Demo Gold is a Ghanaian mining company that has been operating on-land deep pit gold mining in Africa since its incorporation. Aiming at increasing the value of shareholders, the directors have signed an agreement with the governments of Tonga and Tuvalu to begin excavating an area of seabed in the Pacific Ocean for ores of copper, gold and other valuable metals.

The idea of mining mineral deposit in the seabed has for many decades been considered as unrealistic because of engineering challenges. However, the recent boom in offshore oil and gas operations has come with it the development of a few advanced deep sea technologies which can be used in mining mineral deposits in the seabed.
Required:
ii) Advice the directors of Demo Gold on THREE (3) likely sources of risk relating to the seabed mining operation. For each point, suggest a way through which the risk could be avoided or minimized. (6 marks)

Demo Gold is a Ghanaian mining company that has been operating on-land deep pit gold mining in Africa since its incorporation. Aiming at increasing the value of shareholders, the directors have signed an agreement with the governments of Tonga and Tuvalu to begin excavating an area of seabed in the Pacific Ocean for ores of copper, gold and other valuable metals.

The idea of mining mineral deposit in the seabed has for many decades been considered as unrealistic because of engineering challenges. However, the recent boom in offshore oil and gas operations has come with it the development of a few advanced deep sea technologies which can be used in mining mineral deposits in the seabed.
Required:
i) It appears that the sole objective of the seabed mining operation is to maximise the value of shareholders. Advice the directors on FOUR (4) non-financial objectives that Demo Gold should pursue to achieve a sustainable increase in shareholder value. (4 marks)

Explain FOUR (4) differences between a foreign currency swap and an interest rate swap.   (4 marks)

Innovate Ghana Ltd is a dealer in household consumables in Ghana. It currently sells on only cash basis. The company’s current annual sales are GH¢10 million. The operating cost structure is as follows:

• Cost of sales 55% of sales
• Staff cost 10% of sales
• Marketing and distribution cost 15% of sales

Management in a meeting concluded that introducing credit sales will help boost sales in the light of the current tightness in liquidity in the market, the drive by other competitors, and pressure from the sales team.

It is projected that total sales will grow by 50% solely from the credit sales. The customers are offered 1-month credit and a new credit department is set up to assess and monitor this credit sales. The monthly cost of running this credit department is GH¢20,000 and bad debts is expected to be 4% of the credit sales.

To finance this credit, Innovate Ghana Ltd will borrow at an interest rate of 25% per annum.

Required:
i) Calculate the total profit before tax before the introduction of the new policy. (4 marks)

ii) Calculate the total profit before tax after the introduction of the new policy. (6 marks)

iii) Advise management whether the initiative should be undertaken. (3 marks)

Explain THREE (3) motives for holding cash. (3 marks)

c) Explain the meaning of market volatility in financial markets. (3 marks)

d) Explain the difference between a bull and bear market. (2 marks)

Sabir Company is considering whether to invest in a project whose details are as follows.
The project will involve the purchase of equipment costing GH¢2,000,000. The equipment will be used to produce a range of products for which the following estimates have been made.

Incremental fixed costs are GH¢1,200,000 per annum. The sales prices allow for expected price increases over the period. However, cost estimates are based on current costs, and do not allow for expected inflation in costs. Inflation is expected to be 3% per year for variable costs and 4% per year for fixed costs. The incremental fixed costs are all cash expenditure items. Tax on profits is at the rate of 30%, and tax is payable in the same year in which the liability arises.

Sabir Company uses a four-year project appraisal period, but it is expected that the equipment will continue to be operational and in use for several years after the end of the first four-year period.

The company’s cost of capital for investment appraisal purposes is 10%. Capital projects are expected to pay back within two years on a non-discounted basis and within three years on a discounted basis. Tax allowable depreciation will be available on the equipment at the rate of 25% per year on a reducing balance basis. Any balancing allowance or balancing charge is not attributed to a project unless the asset is actually disposed of at the end of the project period.

Required:
To the nearest month, calculate the non-discounted payback period and the discounted payback period (4 marks)

Sabir Company is considering whether to invest in a project whose details are as follows.
The project will involve the purchase of equipment costing GH¢2,000,000. The equipment will be used to produce a range of products for which the following estimates have been made.

Incremental fixed costs are GH¢1,200,000 per annum. The sales prices allow for expected price increases over the period. However, cost estimates are based on current costs, and do not allow for expected inflation in costs. Inflation is expected to be 3% per year for variable costs and 4% per year for fixed costs. The incremental fixed costs are all cash expenditure items. Tax on profits is at the rate of 30%, and tax is payable in the same year in which the liability arises.

Sabir Company uses a four-year project appraisal period, but it is expected that the equipment will continue to be operational and in use for several years after the end of the first four-year period.

The company’s cost of capital for investment appraisal purposes is 10%. Capital projects are expected to pay back within two years on a non-discounted basis and within three years on a discounted basis. Tax allowable depreciation will be available on the equipment at the rate of 25% per year on a reducing balance basis. Any balancing allowance or balancing charge is not attributed to a project unless the asset is actually disposed of at the end of the project period.

Required:
a) Calculate the net present value (NPV) of the project. (11 marks)

Asanka Ghana Ltd is a medium size business in Ghana that is currently borrowing GH¢1,000,000 from North East Bank at a floating or variable interest rate basis at Ghana Reference Rate (GRR) plus 3% margin which is market determined on monthly basis. This makes their monthly interest payment volatile depending on where GRR is at the end of the month. They are rather interested in fixed interest payment at the end of the month to manage this volatility.

OTI Bank Ghana Ltd has agreed to do an Interest rate Swap with Asanka where OTI Bank Ghana Ltd pays the variable rate to Asanka but Asanka pays them a fixed rate of 21% per annum paid monthly.

Required:
i) Calculate the variable interest, fixed interest and net settlement under columns (C), (E) and (F) in the table above. (8 marks)

ii) Will you describe this strategy as an interest rate hedge? Explain. (2 marks)

Odapagyan Foods Ltd is borrowing GH¢500,000 to finance a project involving an expansion of its existing factory. It has obtained an offer from Sika Bank. The terms of the loan facility are as follows:

Annual interest rate                  : 22%
Duration                                   : 2 years
Interest method                         : compound interest with quarterly compounding
Payment plan                            : equal instalments at the end of each quarter

Required:
i) Compute the quarterly instalment. (3 marks)

ii) Prepare a loan amortisation schedule to show the periodic interest charges, instalment payments, principal payments, and balance of the loan at the end of each quarter. (7 marks)