Level 2 – Page 17

FM – L2 – Q128 – Public Procurement Principles

Explain five general principles of public procurement to enhance public financial management.

Question

(a) Public procurement rules seek to ensure adherence to certain general principles in procurement of goods, works and services in the public sector with the view of enhancing public financial management.

Required:

Explain five general principles of public procurement.

(b) Structures are important in achieving an open and orderly public procurement system. Each structure is entrusted with certain responsibilities in public procurement.

Required:

Explain the responsibilities of the following structures in public procurement within the framework of the Public Procurement Act:

(i) Head of Procurement Entity

(ii) Procurement Unit

(iii) Entity Tender Committee

Answer

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Tags: Compliance, Due Process, Entity Tender Committee, Head of Procurement, Procurement Structures, Procurement Unit, Public Procurement, Responsibilities
Level: Level 2

Topic: Economic and regulatory environment

FM – L2 – Q127 – Value for Money in Public Financial Management

Explain the concept of value for money in PFM and its elements with illustrations.

Question

(a) Value for money is critical in public financial management (PFM) and therefore every public policy and programme should be subjected to the value for money test.

Required:

(i) What do you understand by value for money in relation to PFM? (2 marks)

(ii) Explain, with illustration, the elements of value for money and their interrelations.

(b) The flagship programme of government is a Free Secondary Education Programme (FSEP) which aims at improving quality and access to secondary education through the removal of cost barriers.

Required:

Discuss steps that should be taken to ensure value for money in the implementation of the FSEP. (10 marks)

Answer

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Tags: Economy, Effectiveness, Efficiency, Equity, Free Education, Public Financial Management, Value for Money
Level: Level 2

Topic: Introduction to financial management

FM – L2 – Q126 – Internal Control System

Discuss objectives of internal control system and explain COSO framework components in relation to PEFA.

Question

(a)

The PEFA assessment of a PFM system considers internal control system of the country, as the internal control system plays a vital role across every pillar in addressing risks and providing reasonable assurance that operations are carried out in orderly and open manner.

Required:

(i) Explain the objectives of an effective internal control system.

(ii) With reference to the COSO framework, explain the components of internal control system in relation to the PEFA framework.

Answer

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Tags: Accountability, Control Environment, COSO Framework, Internal Control, PEFA framework, Public Financial Management, Risk Management
Level: Level 2

Topic: Treasury Management

FM – L2 – Q125 – Public Financial Management

Discuss benefits of PEFA reports and methodology for measuring PFM performance in Zamara.

Question

(a) PEFA reports on countries’ PFM performance has gained prominence in Zamara in recent times. This is largely attributed to the robustness of its scoring methodology, the wide coverage of their measurements and factors considered in drawing conclusion of the status of a PFM system.

(i) Discuss the benefits of PEFA reports in promoting open and orderly PFM systems across the world.

(ii) Explain the methodology of PEFA in measuring PFM performance.

(b) A country performance of PFM dimensions are as follows:

(i) For the legislation scrutiny and audit indicator, a score of A, A and D were obtained on three dimensions. This indicator is measured using Method 1 (Weakest Link).

(ii) Budget preparation process as an indicator of PFM performance was measured using three dimensions and the scores obtained are B, C, D. This indicator is measured using method 2 (Average Method).

Required:
Compute the score of each indicator in (i) and (ii) for the country and interpret your result.

Answer

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Tags: Fiscal Discipline, PEFA Reports, PFM Systems, Resource Allocation, Service Delivery, Transparency
Level: Level 2

Topic: Public Financial Management Systems

FM – L2 – Q124 – Public Financial Management

Discuss three outcomes and seven pillars of an open and orderly PFM system per PEFA framework.

Question

(a) Governments have been encouraged to invest in building strong public financial management. The Public Expenditure and Financial Accountability (PEFA) framework has been developed to assess the public financial management systems of countries with the aim of helping them to improve their public financial management system.

Required:

(i) With reference to the PEFA, discuss the THREE outcomes that a country derives from establishing an open and orderly public financial management system.

(ii) Explain the seven pillars of an open and orderly public financial management system.

Answer

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Tags: Asset management, Budget reliability, Fiscal Discipline, PEFA, Public Financial Management, Resource Allocation, Service Delivery, Transparency
Level: Level 2

Topic: Public Financial Management Systems

FM – L2 – Q123 – Mergers and acquisitions

Calculate NPV of Kofi Ltd's acquisition of Ama Ltd and advise on proceeding with a cash offer

Question

The Directors of Kofi Ltd (Kofi), a large listed company, are considering an opportunity to acquire all the shares of Ama Ltd (Ama), a small listed company with a highly efficient production technology.

