- 20 Marks
Question
a) At a recent investment forum, Pacific Lithium indicated that the National Minerals Fund (NMF) subscribed for 19,245,574 Pacific Lithium shares at a price of US$0.2598. Additionally, NMF subscribed to a warrant transaction that consists of one warrant for every two Pacific Lithium shares subscribed for at a 40% premium. The warrant expires on July 23, 2025.
Required:
i) Distinguish between a warrant and a convertible feature in the capital market.
ii) Compute each warrant’s exercise price and the warrant transaction cost to NMF.
iii) What is the maximum loss NMF can book on the warrant transaction?
iv) Assuming NMF exercises its warrant by July 23 2025, what will be its effect on Pacific Lithium’s EPS? (Note: All other factors are considered to be constant).
v) Distinguish between bonus issue and share splits
b) The Ministry of Health in Ghana is conducting a review of its procurement practices and the overall performance of its Public Financial Management (PFM) system. The review aims to enhance value for money in public spending while adhering to the principles outlined by the Public Expenditure and Financial Accountability (PEFA) framework.
You are provided with the following data for the fiscal year 2023:
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Budgeted Public Expenditure: GH¢450 billion
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Actual Public Expenditure: GH¢156 billion
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Total Procurement Expenditure: GH¢75 billion
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Value of Contracts Awarded through Competitive Tendering: GH¢45 billion (60 contracts)
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Value of Contracts Awarded through Restricted Tendering: GH¢15 billion (20 contracts)
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Value of Contracts Awarded through Single-Source Procurement: GH¢15 billion (20 contracts)
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Number of Procurement Violations Detected: 15 (with a total value of GH¢900 million)
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Disposal of Stores and Equipment: GH¢300 million
Required:
Calculate the average value per contract for each procurement method (Competitive Tendering, Restricted Tendering and Single-Source Procurement)
Answer
i) A warrant serves as a long call option for the holder, allowing the holder to buy shares in the company based on agreed terms (such as the price, and expiry date). On the other hand, a convertibility feature allows the holder to convert its current capital type into ordinary company shares based on agreed terms. For example, a debt holder with a convertible option can exercise the option to convert the debt into equity based on the conversion terms. Upon conversion, the debt holder ceases to be a debt holder and becomes an equity holder.
ii) Exercise price = 1.4 * US$0.2598 = US$0.3637, with the total cost being = US$0.3637 * 0.5*19,245,574 = US$3.5million
iii) In the worst-case scenario, the long leg of a call option will lose the premium paid. Assuming Pacific Lithium’s shares are worthless by July 23, 2025, NMF will lose US$3.5 million.
iv) Warrants have potential dilutive effects on companies. All things being equal, Pacific Lithium’s EPS will fall due to the larger number of shares used to compute it. Note that when NMF exercises its warrants, the outstanding shares of Pacific Lithium will increase by 9,623,316. Assuming the company’s earnings remain stable, the EPS will decline.
v) A bonus issue involves issuing new shares to shareholders, funded from company reserves, while a share split divides existing shares into multiple smaller shares without affecting reserves.
Procurement Efficiency
Average Value per Contract:
| Procurement Method | Calculation | Average Value per Contract |
|---|---|---|
| Competitive Tendering | GH¢45 billion / 60 contracts | GH¢750 million |
| Restricted Tendering | GH¢15 billion / 20 contracts | GH¢750 million |
| Single-Source Procurement | GH¢15 billion / 20 contracts | GH¢750 million |
- Topic: Business valuations, Equity, Sources of Finance
- Series: JULY 2025
- Uploader: Samuel Duah