FINANCIAL MANAGEMENT – Page 11

FM – L2 – Q20 – Cost of capital

Calculate WACC using dividend growth model for cost of equity, given dividend, share price, and debt details.

Question

A company, Volta Ventures Ltd, has just paid an annual dividend of GH¢0.18. Investors expect the annual dividend to grow by 3% each year in perpetuity. The current share price is GH¢1.55, and the total market value of the company’s shares is GH¢1,200,000.

The company has debt capital on which the yield is 7.8% before tax. The rate of tax is 30%. The total value of the company’s debt is GH¢350,000.

Calculate the weighted average cost of capital. Use the dividend growth model to estimate the cost of equity.

Answer

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Tags: Cost of Equity, Debt Capital, Dividend Growth Model, Financial management, WACC
Level: Level 2

Topic: Cost of capital

FM – L2 – Q19 – Financial markets

Effect of NPV announcement on share price in a weak form efficient market.

Question

A company’s board of directors makes a decision on 1st May to invest in a new project that will have an NPV of + GH₵4,000,000. The decision is announced to the stock market on 12th May.

The company has 50 million shares in issue and at close of trading on 30th April these had a market value of GH₵4 each.

Required:

(A). State what would happen to the share price of the company if the stock market has weak form efficiency

(B) State what would happen to the share price of the company if the stock market has semi-strong form efficiency.

(C). State what would happen to the share price of the company if the stock market has strong-form efficiency.

Answer

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Tags: Efficient markets, NPV announcement, share price, Stock market, Strong form efficiency
Level: Level 2

Topic: Financial markets

FM – L2 – Q18 – Business valuations

Calculate the value of a zero coupon bond and an 8% coupon bond, both redeemable in 10 years, with a 5% investor yield.

Question

(a) Calculate the value of the following bonds:

(i) a zero coupon bond redeemable at par in ten years’ time

(ii) a bond with an 8% coupon, with interest payable half-yearly, and redeemable at par after ten years.

Assume that the yield required by investors is 5%, and that this is 2.5% each half year for the purpose of valuing the 8% coupon bond.

(b) Calculate the value of both bonds in part (a) of the question if the yield required by investors goes up by 1%, to 6% for the zero coupon bond and 3% each half year for the 8% coupon bond.

Answer

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Tags: Bond valuation, Coupon bond, Discounted cash flow, Yield change, Zero coupon bond
Level: Level 2

Topic: Business valuations

FM – L2 – Q16 – Sources of finance: debt

Calculate value of convertible debentures and warrants for Amoah Plc and Bonsu Plc at expiry for given share prices.

Question

Amoah Plc and Bonsu Plc each have in issue 2,000,000 ordinary shares of GH₵1 nominal value.
Amoah Plc also has GH₵2,500,000 of 12% convertible debentures in issue. Each GH₵100 of bonds is convertible into 20 ordinary shares at any time until the date of expiry of the bonds. If the bonds have not been converted by the expiry date, they will be redeemed at 105.
Bonsu Plc has 500,000 equity warrants in issue. Each warrant gives its holder an option to subscribe for 1 ordinary share at a price of GH₵5.00 per share. The warrants can be exercised at any time until the date of their expiry.
The shares of both companies, the convertible debentures, and the warrants are all actively traded in the stock market.

Required
(a) Calculate the value of each GH₵100 unit of convertible debentures of Amoah Plc and the value of each warrant of Bonsu Plc on the day of expiry, if the share price for each company at that date is:
(i) GH₵4.40
(ii) GH₵5.20
(iii) GH₵6.00
(iv) GH₵6.80

(b) Assume that the profit before interest and tax of both companies is GH₵1,200,000 and the rate of tax is 50%.

Calculate the earnings per share for:

(i) Amoah Plc, assuming that none of the convertible debentures are converted

(ii) Amoah Plc, assuming that all of the convertible debentures are converted

(iii) Bonsu Plc, assuming that none of the warrants are exercised

(iv) Bonsu Plc, assuming that all of the warrants are exercised

Answer

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Tags: Earnings per share, Equity, Financial instruments, onvertible debentures, Profit after tax, Stock market, Warrants
Level: Level 2

Topic: Sources of finance: debt

FM – L2 – Q15 – Business valuations

Estimate market value of irredeemable 7.5% bonds with 9% required return.

Question

Assume that bond investors in Ama Industries require a return of 9% per year on their investments.

Required:

(A) Estimate the market value of irredeemable 7.5% bonds that pay interest annually.

(B) Estimate the market value of bonds paying coupon interest of 6% per year annually, that are redeemable at par in four years’ time.

(C) Estimate the market value of bonds paying coupon interest of 10%, redeemable at par after three years, where interest is payable every six months.

(D) Estimate the market value of a convertible bond with a coupon of 5% and interest payable annually; these bonds are convertible after three years into equity shares at the rate of 20 shares for every GH₵100 nominal value of bonds. The expected share price in three years’ time is GH₵7.

Answer

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Tags: Bond valuation, Business valuations, Interest rate, Irredeemable bonds
Level: Level 2

Topic: Business valuations

FM – L2 – Q14 – Business valuations

Calculate expected share price using dividend valuation model with constant dividends of GH₵0.24 in perpetuity.

Question

Kofi Enterprises has shareholders expecting an 8% annual return. The company paid dividends of GH₵0.24 per share in the year just ended.

Required:

(A). Assume that Kofi Enterprises pays out all of its annual profits as dividends, and the annual dividend per share is expected to be GH₵0.24 in perpetuity. Using the dividend valuation model, suggest what the expected share price of the company should be.

