Question Tag: Investment Decision

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CR – Nov 2024 – L3 – Q5a – Financial Analysis and Investment Evaluation

Compute financial ratios for Nsawkaw PLC to evaluate its financial performance for investment recommendation.

Question

Nsawkaw PLC (NK), a gold processing and trading company, has been identified by Djaraye Private Equity Fund (DPEF) as a target for long-term equity investment. As a financial consultant of DPEF, you have been tasked to evaluate the integrated financial condition of NK and make an investment recommendation.

Below are the summarised versions of NK’s Consolidated Financial Statements for the year ended June 30, 2024 (together with its comparative period):

Summarised Consolidated Statement of Profit or Loss for the year ended 30 June 2024

	2024 (GH¢000)	2023 (GH¢000)
Revenue	2,538,000	2,125,000
Operational expenses	(1,909,100)	(1,592,900)
Interest costs	(186,700)	(157,250)
Taxation	(234,000)	(198,500)
Profit after tax	208,200	176,350
Other comprehensive income	17,900	10,550
Total comprehensive income	226,100	186,900

Summarised Consolidated Statement of Changes in Equity for the year ended 30 June 2024

	Equity Holders of the Parent (GH¢000)	Non-controlling Interests’ Equity (GH¢000)	Total Equity (GH¢000)
2024
Balances b/d	457,200	65,600	522,800
Total comprehensive income	190,800	35,300	226,100
Dividends	(110,000)	(8,700)	(118,700)
Balances c/d	538,000	92,200	630,200
2023
Balances b/d	355,000	46,650	401,650
Total comprehensive income	160,500	26,400	186,900
Dividends	(58,300)	(7,450)	(65,750)
Balances c/d	457,200	65,600	522,800

Summarised Statement of Financial Position as at 30 June 2024

	2024 (GH¢000)	2023 (GH¢000)
Non-current assets
Property, plant, and equipment	718,000	657,000
Others	156,000	99,000
Total Non-current assets	874,000	756,000
Current assets
Trade receivables	140,000	121,000
Others	236,500	123,050
Total Current assets	376,500	244,050
Total Assets	1,250,500	1,000,050
Total Equity and Liability	1,250,500	1,000,050

Additional information:

The total number of equity shares outstanding was 1.2 million and 1.4 million at 30 June 2023 and 30 June 2024 respectively.
Other comprehensive income attributable to non-controlling interests for the years ended 30 June 2023 and 2024 amounted to GH¢8.05 million and GH¢9.6 million respectively.
Non-current liabilities at 30 June 2023 and 30 June 2024 amounted to GH¢250,800 and GH¢308,510 respectively.
The following metrics have been gleaned from NK’s published sustainability reports across the two years:

Metric	2024	2023
Scope 1 & 2 carbon emissions (tonnes of CO2)	650	780
Scope 3 carbon emissions (tonnes of CO2)	2,400	2,380
Women in senior management (%)	21	16
Total recordable injury frequency rate (TRIFR) per 100 full-time workers	3.3	4.1

The scope and definitions of the above sustainability measures have remained materially unchanged across the two years.

Required:

Compute the following ratios for the years ended 2024 & 2023:

Operating profit margin
Return on parent’s equity
Earnings per share
Current ratio
Trade receivables days
Total liabilities to total assets %

Answer

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Tags: Financial Analysis, Investment Decision, Leverage, Liquidity, Profitability, Ratio Analysis, Working Capital Management
Level: Level 3

Topic: Analysis and Interpretation of Financial Statements
Series: Nov 2024

FR – Nov 2024 – L2 – Q4b – Financial Performance Assessment of Acquisition Targets

Assessment of financial performance and position of Suah LTD and Nagbe LTD to assist Dukuly LTD in an acquisition decision.

Question

Dukuly LTD, a public entity, has been expanding through acquisitions. It is assessing two potential acquisition targets, Suah LTD and Nagbe LTD, both operating in the same industry.

The financial statements of Suah LTD and Nagbe LTD for the year ended 30 September 2024 have been provided, along with a set of financial ratios calculated for Suah LTD.

