Tag (SQ): Limitations
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- 20 Marks
BCL – L1 – Q67 – Company directors and other officers
State limitations on directors' powers and ways a director’s appointment can be terminated under Companies Act 2019.
Question
In accordance with the Companies Act, 2019 (Act 992), the directors shall not, without the approval of an ordinary resolution of the company, exceed the powers conferred on them.
Required:
(a) State THREE (3) limitations on the powers of directors.
(b) Explain THREE (3) ways in which a director’s appointment can be terminated.
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- Tags: Companies Act, Corporate Governance, Directors powers, Limitations, Termination
- Level: Level 1
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- 20 Marks
SCS – L3 – Q33- Financial management
Explain limitations of financial measures and describe financial and non-financial measures for Zamco Enterprises’ performance.
Question
(a) During the past year, the management of Zamco Enterprises faced many challenges, including several customer complaints, loss of some key customers and a high level of employee turnover. At a meeting of the Board of Directors, the Chief Executive Officer presented a report on the financial performance of the company during the period and, in his closing remarks, he said, “Overall, we have done very well, notwithstanding the challenges we faced.” Some members of the Board were not happy with these remarks and accused him of doing a “partial evaluation” of the company.
Required:
(i) Explain FOUR limitations of the use of financial measures for evaluating the performance of the company.
(ii) Describe THREE financial measures and THREE non-financial measures that Zamco Enterprises may use to evaluate its performance.
(b) Innovation can be a major source of competitive advantage of business firms, even though it comes with a burden of cost and uncertainty. Management would have to decide whether it would be a leader or follower in the industry regarding innovation.
Required:
State FIVE competitive advantages associated with being a first mover in product innovation in an industry.
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- Tags: EVA, Financial measures, Limitations, Non-financial measures, Performance Evaluation, ROCE, Zamora
- Level: Level 3
- Topic: Financial management
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- 20 Marks
FM – L2 – Q69 – Discounted cash flow
Calculate NPV of replacing Product X with Product Y using DCF analysis, with given sales, costs, and 8% cost of capital.
Question
A well-established company in the region of the Volta River manufactures engines. One of its current products is Product X, for which sales will be 150,000 units in the year just ending (Year 1). However, after four more years, at the end of Year 5, Product X will no longer be permitted, when new government environmental regulations come into force. On or before that time, the company needs to introduce a new product to replace Product X.
A replacement product has already been developed. This is Product Y. A market research report has estimated that, if Product Y is introduced to the market now to replace Product X, annual sales of Product Y at a unit price of GH₵350 would be:
| Annual sales (units) | Probability |
|---|---|
| 100,000 | 0.2 |
| 80,000 | 0.5 |
| 50,000 | 0.3 |
The current selling price of Product X is GH₵250 per unit, and its variable cost of sales is GH₵180. There is no possibility of increasing the selling price.
The annual sales demand for Product X is expected to fall each year if it is kept on the market. The best estimate is that annual sales in Year 2 will be 10,000 units less than in Year 1, with a further fall in sales by 10,000 units each year until Year 5.
To prepare a production facility for manufacturing Product Y instead of Product X, an initial capital outlay of GH₵2,000,000 would be required. Annual fixed costs would increase by GH₵160,000. The variable cost of making and selling Product Y would be GH₵230 per unit.
The company’s cost of capital is 8%. Ignore inflation and taxation.
Required:
(a) Using DCF analysis, calculate the NPV of a proposal to replace Product X with Product Y from Year 2 onwards.
(b) Estimate the minimum annual sales for Product Y that would be required to justify the immediate replacement of Product X with Product Y. Assume that the estimates of annual sales of Product X are correct.
(c) Calculate the minimum reduction in the annual sales of Product X, in Year 2 and in each subsequent year that would be necessary before you recommended the immediate replacement of Product X with Product Y. Assume that the estimates of annual sales of Product Y are correct.
(d) List briefly the weaknesses or limitations in the financial analysis in part (a) to (c) above.
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- Tags: DCF, Financial analysis, Limitations, NPV, product replacement
- Level: Level 2
- Topic: Discounted cash flow
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- 8 Marks
FM – L2 – Q51 – Introduction to investment appraisal
State two justifications for payback period and one for ARR as investment appraisal techniques.
Question
ZESTA VENTURES
It is said that of all the capital investment evaluation approaches, the Payback (PB) and Accounting rate of return (ARR) methods are widely used in practice. But these methods are not without limitations.
Required:
(a) State TWO justifications of payback period and ONE justification of ARR for their popularity in practice as investment appraisal techniques.
(b) Outline TWO limitations each for payback and ARR, as investment appraisal techniques.
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