a) Explain the implications of the following concepts/theories as used in financial management: i. Traditional theory of

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Question:

a) Explain the implications of the following concepts/theories as used in financial management:
i. Traditional theory of capital structure(2 marks)
ii. Trade off theory of capital structure(2 marks)
Net operating Income(2 marks)
iv. Corporate governance(2 marks)
V. Agency problems(2 marks)
b) The financial manager of ABC Ltd expects earnings before interest and taxes of Kshs 50,000 in the current financial year and pays interest of 10% as long-term loan of Kshs 200 000. The company has 100 000 ordinary shares and the tax rate is 30%. The finance manager is currently examining 2 scenarios.
A case where EBIT is 25% less than expected.
A case where EBIT is 25% more than expected.
Required:
Compute the EPS under the 3 cases and analyze the degree of financial gearing for both scenarios 1 and 2.
(5 marks)