Series: APR 2022

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  • 10 Marks

SCS – Apr 2022 – L3 – Q8 – Controlling risk

Explain five factors of internal control that HPC can implement to strengthen governance.

The Accountant advised the CEO that to strengthen governance, the Board should concern itself with the establishment of strong internal control systems. Failures or weaknesses in internal controls will have adverse consequences for HPC’s finances, financial reporting, operational efficiency and effectiveness, or regulatory compliance.

Required:
Write a paper, explaining FIVE (5) factors to the Board the nature of internal controls that could be instituted by HPC to strengthen governance. (10 marks)

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  • 10 Marks

SCS – Apr 2022 – L3 – Q7 – Professional practice and codes of ethics

Discuss key governance issues based on Ghana’s Code of Best Practices considering the Board Chairman’s intentions.

In reference to Ghana’s Code of Best Practices in Corporate Governance, discuss FOUR (4) key issues that could determine how well or badly HPC is governed, taking into consideration the intention and business relationship of the Board Chairman. (10 marks)

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  • 20 Marks

SCS – Apr 2022 – L3 – Q6 – Investment decisions

Compute NPV for two investment options and evaluate potential benefits and difficulties for HPC.

a) For the two strategic development options being considered by HPC, compute:
i) the Net Present Value of Option 1.
ii) the Net Present Value of Option 2.
iii) the Net Present Value for the worst-case outcome for Option 1. (10 marks)

b) Discuss THREE (3) potential benefits and TWO (2) difficulties for HPC of undertaking each of the strategic development options. Your answer should include an evaluation of the calculations of the profitability index of each option. (10 marks)

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  • 20 Marks

SCS – Apr 2022 – L3 – Q5 – Identifying and assessing risk

Discuss eight business risks faced by HPC and recommend mitigation strategies based on the Turnbull Report.

In their Annual Business Review meeting, the Board of HPC discussed a report on Internal Controls and Risk Management, presented by the Internal Auditor. The Board Chairman in his comments mentioned that he would have been more comfortable with a Risk Management report categorized according to the Turnbull Report.

Required:
With reference to the Turnbull Report and the comments made by the Board Chairman, write a report discussing EIGHT (8) categories of business risks faced by HPC and recommendations to mitigate the identified risks. (20 marks)

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  • 10 Marks

SCS – Apr 2022 – L3 – Q4 – Strategy implementation

Explain why HPC’s decentralized system is preferable to a centralized system.

The Chief Executive Officer is concerned that with the expansion of the operations of HPC to other countries, she would further have to divulge authority and power to other Managers because of how the company would grow in size and complexity.

Required:
Explain to the CEO why HPC’s decentralized system of internal organizational relationship is preferable to a centralized system. (10 marks)

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  • 10 Marks

SCS – Apr 2022 – L3 – Q3 – Competitive advantage

Analyse how HPC can achieve competitive advantage using Porter’s six principles when expanding to Nigeria and Togo.

Consistent with its strategic ambition to expand its business into other countries, HPC is considering expanding to Nigeria and Togo.

Required:
Using Porter’s six principles of strategic positioning, analyse how HPC can achieve sustainable competitive advantage if it decides to expand the business to Nigeria and Togo. (10 marks)

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  • 10 Marks

SCS – Apr 2022 – L3 – Q2 – Environment analysis

Discuss HPC’s external business environment using PESTEL and evaluate limitations of PESTEL.

favourable or unfavourable to its present survival and future success. The influences (current influences and possible future influences) of the business environment of HPC need to be analysed to ensure that none are over-looked.

Required:

a) Using PESTEL analysis, discuss HPC’s external business environment that appears to be either favourable or unfavourable to its present survival and future success. (8 marks)

b) Discuss TWO (2) limitations of PESTEL as a technique in analysing the environmental influences of HPC. (2 marks)

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  • 10 Marks

SCS – Apr 2022 – L3 – Q1 – Strategy, stakeholders and mission

Discuss stakeholder groups' influence on business decisions using Mendelow's matrix.

As part of a review of the strategic position of HPC and its move to expand the business, management identified its major stakeholder groups, their power, and their expectations that could either fast-track or delay the implementation of the decision. These major stakeholder groups are the employees, farmers, regulatory authorities, and customers.

