If we assume a constant growth in dividends, we may estimate the cost of equity by using:

Cost of debt (Kd), as corporate debt is assumed to be risk free, is 12%, the Treasury bill yield.
The after-tax cost is 12(1 – 0.30) = 8.4%
The weighted average cost of capital (WACC) is found as follows:

Cost of equity may be estimated using:

The beta value of the security may be found using:

If the stock market is in equilibrium, and the inputs into the models are correctly specified (e.g., the dividend valuation model reflects only systematic risk), then the cost of equity Ke from the dividend valuation model should approximately equal the expected return on equity E(re) of the CAPM.

The SEC of Ghana is expected to perform the following functions:

• to advise the Minister responsible for Finance on all matter relating to the securities industry.
• to maintain surveillance over activities in securities to ensure orderly, fair and equitable dealings in securities;
• to register, licence, authorise or regulate stock exchanges, investment advisers, unit trust schemes, mutual funds, securities dealers, and their agents and to control and supervise their activities with a view to maintaining proper standards of conduct and acceptable practices in the securities business;
• to formulate principles for the guidance of the industry;
• to monitor the solvency of licence holders and take measures to protect the interest of customers where the solvency of any such licence holder is in doubt;
• to protect the integrity of the securities market against any abuses arising from the practice of insider trading;
• to adopt measures to minimize and supervise any conflict of interests that may arise for dealers;
• to review, approve and regulate takeovers, mergers, acquisitions and all forms of business combinations;
• to examine and approve of the new issue of securities on the stock exchange (i.e., IPO);
• to create the necessary atmosphere for the orderly growth and development of the capital market;

The regulatory functions of the SEC have the following implications for corporate financing:

• When making securities offers, companies must ensure that the offer is fair and equitable. For instance, all potential buyers must be treated equally, and communications relating to the offer should be true and fair.
• The company, its members, and directors cannot trade securities based on insider information.
• The company cannot engage in any form of business combination without the approval of the SEC.
• The company will need approval from the SEC when making an IPO.

• The future dividend growth rate
  The DGM is based on the assumption that the future dividend growth rate is constant, but experience shows that a constant dividend growth rate is, in reality, very rare. This may be seen as less of a problem if the future dividend growth rate is regarded as an average growth rate. Estimating the future dividend growth rate is very difficult in practice and the DGM is very sensitive to small changes in this key variable. It is common practice to estimate the future dividend growth rate by calculating the historical dividend growth, but the assumption that the future will reflect the past is an easy one to challenge.
• The cost of equity
  The DGM assumes that the future cost of equity is constant, when in reality it changes quite frequently. The cost of equity can be calculated using the capital asset pricing model, but this model usually employs historical information, which may not reflect accurately expectations about the future.
• Zero dividends
  It is sometimes claimed that the DGM cannot be used when no dividends are paid, but this depends on whether dividends are expected in the future. If dividends are forecast to be paid from a future date, the dividend growth model can be applied at that point to calculate a share price, which can then be discounted to give the current ex dividend share price. Only in the case where no dividends are paid and no dividends are expected to be paid will the DGM have no application.

Face value= GH¢ 100
Coupon rate = 20%, paid semi-annually
Required return= 25%

There is an inverse relationship between interest rates and price of bonds. As interest rates rise, bond prices drop. Conversely, as interest rates decline, bond prices rise. Interest rate movements reflect the value of money or safety of investment at a given time. The movement of interest rates affects the price of bonds because the coupon rate of interest, the money the issuer pays semi-annually to the owners of its bonds, remains fixed until the bond matures and pays the GH¢1,000 principal. The fixed semi-annual interest payments and the fixed repayment of principal at maturity are why bonds are called fixed income investments.

.                                                                                                                             GH¢
Current average trade receivables 45/365 × GH¢1 million                        123,288
Average receivables with the factor 30/365 × GH¢1 million                       82,192

It is assumed that if the factor’s services are used, 80% will be financed by the factor at 8% and the remaining 20% will be financed by bank overdraft at 15%.

ALTERNATIVE SOLUTION:

