The portfolio borrowing rate is 15.82 % based on the available information.

The cedi borrowing rate is 18%. This means the portfolio borrowing rate is better than the cedi borrowing rate, ALL OTHER THINGS REMAINING CONSTANT.

This is so because it was assumed that whatever currency used, there was no effect of exchange rate differences among the cedi, euro and the pound.

Spin-Off
A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company. A spinoff is a type of divestiture. The spun-off companies are expected to be worth more as
independent entities than as parts of a larger business. A spinoff is also known as a spinout or starbust.

When a corporation spins off a business unit that has its own management structure, it sets it up as an independent company under a renamed business entity. The company that initiates the spinoff is referred to as the parent company. A spinoff retains its assets, employees, and intellectual property from the parent company which gives it support in a number of ways, such as investing equity in the newly formed firm and providing legal, technology, or financial services.

Sell-off
A sell-off is the rapid selling of securities such as stocks, bonds, ETFs, commodities or currencies. A sell-off may occur for many reasons, such as the sell-off of a company’s stock after a disappointing earnings report, the departure of a important executive or the failure of an important product. Markets and stock indexes can also sell-off when interest rates rise or oil prices surge, causing increased fear about the energy costs that companies will face. Sell-offs can also be caused by political events, or terrorist acts.

All financial trading instruments have sell-offs. They are a natural occurrence from profit-taking, short-selling or portfolio turnover. Healthy price uptrends require periodic sell-offs to replenish supply and trigger demand. Minor sell-offs are considered pullbacks. Pullbacks tend to hold support at the 50-period moving average. However, when a sell-off continues on an extensive basis, it can be signs of a potentially dangerous market reversal leading to a correction or a crash.

Reasons for Spin-Offs
Here are reasons why some companies are better off as separate units than they are as one bigger business:

• Better management: While executives of a company may be well-suited to overseeing most of its lines of business, perhaps there’s a unit that doesn’t quite match their expertise. In another example, a specific unit may require more attention than it’s getting from top management and its performance suffers as a result. In either case, spinning off the unit and putting it under new management may result in better performance in the unit-turned-independent company, while the parent company’s managers can now redouble their focus on their remaining units.
• Separating growth trajectories and strategies: A business unit that’s slow to make money might prove a drag on a sister unit that’s experiencing robust growth, particularly if the parent company uses profits from the latter to subsidize the former. But when two such units are no longer under the same parent company, they can grow at their own pace and might even see more success in attracting investors who specifically seek out fast-growing or mature companies.
• Better coverage from securities analysts: Research has shown that divestitures —including spinoffs and sales to other companies — by parent companies result in higher quality research by the analysts covering those parent companies. One study of 103 spinoffs, for instance, found that analyst forecast accuracy increased between 30 to 50 percent following spinoff transactions. One of the reasons why is that when a business is less complex, it’s easier to analyze. In addition, after a corporation narrows its array of businesses, it may attract coverage from analysts with specializations matching those businesses who may provide more accurate forecasts about the corporation.
• Unlocking shareholder value: Perhaps the biggest factor driving spinoffs is the idea that the parent company is undervalued— perhaps because of management or strategy issues described above — and that its remaining business valuation would be higher if it spun off one or more business units.         (Any 3 points)
  

A successful performance measure evaluates how well an organisation performs in relation to its objectives. Since the primary objective of commercial organisations is normally assumed to be the maximisation of the wealth of its shareholders, it follows
that performance measures should evaluate this. In practice, many organisations use profit-based measures as the primary measure of their financial performance. Two problems relating to profit in this area are, profit ignores the cost of equity capital.

Companies only generate wealth when they generate a return in excess of the return required by providers of capital –both equity and debt. In financial statements, the calculation of profit does take into account the cost of debt finance, but ignores the
cost of equity finance. Profits calculated in accordance with accounting standards do not truly reflect the wealth that has been created, and are subject to manipulation by accountants. Economic Value Added (EVA) is a performance measurement system
that aims to overcome these two weaknesses. EVA was developed by the US consulting firm Stern Stewart & Co, and it has gained widespread use among many well-known companies such as Siemens, Coca Cola and Herman Miller.

EVA is based on the residual income technique that has been used since the early 20th century. Residual income is a performance measure normally used for assessing the performance of divisions, in which a finance charge is deducted from the profits of the division. The finance charge is calculated as the net assets of the division, multiplied by an interest rate – normally the company’s weighted average cost of capital. EVA is similar in structure to residual income. It can be stated as EVA =
NOPAT – (k x capital)

Where: NOPAT = Net operating profits after tax. (k x capital) is the finance charge, where k = the firms weighted average cost of capital and capital = equity plus long term debt of the company at the start of the period. EVA therefore is an estimate of
amount by which earnings fall short or exceed the required rate of return investors could achieve from alternative investment of similar risk.