Required:
Using the calculated ratios for Nagbe LTD from Question 4a, assess the relative financial performance and financial position of Suah LTD and Nagbe LTD, to assist the directors of Dukuly LTD in making an acquisition decision.

Answer

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Tags: Financial Position, Gearing, Investment Decision, Liquidity, Performance Evaluation, Profitability, Ratio Analysis
Level: Level 2

Topic: Financial Statement Analysis
Series: Nov 2024

FR – Nov 2024 – L2 – Q4a – Financial Ratios and Performance Evaluation

Calculation of key financial ratios for Nagbe LTD to compare with Suah LTD and evaluate financial performance.

Question

Dukuly LTD, a public entity, has been expanding through acquisitions. It is assessing two potential acquisition targets, Suah LTD and Nagbe LTD, which operate in the same industry. The indicative price for acquiring either entity is GH¢12 million.

The financial statements for Suah LTD and Nagbe LTD are provided as follows:

Statement of Profit or Loss for the year ended 30 September 2024

Item	Suah LTD (GH¢’000)	Nagbe LTD (GH¢’000)
Revenue	25,000	40,000
Cost of Sales	(19,000)	(32,800)
Gross Profit	6,000	7,200
Distribution & Admin Expenses	(1,250)	(2,300)
Finance Costs	(250)	(900)
Profit Before Tax	4,500	4,000
Income Tax Expense	(900)	(1,000)
Profit for the Year	3,600	3,000

Statement of Financial Position as at 30 September 2024

Item	Suah LTD (GH¢’000)	Nagbe LTD (GH¢’000)
Non-Current Assets	4,800	10,300
Current Assets	4,800	8,700
Total Assets	9,600	19,000
Equity	2,600	5,600
Non-Current Liabilities	5,000	9,200
Current Liabilities	2,000	4,200
Total Equity & Liabilities	9,600	19,000

Additional Information:

Carrying Amount of Plant Assets:
- Suah LTD: GH¢4,800,000
- Nagbe LTD: GH¢2,000,000

The following ratios for Suah LTD are provided:

Ratio	Suah LTD
Return on Capital Employed (ROCE)	62.5%
Net Asset Turnover	3.3 times
Gross Profit Margin	24.0%
Profit Margin (Before Interest & Tax)	19.0%
Current Ratio	2.4:1
Inventory Holding Period	31 days
Trade Receivables Collection Period	31 days
Trade Payables Payment Period	24 days
Gearing Ratio	65.80%
Acid Test Ratio	1.6:1

Required:
Using the financial statements provided, calculate the corresponding ratios for Nagbe LTD to compare with Suah LTD.

Answer

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Tags: Efficiency, Financial Statement Interpretation, Gearing, Investment Decision, Liquidity, Profitability, Ratio Analysis
Level: Level 2

Topic: Financial Statement Analysis
Series: Nov 2024

FM – Nov 2016 – L3 – SB – Q2 – Investment Appraisal Techniques

Calculate the value of the convertible loan stock, expected growth rate in equity price, and provide recommendations on whether to hold or sell the security.

Question

Honey Comb Plc has issued 10% convertible loan stock, which is due for redemption in 10 years’ time (i.e., December 31, 2025). The option to convert is open only for another two years. If conversion does not take place by December 31, 2017, the option will lapse. The issue was sold to the public at a price of N920 for N1000 of convertible loan stock. The conversion rate at January 1, 2016 was 250 equity shares for N1000 of stock. Non-convertible loan stock in a similar risk class is presently yielding 12%. The market price of Honey Comb Plc equity shares has been increasing steadily over time, reflecting the performance of the company. The shares currently pay a dividend of N0.30 per share. The current price of the convertible security is N960, and each share is currently valued at N3.00. A holder of the convertible loan stock is considering whether to sell his holdings or continue to hold the stock. Ignore taxation while answering the questions.