• Higher Return on Capital
  Firms with lower working capital will post a higher return on capital. Therefore, shareholders will benefit from a higher return for every dollar invested in the business.
• Improved Credit Profile and Solvency
  The ability to meet short-term obligations is a pre-requisite to long-term solvency. And it is often a good indication of counterparty’s credit risk. Adequate working capital management will allow a business to pay on time its short-term obligations. This could include payment for a purchase of raw materials, payment of salaries, and other operating expenses.
• Higher Profitability
  The management of account payables and receivables is an important driver of small businesses’ profitability.
• Higher Liquidity
  A large amount of cash can be tied up in working capital, so a company managing it efficiently could benefit from additional liquidity and be less dependent on external financing. This is especially important for smaller businesses as they typically have limited access to external funding sources. Also, small businesses often pay their bills in cash from earnings so efficient working capital management will allow a business to better allocate its resources and improve its cash management.
• Increased Business Value
  Firms with more efficient working capital management will generate more free cash flows which will result in higher business valuation and enterprise value.
• Favourable Financing Conditions
  A firm with a good relationship with its trade partners and paying its suppliers on time will benefit from favourable financing terms such as discount payments from its suppliers and banking partners.
• Uninterrupted Production
  A firm paying its suppliers on time will also benefit from a regular flow of raw materials, ensuring that the production remains uninterrupted and clients receive their goods on time.
• Ability to face shocks and peak demand
  Efficient working capital management will help a firm to survive through a crisis or ramp up production in case of an unexpectedly large order.
• Competitive Advantage
  Firms with an efficient supply chain will often be able to sell their products at a discount versus similar firms with inefficient sourcing.

Difference (LOSS): 48,400,000 – 45,000,000 = 3,400,000
*By exercising the total cost is GHS 48,400,000 (inclusive of premium paid)
*By Not exercising and buying from the spot market the total cost is GHS 45,000,000
*The LOSS will be 3,400,000 for exercising option A.
Decision:
Universal Plastics should not exercise the option but buy from the spot market. That will be cheaper not withstanding option premium already paid.

Alternatively:
The option is out of the money since the spot rate was lower than the option rate and should not be exercised. The maximum loss is the option premium of 1,400,000 cedis.

Profit/Gain for exercising = Rate Differentials less premium paid in buying protection
.                                          = 51,600,000 – 48,400,000 -1,200,000
.                                          = 2,000,000
OR 50,400,000 – 47,200,000  – 1,200,000
.                  = 2,000,000
OR (6.3 -5.9) X EUR 8m = 3,200,000 – 1,200,000
.                                         = 2,000,000
Decision:
Universal Plastics should exercise option B as it will Profit or gain = GHS 2,000,000

Decision:  Project GO gives the lowest payback period and should be selected.

Decision:  PROJECT GO gives the highest Rate of return and should be selected.

Decision:
Both projects produced positive NPVs but project GO has the highest NPV and should be selected since both projects are mutually exclusive.

Decision:
Both projects give IRR above the 20% cost of Capital, Project GO gives the highest 32% and should be taken since the two projects are mutually exclusive

Convertible loan notes are bonds that, at the option of the holder, can be converted into ordinary shares. If not converted, it will be redeemed like ordinary or straight debt on maturity.
Convertible debt has a number of attractions compared with a bank loan of similar maturity, as follows:
• Self-liquidating: Provided that the conversion terms are pitched correctly and expected share price growth occurs, conversion will be an attractive choice for bond holders as it offers more wealth than redemption. This occurs when the conversion value is greater than the redemption value, or when the conversion value is greater than the floor value on the conversion date. If the debt is converted into ordinary shares, it will not need to be redeemed. A bank loan of a similar maturity will need to have all of the capital repaid.
• Lower interest rate: It will be lower than the interest rate on ordinary debt such as a bank loan because of the value of the option to convert. The returns on fixed-interest debt will not increase with corporate profitability, so debt providers will have a limited share of the benefits from the investment of the funds they have provided. When debt has been converted, however, bond holders become shareholders and will potentially have unlimited returns, or at least returns that are higher than the returns on debt finance.
• Increase in debt capacity on conversion: Gearing increases when convertible debt is issued, but if conversion occurs, the gearing will fall not only because the debt has been removed, but will fall even further because equity has replaced the debt. The debt capacity of the company will therefore be enhanced by conversion, compared to redemption of a bank loan of a similar maturity.
• More attractive than ordinary debt: It may be possible to issue convertible debt even when ordinary debt such as a bank loan is not attractive to lenders, since the option to convert offers a little extra than ordinary debt does not. This is the option to convert in the future, which can be attractive to optimists, even when the short- and medium-term economic outlook may be poor.

• Stable and long term funding source

• Converted at a premium usually

Share repurchase is the process where a company buys back its own share from investors or from the stock market.

• Discourage unfriendly takeover: Shares repurchased can be used to enhance shareholder value or discourage an unfriendly takeover.
• Acquire another business: Companies can repurchase their own shares to be used for acquisition of another company.
• For employees share options: Where shares are used as part of employee salary package, a company can purchase its own shares for that purpose.
• For retirement: Companies can buy their own shares and retire the shares.
• Redistribution of excess cash: Companies with excess cash as a result of excessive retained earnings can redistribute the excess cash to shareholders through purchase of own shares.
• As part of agreement with investors (Share repurchase agreement): Where there is an agreement with an investor that the company will buy its shares from the investor after a given period, the company will have to comply with this agreement by purchasing its own shares from the investor. This is also referred to as share repurchase agreement.