a) i) Cost of capital & WACC implications

Green Bond Coupon = 18% of GH¢150m = GH¢27m annually. Issuance costs: 2.5% → net proceeds = 150m × 0.975 = GH¢146.25m. Effective cost of debt Kd = 27(1-0.25) / 146.25 = 20.25 / 146.25 = 13.85% (corrected in solution context to 13.75% after precise net calc)

DFI Loan Nominal rate = 16%. Arrangement fee = 2% Interest = 16% x GH¢150m = GH¢24m Arrangement fee 2% = GH¢3m Net proceeds = GH¢150m – GH¢3m = GH¢147m Finance cost before tax = GH¢24m / GH¢147m = 16.33% Effective cost after tax = 16.33 × (1-0.25) = 12.24%

PPP with Government Guarantee Risk-adjusted cost = 14%. After-tax = 14% × (1 – 0.25) = 10.5%. (9 marks)

ii) Macroeconomic factors to be considered

 Interest Rate and Inflation Outlook: The decision is highly sensitive to the future direction of monetary policy. If there is an expectation that domestic interest rates will rise significantly in the coming years, locking in a fixed rate via the Green Bond for 12 years could be advantageous, even if its initial cost is higher than the DFI loan (which may have a variable rate). Conversely, if inflation is expected to fall, a variable-rate loan or a shorter-term facility might be better. The PPP’s 14% fixed rate could be very attractive in a high-inflation environment.

 Exchange Rate Risk: The source of the funds is critical. If the DFI loan or the Green Bond is denominated in a foreign currency while the project’s revenues are in Ghanaian Cedis, the firm is exposed to significant exchange rate risk. A depreciation of the Cedi would drastically increase the real cost of repaying the debt and servicing the interest. The PPP arrangement, if sourced in local currency, would eliminate this risk.

 Sovereign Risk and Political Stability: The PPP option’s viability is directly tied to the government’s stability and creditworthiness. A government guarantee is only as good as the government’s ability to honor it. Factors such as fiscal discipline, political stability, and the risk of changes in government policy must be considered. The DFI loan might come with more stability and potentially stronger covenant protections against political interference.

(3 valid points @ 2 marks each = 6 marks)

b) Benefits to companies in Ghana for being ESG compliant

Financing and regulatory approval ESG-compliant investments such as renewable energy, waste management, energy-efficient equipment are more likely to receive financing and regulatory approval.

Access to Lower-Cost of Capital Banks, such as DBG, and international investors are offering concessional loans and tax incentives for ESG-aligned projects. Firms that integrate ESG may secure cheaper debt and attract more equity funding.

Investor and Market Perception ESG adoption enhances corporate reputation and investor confidence, making it easier for listed firms to raise funds on the Ghana Stock Exchange through equity issues or green bonds.

Risk Management in Financing Decisions Integrating ESG reduces long-term environmental, regulatory, and social risks, which affects the discount rate used in capital budgeting and encourages sustainable financing choices.

(4 four well-explained @ 1.25 marks each = 5 marks)