M&E Ltd, recognised as the leader in steel manufacturing, has received an invitation to supply steel for the construction of rail lines to connect the ECOWAS countries, starting from Nigeria. The contract will be for 10 years, and management is considering appraising the investment to enable them present their proposals for the contract. The following information was extracted from the recently published accounts of M&E Ltd.

The Treasury unit of M&E Ltd has estimated that it will require GH¢ 10 million to finance the new project. The total amount would be raised through 10% Irredeemable bonds at the current market price. The cost of Preference shares and Bonds will not change but equity shareholders will demand an increase of 20% on the current cost of equity.

M&E Ltd has a beta of 0.8, the market risk premium for the steel industry is 6.25%, and the Government of Ghana Bond rate is 20%. The current market price for Irredeemable Bonds of GH¢1,000 nominal value is GH¢850.

M&E Ltd’s dividend policy is to pay constant dividend and this policy will not change into the foreseeable future. The recent dividend paid was GH¢20 per share. M&E Ltd is a Free Zones Company and therefore pays tax at a rate of 8%.
Required:
i) Calculate the current market capitalization of M&E Ltd.                                                                                              (5 marks)

ii) Calculate the Weighted Average Cost of Capital (WACC) prior to the consideration of the finance for the proposed project.                                                                                                                                                                                     (9 marks)

The money market is the arena in which financial institutions make available to a broad range of borrowers and investors the opportunity to buy and sell various forms of short-term securities. The short-term debts and securities sold on the money markets which are known as money market instruments have maturities ranging from one day to one year and are extremely liquid.
Required:
Explain the following short term market instruments:
i) Bankers’ acceptance                                                                                                             (2 marks)

ii) Commercial Paper                                                                                                               (2 marks)

iii) Repurchase Agreement (Repo)                                                                                          (2 marks)

iv) Term deposit                                                                                                                       (2 marks)

Adenta Municipal Assembly (AdMA) has established an ultra-modern library and internet facility for its inhabitants. It intends to subsidise the costs of using this facility for its inhabitants. This facility is to be evaluated by the local assembly (AdMA) to assess amongst other things, whether it is financially sound and offers value for money.
Required:
Suggest THREE (3) appropriate measures each of Financial, Economy, Efficiency and Effectiveness that could be set for the facility based on targets.                                                                                                                                              (12 marks)

Food Ltd has in issue 12% bonds with par value GH¢150,000 and redemption value GH¢165,000 with interest payable quarterly. The cost of debt on the bonds are 8% annually and 2% quarterly. The bonds are redeemable on 30 June 2021 and it is now 31 December 2017.

Required:
Calculate the market value of the bonds.                                                                                            (6 marks)

Flue Ltd wishes to make a takeover bid for the shares of Donc Ltd an unquoted company. The earnings of Donc Ltd over the past five years have been as follows:

The average P/E ratio of quoted companies in the industry in which Donc Ltd operates is 10. Quoted companies which are similar in many respects to Donc Ltd are:

• Beans Ltd has a P/E ratio of 15, but is a company with very good growth prospects.
• Wash Ltd has had a poor profit record for several years and has a P/E ratio of 7.

Required:
Calculate a suitable range of valuations for the shares of Donc. Ltd                                                                                (9 marks)

Kankam Ghana Ltd currently operates a long working capital cash cycle. Management is considering an initiative to reduce the cash cycle in order to manage the size and cost of the company’s working capital. Below are the components of working capital under the existing policy.
.                                                     Existing
.                                                       GH¢
Cash                                           1,000,000
Debtors                                       4,000,000
Inventory                                    6,000,000
Creditors                                     4,000,000

Under the proposed policy or initiative,

• Cash is expected to increase by 50%
• Debtors is expected to reduce by 25%
• Creditors is expected to increase by 25%
• Current ratio is expected to be 1.9 times.