Kofi has 10 million shares of common stock in issue that are currently trading at GH¢6.00 each. Ama Ltd has 5 million shares of common stock in issue, each of which is trading at GH¢4.50.

If Ama is acquired and integrated into the business of Kofi, the production efficiency of the combined entity would increase and save the combined business GH¢600,000 in operating costs each year to perpetuity.

Though Kofi operates in the same industry as Ama, its financial leverage is higher than that of Ama. Kofi’s total debt stock is valued at GH¢40 million, and its after-tax cost of debt is 22%. The beta of Kofi’s common stock is 1.2. The return on the risk-free asset is 20% and the market risk premium is 5%.

Required:

Suppose Kofi offers a cash consideration of GH¢25 million from its existing funds to the shareholders of Ama for all of their shares.

(a) Calculate the NPV of the acquisition, and advise the directors of Kofi on whether to proceed with the acquisition or not.

(b) Calculate the value of the combined entity immediately after the acquisition.

Answer

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Tags: Acquisitions, Business valuations, ergers, Market price, Share exchange ratio
Level: Level 2

Topic: Mergers and acquisitions

FM – L2 – Q122 – Business valuations

Calculate pre-acquisition market values of Clearfield Farms and Village Industries using Gordon’s growth model.

Question

Clearfield Farms Limited is considering acquiring Village Industries Limited, extracts of the financial statement of the two companies is as follows:

Statement of Financial Position

	Clearfield Farms Ltd GH¢’m	Village Industries GH¢’m
Net assets	6,300	1,892
Equity:
Ordinary share capital	2,000	1,000
Retained earnings	4,300	892
	6,300	1,892

The two companies retain the same proportion of profits each year and this is expected to continue into the future. Clearfield Farms Limited return on investment is 16%, while that of Village Industries Limited is 21%. One year after the post-acquisition period, Clearfield Farms will retain 60% of its earnings and expects to earn a return of 20% on new investment.
The dividends of both companies have been paid. The required rate of return of ordinary shareholders of Clearfield Farms Limited is 12% and Village Industries Limited 18%. After the acquisition, the required rate of return will become 16%.

Required:
(a) If the acquisition is to proceed immediately, calculate the:
(i) Pre-acquisition market values of both companies.

(ii) Maximum price Clearfield Farms Limited will pay for Village Industries Limited

(b) As a Finance Manager in your company, you have been asked to produce an explanatory memo to Senior Management on the subject Mergers and Acquisition. Your memo should clearly outline what actions a target company might take to prevent a hostile takeover bid.

Drake Limited is a Ghanaian registered multi-national company with FIVE subsidiaries in Europe, Asia and Africa. These subsidiaries have traditionally been allowed a large amount of autonomy, but Drake Limited is proposing to centralize most of the group’s treasury management operations.

Required:
(c) Acting as Group Head of Finance to Drake Limited, prepare a memo suitable for distribution to Senior Management of each of the subsidiaries explaining the potential benefits of treasury centralization.

Answer

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Tags: Centralization, Corporate finance, Financial efficiency, Risk Management, Treasury management
Level: Level 2

Topic: Treasury Management

PSAF – L2 – Q14.4 – Sustainability Reporting Principles

Discuss four principles for implementing sustainability reporting in a public tertiary hospital.

Question

A public tertiary hospital, St. Mary’s Hospital, is considering implementing sustainability reporting from the next financial year, arguing that such reports are fundamental to health and sustainable development. However, the management is not clear about what it entails and its implications for the hospital.

Required:

In a memorandum to the Chief Executive of St. Mary’s Hospital:

(a) Discuss four general principal considerations in implementing sustainability reporting in the hospital.

(b) Conduct a needs assessment of the hospital in relation to the implementation of sustainability reporting.

Answer

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Tags: Accountability, ESG, Hospital, Principles, Public Sector, Stakeholder Engagement, Sustainability Reporting, Transparency
Level: Level 2

Topic: General purpose financial reporting framework

FM – L2 – Q121 – Cost of capital

Estimate the required rate of return for Kofi Textiles Ltd's equity stock, considering industry return and marketability risk.

Question

Kofi Textiles Ltd is a Kumasi-based textile company owned and managed by its two founders. The company has been selling to only domestic consumers in Nigeria since inception. The founders think it is time to extend the operations of the company to foreign markets, particularly those in neighbouring West African countries. Moving into foreign markets requires additional financing and capabilities, which the company does not have. The owners have agreed on ceding 40% stake in their company to a strategic investor who would provide the additional financing and capabilities needed to compete successfully in the international business environment. However, they are not sure of what range of prices to accept for the shares they would give up.