Required:
a. What is the value of the security as simple unconvertible loan stock? (5 Marks)

b. What is the expected minimum annual rate of growth in the equity share price that is required to justify the holder of convertible loan stock holding on to the security before the option expires? (12 Marks)

c. What recommendation would you make to the holder of the security and why? (3 Marks)

Answer

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Tags: Convertible Loan Stock, Equity Shares, Financial management, Investment Decision, Valuation
Level: Level 3

Topic: Investment Appraisal Techniques
Series: NOV 2016

AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

Question

Investigation under investment decision will NOT include:
A. Loan facility decision
B. Purchase of shares
C. Purchase of business
D. Reporting on profit forecast
E. Partnership participation

Answer

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Tags: Financial Analysis, Investigation, Investment Decision, Profit Forecast
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2012

CR – May 2024 – L3 – SB – Q2 -Consolidated Financial Statements (IFRS 10)

Memo advising on acquisition decision based on financial analysis of Betta and Gamma Ltd.

Question

Alpha PLC is an entity which has grown in recent years by acquiring established businesses. Alpha PLC is contemplating acquiring Betta Limited and Gamma Limited, both operating in the same industry as Alpha PLC. The management of Alpha PLC has indicated a total acquisition price of N12 million for each company. The following financial statements provide insight into the performance and financial position of both Betta Limited and Gamma Limited as at September 30, 2020:

Statement of Profit or Loss (for the year ended September 30, 2020):

	Betta Ltd (N’000)	Gamma Ltd (N’000)
Revenue	25,000	40,000
Cost of sales	(19,000)	(32,800)
Gross profit	6,000	7,200
Distribution costs	(800)	(1,400)
Administrative expenses	(450)	(900)
Finance costs	(250)	(900)
Profit before tax	4,500	4,000
Income tax expense	(900)	(1,000)
Profit for the year	3,600	3,000

Statement of Financial Position (as at September 30, 2020):

	Betta Ltd (N’000)	Gamma Ltd (N’000)
Non-current assets
Property, plant and equipment
– Property	–	3,000
– Owned plant and equipment	4,800	2,000
– Leased plant and equipment	–	5,300
Total non-current assets	4,800	10,300
Current assets
Cash at bank and in hand	1,600	200
Trade receivables	1,600	5,100
Inventories	1,600	3,400
Total current assets	4,800	8,700
Total assets	9,600	19,000
Equity and liabilities
Ordinary shares (N1.00 each)	1,000	2,000
Revaluation surplus on property	–	900
Retained earnings	1,600	2,700
Total equity	2,600	5,600
Non-current liabilities
Finance lease obligation	–	4,200
5% loan notes (Dec 2026)	5,000	–
10% loan notes (Dec 2026)	–	5,000
Total non-current liabilities	5,000	9,200
Current liabilities
Trade payables	1,250	2,100
Finance lease obligation	–	1,000
Tax payable	750	1,100
Total current liabilities	2,000	4,200
Total equity and liabilities	9,600	19,000

Additional Ratios Calculated:
- Gross profit margin: Betta 24.0%, Gamma 18.0%
- Profit margin (before interest and tax): Betta 19.0%, Gamma 12.3%
- Return on capital employed (ROCE): Betta 62.5%, Gamma 31.0%
- Current ratio: Betta 2.4:1, Gamma 2.1:1
- Acid test ratio: Betta 1.6:1, Gamma 1.26:1
- Net assets turnover: Betta 3.3 times, Gamma 2.5 times
- Gearing: Betta 65.8%, Gamma 64.6%

Required:

a. Write a memo to the Director of Alpha PLC advising him on how to make the investment decision considering the performance and financial position of Betta Limited and Gamma Limited for the year ended September 30, 2020. (14 Marks)

b. What other qualitative factors should the management of Alpha PLC take into consideration assuming Gamma Limited is a foreign subsidiary? (6 Marks)

Answer

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Tags: Business Acquisition, Corporate Reporting, Financial Position, Investment Decision, Ratio Analysis
Level: Level 3

Topic: Consolidated Financial Statements (IFRS 10)
Series: MAY 2024

FM – May 2018 – L3 – SB – Q4 – Portfolio Management

Analyze SF Plc.'s portfolio beta and assess whether the short-term investment strategy is optimal.

