Restwell Ltd (Restwell), a hotel and leisure company is currently considering taking over a smaller private limited liability company, Staygood Ltd (Staygood). The board of Restwell is in the process of making a bid for Staygood but first needs to place a value on the company. Restwell has gathered the following data:

The required rate of return of the shareholders of Staygood is 20% higher than that of Restwell due to the higher level of risk associated with Staygood. Restwell estimates that cash flows at the end of the first year will be GH¢2.5 million and these will grow at an annual rate of 5%. Restwell also expects to raise GH¢5 million in two years’ time by selling off hotels of Staygood that are surplus to its needs.
Required:
Estimate values for Staygood using the following valuation methods:
i) Price/earnings ratio valuation. (6 marks)

ii) Gordon growth model. (8 marks)

iii) Discounted cash flow valuation. (6 marks)

Firm A and Firm B are both subsidiary companies of Groupe Trojan Electronics. The directors of Groupe Trojan Electronics are reviewing the capital structure of the two subsidiary companies. You have been engaged to advise the directors on the appropriate capital structure for the subsidiaries.

You have obtained extracts from the financial results of the two companies for the past financial year and projection of the annual results for the current year, which is in its first quarter.

Required:
i) Compute the degree of operating leverage for each of the two companies. Based on the degree of operating leverage you obtain, advise the directors on the relative level of business risk associated with the two subsidiaries and the implication of that for capital structure design. (5 marks)

ii) Compute the degree of financial leverage for each of the two companies. Based on the degree of financial leverage you obtain, advise the directors on the relative level of financial risk associated with the two subsidiaries and the implication of that for capital structure design. (5 marks)

K-Force Ltd, a newly established security company, has constituted its first board of directors. The directors are expected, among others, to take financial decisions in the areas of investment, financing, and dividend payment. A consultancy firm has been engaged to run an orientation program for the directors in the coming week.

You work with the consultancy firm that has been engaged to run the orientation program for the new directors. You have been asked by your boss to prepare briefing notes on the specific roles the directors are expected to play in the three fundamental decision areas and the constraints that government policies might impose on them.

Required:
Prepare a briefing note on the nature of the three fundamental decision areas. Specifically, the briefing notes should cover the objective of each class of decision; TWO (2) specific decisions the directors are expected to take in each class of financial decisions; and TWO (2) factors in the external environment they should consider when making financial decisions.   (10 marks)

Holding stock and sometimes over-stocking come at a great cost to a company. Not withstanding these costs, it is sometimes necessary to hold stock or even over stock for the smooth running of the company
Required:
i) Explain TWO (2) reasons for holding stock.                                                                                                               (2 marks)

ii) State and explain THREE (3) costs associated with holding stocks.                                                                          (3 marks)

Taaba Oil Ghana Ltd is an Oil Marketing Company operating in the downstream Sector of the Oil and Gas industry in Ghana. The company initially was offering 4 weeks credit to its retailers until it changed it strategy to reduce the credit period from 4 weeks to 2 weeks to manage down it financing cost and bad debt.

Under the 4 weeks credit regime, annual credit sales was 500 million liters. The profit made per litre before financing charge and bad debt was GH¢0.20 (Twenty pesewas). The total working capital was GH¢250m but 50% was funded through trade credit and the remaining 50% was through Bank Overdraft at an interest rate 25% per annum. The cost of trade credit was already factored in the margin. Bad debt was at GH¢ 0.01 (one pesewa per litre) of the credit sales.

The change in policy from 4 weeks to 2 weeks was done immediately without prior advance discussion and notice period granted to retailers who were also selling on credit to their customers.

After operating the new credit policy, the volume of sales was negatively impacted as sales volume per annum dropped by 25% and bad debts increased by 100% due to pressure on the working capital of the retailers.As the new Finance Manager for Taaba Oil Ghana Ltd, you are tasked to review this policy.

Required:
i) Calculate the profit under the old policy.                                                                                                 (4 marks)

ii) Calculate the profit under the new policy.                                                                                              (4 marks)

iii) Based on your calculations above, advise management whether to revert to the old policy or maintain the new policy. (1 mark)

In driving the profitability and liquidity position of an organisation in the current local and global business environment, one area that has become the centre of focus or attention to Management is how working capital is managed. Aggressive, moderate and conservative policies to working capital management have implications on the profitability and liquidity positions of the organisation.
Required:
In the light of the above explain and demonstrate the impact of each of the policies below on profitability and liquidity:
i) Aggressive Working Capital Management;                                                               (2 marks)

ii) Moderate Working Capital;                                                                                      (2 marks)

iii) Conservative Working Capital Management;                                                         (2 marks)

The current financial year of General Kapito Ltd, a sports apparel company based in Ghana, will be ending in two months’ time. The directors of the company will be meeting next week to approve capital projects that will be implemented in the coming financial year. A major concern for the coming year is the availability of finance to meet investment requirements.

