.The ordinary sharecurrently sells at Shs30,000 cum-div.2.The 15% bonds sell at par.3.The 10% debenturesellsat premium of 5% ex-interest.4.The interest rate on the bank loan is currently at 10% marketrate.5.The company expects to pay a dividend of Shs5,000 per share.6.The bonds and debentures are irredeemable.


Required:


(a)Using the internal rate of return(IRR)method, evaluate the viability of the project above.(20marks)
(b) Determinethe weighted average cost of capital of the existing funds of PUL.(15marks)(c)Explain to the management of PUL the advantages of debt finance in contrast withequity capital.(5 marks)


SECTION B
Question 2


(a)Tot Services Ltd (TSL), a road construction company operatingin Northern Uganda, has its main camp site in Gulu Municipal Council. The company on average requires 2,000 litres of fuel perday to run all their machines and equipment. Their fuel supplier is Fuel Masters, a petrol station based in Gulu. A fixed cost of Shs30,000 is incurred for placing an order of 2,000 litres and Shs500 to carry a 20-litrejerrycan to its fuel depots. The lead time is 2days.In January 2018, Ugandawas hit by fuel shortage andthis affected allfuelstations including Fuel Masterswhich caused inabilityto supply fuel to their clients including TSL.During the weekly management meeting, the finance manager of TSLsuggestedthat TSLshould think of buying shares in one of the big fuelcompanies in Uganda that arelisted on the Securities Exchangein order toensure reliable fuel supply.


Required:


As a management consultant, compute and advise TSL on the:
(i)economic order quantity.(4 marks)
(ii)total ordering costs.(2 marks)
(iii)total carrying costs.(2 marks)
(iv)re-order level.(2 marks)
(b)Discuss the:(i)roles of a finance manager in an organisation.(5 marks)
(ii)various sources of finance for capital investment projects.(5marks)


Question3
When India'sPrime Minister,Mr.NarendraModi visited Uganda in July 2018, he was happy to learn that 60% of the major companies in Uganda are owned by Indians. He was,however,saddened to learn that most of these companiesare neitherlisted on the Uganda Securities Exchange (USE) nor the IndianStock Market in form of international cross listing. During his presentation to the Indian community in Uganda, he emphasised the benefits of companies getting listed on stock markets. He advised them to seek listing not only on the USEbut also on regional and overseas stock markets.Financial Management -Paper 1022August,2018Page 5of 10The directorsof one of the companies, who organised Mr. Narendra'swelcome party, M/S TemboSteelLtd, picked interest and wantsto list their company on the USEbut they are not familiar withthe procedures and requirements. You have been contacted by M/S Tembo Ltd to provide professional servicesonthe listing process.


Required:


Advise the directors of TemboSteel Ltd on:(a)the listing procedures on the USE.(5 marks)(b)the contents of a prospectus.(5 marks)
(c)why companies may wish to be listed on more than one stock market.(5 marks)
(d)the challenges faced bystock markets in Uganda.(5 marks)


Question 4


Goodwill Enterprise Ltd (GEL) was incorporated in Uganda in2015 and deals in estates management. GEL is entirely financed byequity but can use other sources of finance as stipulated in its Memorandum and Articles of Association. Because of the current economic hardships, low occupancy is expected and management is concerned. Asurvey has been conducted on how the business will fare for the first half of the year 2019and the real estate business is projectedto be negatively affected.At a recent Board meeting, the Chief Executive Officer (CEO), proposed that "bonds or preference shares should be issued in order to generate more fundsfor growth." This was in support of the proposal by one of the directors to diversity and buyland for re-sale since land appreciatesin value whereasbuildings depreciate. Thefollowing information was also obtained during the survey in regard to projected rental paymentsand business operations in general:1.Projected rentalsfor the period January to June 2019.MonthJan.Feb.Mar.AprilMayJuneShs'million'100200250400600800It was estimated that(i)50% of the tenants will pay cash every month.(ii)40% of the tenants will pay after a month.(iii)10% of the tenants are doubtful.Financial Management -Paper 1022August,2018Page 6of 102.Purchases:Two estates are still under construction and during the period January to June 2019, building materials will be purchased as follows:MonthJan.Feb.Mar.AprilMayJuneShs'million'506080280380450The suppliers of these building materials can be paid in the month following delivery.3.Wages for management and contractors of Shs50 million will be paid per month.4.Maintenancecosts at all sites are estimated at Shs10 million in January 2019and are expected to increaseto 15 millionin June 2019.5.Utility bills are expected to be Shs3 million per month and paid a month in arrears.6.Purchase of land worth Shs 100 million is to be made in March2019 in line with the director's proposal.7.Cash balance at the end of December 2018will be Shs10million.


Required:


(a)Prepare cash budget for the period of January to June 2019, and advise management on the performance of the business.(10marks)
(b)Explain to management the key features of:
(i)bonds.(5 marks)
(ii)shares.(5 marks)


Question 5


One of the leading banks in Uganda has recentlybeen in the media encouraging the public to form investment clubs and access funds for investment and plan for retirement when it is still early enough. A group of employees from Mapambano Grain Millers formed KPC Investment Club.They saved Shs120 million and they expect to get 150% of their savings as loan from the bank. They plan to invest these funds in projects that bring returns in the shortest possible time but their worry is the risk. They have identified three projects and their possible returns given the state of the economy but they areunable to determine the risk associated with these projects. Youhave been hired as a financial consultant to advise on risk management and the following informationis provided:Financial Management -Paper 1022August,2018Page 7of 10Possible returns (%) from:Economic conditionProbabilityReal estatesBondsBakeryBoom0.20304520Normal0.70153030Recession 0.10102520


Required:


(a)Determine the risk and return ofthe three projects and advise the employees of Mapambano Grain Millers in which project to investtheir funds. (12 marks)
(b)Explain to the members of KPC Investment Clubthe risks that may affect the realisation of the expected returns from their investment.(4 marks)
(c)Discuss the strategies that can be employed to deal with risk in the real business world.(4 marks)

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