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a) Your bank’s Asset Liability Committee (ALCO) is a very important committee that ensures the sustainability and viability of the bank both in the short-term and long term. Identify and explain five functions performed by this committee in your bank. [15 marks]
b) Gap analysis is used in Asset and Liability management to measure interest rate risk in a bank’s balance sheet. Explain the phrase ‘Positive Gap’. How is a positive gap affected by rising interest rates? [7.5 marks]
c) Interest rate swaps are often used to manage interest rate risk of an organization. Briefly explain interest rate swaps and the expectation of a buyer of this risk hedging instrument. [7.5 marks]
[Total: 30 marks]
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(a.) How would you describe Financial Intermediation as a form of business activity? (b.) With reference to its revenue streams and cost components, consider how Profitability of a Financial Intermediary could be enhanced within the ambit of caution.
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The changing role of the Company Secretary to become the Chief Governance Officer (CGO) means that in situations of stressed Balance Sheet or Statement of Position of banks, the role of the CGO should be expanded to include Capital Planning. Discuss.
(20 marks)
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a) Akosa Minerals Limited (AML) has undergone significant transformations in its operations, particularly with the integration of lithium extraction into its core business. This shift has presented both opportunities and challenges, including regulatory compliance, technological advancements and stakeholder management. Successfully navigating these changes requires effective leadership and change management.
Rosabeth Moss Kanter suggests that managers in change-adept organisations must possess key skills to drive transformation effectively. As AML continues its diversification efforts, the company’s leadership must demonstrate these skills to sustain growth and maintain a competitive edge.
Required:
Identify and explain the critical role of leadership in managing change and THREE out of five key change management skills suggested by Kanter that AML’s leadership should exhibit to effectively manage its diversification and growth strategies.
b) Akosa Minerals Limited (AML) recently engaged a risk consultant from Isodek Consultants to conduct a comprehensive risk assessment and provide recommendations on managing the transformational changes the company is undergoing. The consultant’s report highlights key risks and challenges related to AML’s diversification strategy, operational restructuring, stakeholder engagement and compliance with global sustainability standards.
To navigate these challenges effectively, AML’s leadership needs to apply the Gemini Consultants’ 4Rs model which provides a structured framework for managing large-scale organisational change.
Required:
Using the Gemini Consultants’ 4Rs model, discuss how each component can be applied to address the operational and environmental risks identified in the consultant’s report.
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a) Gyenyame Pharmaceuticals LTD (GPL), a Ghanaian company, imports raw materials from the United States of America to produce generic drugs for the local market. Due to recent fluctuations in the foreign exchange market, the company’s management is concerned about the impact of exchange rate movements on its costs and profitability.
The company is expected to pay USD750,000 in three months for a shipment of Active Pharmaceutical Ingredients (APIs). GPL also exports locally produced herbal medicine called ‘Koo-pile’ to the Ghanaian community in Oklahoma, USA on credit basis. The company is expecting a receipt of USD250,000 in three months for a consignment exported a month ago.
GPL is considering two hedging strategies to manage the foreign exchange risk: a forward contract and a money market hedge.
The following financial information is available:
Required:
i) Determine the outcome of the two hedging techniques and recommend the appropriate technique to GPL based on your computations.
(9 marks)
ii) Explain THREE internal hedging techniques that GPL could use to manage its foreign exchange risk.
b) Technological advancements have significantly transformed financial markets, enhancing the way transactions are conducted, information is accessed and risks are managed. As financial institutions and individual investors increasingly depend on digital tools and innovative technologies, financial markets have become more efficient, accessible and transparent.
Required:
Explain FIVE positive impacts of technological development on financial markets.
(5 marks)
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a) The overall audit strategy sets the scope, timing and direction of the audit and guides the development of a more detailed plan. Audit plan converts the audit strategy into a more detailed plan and includes the nature, timing and extent of audit procedures to be performed by the engagement team members in order to obtain sufficient and appropriate audit evidence to reduce audit risk to an acceptable level. Required: Discuss the content of an audit strategy memorandum and its relevance to an audit.
b) Kalomo & Partners, an audit firm, has decided to enhance its audit procedures by integrating Artificial Intelligence (AI) technologies. The firm aims to leverage on AI to audit financial data and transactions more efficiently and effectively. As part of this initiative, the audit team is exploring how AI can be used to analyse large datasets, identify anomalies, and improve the accuracy of their audit findings. The management of Kalomo & Partners is seeking to understand the best practices for using AI in auditing and the potential challenges they may encounter. The firm wants to ensure that the integration of AI aligns with auditing standards and enhances the overall quality of their audit processes.
