Corporate finance – Page 3

FM – May 2016 – L3 – Q6a – Financial Risk Management

Calculating the number of call options needed to delta-hedge the position of a bank's investment in shares.

Question

You work in the corporate finance department of a major bank. The bank has invested in 20,000,000 shares of Ode Oil Plc. You are concerned about the recent volatility in Ode Oil Plc’s share price due to the recent instability in the global oil market. You plan to protect the bank’s investment from a possible fall in Ode Oil Plc’s share price for the next three months and do not plan to sell the shares at present.

You have the following additional information:

Ode Oil Plc’s current share price: N10
Call option’s current share price: N11
Option expiry: 3 months
Interest rate (annual): 8%
Ode Oil Plc’s share annual standard deviation: 64%

You are required to calculate:
How many call options you need to buy or sell in order to delta-hedge the bank’s position. Please be specific.

Note: Delta may be estimated using N(d1).

Answer

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Tags: Call Options, Corporate finance, Delta Hedging, Risk Management, Share Price Volatility
Level: Level 3

Topic: Financial Risk Management

FM – May 2024 – L3 – SC – Q7 – Mergers and Acquisitions

Discuss manager-shareholder conflicts with examples and reasons for synergy in mergers and acquisitions.

Question

(a) Discuss conflict of interest that may exist between managers and shareholders and give examples. (8 Marks)

(b) Explain why synergy might exist when one company merges with or takes over another company. (7 Marks)

Answer

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Tags: Conflict of Interest, Corporate finance, Managerial Agency, Mergers, Shareholders, Synergy
Level: Level 3

Topic: Mergers and acquisitions
Series: MAY 2024

BMF – Nov 2020 – L1 – SB – Q6 – Basics of Business Finance and Financial Markets

Explanation of loan covenants, reasons and benefits for share repurchase, and features of a finance lease arrangement.

Question

(a) For many loan agreements, the borrower is required to provide undertakings or guarantees of some kind.
Distinguish between covenants and guarantees. (5 Marks)

(b) State THREE reasons why a company will repurchase its shares and THREE benefits that will accrue to the company for doing so. (6 Marks)

(c) Companies can acquire assets with finance lease instead of buying assets with equity or debt capital.
State SIX main features of a finance lease arrangement. (9 Marks)

(Total 20 Marks)

Answer

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Tags: Corporate finance, Finance lease, Guarantees, Loan Covenants, Share repurchase
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

SCS – Nov 2020 – L3 – Q8 – Financial management

Calculate operating and financial gearing for GGOH and assess how these ratios impact investor decisions.

Question

Assume a 10% interest on the outstanding loan and 22% Corporate Tax.

Required:
i) Calculate the operating gearing and financial gearing for GGOH. (5 marks)

ii) Assess how these ratios could impact an investor’s decision to invest in GGOH. (5 marks)

Answer

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Tags: Corporate finance, Financial Gearing, Investor decision, Operating Gearing, Ratio Analysis
Level: Level 3

Topic: Financial management
Series: NOV 2020

BMF – Nov 2021 – L1 – SA – Q10 – Basics of Business Finance and Financial Markets

Question about identifying a source of long-term financing.

Question

Which of the following is a source of long-term financing?

A. Bank overdraft
B. Trade payables
C. Venture capital
D. Operating lease
E. Debt factoring

Answer

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Tags: Corporate finance, Debt Instruments, Long-term Financing
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2021

BL – Nov 2022 – L1 – SB – Q4a – Company Law

Explaining the advantages of a floating charge to a company.

Question

Debenture stock is secured by charge on the company’s assets.

Required:
Explain two advantages of floating charge to the company.

Answer

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Tags: Corporate finance, Debenture, Floating Charge
Level: Level 1

Topic: Company Law
Series: NOV 2022

BMF – Nov 2022 – L1 – SA – Q7 – Basics of Business Finance and Financial Markets

This question asks about the method of issuing new shares to selected investors.

Question

A method of issuing new shares to a relatively small number of selected investors is called:
A. Rights issue
B. Public offer
C. Placing
D. Initial offer
E. General offer

Answer

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Tags: Corporate finance, Issuing shares, Placing, Public offer
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2022

BMF – Mar July 2020 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets

Identifying a non-source of new finance for public companies.