Question

Sunmola Funds (SF) Plc. has a portfolio of short-term investments in the shares of four quoted companies.

Company	Holding
Tomiwa (T)	100,000 shares
Pascal (P)	155,000 shares
Binta (B)	260,000 shares
Yetunde (Y)	420,000 shares

You have the following additional information:

Company	Beta	Market Value Per Share (Kobo)	Expected Total Return on Investment p.a (%)
T	1.55	280	21.0
P	0.65	340	12.5
B	1.26	150	18.0
Y	1.14	9.5	18.5

The market risk premium is 10% per year, and the risk-free rate is 6% per year.

Required:

a. Estimate the Beta of SF Plc.’s short-term investment portfolio. (4 Marks)

b. Recommend, giving your reasons, whether the composition of SF Plc.’s short-term investment portfolio should be changed using relevant calculations. (10 Marks)
Hint: Consider the alpha values of the shares and the propriety of investing short-term funds in equity.

c. Explain THREE factors that a financial manager should take into account when investing in marketable securities. (6 Marks)

Answer

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Tags: Beta calculation, Investment Decision, Marketable Securities, Portfolio analysis, Risk-Return Analysis
Level: Level 3

Topic: Portfolio Management
Series: MAY 2018

PSAF – May 2021 – L2 – Q3b – Fiscal Policy and Public Finance

NPV-based investment recommendation for Omidan Local Government among three projects and a risk-free security alternative.

Question

Omidan Local Government Council has N20,000,000 to invest, if there is an assurance that the investment will earn at least 12% p.a. In view of this, the following projects are being considered:

Project A will earn N21,800,000 at the end of year one with a residual value of N1,500,000;
Project B will earn N24,000,000 at the end of year two with a residual value of N500,000; and
Project C will earn N14,000,000 at the end of year one and another N10,000,000 at the end of year two with no residual value.

If none of the projects is undertaken, Omidan Local Government Council will invest the N20,000,000 in a risk-free security that will earn interest of 12% p.a.

Required:

Assess and advise Omidan Local Government Council on which of the projects to be undertaken using Net Present Value (NPV) method.

Answer

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Tags: Capital Budgeting, Investment Decision, NPV Analysis, Public Sector Finance, Risk-Free Investment
Level: Level 2

Topic: Government Revenue
Series: MAY 2021

QT – May 2019 – L1 – Q2b – Mathematics of Business Finance

Calculate NPV and IRR for two machines and determine which machine yields a better return.

Question

BonBone Company Ltd wants to make a decision on which of the two machines to purchase. Each will involve a GH¢10,000 investment. The expected net incremental cash flows are given by the table below:

Year	Machine I (GH¢)	Machine II (GH¢)
1	5,000.00	2,000.00
2	4,000.00	3,000.00
3	2,000.00	5,000.00
4	2,000.00	4,000.00

Required:

i) If the company’s cost of capital is 10%, calculate the Net Present Value (NPV) of Machine I and Machine II and determine which machine should be purchased for higher returns. (8 marks)

ii) If the initial investment for Machine I is changed to GH¢4,000 and Machine II is changed to GH¢2,000, calculate the Internal Rate of Return (IRR) for Machine I and Machine II. (6 marks)

iii) If the IRRs in (ii) above are to be used as the basis of selection, determine which machine should be purchased for higher returns. (2 marks)

Answer

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Tags: Capital Budgeting, Discounting, Internal Rate of Return, Investment Decision, Net Present Value

Topic: Mathematics of Business Finance
Series: MAY 2019

QT – May 2019 – L1 – Q2a – Mathematics of Business Finance

Distinguish between IRR and NPV, and evaluate investment decisions using NPV and IRR.

