Level 2 – Page 33

FM – L2 – Q15 – Business valuations

Estimate market value of irredeemable 7.5% bonds with 9% required return.

Question

Assume that bond investors in Ama Industries require a return of 9% per year on their investments.

Required:

(A) Estimate the market value of irredeemable 7.5% bonds that pay interest annually.

(B) Estimate the market value of bonds paying coupon interest of 6% per year annually, that are redeemable at par in four years’ time.

(C) Estimate the market value of bonds paying coupon interest of 10%, redeemable at par after three years, where interest is payable every six months.

(D) Estimate the market value of a convertible bond with a coupon of 5% and interest payable annually; these bonds are convertible after three years into equity shares at the rate of 20 shares for every GH₵100 nominal value of bonds. The expected share price in three years’ time is GH₵7.

Answer

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Tags: Bond valuation, Business valuations, Interest rate, Irredeemable bonds
Level: Level 2

Topic: Business valuations

MA – L2 – Q62 – Divisional performance

Calculate ROI for a new investment project at Kumasi Tech Ltd over three years.

Question

Kumasi Tech Ltd is organised into several investment centres. The annual performance of each investment centre is measured on the basis of ROI. ROI is measured each year as the profit before interest as a percentage of the average investment/average capital employed in the investment centre.
One of the investment centres has achieved a ROI in excess of 35% in each of the past four years. Its managers are considering a new investment project that will have the following cash flows:

Year	Cash flow
Beginning of Year 1	(42,000)
1–3	19,000 each year

The initial investment will be in an item of machinery that will have no residual value at the end of Year 3. Assume that depreciation is charged on a straight-line basis.
Required:
(a) Calculate the ROI for the project, each year and on average for the three-year period.

(b) Suggest whether the managers of the investment Centre are likely to invest in the project.

Answer

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Tags: Depreciation, Divisional performance, Investment centre, Performance Measurement, ROI
Level: Level 2

Topic: Divisional performance

FM – L2 – Q14 – Business valuations

Calculate expected share price using dividend valuation model with constant dividends of GH₵0.24 in perpetuity.

Question

Kofi Enterprises has shareholders expecting an 8% annual return. The company paid dividends of GH₵0.24 per share in the year just ended.

Required:

(A). Assume that Kofi Enterprises pays out all of its annual profits as dividends, and the annual dividend per share is expected to be GH₵0.24 in perpetuity. Using the dividend valuation model, suggest what the expected share price of the company should be.

(B). Assume that the expected annual rate of growth in dividends is expected to be 3%. Using the dividend growth valuation model, suggest what the expected share price of the company should be.

(C). Assume that Kofi Enterprises is expected to retain 60% of its profits and reinvest the money to earn an annual return of 9%. Using the dividend growth valuation model (the Gordon growth model), suggest what the expected share price of the company should be.

Answer

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Tags: Business valuations, dividend valuation, Perpetuity, share price
Level: Level 2

Topic: Business valuations

MA – L1 – Q61 – Performance analysis

Calculate ROI for Keta Textiles Ltd for 5 years and assess division performance using ROI and other measures.

Question

Keta Textiles Ltd is planning to open a new investment centre, which will make and sell a single product. The investment in the new division at the beginning of the year will be GH¢2 million, consisting entirely of non-current assets. These are expected to have a five-year life with no residual value, and they will be depreciated each year at the rate of 20% of cost.
Sales in the first year of operation are expected to be GH¢4 million and the budgeted gross profit is 30%. Overhead costs excluding depreciation of non-current assets will be GH¢600,000 in Year 1.
The estimates for the first five years of operation are as follows:
(1) The company will not make any additional investment in non-current assets for the division in the first five years.
(2) The cost of sales per unit in the five years will remain constant, with no increases.
(3) Sales volume will be the same in Year 2 as in Year 1. Sales volume will then increase in Year 3 by 5% but will fall by 10% in Year 4 and a further 10% in Year 5.
(4) The sales price per unit will be increased by 5% in Year 2. There will be no change in sales prices in Year 3, but prices will be increased by 5% in Year 4 and again by 5% in Year 5.
(5) Overhead costs excluding depreciation will remain at GH¢600,000 for the first three years, but will then be GH¢700,000 in each of Years 4 and 5.

Required:
Calculate the return on investment for the division for each of the first five years, assuming that ROI is calculated using the net book value of assets at the beginning of the year.
Using ROI and any other measures of performance, assess the expected performance of the division over the five-year period.

Answer

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Tags: Divisional performance, Financial metrics, Investment centre, Long-term performance, Performance Analysis, ROI
Level: Level 2

Topic: Divisional performance, Performance Analysis

FM – L2 – Q13 – Portfolio theory and CAPM

Calculate the expected return on shares with a beta of 1.2, given risk-free rate of 15% and market return of 20%.

Question

Unity Ventures have shares in a company which paid a dividend of GH¢10 to its shareholders. The shares have a beta factor of 1.2. The risk-free rate of return and the market return are 15% and 20% respectively.

Required:

(a) Calculate the return on the shares.

(b) Calculate the value of the shares.

Answer

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Tags: dividend valuation, expected return, share price
Level: Level 2

Topic: Business valuations

MA – L2 – Q60 – Performance Analysis

Calculate the budgeted ROI for North Sector for the year to 31 December Year 7.

