Subject: FINANCIAL MANAGEMENT

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  • 20 Marks

FM – Mar2025 – L2 – Q5 – Working Capital Management

Compute Gagba LTD's working capital requirement after a 15% sales increase using provided financial and operational data.

a) Gagba LTD, a manufacturing company, is planning to expand its operations to meet increasing demand for its products. As part of this expansion, the company needs to determine its working capital requirements to ensure smooth operations and avoid liquidity issues. The company has provided the following financial and operational data for the year ended 31 December 2023:

  1. Sales Data:
  • Annual Sales: GH₵18,000,000
  1. Cost Data:
  • Cost of goods sold (COGS): 70% of sales
  • Inventory turnover ratio: 8 times per annum
  • Accounts receivable turnover ratio: 6 times per annum
  • Accounts payable turnover ratio: 4 times per annum
  1. Operation Data:
  • Average inventory: GH₵1,500,000
  • Average Accounts receivable: GH₵2,000,000
  • Average accounts payable: GH₵1,200,000
  1. Additional Information:
  • Desired Cash balance: GH₵500,000
  • Projected Increase in Sales due to expansion: 15%
  • Cost of capital: 12% per annum Required: Compute the working capital requirement for Gagba LTD after the planned expansion. (10 marks)

b) The Ministry of Health in Ghana is conducting a review of its procurement practices and the overall performance of its Public Financial Management (PFM) system. The review aims to enhance value for money in public spending while adhering to the principles outlined by the Public Expenditure and Financial Accountability (PEFA) framework. You are provided with the following data for the fiscal year 2023:

    1. Budgeted Public Expenditure: GH₵50 billion
    2. Actual Public Expenditure: GH₵52 billion
    3. Total Procurement Expenditure: GH₵25 billion
    4. Value of Contracts Awarded through Competitive Tendering: GH₵15 billion (60 contracts)
    5. Value of Contracts Awarded through Restricted Tendering: GH₵5 billion (20 contracts)
    6. Value of Contracts Awarded through Single-Source Procurement: GH₵5 billion (20 contracts)
    7. Number of Procurement Violations Detected: 15 (with a total value of GH₵300 million)
    8. Disposal of Stores and Equipment: GH₵100 million Required: i) Analyse the variance in the public expenditure and its implications for the PFM system in Ghana. (3 marks) ii) Discuss which procurement method appears to provide the best value for money with suitable computations. (7 marks)

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  • 20 Marks

FM – Mar2025 – L2 – Q4 – Business valuations

Estimate the value of Obuorba LTD's stock at the end of Year 4 using dividend valuation model.

a) Mama Lomo is trying to value Obuorba LTD’s stock. She uses a spreadsheet model to easily see how a change in one or more assumptions affects the stock’s estimated value. The model has projections for the next four years based on the following assumptions.

  • Sales will be GH₵300 million in Year 1.
  • Sales will grow at 15% in Years 2 and 3 and 10% in Year 4.
  • Operating profits (EBIT) will be 17% of sales in each year.
  • Interest expense will be GH₵10 million per year.
  • Income tax rate is 30%.
  • Earnings retention ratio will stay at 60%.
  • The per-share dividend growth rate will be constant from Year 4 onwards, and the final growth rate will be 200 bps (2%) less than the growth rate from Year 3 to Year 4. This final growth rate should be used to derive the dividend growth from year 4 onwards.
    The company has 10 million shares outstanding. Mama Lomo has estimated the required return on Obuorba LTD’s stock to be 13%.
    Required:
    i) Estimate the value of the stock at the end of Year 4 based on the foregoing assumptions. (6 marks)

ii) Estimate the current value of the stock using the foregoing assumptions. (4 marks)

b) State THREE limitations of the dividend discount model of stock valuation. (5 marks)

c) In the healthcare sector, efficient inventory management and resource utilisation are critical to providing timely and high-quality patient care. The Korle-Bu Teaching Hospital, the largest teaching hospital in West Africa, has recently implemented a Just-in-Time (JIT) system to enhance its operational efficiency. The hospital adopted JIT production and purchasing strategies to manage its medical supplies and pharmaceuticals more effectively. The goal is to reduce inventory holding costs, minimise wastage and ensure that critical medical supplies are available when needed without overstocking.