Question

Distinguish between Internal Rate of Return and Net Present Value. (4 marks)

Answer

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Tags: Capital Budgeting, Discounting, Internal Rate of Return, Investment Decision, Net Present Value
Level: Level 1

Topic: Mathematics of Business Finance
Series: MAY 2019

FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

Question

a) Sakyiama Poultry Farms is considering purchasing a new incubator that will improve its incubation efficiency to 90% as against the current 50%. The incubator, which is to be purchased immediately, will cost GH¢120,000. The incubator has a useful life of 4 years, after which it would be sold for scrap at GH¢10,000. The current contribution of GH¢3 per day-old chick will not change. The number of day-old chicks sold at 12,000 units per annum will increase by 80%. Fixed cost will be GH¢20,000 per annum. Sakyiama Farms has an after-tax cost of capital of 12.5% and pays tax in the year in which profit is made at a rate of 15% per annum. The farm is also entitled to capital allowance at 25% on a reducing balance.

i) Calculate the Net Present Value (NPV) and the viability of the investment. (7 marks)
ii) Calculate the Internal Rate of Return (IRR). (8 marks)

b) Two blue-chip companies – Abu Ltd and Ada Ltd are seeking to raise funds from venture capital to boost their production in order to satisfy demand for their solar-powered refrigeration and air-conditioning systems, which they developed through a joint venture. They have consulted you for advice.

Required:
Explain FIVE conditions that a venture capitalist will consider in accessing an application for funding. (5 marks)

Answer

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Tags: Capital Allowance, Internal Rate of Return (IRR), Investment Decision, Net Present Value (NPV), Venture Capital
Level: Level 2

Topic: Cost of capital, Introduction to Investment Appraisal
Series: NOV 2016

FM – March 2023 – L2 – Q1a – Introduction to Financial Management

Explain the four major financial decisions taken by a Finance Manager, citing examples for each.

Question

The four major decisions taken by a Finance Manager are:

i) Investment Decision
ii) Financing Decision
iii) Dividend Decision
iv) Liquidity Decision

Required:
Explain each of the above decisions citing an example of each. (10 marks)

Answer

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Tags: Dividend decision, Financing decision, Investment Decision, Liquidity decision
Level: Level 2

Topic: Introduction to Financial Management
Series: MAR 2023

FM – MAR 2024 – L2 – Q4 – Introduction to investment appraisal

This question involves calculating the NPV of a project, advising on whether to undertake the project, and explaining why NPV is preferred over the payback period as an investment appraisal method.

Question

a) Toolo Ghana Ltd was recently formed as a special purpose vehicle (SPV) to provide a secondary market for investors involved in the domestic debt exchange programme who want to sell off their holdings for immediate cash.

The SPV was embarking on this special initiative as a one-off project; The company in year zero will acquire a total of GH¢500 million worth of bonds from investors and pay for all at the same time for cash.

Based on the projections, the expected cash inflows from the bonds are as follows:

Year 1 = GH¢100 million
Year 2 = Year 1 cash flows + 20% increase
Year 3 = Year 2 cash flows + 15% increase
Year 4 = Year 3 cash flows + 25% increase
Year 5 = Year 4 cash flows + 20% increase

A special investment in systems and software, computers and other fixed assets is GH¢6 million in year zero and tax deductible depreciation is on a straight-line basis with a scrap value of GH¢1 million. Salaries and wages and other administrative expenses will be GH¢1 million in year 1 and grow at 15% per annum on the previous year’s figure. Rent is also determined at GH¢0.5 million in year 1 and growing by GH¢100,000 each year.

The internal cost of capital is 22% whilst corporate tax rate is 25%.

Required:

i) Calculate the Net Present Value (NPV) of this project and advise whether Toolo Ltd should embark on the project.
(12 marks)

ii) Explain TWO (2) reasons why NPV is preferred to payback period.
(3 marks)

b) Soso Ghana Ltd is considering investing in project Sankofa which has been appraised to have an expected return of 25% per annum. The project’s beta is 1.9 and the risk-free interest rate is 14% per annum, which is 9% below the average return on equity stocks on the market.