Question

PrimeCorp has several separate divisions, each operating as an investment centre within the group. North Sector makes and sells three products, A, B, and C. All three products are sold under the Apex brand label, but Product A and Product B are also sold through a supermarket group as unbranded products. Budgeted data for the year to 31 December Year 7 is as follows:

Product sales

	Product A	Product B	Product C
	units	units	units
Apex brand	160,000	120,000	50,000
Unbranded	450,000	600,000

Selling prices

	Product A	Product B	Product C
	GH¢ per unit	GH¢ per unit	GH¢ per unit
Apex brand	2.50	3.20	5.00
Unbranded	1.50	2.00

Variable costs

	Production	Packaging
	GH¢ per unit	GH¢ per unit
Product A:
Apex brand	1.20	0.30
Unbranded	1.20	0.10
Product B:
Apex brand	1.60	0.40
Unbranded	1.60	0.20
Product C:
Apex brand	2.50	0.50

Budgeted marketing expenditure is GH¢180,000 for the year, and other budgeted expenditure for other fixed costs is GH¢375,000. The average capital employed in North Sector in Year 7 is expected to be GH¢400,000 and the division’s cost of capital is 10%.

Required:
(a) Calculate the budgeted ROI for North Sector for the year to 31 December Year 7.

b) Calculate the budgeted residual income for North Sector for the year to 31 December Year 7.

Answer

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Tags: Divisional performance, Financial metrics, Investment centre, Performance Analysis, ROI
Level: Level 2

Topic: Performance Analysis

FM – L2 – Q12 – Economic and regulatory environment

Outline three unfair practices from GBA Bank's new AI-based credit assessment system.

Question

KWE Bank is part of a large financial services group in Kumasi, KWE Group. KWE Bank provides personal loans to individuals. In order to determine whether a customer is an acceptable credit risk for a loan to be offered, KWE has used the information provided by the customer in their application form together with an employer’s salary reference.

KWE intends to introduce a more sophisticated credit risk assessment system to determine whether loans should be advanced to customers. This system will combine information from the credit application with any information about the customer held by KWE Group and unstructured information about the customer obtained from their online activity. This data will be analysed by an AI-based credit assessment system that uses machine learning to improve the accuracy of its credit assessments over time.

Required:

Outline three ways in which KWE’s new credit assessment system may lead to practices that are likely to be viewed as unfair.

Answer

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Tags: AI technology, Banking, Credit assessment, Customer data, Data privacy, Discrimination, Ethical finance, Financial inclusion, Regulatory compliance, Technology risks
Level: Level 2

Topic: Economic and regulatory environment

FM – L2 – Q11 – Economic and regulatory environment

Explain five areas where government action impacts financial management decisions.

Question

The economic environment within which the financial manager must operate is subject to a variety of influences, a major one is from the government.

Required:

Explain FIVE areas in which government action might affect the problem solving and decision making roles of a Finance Manager.

Answer

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Tags: Credit controls, Economic policy, Exchange controls, Financial management, Government influence, Investment decisions, Taxation
Level: Level 2

Topic: Economic and regulatory environment

FM – L2 – Q10 – Economic and regulatory environment

Compare functions of IMF and World Bank, and explain IMF challenges in West Africa.

Question

INTERNATIONAL MONETARY FUND (IMF) AND THE WORLD BANK

The International Monetary Fund (IMF) and the World Bank are institutions in the United Nations system. They are twin intergovernmental pillars supporting the structure of the world’s economic and financial order.

Required:

(a) Compare and Contrast THREE functions of the International Monetary Fund (IMF) and the World Bank

(b) Explain TWO challenges being faced by the IMF in attaining its objectives in West African Countries

Answer

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Tags: economic challenges, IMF, international finance, policy implementation, West Africa
Level: Level 2

Topic: Economic and regulatory environment

FM – L2 – Q9 – Financial Policy Decisions

Discuss investment, financing, and dividend policy decisions, their interrelation, and impact on firm value.

Question

When determining the financial objectives of a company, it is necessary to take three types of policy decision into account: investment policy, financing policy, and dividend policy.

Required:

Discuss the nature of these THREE types of decisions, commenting on how they are inter-related and how they might affect the value of the firm (that is the present value of projected cash flows).

Answer

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Tags: Cash Flows, Cost of Capital, Debt Finance, Dividend Policy, Equity Finance, Financial Decisions, Financing Policy, Investment Policy, Project Viability, Shareholder Value
Level: Level 2

Topic: Introduction to Investment Appraisal

Level (SQ): Level 2

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FM – L2 – Q15 – Business valuations

Estimate market value of irredeemable 7.5% bonds with 9% required return.

MA – L2 – Q62 – Divisional performance

Calculate ROI for a new investment project at Kumasi Tech Ltd over three years.

FM – L2 – Q14 – Business valuations

Calculate expected share price using dividend valuation model with constant dividends of GH₵0.24 in perpetuity.

MA – L1 – Q61 – Performance analysis

Calculate ROI for Keta Textiles Ltd for 5 years and assess division performance using ROI and other measures.

FM – L2 – Q13 – Portfolio theory and CAPM

Calculate the expected return on shares with a beta of 1.2, given risk-free rate of 15% and market return of 20%.

MA – L2 – Q60 – Performance Analysis

Calculate the budgeted ROI for North Sector for the year to 31 December Year 7.

FM – L2 – Q12 – Economic and regulatory environment

Outline three unfair practices from GBA Bank's new AI-based credit assessment system.

FM – L2 – Q11 – Economic and regulatory environment

Explain five areas where government action impacts financial management decisions.

FM – L2 – Q10 – Economic and regulatory environment

Compare functions of IMF and World Bank, and explain IMF challenges in West Africa.

FM – L2 – Q9 – Financial Policy Decisions

Discuss investment, financing, and dividend policy decisions, their interrelation, and impact on firm value.

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Estimate market value of irredeemable 7.5% bonds with 9% required return.

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Calculate expected share price using dividend valuation model with constant dividends of GH₵0.24 in perpetuity.

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