However, the implementation of JIT systems in a healthcare setting like Korle-Bu Teaching Hospital presents several challenges. While JIT aims to streamline operations and reduce costs, it also introduces potential risks and problems, particularly in an environment where the timely availability of medical supplies is crucial for patient care.

Required:

i) Explain JIT purchasing. (2 marks)

ii) Discuss TWO potential problems associated with implementing JIT systems in a hospital environment. (3 marks)

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  • 20 Marks

FM – Mar 2025 – L2 – Q3 – Foreign exchange risk and currency risk management

Determine outcomes of forward contract and money market hedge for GPL's USD payment and recommend the best technique.

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:

  • Current Spot Rate (GHS/USD): 12.00
  • 3-Month Forward Rate (GHS/USD): 12.20
  • 3-Month USD Interest Rate: 3% per annum
  • 3-Month GHS Interest Rate: 14% per annum
  • Expected Future Spot Rate in 3 Months (GHS/USD): 12.50

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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  • 20 Marks

FM – Mar 2025 – L2 – Q2 – Investment Appraisal and Financing Options

Compute loan balance, bond redemption, and NPV for a university hostel project with two financing options

The Governing Board of Dominase Agriculture University is considering a capital project and related financing options. The project involves the construction of a candidate hostel, which requires capital outlays of GH¢20 million in the first year and GH¢30 million in the second year.

The hostel will become operational in the third year. Net operating cash flows from the hostel are expected to be GH¢20 million annually for the first three years of operation (i.e. Years 3, 4, and 5) and then begin to grow at a constant rate of 10% annually to perpetuity.

The project finance advisory team has presented the following two financing options for the consideration by the Governing Board:

Option 1: A Syndicated Bank Loan

Through a syndication arrangement led by the National Investment Bank, the university can borrow the required GH¢50 million from five local banks at an annual interest rate of 28% with quarterly compounding. The loan amount will be released to the university immediately. The university will be given a moratorium (grace period) of two years to complete the construction of the hostel before it is required to start paying off the loan balance in equal instalments at the end of each quarter for ten years. Interest will accumulate on the loan during the grace period.

Option 2: Bond Issuance

The university can issue a bond to raise the GH¢50 million required to finance the construction of the hostel. The bonds will be issued in 50,200 units of GH¢1,000 face value each. The annual coupon rate on the bond will be set at 26%, but coupons will be paid semiannually starting as soon as the bond is issued. The bonds will be issued now and redeemed in 15 years at a premium of 10%. Although the total redemption value will be paid to the bondholders at maturity, the university will be required to establish a sinking fund to raise enough money to redeem the bonds. The university can deposit equal sums of money into the fund at the beginning of every six months, starting from the third year until the fifteenth year when the bond will be redeemed. The fund will be invested at an annual interest rate of 20%.

Required:

a) Regarding the syndicated loan,

i) Compute the loan’s balance at the end of the moratorium.

(3 marks)

ii) Compute the quarterly instalment required to amortise the loan over the ten-year repayment period.

(4 marks)

b) Regarding the bond issue,

i) Compute the total redemption value of the bond.

(3 marks)

ii) Compute the size of each semi-annual instalment into the sinking fund.

(4 marks)

c) Compute the project’s net present value (NPV) and provide an investment recommendation based on it. Assume the required rate of return on the project is 30%.