Required:
Using two matrices of approach to stakeholder mapping, discuss and show (with diagrams) the relative significance of stakeholder groups identified and their real and potential influences over HPC and its expansion strategies. (Use the stakeholder position/importance matrix and the stakeholder power/interest matrix – Mendelow matrix.) (10 marks)

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  • 3 Marks

FR – April 2022 – L2 – Q2c – Conceptual Framework for Financial Reporting

Determine the appropriate accounting treatment for a government grant received by Karikari Ltd for the purchase of a new plant and its impact on the financial statements.

c) On 1 June 2020, Karikari Ltd received a Government of Ghana grant of GH¢8 million towards the purchase of a new plant with a gross cost of GH¢64 million. The plant has an estimated life of 10 years and is depreciated on a straight-line basis. One of the terms of the grant is that the sale of the plant before 31 May 2024 would trigger a repayment on a sliding scale as follows:

The directors propose to credit the statement of profit or loss with GH¢2 million (GH¢8 million @ 25%) being the amount of the grant they believe has been earned in the year ended 31 May 2021. Karikari Ltd accounts for government grants as a separate item of deferred credit in its statement of financial position. Karikari Ltd has no intention of selling the plant before the end of its useful economic life.

Required:
Explain with computations, the appropriate accounting treatment of the above transaction in accordance with IAS 20 Government Grants and Disclosure of Government Assistance in the financial statements of Karikari Ltd for the year ended 31 May 2021. (3 marks)

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  • 6 Marks

FR – April 2022 – L2 – Q2b – Financial Reporting Standards and Their Applications

Prepare extracts for the Statement of Financial Position and Statement of Profit or Loss for Kundugu Ltd in 2020 and 2021, accounting for a lease agreement under IFRS 16.

b) Kundugu Ltd (Kundugu) is a manufacturing company located in the Savannah Region. The reporting date of Kundugu is 31 December, and the company reports under International Financial Reporting Standards (IFRSs). Kundugu intends to expand its production to take advantage of emerging economic activities in the new region.

On 1 January 2020, the company entered into a lease agreement for production equipment with a useful economic life of 8 years. The lease term is for four years, and Kundugu agrees to pay annual rent of GH¢50,000 commencing on 1 January 2020 and annually thereafter. The interest rate implicit in the lease is 7.5%, and the lessee’s incremental borrowing rate is 10%. The present value of lease payments not yet paid on 1 January 2020 is GH¢130,026. Kundugu paid legal fees of GH¢1,000 to set up the lease.

Required:
Prepare extracts for the Statement of Financial Position and Statement of Profit or Loss for 2020 and 2021, showing how Kundugu should account for this transaction. (6 marks)

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  • 15 Marks

FM – April 2022 – L2 – Q5a – Management of receivables and payables

Evaluate the impact of a proposed change in credit policy on Poh-Poh Electronics Ltd’s profitability and recommend whether the policy should be implemented, along with advice on procedures for receivables collection.

Poh-Poh Electronics Ltd is a wholesale distributor of household electrical products of major electronic brands. The company currently sells on credit to all its customers. Although the credit term is net 20 days, the receivables turnover days have been 15 days. The company’s annual credit sales revenue is GH¢80 million, and its contribution margin ratio is 30%. Bad debt is 2% of sales revenue, and credit collection cost is GH¢50,000 per annum.

Management is considering extending the credit period to net 30 days. It is expected that the implementation of this proposal would attract new customers, and the annual revenue would increase by 20%. It is also expected that both the existing and the new customers will probably take the full 30 days credit. To mitigate the probable lengthening in the receivables turnover days, management proposes that the extension in the credit period be combined with the introduction of a cash discount policy of 2% on all payments made within the first 10 days of the credit period. It is expected that 30% of all customers will pay their accounts early to take the discount. Consequently, the receivables turnover days would increase to 24 days. While the bad debt will remain at 2% of sales revenue, the annual credit collection cost will increase to GH¢65,000.

The company’s cost of capital is 24%.

Required:
i) Evaluate the proposed change in the credit policy and recommend whether the proposed change should be implemented. (9 marks)
ii) Advise the management team on THREE (3) procedures for the collection of its receivables. (6 marks)

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  • 5 Marks

FM – April 2022 – L2 – Q4c – Sources of finance: equity

Explain the concept of pre-emptive rights and rights issues, and discuss the advantages to a company for using a rights issue to raise additional capital.