The cost of funds to the company is 20% per annum.
Required:
a) Calculate the company’s net working capital under existing and proposed policies.                                                   (5 marks)

b) Compute the change in the company’s working capital financing cost if the new policy is implemented. Advise management on whether to implement the new policy.                                                                                                               (3 marks)

c) Explain the importance of the cash conversion cycle in ascertaining the working capital needs of the company.        (4 marks)

d) Explain THREE (3) advantages to be derived from effective management of Accounts Receivable.                         (3 marks)

Fluctuations in interest rate is a major concern to entrepreneurs and business executives. It has been observed that interest rate on loans vary according to the term of the loan. Besides, interest rates vary over time for varied reasons.
Required:
i) Explain THREE (3) reasons why interest rates on loans may differ for different maturities as explained by the term structure of interest rate.                                                                                                                                                        (6 marks)

ii) Suggest FOUR (4) ways of hedging the company’s exposure to interest rate risk.                                           (4 marks)

Sevista Ltd is evaluating the purchase of a new machine to produce product SEP, which has a short product life-cycle due to rapidly changing technology. The machine is expected to cost GH¢1 million. Production and sales of product SEP are forecasted to be as follows:

The selling price of product SEP (in current price terms) will be GH¢20 per unit, while the variable cost of the product (in current price terms) will be GH¢12 per unit. Selling price inflation is expected to be 4% per year and variable cost inflation is expected to be 5% per year. No increase in existing fixed costs is expected since Sevista Ltd has spare capacity in both space and labour terms. Producing and selling product SEP will call for increased investment in working capital.

Analysis of historical levels of working capital within Sevista Ltd indicates that at the start of each year, investment in working capital for product SEP will need to be 7% of sales revenue for that year. Sevista Ltd pays tax of 25% per year in the year in which the taxable profit occurs. The new machine is expected to have no scrap value at the end of the four-year period. Sevista Ltd uses a nominal (money terms) after-tax cost of capital of 12% for investment appraisal purposes.

Required:
i) Determine the net present value of the proposed investment in product SEP.                                                             (13 marks)

ii) Advise whether the project should be undertaken.                                                                                                       (2 marks)

KAF is a manufacturer of consumer electronics based in Accra, Ghana. KAF finances its investments with a combination of equity and debt. Its equity capital comprises 10 million shares which are currently trading on the stock exchange at GH¢2.55 per share. Its equity beta is 2.1 currently. The return on the risk-free security is 12.5% while the equity risk premium is 10%.

Included in KAF’s debt stock are irredeemable bonds that have a total face value of GH¢10 million while their total market value is GH¢12 million. The annual coupon of the irredeemable bonds is 18% but is paid semiannually.

The directors of the company are considering two new investment opportunities, which are described below:
Project 1
This is an expansion project in the consumer electronics manufacturing industry. It involves the setting up of a new factory in the northern part of Ghana. KAF would finance it with existing capital.
Project 2
This involves the installation of a new factory to manufacture furniture for export to foreign markets. Although this investment is a completely new line of business, KAF plans to finance it with existing capital. The average equity beta for the furniture manufacturing industry is 1.52 and average industry capital structure is 60% equity and 40% debt.

It is expected that KAF’s tax rate will remain at 22%.

Required:
i) Compute the cost of capital that should be used as discount rate for appraising Project 1.                                            (5 marks)

ii) Compute the cost of capital that should be used as discount rate for appraising Project 2.                                           (5 marks)

The Board of Directors of Continental Bank Ghana Ltd (CBGL) decided through a Board resolution to raise additional capital through rights issue to meet the new capital requirement by Bank of Ghana. CBGL plans to issue 1 new share for every 3 shares held by existing shareholders at 10% discount to its existing market price. CBGL currently has 6 million shares in issue at a book value of 2 cedis per share. CBGL maintains a dividend payout ratio of 50% and earnings per share currently is 1.6 cedis. Dividend growth is 5% per annum and this is expected into the foreseeable future. CBGL’s cost of equity is 15%. The issue cost is 600,000 cedis.
Required:
Calculate:
i) The market price per share                                                                                                         (2 marks)

ii) The capitalization of CBGL.                                                                                                     (2 marks)

iii) The rights issue price                                                                                                                (2 marks)

iv) The theoretical ex-right price                                                                                                    (2 marks)

v) The market capitalization after the rights issue                                                                          (2 marks)