Required:

Calculate the required return on project Sankofa and advise Soso Ghana Ltd whether it should invest in the project.
(5 marks)

Answer

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Tags: Capital Budgeting, Investment Decision, NPV Calculation, Payback Period
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: MAR 2024

FM – NOV 2015 – L2 – Q3b – Introduction to financial management

Calculate the NPV for God is King Ltd's project and advise management on whether to accept or reject the project.

Question

God is King Ltd has been printing all its magazines from Dubai due to the comparative cost advantage. The company is considering establishing its own printing department, and the R&D team has identified a printing machine which will meet the quality and cost specifications of God is King Ltd. The machine also has the capacity to print to meet the market needs of the company. The machine, which has a useful life of 5 years, will cost GHS800,000 and immediate installation cost will be GHS50,000. Fixed cost for maintaining the machine will be 170,000 per annum over the machine’s useful life and additional working capital of GHS30,000 will be introduced in year 2. The use of this machine will generate a contribution of GHS500,000 per annum for five (5) years. Corporate income tax rate, payable in arrears, is 25% and the company’s after-tax cost of capital is 20%. No capital allowance is permitted.

Required:
Calculate the NPV for the project and advise management on whether to accept or reject the project. (10 marks)

Answer

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Tags: Capital Budgeting, Investment Decision, NPV Calculation
Level: Level 2

Topic: Introduction to Financial Management
Series: NOV 2015

Question Tag: Investment Decision

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CR – Nov 2024 – L3 – Q5a – Financial Analysis and Investment Evaluation

Compute financial ratios for Nsawkaw PLC to evaluate its financial performance for investment recommendation.

Summarised Consolidated Statement of Profit or Loss for the year ended 30 June 2024

Summarised Consolidated Statement of Changes in Equity for the year ended 30 June 2024

Summarised Statement of Financial Position as at 30 June 2024

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FR – Nov 2024 – L2 – Q4b – Financial Performance Assessment of Acquisition Targets

Assessment of financial performance and position of Suah LTD and Nagbe LTD to assist Dukuly LTD in an acquisition decision.

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FR – Nov 2024 – L2 – Q4a – Financial Ratios and Performance Evaluation

Calculation of key financial ratios for Nagbe LTD to compare with Suah LTD and evaluate financial performance.

Statement of Profit or Loss for the year ended 30 September 2024

Statement of Financial Position as at 30 September 2024

Additional Information:

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FM – Nov 2016 – L3 – SB – Q2 – Investment Appraisal Techniques

Calculate the value of the convertible loan stock, expected growth rate in equity price, and provide recommendations on whether to hold or sell the security.

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AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

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CR – May 2024 – L3 – SB – Q2 -Consolidated Financial Statements (IFRS 10)

Memo advising on acquisition decision based on financial analysis of Betta and Gamma Ltd.

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FM – May 2018 – L3 – SB – Q4 – Portfolio Management

Analyze SF Plc.'s portfolio beta and assess whether the short-term investment strategy is optimal.

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PSAF – May 2021 – L2 – Q3b – Fiscal Policy and Public Finance

NPV-based investment recommendation for Omidan Local Government among three projects and a risk-free security alternative.

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QT – May 2019 – L1 – Q2b – Mathematics of Business Finance

Calculate NPV and IRR for two machines and determine which machine yields a better return.

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QT – May 2019 – L1 – Q2a – Mathematics of Business Finance

Distinguish between IRR and NPV, and evaluate investment decisions using NPV and IRR.

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FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

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FM – March 2023 – L2 – Q1a – Introduction to Financial Management

Explain the four major financial decisions taken by a Finance Manager, citing examples for each.

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FM – MAR 2024 – L2 – Q4 – Introduction to investment appraisal

This question involves calculating the NPV of a project, advising on whether to undertake the project, and explaining why NPV is preferred over the payback period as an investment appraisal method.

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FM – NOV 2015 – L2 – Q3b – Introduction to financial management

Calculate the NPV for God is King Ltd's project and advise management on whether to accept or reject the project.

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