Rosa Kurablah Ltd (Kurablah) plans to invest in ordinary shares for a period of fifteen years, after which she will sell out, buy a lifetime room and board membership in a retirement home and retire. She feels that Senchi Ltd (Senchi) is currently, but temporarily, undervalued by the market. Kurablah expects Senchi’s current earnings and dividend to double in the next fifteen years. Senchi’s last dividend was GH¢3, and its stock currently sells for GH¢35 a share.
Required:
i) If Kurablah requires a 12 percent return on her investment, will Senchi be a good buy for her?                                   (3 marks)

ii) What is the maximum that Kurablah could pay for Senchi and still earn her required 12 percent?                              (2 marks)

iii) What might be the cause of such a market undervaluation?                                                                                          (3 marks)

iv) Given Kurablah’s assumptions, what market capitalisation rate for Senchi does the current price imply?                  (2 marks)

Edi Ltd, based in Accra Ghana, is a multinational company with two wholly-owned subsidiaries: Gil Plc based in Nigeria and Zep Ltd based in South Africa. Until recently, the Edi group has been doing well, returning a stable level of dividends to its shareholders. The financial performance of the Edi group has dipped in the past two years. In the last quarter of last year, the directors approved the establishment of a central treasury department based at the group’s headquarters in Accra. It is believed that the central treasury function will help boost effectiveness and efficiency in the group’s liquidity management, currency risk management, dividend remittances and borrowing.

Intragroup Currency Transfers:
There are a lot of intragroup credit transactions which are often settled independently between the parties involved. This year, the treasury department has been tasked to manage settlement of intragroup indebtedness through netting to reduce the volume of currency transactions. It has been agreed that all settlements will be made in the Ghanaian cedi at the prevailing spot mid-market exchange rate.

Below is a list of intragroup indebtedness at the end of the first quarter to be settled today:

Today’s mid-market cross currency spot exchange rates are as follows:

Group Dividend Policy:
Edi Ltd owns all the equity shares in each of the two subsidiaries; and so, has the power to determine the level of dividend paid by the two subsidiaries. Considering the high level of competition faced by the subsidiaries in the host countries, the directors of Edi Ltd have granted managers at the subsidiaries the discretion of reinvesting earnings as appropriate and remit the residual income to Edi Ltd. In consequent, dividend remittances from the foreign subsidiaries have averaged around 20% of subsidiaries’ after-tax earnings.
The dividend payment policy of Edi Ltd is GH¢1.5 per share. For the past two years, Edi Ltd has not been able to meet its promised dividend payment to its shareholders due to insufficient cash flows from its foreign subsidiaries.

Required:
i) Suppose the currency netting is implemented. Calculate the intragroup company currency transfers that will be required for settlement by each member of the Edi group.                                                                                                                     (6 marks)

ii) Suppose the treasury department is recommending the use of currency futures to hedge net currency exposures. Discuss the advantages and disadvantages of the Edi group using currency options instead of currency futures in hedging net currency exposures.                                                                                                                                                                            (4 marks)

Asana Ltd (Asana) is a manufacturing company based in Ghana. It is listed on Ghana’s stock exchange with a total market capitalization of GH¢400 million and 50 million shares outstanding. Its debt stock is made up of 10,000 18% bonds with face value of GH¢100 each. Per the bond indenture, Asana is required to maintain a maximum debt-to-equity ratio of 80% and is prohibited from paying a dividend in any year unless its dividend capacity for that year is at least 45% of net income for that year. For the past three years, the company has not been able to pay dividends to its shareholders because it has not been able to meet the minimum dividend capacity requirement.

Presently, the company is planning an expansion project that could enhance its dividend capacity for the coming years. The expansion project is expected to increase profit before interest and tax by 15% above the recent figure of GH¢35 million. The directors are considering whether to use equity or debt finance to raise the GH¢50 million required by the expansion project. The amount required by the business expansion will be invested in additional property and equipment. Details of the two financing methods under considering follow:

Method 1: Equity finance
If equity finance is used, Asana will offer 1 new share for every 4 existing shares in rights offer at a discount of 10% off the current market price.