Below is a summary of financial data for Kofi Textiles Ltd for the recent financial year:

Item	Amount
Issued shares	2 million
After-tax profit	GH₦’000 9,600
Total dividends	GH₦’000 1,920
Property, plant and equipment	GH₦’000 50,500
Current assets	GH₦’000 25,300
Long-term borrowings	GH₦’000 9,100
Current liabilities	GH₦’000 11,100

The following information is relevant to the position and value of Kofi Textiles Ltd:
(1) The assets of Kofi Textiles Ltd were valued just after the recent financial statements were published. Inventories and trade receivables, which are included in current assets, were written down by GH₦80,000 and GH₦95,000 respectively. Property, plant and equipment were valued at GH₦52,400,000.
(2) Kofi Textiles Ltd falls into the textile and apparel industry. The average P/E ratio for listed equity stocks in the industry is 10. The average required return on listed equity stocks in the industry is 16%.
(3) Marketability of shares in Kofi Textiles Ltd is limited as its equity stock is not listed on the stock exchange. Consequently, investors demand a marketability risk premium of 7% above the industry average required return on equity in order to invest in the equity stock of Kofi Textiles Ltd.
(4) Earnings and dividends of Kofi Textiles Ltd are expected to grow by 5% every year to perpetuity.

Required:
(a) Estimate an appropriate required rate of return on the equity stock of Kofi Textiles Ltd.

(b) Estimate a range of suitable considerations for 40% stake in Kofi Textiles Ltd using the net assets method, P/E ratio method, and dividend valuation method.

Answer:

Answer

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Tags: Business valuation, Dividend valuation method, Equity stake, Financial Statements, Net assets method, P/E ratio method, Unlisted company
Level: Level 2

Topic: Business valuations

FM – L2 – Q120 – Corporate Restructuring

Discuss advantages of management buy-outs and features of share repurchases and splits, including their effects on share price vs. dividends.

Question

(a) Briefly discuss the potential advantages of management buy-outs.

(b) Discuss the main features of the following and explain why companies might use them:
(i) corporate share repurchases (buy-backs); and
(ii) share (stock) splits;
Include in your discussion comment on the possible effects on share price of share repurchases and share (stock) splits in comparison to the payment of dividends.

Answer

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Tags: Capital structure, Corporate restructuring, Dividends, Management buy-outs, Share repurchases, Share splits, Takeover defense
Level: Level 2

Topic: Mergers and acquisitions

Level (SQ): Level 2

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FM – L2 – Q128 – Public Procurement Principles

Explain five general principles of public procurement to enhance public financial management.

FM – L2 – Q127 – Value for Money in Public Financial Management

Explain the concept of value for money in PFM and its elements with illustrations.

FM – L2 – Q126 – Internal Control System

Discuss objectives of internal control system and explain COSO framework components in relation to PEFA.

FM – L2 – Q125 – Public Financial Management

Discuss benefits of PEFA reports and methodology for measuring PFM performance in Zamara.

FM – L2 – Q124 – Public Financial Management

Discuss three outcomes and seven pillars of an open and orderly PFM system per PEFA framework.

FM – L2 – Q123 – Mergers and acquisitions

Calculate NPV of Kofi Ltd's acquisition of Ama Ltd and advise on proceeding with a cash offer

FM – L2 – Q122 – Business valuations

Calculate pre-acquisition market values of Clearfield Farms and Village Industries using Gordon’s growth model.

PSAF – L2 – Q14.4 – Sustainability Reporting Principles

Discuss four principles for implementing sustainability reporting in a public tertiary hospital.

FM – L2 – Q121 – Cost of capital

Estimate the required rate of return for Kofi Textiles Ltd's equity stock, considering industry return and marketability risk.

FM – L2 – Q120 – Corporate Restructuring

Discuss advantages of management buy-outs and features of share repurchases and splits, including their effects on share price vs. dividends.

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Explain five general principles of public procurement to enhance public financial management.

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Explain the concept of value for money in PFM and its elements with illustrations.

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Discuss objectives of internal control system and explain COSO framework components in relation to PEFA.

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Discuss benefits of PEFA reports and methodology for measuring PFM performance in Zamara.

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Discuss three outcomes and seven pillars of an open and orderly PFM system per PEFA framework.

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Calculate NPV of Kofi Ltd's acquisition of Ama Ltd and advise on proceeding with a cash offer

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Calculate pre-acquisition market values of Clearfield Farms and Village Industries using Gordon’s growth model.

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Discuss four principles for implementing sustainability reporting in a public tertiary hospital.

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Estimate the required rate of return for Kofi Textiles Ltd's equity stock, considering industry return and marketability risk.

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