Existing shareholders have some advantages available to them that potential shareholders interested in buying shares from the company do not have. Some of those advantages are pre-emptive rights and rights issues.

Required:
i) Explain the term Pre-emptive rights. (2 marks)
ii) Explain the concept of a Rights issue and explain ONE (1) advantage to a company for using rights issues to raise additional capital. (3 marks)

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  • 10 Marks

FM – April 2022 – L2 – Q4b – Introduction to Investment Appraisal

Calculate the Accounting Rate of Return (ARR) for three projects and provide advice on which projects should be undertaken based on a target ARR.

SAKAMA Ghana Ltd uses the Accounting Rate of Return (ARR) as the basis of evaluating projects for investment of its scarce financial resources. It uses its predetermined expected return on capital as the basis for the choice of investment projects. The company’s Finance team has provided the information below regarding various projects and their initial investments and net cash flows. The hurdle rate or target Accounting Rate of Return for SAKAMA Ghana Ltd is 25%.

Required:
i) Calculate the Accounting Rate of Return for each project (Average Investment basis). (7 marks)
ii) Using the target return of 25%, advise SAKAMA Ghana Ltd which projects should be undertaken. (3 marks)

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  • 5 Marks

FM – April 2022 – L2 – Q4a – Introduction to Investment Appraisal

Explain the limitations of using the Payback period method in investment appraisals.

In investment appraisal, many methods are available for use by finance and project professionals. One of these methods is the Payback period, but stakeholders have often raised questions on the usefulness of this method due to a number of limitations inherent in the use of the method.

Required:
Explain FOUR (4) limitations of using the Payback period method in investment appraisals. (5 marks)

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  • 10 Marks

FM – April 2022 – L2 – Q3b – Foreign exchange risk and currency risk management

Evaluate the outcome of hedging strategies for Healthy Beverages Ltd using forward contracts and money market transactions.

b) Healthy Beverages Ltd is a food processing company based in Accra, Ghana. It has imported raw soybeans from farmers in the United States for processing into soy milk. The shipment is invoiced at USD800,000, and the company is expected to make payment in three months’ time. The exchange rate between the Ghanaian cedi and the U.S. dollar is currently quoted at GH¢5.8555 / USD1 bid and GH¢5.8585 / USD1 ask/offer. Considering that the Ghanaian cedi has been depreciating against the U.S. dollar in recent times, the managers of the company are worried that the exchange rate might rise further over the next three months.

The Finance Manager is considering two strategies for hedging the company’s foreign exchange risk exposures: a forward market hedge and a money market hedge. Below are pieces of information from the forward foreign exchange market and the money markets:

  • Forward market FX rates:
    • 3-month forward rate: bid rate = GH¢5.8755 / USD1; ask/offer rate = GH¢5.8785 / USD1
    • 6-month forward rate: bid rate = GH¢5.8955 / USD1; ask/offer rate = GH¢5.8985 / USD1
  • Money market average interest rates:
    • Ghana money market: lending/investing rate = 16.5%; borrowing rate = 18.5%
    • U.S. money market: lending/investing rate = 6.5%; borrowing rate = 8.5%

Required:
i) Suppose the risk exposure is to be hedged using a forward foreign exchange contract, calculate and comment on the outcome of the forward market hedge. (4 marks)
ii) Suppose the risk exposure is to be hedged using money market transactions, calculate and comment on the outcome of the money market hedge. (6 marks)

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  • 10 Marks

FM – April 2022 – L2 – Q3a – Simple interest and compound interest

Compute the terminal value of investments in Treasury bills and fixed deposits over a five-year period and analyze the investment strategy.

An online university is setting up an endowment fund for the financing of scholarship grants. A total of GH¢200 million has been raised through fundraising events. This amount will be invested continuously for 5 years before disbursements will be made from the fund. The Trustees of the Endowment Fund have received a tentative investment strategy from the appointed Investment Manager.

Below is an extract from the tentative investment strategy:

“The seed money will be invested in fixed-income securities and negotiated short-term investments to secure the protection of the principal while earning stable returns over the 5-year gestation period. To achieve this objective, the seed money will be invested as follows: 60% in Government of Ghana 91-day Treasury Bills, 40% in 6-month fixed deposit accounts with top-class universal banks in Ghana. Over the 5-year gestation period, the maturity value of each round of investment will be rolled over as they mature.”