(6 marks)

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  • 20 Marks

FM – Mar2025 – L2 – Q1 – Sources of finance: debt Level

Explain four types of risks in PPP arrangements in Ghana's healthcare sector.

a) In Ghana, the collaboration between public institutions and private entities in the healthcare sector has become increasingly noteworthy, particularly through Public-Private Partnership (PPP) arrangements. These partnerships are essential for expanding healthcare infrastructure, improving service delivery and ensuring access to quality healthcare for all citizens. For instance, the Government of Ghana has agreements with private companies to build hospitals, supply medical equipment, or manage healthcare facilities. One of the critical aspects of PPP arrangements in healthcare is allocating risks between the public and private partners. Effective risk allocation is crucial to the success of these partnerships, guaranteeing that both parties are driven to fulfil their obligations and that the project can deliver the expected benefits to the public. Required: Explain FOUR types of risks associated with a PPP arrangement in the health sector.

b) Kakape LTD (Kakape), a leading Information Technology firm known for its innovative technology solutions, has $50,000,000$ shares in issue with an equity market value of GH£87,000,000 at the end of 2023. The company is forecasting its profit after tax to grow by 15% per year for the next three years (2024-2026) and onwards by 8% per year. Kakape’s cost of equity capital is estimated to be 12% per year. Dividends may be assumed to grow at the same rate as profits. Assume that the 2023 dividend per share ended up as GH$0.07 and that all dividends will be paid at the end of the financial year. Required: Using the dividend valuation model, determine whether Kakape’s shares are under or overvalued in 2023. (7 marks)

c) In the healthcare sector, hospitals are expected to provide high-quality medical care and uphold corporate social responsibility (CSR) principles that guide them in making decisions that align with their values and responsibilities to patients, staff and the broader community. Required: Explain THREE core principles of corporate social responsibility as applied in the healthcare sector.

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  • 5 Marks

FM – Nov 2024 – L2 – Q5c – Public-Private Partnerships (PPP)

Discuss types of PPP arrangements and their suitability for a highway project.

Public-Private Partnerships (PPP) involve collaboration between government and a private sector company that can be used to finance, build and operate projects. Financing a project (for example, a highway) through PPP can allow a project to be completed sooner or make it a possibility in the first place.

Required:
Given the following types of PPP arrangements, discuss each of them and how they can be suitable for a highway project:

i) Build-Operate-Transfer (BOT) 
ii) Design-Build-Finance-Operate (DBFO) 
iii) Service Concession

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  • 5 Marks

FM – Nov 2024 – L2 – Q5b – Overdue Debt Collection

Steps to collect overdue debts in financial management.

Outline the steps to be followed to collect overdue debts.

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  • 10 Marks

FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

Abaa LTD, a company that manufactures and sells electronic appliances, has been facing challenges with its accounts receivable management. Currently, the company allows its customers 60 days of credit. Due to the highly competitive market, Abaa LTD has been experiencing an increasing amount of bad debts and delayed payments, which has adversely affected its cash flow and profitability. To address these issues, the company’s Finance Manager is considering several strategic changes:

  1. Reduction in Credit Period: Reducing the credit period from 60 days to 45 days. It is estimated that this change could reduce sales by 5% due to the stricter credit terms, but it would also decrease the bad debt ratio from 4% to 2% of sales.
  2. Offering Early Payment Discounts: Introducing a 2% discount for customers who pay within 30 days. The company anticipates that 30% of its customers will take advantage of this discount, which would improve cash flow and reduce the average collection period by 15 days.
  3. Engagement of a Factor: The company is also considering engaging a factoring company to manage its receivables. The factor would advance 80% of the invoice value upon the sale of goods at 200 basis points below the company’s cost of capital and charge a 3% fee on all sales. The factor is expected to reduce the bad debt ratio to 1% of sales and further reduce the average collection period by 20 days. Engaging the factor will lead to annual administrative savings of GH¢90,000.

Abaa LTD’s current annual sales are GH¢20 million, and the variable cost of sales is 60% of sales. The company’s cost of capital is 12% per annum.

Required:
Evaluate the financial implications of the following:
i) Reduction in Credit Period
ii) Offering Early Payment Discounts
iii) Engagement of a Factor
iv) Recommend the appropriate method to manage the credit sales

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  • 5 Marks

FM – Nov 2024 – L2 – Q4b – Procurement and Tendering Procedures

Discuss circumstances under which single-source procurement is appropriate and functions of the Entity Tender Committee.

