Financial management – Page 2

FM – L2 – Q21 – Discounted cash flow

Calculate NPV for a machine investment at Tema Electrical Plc and recommend if it should be undertaken, considering cash flows, WACC, and tax.

Question

Tema Electrical Plc is considering whether to purchase a machine for the manufacture of a new product, Product X. It has been estimated that Product X would have a life of four years and at a selling price of GH¢8 per unit, annual sales demand would be 400,000 units in Year 1, 600,000 units in Year 2 and 800,000 in each of Years 3 and 4.

Variable production and selling costs would be GH¢6 per unit. Incremental annual fixed cost expenditures (all cash cost items) would be GH¢500,000 in Year 1, rising by GH¢20,000 each year.

The machine, which has an annual output capacity of 700,000 units of Product X, would cost GH¢1,200,000 and would have a resale value of GH¢200,000 at the end of Year 4. Capital allowances would be available on a 25% annual reducing balance basis, with a balancing charge or allowance in the year of disposal. Tax at 25% is payable one year in arrears of the profits to which it relates.

Tema Electrical Plc is financed 70% by equity capital and 30% by debt capital. The equity has a cost of 10% and the debt has a cost of 8.9% (before tax).

Required

Calculate the net present value of the proposed project and recommend whether the investment in the machine should be undertaken.

Answer

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Tags: capital allowances, Cash Flows, Cost of Capital, Discounted cash flow, Financial management, investment appraisal, NPV, project evaluation, Taxation, WACC
Level: Level 2

Topic: Discounted cash flow

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 – 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 – Q8 – Introduction to financial management

Describe four key factors indicative of a successful organization.

Question

(A). One of the key expectations of the Finance Manager is to ensure the success of the organisation. Describe FOUR (4) key factors that are indicative of a successful organisation.

(B). The quarterly report of the treasury unit of Saruwa Limited contains a paragraph on government policy targets and progress towards achievement of the targets. The technical director has expressed disagreement about the time spent in discussing these policies as wasteful because the policies have no relevance to the business activities of the confectionery company.

Required:

As Head of Finance, you have been tasked to discuss SIX (6) points on government revenue mobilisation policies to agree or disagree with the Technical Director’s position.

(C). (i) Distinguish between fiscal policy and monetary policy.

(ii) Explain TWO adverse effects a contractionary fiscal policy could have on businesses.

Answer

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Tags: Business impact, Contractionary fiscal policy, Economic policy, Financial management
Level: Level 2

Topic: Economic and regulatory environment

Tag (SQ): Financial management

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FM – L2 – Q21 – Discounted cash flow

Calculate NPV for a machine investment at Tema Electrical Plc and recommend if it should be undertaken, considering cash flows, WACC, and tax.

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 – Q11 – Economic and regulatory environment

Explain five areas where government action impacts financial management decisions.

FM – L2 – Q8 – Introduction to financial management

Describe four key factors indicative of a successful organization.

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FM – L2 – Q21 – Discounted cash flow

Calculate NPV for a machine investment at Tema Electrical Plc and recommend if it should be undertaken, considering cash flows, WACC, and tax.

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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.

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FM – L2 – Q11 – Economic and regulatory environment

Explain five areas where government action impacts financial management decisions.

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FM – L2 – Q8 – Introduction to financial management

Describe four key factors indicative of a successful organization.

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