Required:
i) Explain how AI can be utilised in auditing financial data and transactions.
ii) State TWO potential benefits of using AI in the audit process of Kalomo & Partners.
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An Audit Committee is a sub-group of a company’s Board of Directors responsible for the oversight of the financial reporting and disclosure process. The duties and responsibilities of the Audit Committee greatly contribute to good corporate governance practices of a company.
Required:
Explain FOUR roles of an Audit Committee in compliance with good corporate governance practices.
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Question:
ISA 500: Audit Evidence provides guidance for auditors intending to rely on the work of a management’s expert. If the information to be used as audit evidence has been prepared using the work of a management’s expert, the auditor must evaluate the management’s expert.
Required:
i) Explain the term “management’s expert.”
ii) Explain FOUR factors to consider before relying on the work of a management’s expert as audit evidence.
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An effective internal control system is a prerequisite for addressing risks and providing reasonable assurance that the assets of an organization are safeguarded. It also contributes to the achievement of an organization’s control objectives. In line with this, the Committee of Sponsoring Organizations (COSO) of the Treadway Commission recommended five integrated internal control components to appraise internal control systems.
Required:
Explain the FIVE (5) components of the Integrated Framework of Internal Control System recommended by COSO. (10 marks)
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The recent financial sector clean-up in Ghana has created tough economic times for borrowers and investors and has tightened Financial Institutions’ appetite for granting credit and depositors’ appetite for depositing or placing funds with Financial Institutions, thereby creating a tight liquidity situation in the market.
Required:
As an expert in Financial Management, explain the difference between credit risk and liquidity risk. (3 marks)
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The directors of Fameko Ltd (Fameko), a courier delivery services company based in Ghana, are considering a proposal for setting up a subsidiary in the United States of America to provide courier services in North America. The capital of this new subsidiary will be structured as 20% equity and 80% debt.
The directors are not sure of what would be an appropriate discount rate for appraising the North American business. You have been asked to recommend an appropriate discount rate for this project. You have gathered the following information for this exercise.
| S&P 500 Index | ExFed Equity Stock | |
|---|---|---|
| Average return | 0.0628 | 0.0321 |
| Standard Deviation | 0.1875 | 0.1521 |
| Sample Variance | 0.0352 | 0.0231 |
| Kurtosis | -1.4335 | -1.1121 |
| Skewness | -0.2178 | -0.1601 |
You analyzed the correlation between the excess returns on ExFed and excess returns on the S&P 500 Index and obtained a correlation coefficient of 0.91.
Required:
i) Compute the equity beta of ExFed. (3 marks)
ii) Derive an appropriate equity beta for Fameko’s U.S. subsidiary. (4 marks)
iii) Using the capital asset pricing model or the Modigliani and Miller Proposition II with tax, compute an appropriate cost of equity for Fameko’s U.S. subsidiary. (3 marks)
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Demo Gold is a Ghanaian mining company that has been operating on-land deep pit gold mining in Africa since its incorporation. Aiming at increasing the value of shareholders, the directors have signed an agreement with the governments of Tonga and Tuvalu to begin excavating an area of seabed in the Pacific Ocean for ores of copper, gold, and other valuable metals.
The idea of mining mineral deposits in the seabed has for many decades been considered unrealistic because of engineering challenges. However, the recent boom in offshore oil and gas operations has come with it the development of a few advanced deep sea technologies which can be used in mining mineral deposits in the seabed.
Required:
i) It appears that the sole objective of the seabed mining operation is to maximize the value of shareholders. Advise the directors on FOUR (4) non-financial objectives that Demo Gold should pursue to achieve a sustainable increase in shareholder value. (4 marks)
ii) Advise the directors of Demo Gold on THREE (3) likely sources of risk relating to the seabed mining operation. For each point, suggest a way through which the risk could be avoided or minimized. (6 marks)
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