The Farms and Gardens Authority (FGA), a public entity, wants to buy 100 computers and 20 printers for its administrative offices. The Chief Executive Officer (CEO) is considering using the single-source procurement method to procure the computers and printers while pushing back on the recommendations of the Entity Tender Committee.

Required:

i) State TWO circumstances under which single-source procurement would be appropriate for the goods the FGA wants to procure.

ii) Advise the CEO on TWO functions the Entity Tender Committee is expected to perform in the FGA’s procurements.

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  • 11 Marks

FM – Nov 2024 – L2 – Q4a – Business Valuation

Valuing a company using the discounted cash flow model and price multiples.

Djokoto PLC (Djokoto) has 12 million ordinary shares outstanding and no other long-term debt. The Finance Director of Djokoto, Adepa, estimates that Djokoto’s free cash flows at the end of the next three years will be GH¢0.5 million, GH¢0.6 million, and GH¢0.7 million, respectively. After Year 3, the free cash flow will grow at 5% yearly forever. The appropriate discount rate for this free cash flow stream is determined to be 15% annually.

In a separate analysis based on ratios, Adepa estimates that Djokoto will be worth 10 times its Year 3 free cash flow at the end of the third year. Adepa gathered data on two companies comparable to Djokoto: Mesewa and Dunsin. It is believed that these companies’ price-to-earnings, price-to-sales, and price-to-book-value per share should be used to value Djokoto.

The relevant data for the three companies are given in the table below:

Variables Mesewa Dunsin Djokoto
Current Price Per Share 7.20 4.50 2.40
Earnings Per Share 0.20 0.15 0.10
Revenue Per Share 3.20 2.25 1.60
Book Value Per Share 1.80 1.00 0.80

Required:
i) Estimate Djokoto’s fair value based on the discounted cash flows model. (5 marks)
ii) Compute the following ratios for the comparable companies:

  • P/E Ratio (2 marks)
  • Price-to-Sales Ratio (2 marks)
  • Price-to-Book-Value Ratio (2 marks)
    iii) Based on the valuation results, discuss whether an investor should buy, sell, or hold Djokoto shares. Justify your recommendation. (4 marks)
    iii) Identify two advantages and two disadvantages of business combinations.

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  • 15 Marks

FM – May 2022 – L3 – Q5 – Cost of Capital

Calculate market value WACC for JP and discuss its preference over book value WACC for investment appraisals.

The directors of Jindadi Plc. (JP), an Abuja-based entertainment company, are currently considering the appropriate cost of capital to use in appraising capital investments. It is the policy of the company to assess the financial viability of all capital projects using the net present value criterion.

You have been provided with some financial information about the company.

JP has an equity beta of 1.2, and the ex-dividend market value of the company’s equity is N1 billion. The ex-interest market value of the convertible bonds is N168 million, and the ex-dividend market value of the preference shares is N50 million.

The convertible bonds of JP have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption date are both on the same date in five years’ time. The current ordinary share price of JP is expected to increase by 4% per year for the foreseeable future.

The equity risk premium is 5% per year, and the risk-free rate of return is 4% per year. JP pays profit tax at an annual rate of 30% per year.

Required:

a. Calculate the market value after-tax weighted average cost of capital of JP, explaining clearly any assumptions you make. (10 Marks)

b. Discuss why market value weighted average cost of capital is preferred to book value weighted average cost of capital when making investment decisions. (5 Marks)

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  • 20 Marks

FM – May 2022 – L3 – Q4 – Treasury Management

Discuss the roles of a treasury department and analyze its operation as a profit versus cost centre.

he finance director of Keyman Plc. has recently reorganised the finance department following a number of years of growth within the business, which now includes a number of overseas operations. The company has created separate treasury and financial control departments.

Required:

a. Describe the main responsibilities of a treasury department, and comment on the advantages to Keyman Plc. of having separate treasury and financial control departments. (14 Marks)

b. Identify the advantages and disadvantages of operating the treasury department as a profit centre rather than a cost centre. (6 Marks)

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  • 20 Marks

FM – May 2022 – L3 – Q3 – Investment Appraisal Techniques

Calculate NPV of an investment, discuss inflation's impact, and recommend an optimal project under capital constraints.

