(a) The dividend growth model can be used in determining the cost of equity capital.
This model, however, has some weaknesses.
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%
(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.
Which option, if any, would be preferable to the current policy?