Choosing an appropriate source of business finance can be a difficult and time-consuming task. This is due to the sheer amount of funding options available. Financing can come in the form of debt or investment, and finance terms can vary significantly. The criteria and implications of each source require critical analysis before proceeding, and it is essential to weight the cost versus benefits of each source before making a decision.
Required:
i) Discuss FOUR factors that a company should consider when choosing a source of debt finance.                            (6 marks)

ii) Explain THREE factors that may be considered by providers of finance in deciding how much to lend to a company. (3 marks)

SAFOO Ltd has in issue 5 million shares with a market value of GH¢ 3.81 per share. The equity beta of the company is 1.2. The yield on short- term government debt is 23% per year and equity risk premium is 5% per year. The debt finance of SAFOO Ltd consists of bonds with a total book value of GH¢2 million. These bonds pay annual interest before tax of 25%. The par value and market value of each bond is GH¢100. The Company pays tax at 25%.
Required:
Calculate SAFOO Ltd Weighted Average cost of Capital.                                                                                         (10 marks)

b) One of the important sustainability requisite for the accelerated development of an economy is the existence of a dynamic financial market. Financial markets can be found in nearly every nation in the world. Some are very small, with only a few participants, while others, like the New York Stock Exchange (NYSE) and the forex markets, trade trillions
of dollars daily.
Required:
What is a financial market?                                                                                                       (1 mark)

c) Explain the difference between the following financial markets;
i) Debt market and Equity market.                                                                                                    (3 marks)

ii) Money market and Capital market                                                                                               (3 marks)

iii) Forex market and Interbank market                                                                                            (3 marks)

Bhim is a not-for-profit non-governmental organisation aimed at supporting alleged witches to have an empowered livelihood. The organisation is developing a proposal to the Ministry of Gender and Social Protection to secure funding to improve basic healthcare and sanitation at three alleged witches’ camps. They have consulted you to help them develop the section on value for money (VfM) in their proposal.
Required:
i) Briefly explain the following value for money concepts :                                     (6 marks)

• Economy

• Efficiency

• Effectiveness

ii) Compare and contrast value for money and corporate value maximization.                                                    (4 marks)

Brothers Limited enters into a forward rate agreement (FRA) with Bank of Frica in which Brothers Limited will receive a fixed rate of 8% for nine (9) months on a loan of GH¢1million. Bank of Frica agrees to receive a nine (9) months LIBOR rate to be determined in nine (9) months’ time on the loan principal.
Required:
Determine the results of the FRA and the effective loan rate if the spot rate for the LIBOR in nine (9) months is:          (6 marks)
i) 5%

ii) 10%

Zeb Limited offers 2 percent discount to its customers who pay within ten (10) days. The company normally collects its debt within thirty (30) days. Assume 365 days in a year.
Required:
Determine the cost of the discount to the company                                                                                                            (3 marks)

Five years ago, Gasoto Ltd. issued 12 per cent irredeemable debentures at their par value of GH¢100. The current market price of these debentures is GH¢94. The company pays corporation tax at a rate of 30 per cent.
Required:
Calculate the company’s current cost of debenture.                                                                                                      (3 marks)

The annual demand for Praise Limited’s inventory is 10,500 units. The item costs GH¢400 a unit to purchase. The holding cost for one unit for one year is 12% of the unit cost and ordering costs are GH¢450 per order. The supplier offers a 2% discount for orders of 700 units or more and a discount of 3% for orders of 950 units or more.

Required:
Determine the cost minimising order size of the company.                                                                                             (8 marks)

i) Distinguish between repurchase agreement (repos) and reverse repos.                                                                        (3 marks)

ii) A company enters into an agreement with a bank and it sells GH¢10million government bonds with an obligation to buy back the security in 60 days. If the rate is 8.2% what is the repurchase price of the bond? Assume 365 days in a year.           (3 marks)

Kaluu Ltd is a listed company on the Ghana Stock Exchange Market and showed the following performance. The following information was made available to you:
Current market price per share (as at 31/12/15)                               GH¢ 10
Dividend per share 2015                                                                       GH¢ 1
Expected growth rate of dividend                                                        20% per annum
The average market returns                                                                  27%
The risk free government rate                                                              24%
The beta factor of Kaluu Ltd                                                                 1.4
Required:
i) What is the estimated cost of equity using the dividend growth model?                                                         (3 marks)

ii) What is the estimated cost of equity using the Capital Assets Pricing model?                                              (3 marks)