Opeyemi operates in an economy that has almost zero inflation. Management ignores inflation when evaluating investment projects because it is very low and considered insignificant. Opeyemi is evaluating a number of similar, alternative investments. The company uses an after-tax cost of capital of 6% and has already completed the evaluation of two investments.

The third investment is a new product that would be produced on a just-in-time basis and is expected to have a life of three years. This investment requires an immediate cash outflow of N200,000, which does not qualify for tax depreciation. The expected residual value at the end of the project’s life is N50,000.

A draft financial statement showing the values that are specific to this investment for the three years is as follows:

Year 1 2 3
Sales 230,000 350,000 270,000
Production Costs:
Materials 54,000 102,000 66,000
Labour 60,000 80,000 70,000
Other* 80,000 90,000 80,000
Profit 36,000 78,000 54,000
Closing Receivables 20,000 30,000 25,000
Closing Payables 6,000 9,000 8,000

*Other production costs shown above include depreciation calculated using the straight-line method.

The company is liable to pay corporate tax at a rate of 30% of its profits. One half of this is payable in the same year as the profit is earned, and the remainder is payable in the following year.

Required:

a. Calculate the net present value of the above investment proposal. (14 Marks)

b. Explain how the above investment project would be appraised if there were to be a change in the rate of inflation, so that it became too significant to be ignored. (3 Marks)

c. The evaluation of the other two investments is shown below:

Investment Initial Investment Net Present Value
W 300,000 75,000
Y 100,000 27,000

The company only has N400,000 of funds available. All of the investment proposals are non-divisible. None of the investments may be repeated.

Required:

Recommend, with supporting calculations, which of the three investment proposals should be accepted. (3 Marks)

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  • 20 Marks

FM – May 2022 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluate the financing options for Effe's expansion and provide advice on creditworthiness for a bond investment.

Effe is a Nigerian company specialising in the provision of information systems solutions to large corporate organisations. It is going through a period of rapid expansion and requires additional funds to finance the long-term working capital needs of the business.

Effe has issued one hundred million N1 ordinary shares, which are listed on the stock market at a current market price of N15 with typical increases of 10% per annum expected in the next five years. Dividend payout is kept constant at a level of 10% of post-tax profits. Effe also has N1,000 million of bank borrowings.

It is estimated that a further N300 million is required to satisfy the funding requirements of the business for the next five-years beginning July 1, 2021. Two major institutional shareholders have indicated that they are not prepared to invest further in Effe at the present time and so a rights issue is unlikely to succeed. The directors are therefore considering various forms of debt finance. Three alternative structures are under discussion as shown below:

  • Five-year unsecured bank loan at a fixed interest rate of 7% per annum;
  • Five-year unsecured bond with a coupon of 5% per annum, redeemable at par and issued at a 6% discount; and
  • A convertible bond, issued at par, with an annual coupon rate of 4.5% and a conversion option in five years’ time of five shares for each ₦100 nominal of debt.

There have been lengthy boardroom discussions on the relative merits of each instrument. Summarised below are the queries of three different directors concerning the instruments.

Director A: “The bank loan would seem to be more expensive than the unsecured bond. Is this actually the case?”
Director B: “Surely, the convertible bond would be the cheapest form of borrowing with such a low interest rate?”
Director C: “If we want to increase our equity base, why use a convertible bond, rather, than a straight equity issue?”

Required:

a. Write a response to the queries raised by the three directors and advise on the most appropriate financing instrument for Effe. In your answer, include calculations of appropriate yield for each instrument. Ignore tax. (15 Marks)
b. Advise a prospective investor in the five-year unsecured bond issued by Effe on what information he should expect to be provided with and what further analysis he should undertake in order to assess the credit worthiness of the proposed investment. (5 Marks)

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  • 30 Marks

FM – May 2022 – L3 – Q1 – Business Valuation Techniques

Estimate VT's valuation using FCFE, CAPM, and terminal value assumptions for three-year cash flow forecasts.