Being the only Trustee with expertise in finance, your fellow Trustees have asked you to do some simulations to inform them about the growth of the fund in the gestation period based on the tentative investment strategy.

Required:
i) Suppose the annual nominal interest rate on the Government of Ghana 91-day Treasury bills will be 15.2514% in year 1, 15.4814% in year 2, 15.7565% in year 3, 15.9478% in year 4, and 16.2146% in year 5. Compute the terminal value of that component of the investment at the end of the fifth year. (5 marks)
ii) Suppose the average nominal interest rate on the fixed deposits will be 16.5% over the next five years. Compute the terminal value of that component of the investment at the end of the fifth year. (3 marks)
iii) Considering the proposed strategy that the maturity value of each round of investment is rolled over as they mature, explain whether the interest that would accrue on the investment over the entire investment period would effectively be a simple interest. (2 marks)

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  • 12 Marks

FM – April 2022 – L2 – Q2 – Business valuations | Mergers and acquisitions

Evaluate the possible prices for Blanco Ltd to offer for Zinko using three valuation methods, discuss the issues Zinko may have with these methods, and outline benefits to Blanco Ltd from the acquisition.

Blanco Ltd is listed on the Ghana Stock Exchange (GSE) and is also included in the Ghana club 500 companies. In its recently published accounts, the directors indicated that as part of their growth strategy, the company is negotiating to take over the business of Zinko Enterprise (Zinko), a start-up business in the industry.

Blanco Ltd has in issue 2,480,000 ordinary shares with each share earning approximately GH¢0.79 to give a Price-Earnings ratio of 8. Shareholders expected rate of return is 18%.

The books of Zinko also show that the company has in issue 1,456,000 ordinary shares. The Company’s earnings have increased significantly in the last 4 years from GH¢300,000 to GH¢455,000. The dividend pay-out ratio has been consistent at 45% as a strategy to pay enough funds to shareholders and generate internal resources for future expansion projects. Shareholders expected rate of return is 20%.

Blanco Ltd has estimated that upon completion of the acquisition, the Zinko line of business would generate annual cashflow of GH¢682,500 in the first year, and after that grow at an annual rate of 5% into perpetuity. The investment required for the acquisition will be GH¢1,230,000. However, the funds for this investment would be raised at a cost of capital of 20%.

Required:
a) Use the following valuation methods to estimate the possible prices that Blanco Ltd can offer for the acquisition of Zinko:
i) Price-Earnings ratio
ii) Dividend growth model
iii) Discounted Cashflow (12 marks)

b) Discuss TWO (2) key issues that Zinko management may have with each of the valuation methods used above. (6 marks)

c) Discuss FOUR (4) possible benefits that will accrue to Blanco Ltd if it acquires Zinko. (2 marks)

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  • 10 Marks

FM – April 2022 – L2 – Q1b – Capital structure

Calculate the capital structure of Boom Ltd and determine the earnings required to achieve a 25% return for equity holders.

Boom Ltd is into the provision of online conference call facilities which has become popular due to the rising trend in Covid-19 cases in Ghana. The company has 10 million issued shares currently at GH¢50 each, 3 million preference shares trading at GH¢25 each, and 5,000 bonds also trading at GH¢600 each.

Required:
i) Calculate the Capital Structure of the Company. (4 marks)
ii) How much should the company earn annually to achieve a return of 25% per annum on capital employed for equity holders if the dividend rate on preference shares per annum is 20% and the coupon on the bonds is 18%? In Ghana, interest paid on debt is tax deductible and corporate tax is at 25%. (6 marks)

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  • 10 Marks

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.

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)

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  • 20 Marks

FA – April 2022 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Calculation and interpretation of key financial ratios for two companies to assess profitability and liquidity.`

The Statement of Profit or Loss and Statements of Financial Position of two manufacturing companies in the same sector are set out below:

Required:
a) Define and calculate the following ratios for each company:
i) Net profit percentage
ii) Return on capital employed
iii) Average receivables collection period
iv) Average payables period
v) Inventory turnover
(15 marks)

b) A not-for-profit organisation issues a different set of financial statements than the statements produced by a business organisation (profit making). When it comes to bookkeeping for a not-for-profit organisation, many processes remain the same as that of a business organisation. However, differences in terminology apply when managing the books of a not-for-profit organisation.

Required:
What terminology will be used for the following:
i) Profit for the period
ii) Loss for the period
iii) Equity reserve
(5 marks)

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