(B). Assume that the expected annual rate of growth in dividends is expected to be 3%. Using the dividend growth valuation model, suggest what the expected share price of the company should be.

(C). Assume that Kofi Enterprises is expected to retain 60% of its profits and reinvest the money to earn an annual return of 9%. Using the dividend growth valuation model (the Gordon growth model), suggest what the expected share price of the company should be.

Answer

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Tags: Business valuations, dividend valuation, Perpetuity, share price
Level: Level 2

Topic: Business valuations

FM – L2 – Q13 – Portfolio theory and CAPM

Calculate the expected return on shares with a beta of 1.2, given risk-free rate of 15% and market return of 20%.

Question

Unity Ventures have shares in a company which paid a dividend of GH¢10 to its shareholders. The shares have a beta factor of 1.2. The risk-free rate of return and the market return are 15% and 20% respectively.

Required:

(a) Calculate the return on the shares.

(b) Calculate the value of the shares.

Answer

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Tags: dividend valuation, expected return, share price
Level: Level 2

Topic: Business valuations

FM – L2 – Q12 – Economic and regulatory environment

Outline three unfair practices from GBA Bank's new AI-based credit assessment system.

Question

KWE Bank is part of a large financial services group in Kumasi, KWE Group. KWE Bank provides personal loans to individuals. In order to determine whether a customer is an acceptable credit risk for a loan to be offered, KWE has used the information provided by the customer in their application form together with an employer’s salary reference.

KWE intends to introduce a more sophisticated credit risk assessment system to determine whether loans should be advanced to customers. This system will combine information from the credit application with any information about the customer held by KWE Group and unstructured information about the customer obtained from their online activity. This data will be analysed by an AI-based credit assessment system that uses machine learning to improve the accuracy of its credit assessments over time.

Required:

Outline three ways in which KWE’s new credit assessment system may lead to practices that are likely to be viewed as unfair.

Answer

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Tags: AI technology, Banking, Credit assessment, Customer data, Data privacy, Discrimination, Ethical finance, Financial inclusion, Regulatory compliance, Technology risks
Level: Level 2

Topic: Economic and regulatory environment

FM – L2 – Q11 – Economic and regulatory environment

Explain five areas where government action impacts financial management decisions.

Question

The economic environment within which the financial manager must operate is subject to a variety of influences, a major one is from the government.

Required:

Explain FIVE areas in which government action might affect the problem solving and decision making roles of a Finance Manager.

Answer

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Tags: Credit controls, Economic policy, Exchange controls, Financial management, Government influence, Investment decisions, Taxation
Level: Level 2

Topic: Economic and regulatory environment

FM – L2 – Q10 – Economic and regulatory environment

Compare functions of IMF and World Bank, and explain IMF challenges in West Africa.

Question

INTERNATIONAL MONETARY FUND (IMF) AND THE WORLD BANK

The International Monetary Fund (IMF) and the World Bank are institutions in the United Nations system. They are twin intergovernmental pillars supporting the structure of the world’s economic and financial order.

Required:

(a) Compare and Contrast THREE functions of the International Monetary Fund (IMF) and the World Bank

(b) Explain TWO challenges being faced by the IMF in attaining its objectives in West African Countries

Answer

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Tags: economic challenges, IMF, international finance, policy implementation, West Africa
Level: Level 2

Topic: Economic and regulatory environment

Subject (SQ): FINANCIAL MANAGEMENT

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FM – L2 – Q20 – Cost of capital

Calculate WACC using dividend growth model for cost of equity, given dividend, share price, and debt details.

FM – L2 – Q19 – Financial markets

Effect of NPV announcement on share price in a weak form efficient market.

FM – L2 – Q18 – Business valuations

Calculate the value of a zero coupon bond and an 8% coupon bond, both redeemable in 10 years, with a 5% investor yield.

FM – L2 – Q16 – Sources of finance: debt

Calculate value of convertible debentures and warrants for Amoah Plc and Bonsu Plc at expiry for given share prices.

FM – L2 – Q15 – Business valuations

Estimate market value of irredeemable 7.5% bonds with 9% required return.

FM – L2 – Q14 – Business valuations

Calculate expected share price using dividend valuation model with constant dividends of GH₵0.24 in perpetuity.

FM – L2 – Q13 – Portfolio theory and CAPM

Calculate the expected return on shares with a beta of 1.2, given risk-free rate of 15% and market return of 20%.

FM – L2 – Q12 – Economic and regulatory environment

Outline three unfair practices from GBA Bank's new AI-based credit assessment system.

FM – L2 – Q11 – Economic and regulatory environment

Explain five areas where government action impacts financial management decisions.

FM – L2 – Q10 – Economic and regulatory environment

Compare functions of IMF and World Bank, and explain IMF challenges in West Africa.

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Subject (SQ): FINANCIAL MANAGEMENT

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Calculate WACC using dividend growth model for cost of equity, given dividend, share price, and debt details.

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Effect of NPV announcement on share price in a weak form efficient market.

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Calculate the value of a zero coupon bond and an 8% coupon bond, both redeemable in 10 years, with a 5% investor yield.

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Calculate value of convertible debentures and warrants for Amoah Plc and Bonsu Plc at expiry for given share prices.

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Estimate market value of irredeemable 7.5% bonds with 9% required return.

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Calculate expected share price using dividend valuation model with constant dividends of GH₵0.24 in perpetuity.

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Calculate the expected return on shares with a beta of 1.2, given risk-free rate of 15% and market return of 20%.

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Outline three unfair practices from GBA Bank's new AI-based credit assessment system.

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Explain five areas where government action impacts financial management decisions.

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