Revision question on financial management NBAA B1, nov 2018

(a)  The dividend growth model can be used in determining the cost of equity capital.

This model, however, has some weaknesses.

REQUIRED:

Outline the weaknesses of the model.

(b)     The following information is available regarding a mutual fund:

Return     = 13% Risk (σ)   = 16% Beta (β)  = 0.9

Risk free rate = 10%

REQUIRED:

(i)        Calculate Sharpe ratio

(ii)       Calculate Treynor’s ratio 

(iii)     Briefly explain what each ratio measures   

(c)       KIBONDO Company requires immediate advice on its debt collection policy.

The table below summarizes the collection information under the current policy and two options being considered:

  Current Policy Option 1 Option 2
Expenditures on debt collection procedures 3,450,000 6,330,000 9,553,000
Bad debt losses (% of sales) 6% 5.5% 2.5%
Average collection period 2 months 1.5 Months 1 Month

KIBONDO  Company’s  current  sales  are  TZS.134,400,000  annually  and  the company requires a 20% return on its investments.

REQUIRED:

Which option, if any, would be preferable to the current policy?

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