The cost of raising new capital in Ghana’s capital market has risen so high that it is not cost-effective to raise small blocks of capital. Consequently, the directors of the company have decided to finance new projects in the coming year with retained earnings and not raise new external capital from the capital market to bridge any financing gap. The maximum amount of retained earnings that will be available for financing new capital projects in the coming year is GH¢62 million.

There are six independent projects that will be presented before the board of directors for approval in their upcoming meeting. Five of the projects have been appraised already (see a summary of the projects in the table below).

Project-05 refers to a 5-year contract with a local football club for the manufacture and supply of a special football boot for playing under rainy conditions. It is estimated that this project will require an investment of GH¢34 million in plant and equipment at the start of the first year. The estimated cost of required plant and equipment might change as there are speculations about probable change in technology in the coming year. That notwithstanding, this project is expected to return an after-tax net operating cash flow of GH¢13.5 million every year over the coming five years. The estimated after-tax salvage value of the plant and equipment is GH¢10 million at the end of the fifth year.

The company’s required rate of return is 25%.

Required:
a) Compute the NPV and IRR of Project-05.                                                                                                                   (10 marks)

b) Assess the sensitivity of the outcome of Project-05 to variations in the cost of plant and equipment. Interpret your result. (5 marks)

c) Assuming the projects are divisible, recommend the portfolio of projects that should be funded in the coming year.  (5 marks)

c) Explain TWO (2) differences between forward contracts and futures contracts.                                                       (5 marks)

d) ValuePack Ghana Ltd is into the manufacturing and sale of drugs in Ghana. The company imports its raw materials from abroad on credit. The suppliers grant them between 3 months and 6 months credit due to their good track record in payment. The company currently has the following invoices due in:

3 months’ time   –    USD 2 million
6 months’ time   –    USD 1 million
They are looking to buy USD/GH¢ forward to hedge their exchange rate risk and their Bank offers them the following forward rates:
Tenor                Rates
3 months      –    5.65
6 months      –    5.98

The interest rates applicable to their company for both cedi and US dollar for the same tenors are as follows:
Tenor                    GH¢ Interest Rate               USD interest rate
3 months                         15%                                          2%
6 months                         20%                                          3%
The Spot rate for USD/GH¢ is 5.4 in the market.

Required:
As the newly appointed Finance and Treasury Director of the company, calculate the forward rates for the various tenors based on the information provided above.                                                                                                                                   (5 marks)

a) Joy Mummy Ltd is establishing an endowment fund to finance a scholarship scheme to provide funding for the education of children of its employees. The company plans to make an initial deposit of GH¢500,000 into the fund now. The initial deposit will be invested for three years before any disbursements will be made from the fund. The effective annual rate of return on the fund is expected to be 14% in the first year, 15% in the second year, and 16.5% in the third year.

Required:
Compute the balance of the fund at the end of three years.                                                                                               (4 marks)

b) Wobete Ltd is offering 5 million units of 15-year bonds with a face value of GH¢100 each. Though the bonds are being offered at a price of GH¢95 each, the bonds will be redeemed at a premium of 10%. The annual coupon rate of the bonds is 15%. Interest is payable at the end of every six months.

A provision in the bond indenture requires that Wobete Ltd establishes a sinking fund to accumulate enough money to pay the total redemption value of the bonds upon maturity.
To comply with this provision, Wobete Ltd plans to set aside an even amount at the end of each quarter over the next 15 years. Each of the even amounts that will be set aside will be invested at an annual interest rate of 12% with quarterly compounding.

Required:
Calculate the even amount that should be put into the sinking fund at the end of each quarter to raise enough money to pay the total redemption value of the bonds.                                                                                                                                  (6 marks)

Global companies continuously explore ways to be more efficient and effective to survive the challenging global competition. Some resort to mergers and acquisitions to survive. In the light of this, Carsley Ltd and Powell Ltd are planning to merge to form Stimac Ltd. It has been agreed that Powell’s shareholders will accept three shares in Carsley for every share in Powell they hold. Other details are as follows:
.                                                            Carsley Ltd              Powell Ltd
Number of shares                                     40m                           10m
Annual earnings                                     GH¢10m                  GH¢5.8m
P/E ratio                                                        8                                10
Post-merger annual earnings of the enlarged company are expected to be eight per cent higher than the sum of the earnings of each of the companies before the merger, due to economies of scale and other benefits. The market is expected to apply a P/E ratio of 9 to Stimac Plc.

Required:
a) Explain to the stakeholders of both companies the justification on for the following integration strategies in mergers and acquisitions.
i) Horizontal take-over.                                                                           (4 marks)

ii) Vertical backward and forward take-overs.                                        (4 marks)

iii) Conglomerate mergers.                                                                      (2 marks)

b) Determine the extent to which the shareholders of Powell will benefit from the proposed merger.                            (10 marks)