Program (SQ): PROFESSIONAL PROGRAM

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  • 20 Marks

FM – L2 – Q124 – Public Financial Management

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

(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.

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  • 14 Marks

FM – L2 – Q123 – Mergers and acquisitions

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

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.

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  • 20 Marks

FM – L2 – Q122 – Business valuations

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

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.

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  • 20 Marks

PSAF – L2 – Q14.4 – Sustainability Reporting Principles

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

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.

(c) Point out three implementation challenges of sustainability reporting in the hospital.

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  • 14 Marks

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.

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:

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  • 20 Marks

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.

(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.

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  • 20 Marks

PSAF – L2 – Q14.3 – Sustainability Reporting Frameworks

Discuss contributions of ISSB, GRI, CDP, IRF, and TCFD to public sector sustainability standards.

Development of public sector sustainability standards may benefit from the existing sustainability frameworks.
Required:
Discuss the contributions of the following frameworks to the advancement of public sector sustainability standards:

  • International Sustainability Standards Board (ISSB);
  • Global Reporting Initiative (GRI);
  • Carbon Disclosure Project (CDP);
  • Integrated Reporting Framework (IRF); and
  • Task Force on Climate-related Financial Disclosures (TCFD).

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  • 20 Marks

PSAF – L2 – Q14.2- Sustainability Reporting Principles

Discuss five general principles of sustainability reporting in the public sector.

(a) Discuss five general principles of sustainability reporting in the public sector.

(b) Explain four potential challenges of implementing sustainability reporting in the public sector.

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  • 20 Marks

FM – L2 – Q119 – Business valuations

Calculate offer price for SmallCorp using a forward P/E multiple of 8.0 based on expected earnings

LargeCorp is considering a takeover bid for SmallCorp, another company in the same industry. SmallCorp is expected to have earnings next year of GH₵86,000. If LargeCorp acquires SmallCorp, the expected results from SmallCorp will be as follows:

Year after the acquisition
Year 1 Year 2 Year 3
Sales GH₵200,000 GH₵280,000 GH₵320,000
Cash costs/expenses 120,000 160,000 180,000
Capital allowances 20,000 30,000 40,000
Interest charges 10,000 10,000 10,000
Cash flows to replace assets and finance growth 25,000 30,000 35,000

From Year 4 onwards, it is expected that the annual cash flows from SmallCorp will increase by 4% each year in perpetuity. Tax is payable at the rate of 30%, and the tax is paid in the same year as the profits to which the tax relates. If LargeCorp acquires SmallCorp, it estimates that its gearing after the acquisition will be 35% (measured as the value of its debt capital as a proportion of its total equity plus debt). Its cost of debt is 7.4% before tax. LargeCorp has an equity beta of 1.60. The risk-free rate of return is 6% and the return on the market portfolio is 11%.
Required:

(a) Suggest what the offer price for SmallCorp should be if LargeCorp chooses to value SmallCorp on a forward P/E multiple of 8.0 times.

(b) Calculate a cost of capital for LargeCorp.

(c) Suggest what the offer price for SmallCorp might be using a DCF-based valuation.

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  • 20 Marks

PSAF – L2 – Q14.1 – Sustainability Reporting

Explain sustainability reporting in the context of the public sector.

(a) Explain sustainability reporting in the public sector context.

 (b) Discuss five justifications for public sector sustainability reporting.

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