Vico Tony (VT) is a software design company established six years ago. The company is owned by five directors. Since establishment, the company has developed rapidly. VT finds it difficult to obtain bank finance and relies on a long-term strategy of using internally generated funds to finance expansion. The directors are therefore giving consideration to the possibility of floating the company on the stock market. As a first step, you have been appointed by the directors to advise on the current value of the business under their ownership.

The company’s most recent statement of profit or loss and the extracted balances from the latest statement of financial position are as follows:

During the current year:

  1. Depreciation is charged at 10% per annum on the year-end non-current assets balance before accumulated depreciation, and is included in other operating costs in the statement of profit or loss.
  2. The investment in net working capital is expected to increase in line with the growth in gross profit.
  3. Other operating costs consisted of:

  1. Sales and variable costs are projected to grow at 9% per annum and fixed costs are projected to grow at 6% per annum.
  2. The company pays interest on its outstanding loan of 7.5% per annum and incurs tax on its profits at 30%, payable in the following year. The company does not currently pay dividends.

One of your first tasks is to prepare for the directors a forward cash flow projection for three years and to value the firm on the basis of its expected free cash flow to equity. In discussion with them, you note the following:

  • The company will not dispose of any of its non-current assets but will increase its investment in new non-current assets by 20% per annum. The company’s depreciation policy matches the currently available tax allowable depreciation. This straight-line write-off policy is not likely to change;
  • The directors will not take a dividend for the next three years but will then review the position taking into account the company’s sustainable cash flow at that time;
  • The level of loan will be maintained at ₦1.98 billion and interest rates are not expected to change.
  • For estimating the appropriate required return on equity, it is decided to make use of the capital asset pricing model (CAPM). The challenge, however, is that since the company is not quoted, an appropriate beta factor does not exist. You have found a listed company, Konputer Limited (KL) that is into software development. KL is also into computer hardware retailing. It has the following financial statistics:

  • About 60% of the market value of KL is attributed to the software development division, while 40% of the value is attributed to computer hardware retailing. The computer hardware retailing division has an equity beta of 0.8.
  • Risk-free rate is 4% and the market risk premium is 8%.
  • VT has maintained a long-term debt/(debt+equity) ratio of 20%.

Required:

a. Provide an estimate of the appropriate rate of return to be used for the valuation of VT. Round your answer to the nearest whole number. (7 Marks)
b. Prepare a three-year cash flow forecast for the business on the basis described above highlighting the free cash flow to equity in each year. (14 Marks)
c. Estimate the value of the business based on the expected free cash flow to equity and a terminal value based on a sustainable growth rate of 4% per annum thereafter. (Note: Irrespective of your answer in (a), assume required return of 17%). (5 Marks)
d. Advise the directors on the assumptions and the uncertainties within your valuation. (4 Marks)

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  • 15 Marks

FM – May 2023 – L3 – Q7 – Mergers and Acquisitions

Evaluate the share price of Obong plc under different growth scenarios and advise on the takeover bid. Explain EMH and its implications for the market.

Obong plc recently received a takeover bid from Abdul plc. If the bid for Obong plc is successful, it will provide Abdul plc the needed competitive edge in research and development to expand its laboratories into the production of the COVID-19 vaccine.

The shareholders of Obong plc will only accept an offer that meets a required return of 14% on their current shareholdings.

Obong plc recently paid a dividend of N20, and this is expected to grow at a rate of 7% for the foreseeable future.