Method 2: Debt finance
If debt finance is used, Asana will raise the required GH¢50 million through a syndicated loan arrangement. The interest rate on this syndicated loan is expected to be 20%. It is assumed that the entire principal will be drawn immediately and be paid back in a lump sum in 5 years’ time.

The directors of Asana are concerned about how the finance method could affect the firm’s ability to enhance its dividend capacity while maintaining the required debt-to-equity ratio.

Additional information:
1. Presently, the book value of equity is GH¢200 million while the debt level is GH¢100 million.
2. The recent profit before interest and tax is reported after charging depreciation of GH¢10 million and profit on disposal of non-current assets of GH¢2 million. The aggregate cost of the non-current assets sold is GH¢10 million, and their aggregate accumulated depreciation is GH¢8 million.
3. In addition to the business expansion expenditure, GH¢2 million will be invested to maintain existing productive capacity in the coming year. This will be financed from retained earnings.
4. Additional investment in net working capital will be 20% of the current net working capital balance of GH¢100 million.
5. Asana pays corporate income tax at 22%.

Required:
i) Supposing equity finance is used, compute the value of a right.                                                                                     (2 marks)

ii) Forecast the dividend capacity of Asana under both financing methods after the business expansion. Conclude whether Asana would be able to pay dividends to its shareholders in the coming year.                                                                              (5 marks)

iii) Compute the revised debt-to-equity ratio of Asana under both financing methods after the business expansion.       (3 marks)

iv) Use the results of the calculations above to evaluate whether equity or debt finance should be used for the planned business expansion.                                                                                                                                                                            (2 marks)

Ethical issues arise even when the objective is clear. Financial Managers face tradeoffs fraught with ethical issues. Thinking through the tradeoffs and all the costs and benefits is important
Required:                                                            
Suggest ways in which ethical issues would influence the firm’s financial policies in relation to the following:
i) Shareholders;                                                                 (2 marks)

ii) Suppliers;                                                                     (3 marks)

iii) Customers.                                                                     (3 marks)

Ape has 2,500 shares outstanding at GH¢10 per share. Bee has 1,250 shares outstanding at GH¢5 per share. Ape estimates that the value of synergistic benefit from acquiring Bee is GH¢500. Bee has indicated that it would accept a cash purchase offer of GH¢6.50 per share.
Required:
Identify whether Ape should proceed with the merger.                                                                                                      (5 marks)

At a meeting of the Directors of the Alpha Company Limited – a privately owned company- in May 1975 the recurrent question is raised as to how the company is going to finance its future growth and at the same time enable the founders of the company to withdraw a substantial part of their investment. A public quotation was discussed in 1974 but because of the depressed nature of the stock market at that time consideration was deferred. Although the matter is not of immediate urgency the Chairman of the company – one of the founders- produces the following information which he has recently obtained from a firm of financial analysts in respect of two publicly quoted companies Beta Limited and Gamma Limited which are similar to Alpha Limited in respect to size, asset composition, financial structure and product mix.

On the basis of the above information, the Chairman asked of your opinion on what Alpha Ltd was worth in 1974. The only information you have available at the meeting in respect of Alpha Limited is the final accounts for 1974 which discloses the following:

.                                                                                           Alpha Limited
Share Capital (no variation for 8 years)                        100,000 Ordinary GH¢1 Share
Post-Tax Earnings                                                             GH¢400,000
Gross Dividends                                                                GH¢100,000
Book Value                                                                         GH¢3,500,000

From memory, you are of the view that the post-tax earnings and gross dividends for 1974 were at least 1/3rd higher than the average of the previous five years.

Required:                                                   
Make full use of the information above to:
i) Answer the question from the Managing Director and                                                                                             (11 marks)

ii) Discuss FOUR (4) factors to be taken into account in trying to assess the potential market value of shares in a private company when they are first offered public subscription.                                                                                           (4 marks)

a) Rahim Ltd requires a machine for 5 years. There are two alternatives, either to take it on lease or buy basis. The company is reluctant to invest initial amount for the project and approaches their bankers. The Bankers are ready to finance 100% of its initial required amount at 15% rate of interest for any of the alternatives.

