QUESTION ONE $($a$)($b$)$ Briefly explain the primary corporate objective that underlies corporate financial management in public and private companies, and give three reasons why the managers of companies tend to act in furtherance of this objective. The choice of financing strategies results in a capital structure of the firm, which can be explained by different theories. Briefly explain why most managers use financing strategies that follow the Pecking Order Theory. $($c$)($d$)$ The following data relates to ABC LTD and BBQ LTD which operate in the same industry with the same risk level. Particulars ABC LTD Expected net operating income $($TZS$)18,000,000$ BBQ LTD $10\%$ debt $($TZS$)18,000,000$ Equity capitalization rate $12,000,00014\%12\mathrm{.}5\%$ REQUIRED: $($i$)($ii$)($iii$)($iv$)$ Determine the total value and the weighted average cost of capital for each company, assuming no taxes. Show the arbitrage process by which investor holding share worth TZS$180,000$ in BBQ LTD can benefit by investing in the ABC LTD$.$ Can an investor gain by investing in the undervalued firm? When will the arbitrage process come to an end? NONDO LTD is entirely financed with equity shares to the value of TZS$40,000,000.$ The management of NONDO LTD is examing its cost of capital under alternative financing arrangements. In consultation with CMW Bank, NONDO LTD expects to be able to issue TZS$20,000,000$ new debts at a coupon rate of $8\%$ and to issue TZS$40,000,000$ new preferred stock with a TZS$250$ per share dividend at TZS$2,500$ a share. The common stock of NONDO LTD is currently selling for TZS$200$ a share. NONDO LTD expects to pay a dividend of TZS$15$ per share next year. Market analysts foresee growth in dividends in invest stock at a rate of $5\%$ per year. NONDO LTD marginal tax rate is $35\%.$ REQUIRED: Compute the resulting weighted average cost of capital should the company undertake the new financing. QUESTION TWO $($a$)$ Explain any three reasons for carrying out capital investment planning and control. $($b$)$ State conditions for the Weighted Average Cost for Capital $($WACC$)$ to be used in discounting cash flows for investment analysis. $($c$)$ Shambani company is considering to purchase and install an automatic machine for producing frozen french fries. It is believed that the automatic machine will reduce cost by automating some of its manufacturing tasks. The relevant information for net present value $($NPV$)$ analysis of investment in new equipment is given below: $$ Cost of equipment: TZS$72,000,000$ Expected annual cost savings to be provided by new equipment: TZS$40,000,000$ Useful life of the equipment: $6$ years $$ Salvage value at the end of $6$ years: TZS$\mathrm{.}0$ Cost of capital: $23\mathrm{.}2\%$ Expected inflation rate in cash flows associated with the new equipment: $10\%$ REQUIRED: $($i$)($ii$)$ Compute NPV of the automatic machine with and without inflation consideration and comment on the results. Advise whether the new equipment be purchased$/$or not. QUESTION THREE $($a$)$ Explain how the capital asset pricing model would be used as an alternative method of estimating the cost of equity, indicating what information would be required and how it would be obtained. $($b$)($c$)$ Mtumishi Enterprise has presently TZS$3,000,000$ in debt outstanding, bearing an interest rate of $12\%.$ The company wishes to finance a TZS$4,000,000$ expansion program and is considering three alternatives: $1.$ Additional debt at $14\%$ interest $2.$ Preferred stock with a $12\%$ dividend $3.$ The sale of common stock at TZS$16$ per share The company presently has $800,000$ shares of common stock outstanding. The corporate tax rate is $40\%.$ REQUIRED: $($i$)($ii$)$ If Earning Before Interest and Taxes $($EBIT i$.$e$.$ net operating income$)$ are presently TZS$1,500,000,$ what would be Earning Per Share $($EPS$)$ for the three alternatives, assuming no immediate increase in net operating income? Compute the Degree $(1,2,$ and $3)$ of Financial Leverage $($DFL$)$ for each alternative at the expected EBIT level of TZS$500,000$ and provide a precise interpretation of your results. Discuss whether the dividend growth model or the capital asset pricing model offers the better estimate of the cost of equity of a company.