Required:

a. Estimate the share price of Obong plc today. (2 Marks)

b. If Obong plc accepts the bid from Abdul plc, it is estimated that the new growth rate will rise to 12% for the first 3 years and thereafter stabilize at 7%. Calculate the new share price to the shareholders of Obong plc. (2 Marks)

c. As a financial advisor, recommend to the shareholders of Obong plc whether the offer from Abdul plc should be accepted. (2 Marks)

d. According to Efficient Market Hypothesis (EMH), it is believed that the market would react instantly and accurately to the merger announcement between Obong plc and Abdul plc.
Define briefly the THREE forms of EMH and their implications to the market. (9 Marks)

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  • 15 Marks

FM – May 2023 – L3 – Q6 – Dividend Policy

Evaluate the comments in Neko Plc's annual report regarding dividend policy, share price, cost reduction, and tax minimization strategies.

Neko Plc has issued the following statement as part of its annual report:
“This company aims at all times to serve its shareholders by paying a high level of dividends and adopting strategies that will increase the company’s share price. Satisfying our shareholders will ensure our success. The company will reduce costs by manufacturing overseas wherever possible and will attempt to minimize the company’s global tax bill by using tax haven facilities.”

Required:
a. Discuss the validity and implications of each of the comments and strategies in the above statement. (10 Marks)

b. Produce a short note outlining how the company should estimate its dividend capacity. (5 Marks)

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  • 6 Marks

FM – May 2023 – L3 – Q5b – Corporate Governance and Financial Strategy

Discuss ways to motivate managers to align with and achieve stakeholder objectives.

b. Discuss FOUR ways to encourage managers to achieve stakeholder objectives. (6 Marks)

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  • 9 Marks

FM – May 2023 – L3 – Q5a – Strategic Performance Measurement

Evaluate TAXIM Plc’s financial performance in achieving profit growth, EPS growth, and shareholder return objectives.

The following financial information relates to TAXIM Plc, a listed company:

Year 2021 2020 2019
Profit before interest and tax (₦m) 18.3 17.7 17.1
Profit after tax (₦m) 12.8 12.4 12.0
Dividends (₦m) 5.1 5.1 4.8
Equity market value (₦m) 56.4 55.2 54.0

TAXIM Plc has 12 million ordinary shares in issue and has not issued any new shares in the period under review. The company is financed entirely by equity.

The annual report of TAXIM Plc states that the company has three financial objectives:

  • Objective 1: To achieve growth in profit before interest and tax of 4% per year.
  • Objective 2: To achieve growth in earnings per share of 3.5% per year.
  • Objective 3: To achieve total shareholder return of 5% per year.

TAXIM Plc has a cost of equity of 12% per year. 

Required:
Analyse and discuss the extent to which TAXIM Plc has achieved each of its stated objectives. (9 Marks)

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  • 20 Marks

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

The directors of Kenny plc wish to make an equity issue to finance an ₦800 million expansion scheme, with an expected net present value of ₦110 million. It is also to re-finance an existing 15% term loan of ₦500 million and pay off a penalty of ₦35 million for early redemption of the loan.

Kenny has obtained approval from its shareholders to suspend their pre-emptive rights and for the company to make a ₦1,500 million placement of shares, which will be at the price of 185 kobo per share. Issue costs are estimated to be 4 per cent of gross proceeds. Any surplus funds from the issue will be invested in commercial paper, which is currently yielding 9 per cent per year.

Kenny’s current capital structure is summarised below:

₦ million
Ordinary shares (25 kobo per share) 800
Share premium 1,120
Revenue reserves 2,310
Total Equity 4,230
15% term loan 500
11% bond 900
Total Capital 5,630

The company’s current share price is 190 kobo, and bond price is ₦102. Kenny can raise bond or medium-term bank finance at 10 per cent per year.

The stock market may be assumed to be semi-strong form efficient, and no information about the proposed uses of funds from the issue has been made available to the public.

Taxation may be ignored.

Required:

a. Discuss FOUR factors that Kenny’s directors should have considered before deciding which form of financing to use. (6 Marks)

b. Explain what is meant by pre-emptive rights, and discuss their advantages and disadvantages. (4 Marks)

c. Estimate Kenny’s expected share price once full details of the placement, and the uses to which the finance is to be put, are announced. (8 Marks)

d. Suggest two reasons why the share price might not move to the price that you estimated in (c) above. (2 Marks)

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