Question

Which of the following is NOT a source of new finance for public limited liability companies?
A. Placing
B. Rights issue
C. Initial public offer
D. Stock exchange introduction
E. Offer for sale by tender

Answer

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Tags: Capital Markets, Corporate finance, Public Finance
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

AFM – Nov 2016 – L3 – Q4b – Financial strategy formulation

Discuss three advantages and three disadvantages of ABC Ltd being acquired in a leveraged buyout (LBO).

Question

ABC Ltd is a listed company that operates in the Information Technology industry. The company has been experiencing losses for several years now, and its reserves are fast depleting. Its earnings per share have been negative for the past three years. A team of the company’s largest shareholders and some managers are considering acquiring the company in a leveraged buy-out (LBO).

Required:
Discuss THREE advantages and THREE disadvantages of ABC Ltd being acquired in an LBO.

Answer

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Tags: Advantages and disadvantages, Corporate finance, Financial restructuring, LBO, Leveraged buyout
Level: Level 3

Topic: Financial strategy formulation
Series: NOV 2016

AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers

Calculate the NPV of Mama Ltd's acquisition of Papa Ltd and determine the value of the combined entity and an appropriate share exchange ratio.

Question

a) The Directors of Mama Ltd (Mama), a large listed company, are considering an opportunity to
acquire all the shares of Papa Ltd (Papa), a small listed company with a highly efficient
production technology.
Mama has 10 million shares of common stock in issue that are currently trading at GH¢6.00
each. Papa Ltd has 5 million shares of common stock in issue, each of which is trading at
GH¢4.50.
If Papa is acquired and integrated into the business of Mama, 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 Mama operates in the same industry as Papa, its financial leverage is higher than that
of Papa. Mama’s total debt stock is valued at GH¢40 million, and its after-tax cost of debt is
22%. The beta of Mama’s common stock is 1.2. The return on the risk-free asset is 20% and
the market risk premium is 5%.
Required:
Suppose Mama offers a cash consideration of GH¢25 million from its existing funds to the
shareholders of Papa for all of their shares.
i) Calculate the NPV of the acquisition, and advise the directors of Mama on whether to
proceed with the acquisition or not. (8 marks)
ii) Calculate the value of the combined entity immediately after the acquisition. (3 marks)
iii) Suppose Mama would like to acquire all the shares in Papa by offering fresh shares of its
own common stock to the shareholders of Papa. Advise the directors on the appropriate
share exchange ratio based on market price.

Answer

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Tags: Acquisition valuation, Corporate finance, Mergers and Acquisitions, NPV, Synergy
Level: Level 3

Topic: Valuation of acquisitions and mergers
Series: NOV 2016

BCL – Dec2022 – Q3c – Accounts and audit

Define and explain the terms "retained earnings" and "unclaimed dividend" in a corporate context.

Question

Explain the following:
i) Retained earnings (2 marks)
ii) Unclaimed dividend (2 marks)

Answer

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Tags: Corporate finance, Financial Terminology, Retained Earnings, Unclaimed Dividends
Level: Level 1

Topic: Accounts and audit
Series: DEC 2022

BCL – Dec2022 – Q3b – Types of capital and the financing of companies

Explain the circumstances under which a company can acquire its own shares.

Question

Required: Identify and explain TWO (2) circumstances in which a company can acquire its own shares. (6 marks)

Answer

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Tags: Company Law, Company Shares, Corporate finance, Share Acquisition
Level: Level 1

Topic: Types of capital and the financing of companies
Series: DEC 2022

FM – April 2022 – L2 – Q1a – Introduction to Financial Management

Discuss the consistency between shareholder value maximization and social responsibility, and explain why shareholder value maximization is preferred over profit maximization.

Question

Shareholder value maximisation is a core sustainable objective for shareholders than short-term profit maximisation. Also important to management is social responsibility to the community which is delivered at a great cost to the organisation.
Required:
i) Is shareholder value maximisation inconsistent with social responsibility? Explain. (4 marks)
ii) Explain why shareholders value maximisation is considered more appropriate than profit maximization. (3 marks)
iii) Explain THREE (3) non-financial objectives of an organisation. (3 marks)

Answer

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Tags: Corporate finance, Shareholder value maximization, Social responsibility
Level: Level 2

Topic: Introduction to Financial Management
Series: APR 2022

FM – MAY 2019 – L2 – Q5b – Business valuations | Dividend Policy

Identify and explain the weaknesses of the dividend growth model as a method for valuing companies.

Question

Question:
The dividend growth model also has its fair share of criticism. While some have hailed it as being indisputable and not subjective, recent academicians and practitioners have come up with arguments that make you believe the exact opposite. Recent studies have unearthed some glaring flaws in what was considered to be a perfect valuation model.