Under lease option, upfront security deposit of GH¢5,000,000 is payable to the lessor which is equal to cost of machine. Out of which, 40% shall be adjusted equally against annual lease rent. At the end of life of the machine, expected scrap value will be at book value after providing depreciation at 20% on written down value basis.

Under the buying option, loan repayment is in equal annual installments of principal amount, which is equal to annual lease rent charges. However, in case of bank finance for lease option, repayment of principal amount equal to lease rent is adjusted every year, and the balance at the end of 5th year.

Assume income tax rate is 30%, interest is payable at the end of every year and discount rate at 15% p.a. The following discounting factors are given:

Required:
Recommend the most viable option on the basis of net present values.                                                                         (10 marks)

b) A Multinational Company (MNC) is planning to set up a subsidiary company in Ghana (where hitherto it was exporting) in view of growing demand for its product and competition from other MNCs. The initial project cost (consisting of Plant and Machinery including installation) is estimated to be GH¢500 million. The net working capital requirements are estimated at GH¢50 million. The company follows straight line method of depreciation. Presently, the company is exporting two million units every year at a unit price of GH¢ 80, its variable cost per unit being GH¢40.

The Chief Finance Officer has estimated the following operating cost and other data in respect of the proposed project:
i) Variable operating cost will be GH¢20 per unit of production.
ii) Additional cash fixed cost will be GH¢30 million p.a. and project’s share of allocated fixed cost will be GH¢3million p.a. based on the principle of ability to share;
iii) Production capacity of the proposed project in Ghana will be 5 million units;
iv) Expected useful life of the proposed plant is five years with no salvage value;
v) Existing working capital investment for production & sale of two million units through exports was GH¢15 million;
vi) Exports of the product in the coming year will decrease to 1.5 million units in case the company does not open subsidiary company in Ghana. This would be as a result of competing MNC’s that are in the process of setting up their subsidiaries in Ghana;
vii) Applicable Corporate Income Tax rate is 35%, and
viii) Required rate of return for such project is 12%.
ix) Assume that there will be no variations in the exchange rate of the two currencies and all profits will be repatriated, as there will be no withholding tax.

Required:
Calculate Net Present Value (NPV) of the proposed project in Ghana and advise Management.                                    (10 marks)

Kaki Limited needs to finance a seasonal bulge in inventories of GH¢400,000. The funds are needed for six months. The company is considering the following possibilities:
i) Warehouse loan received from a finance company. Terms are 12 percent with an 80 percent advance against the value of the inventory. The warehousing costs are GH¢7,000 for the six month period. The residual financing requirement, which is GH¢400,000 less the amount advanced, will need to be financed by foregoing cash discounts on its payables. Standard terms are 2/10, net 30. However, the company feels it can postpone payment until the fortieth day without adverse effect.
ii) A floating lien arrangement from the supplier of the inventory at an effective interest rate of 20 percent. The supplier will advance the full value of the inventory.
iii) A field warehouse loan from another finance company at an interest rate of 10 percent. The advance is 70 percent and field warehousing costs amount to GH¢10,000 for the six month period. The residual financing requirement will need to be financed by foregoing cash discounts on payables as in the first alternative.

Required:
Evaluate the feasible method of financing the inventory needs of the firm.                                                                    (10 marks)

“Oil-rich Ghana’s sovereign wealth fund Ghana Development Board (GDB) has already invested in a number of real estate and infrastructure projects around the world, including a $2.5 billion joint venture with Petro Nigeria Ltd and a scheme to create a carbon-neutral city in Ghana”.
Required:
i) Compare the use of joint ventures as opposed to licensing for GDB if it wishes to expand abroad and outline the advantages and disadvantages of both joint ventures and licensing.                                                                                                     (5 marks)

ii) Explain FIVE (5) strategic reasons for Foreign Direct Investment, (FDI), for a firm wishing to expand.                    (5 marks)

The money market deals primarily with short term instruments with short term maturities and the repayment of funds borrowed is required within a short period of time.
Required:                                          (10 marks)
Explain the following in the money markets:
i) Securitization.

ii) A “Reversed Repurchase Agreement”.

iii) Banker’s Acceptance.

iv) Commercial Paper.