Required:
Identify and explain THREE (3) weaknesses of the dividend growth model as a way of valuing a company with shares. (6 marks)

Answer

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Tags: Corporate finance, Dividend growth model, Valuation
Level: Level 2

Topic: Business valuations, Dividend Policy
Series: MAY 2019

FM – MAY 2019 – L2 – Q2c – Sources of finance: debt

Explain convertible debt and its advantages over bank loans with similar maturity.

Question

If an existing public company chooses to issue shares, the financial market usually interprets this as a sign that the company’s share price is somewhat overvalued. To avoid this negative impression, a company may choose to issue convertible bonds, which bondholders are likely to convert to equity anyway should the company continue to do well.

Required:
Explain convertible debt and identify FOUR (4) attractions to a company of convertible debt compared to a bank loan of a similar maturity as a source of finance. (5 marks)

Answer

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Tags: Capital structure, Convertible debt, Corporate finance, Financing strategies
Level: Level 2

Topic: Sources of finance: debt
Series: MAY 2019

FM – MAY 2019 – L2 – Q2b – Capital structure

Explain share repurchase and identify situations where it is useful for Mempeasem Ltd.

Question

At a recent Board meeting, the Board Chair of Mempeasem Ltd suggested the need to restructure the capital of their company. The Chair proposed shares repurchase as the option to consider, but the majority of the Board members were hearing this term for the first time. As the Finance Manager, you have been directed to help the Board members to understand this option for decision making.

Required:

Explain the term share repurchase to a non-finance person. (1 mark)
Identify FOUR (4) situations under which share repurchase will be useful for Mempeasem Ltd. (5 marks)

Answer

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Tags: Capital restructuring, Corporate finance, Share repurchase
Level: Level 2

Topic: Capital structure
Series: MAY 2019

Question Tag: Corporate finance

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FM – May 2016 – L3 – Q6a – Financial Risk Management

Calculating the number of call options needed to delta-hedge the position of a bank's investment in shares.

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FM – May 2024 – L3 – SC – Q7 – Mergers and Acquisitions

Discuss manager-shareholder conflicts with examples and reasons for synergy in mergers and acquisitions.

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BMF – Nov 2020 – L1 – SB – Q6 – Basics of Business Finance and Financial Markets

Explanation of loan covenants, reasons and benefits for share repurchase, and features of a finance lease arrangement.

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SCS – Nov 2020 – L3 – Q8 – Financial management

Calculate operating and financial gearing for GGOH and assess how these ratios impact investor decisions.

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BMF – Nov 2021 – L1 – SA – Q10 – Basics of Business Finance and Financial Markets

Question about identifying a source of long-term financing.

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BL – Nov 2022 – L1 – SB – Q4a – Company Law

Explaining the advantages of a floating charge to a company.

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BMF – Nov 2022 – L1 – SA – Q7 – Basics of Business Finance and Financial Markets

This question asks about the method of issuing new shares to selected investors.

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BMF – Mar July 2020 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets

Identifying a non-source of new finance for public companies.

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AFM – Nov 2016 – L3 – Q4b – Financial strategy formulation

Discuss three advantages and three disadvantages of ABC Ltd being acquired in a leveraged buyout (LBO).

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AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers

Calculate the NPV of Mama Ltd's acquisition of Papa Ltd and determine the value of the combined entity and an appropriate share exchange ratio.

You're reporting an error for "AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers"

BCL – Dec2022 – Q3c – Accounts and audit

Define and explain the terms "retained earnings" and "unclaimed dividend" in a corporate context.

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BCL – Dec2022 – Q3b – Types of capital and the financing of companies

Explain the circumstances under which a company can acquire its own shares.

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FM – April 2022 – L2 – Q1a – Introduction to Financial Management

Discuss the consistency between shareholder value maximization and social responsibility, and explain why shareholder value maximization is preferred over profit maximization.

You're reporting an error for "FM – April 2022 – L2 – Q1a – Introduction to Financial Management"

FM – MAY 2019 – L2 – Q5b – Business valuations | Dividend Policy

Identify and explain the weaknesses of the dividend growth model as a method for valuing companies.

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FM – MAY 2019 – L2 – Q2c – Sources of finance: debt

Explain convertible debt and its advantages over bank loans with similar maturity.

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FM – MAY 2019 – L2 – Q2b – Capital structure

Explain share repurchase and identify situations where it is useful for Mempeasem Ltd.

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