Step 1: Calculation of Net operating profit after tax (NOPAT)

Step 2: calculation of adjusted capital employed at 1 January

Step 3: compute the weighted average cost of capital
2017: (60% x 14% ) +(40% x 5% x (1- 0. 25%) = 9.9%
2016 : (60% x 12% ) + (40% x 5% x (1 – 0.25%) =8.7%

Step 4: calculate the Economic Value Added (EVA)
EVA = NOPAT – (k x capital)
2017: 4,740,000 – (9.9% X 38,515,000) = 927,000
2016: 3,840,000 – (8.7% X 35,300,000) = 769,000

WORKINGS:

WORKINGS:

A merger will only be worthwhile for a company that is committed to maximising shareholder wealth, if gains arise that would not otherwise arise if the bidding and target businesses had not been combined. The value of a business may be defined as
the present value of its future cash flows. This means that a takeover will make economic sense if the present value of the combined business exceeds the aggregate of the present values of each business when taken separately.
Thus: PV Combined business > PV Bidding business + PV Target business

Paying too much for the target company
The management of the bidding company may pay too much for the target company. It is quite common for a premium to be paid to the shareholders of the target company in order to encourage them to sell their shares. Unless there are benefits accruing from the takeover, this premium paid will simply transfer wealth from the shareholders of the bidding company to the shareholders in the target company.

Hidden problems
Problems that were hidden at the time of the takeover may emerge later to eliminate any gains that were anticipated. These problems may have been deeply buried and so may have been difficult to unearth, even where proper due diligence procedures were carried out prior to a takeover agreement.

Integration issues
Integrating the two businesses following takeover may prove a difficult task. There may be differences in culture, management style, and organisational methods and systems that cannot be easily reconciled. Integration problems are most acute where
there is an attempt to impose a common style and common systems following takeover. Where the former target company is allowed to maintain its own identity and its own systems, integration problems are likely to be much less of an issue.

Management attitudes and motivation
Once the takeover has been completed, managers may expect the enlarged business to achieve success without the need for much effort. They may feel that the takeover was the most important ingredient for success and expect that future operations will run smoothly. In some cases, an exhausting takeover struggle may leave managers with little energy or enthusiasm for ensuring that things go according to plan.

Errors in valuing a target firm
Managers of the bidding firm may advise their company to bid too much as they do not know how to value an essentially recursive problem. A risk-changing acquisition cannot be valued without revaluing your own company on the presupposition that the acquisition has gone ahead. The value of an acquisition cannot be measured independently. As a result, the merger fails as the subsequent performance cannot compensate for the high price paid.

The target being too large relative to the acquirer
A literature review suggests that the difficulties associated with a merger or acquisition increase as a function of the relative size of the target. This tends to happen because the target becomes more and more difficult to absorb as it becomes relatively larger. A target equal in size to the acquirer can only be effectively absorbed in a merger of equals.

Evaluation of mining project using NPV with no restriction on repatriation.
The project’s NPV

The NPV of the operation is GH¢34.325 million. The positive NPV suggests that implementation of the proposed mining operation in South Africa will enhance the value of the company. Rock should accept the investment opportunity for implementation.

Workings:
1. Computation of tax allowable depreciation

Capital allowance is granted at 20% per annum on straight line basis at the end of each year of commercial production. Since commercial production begins in the third year, the first capital allowance claim will be at the end of year 3.
A total investment of ZAR35 million will qualify for capital allowance as of the end of
the third year and subsequent years.
Thus, each year’s capital allowance is ZAR 7 million (20% x ZAR35 million)

2. Forecasted exchange rates
On the assumption that purchasing power parity holds, forward exchange rates are forecasted as under:

Evaluation of impact of restriction on profit repatriation restriction on the NPV With a restriction on repatriation until exit, all cash returns from the third year to end of year 5 will be available to Rock only at the end of year 5 when it exits. As blocked funds can be invested at 15% in South Africa up to the end of year 5, the amount that will be repatriated at the end of year 5 is the aggregate future value of the cash returns from year 3 to 5.

The NPV will reduce by 3.7% ((33.056 – 34.325) / 34.325)

• Rock can deal with blocked funds by doing any of the following:
• Negotiating with the South African government for a stable profit repatriation policy.
• Selling goods or services to the subsidiary and obtain payment.
• Licensing the subsidiary to use its production processes protected by patent for royalties.
• Offering management services to the subsidiary for a fee.
• Giving more loan (rather than equity) finance to the subsidiary for interest payment.        (Any 3 points)
  

Risks and issues relating to One-Village’s proposed project in a foreign country.
Considering the target country’s lower ranking on the ease of doing business, the directors of One-Village should expect some political risks, legal risks, and other issues that may make it difficult for them to set up and operate successfully. Below
are some risks and ways of addressing them.

• Risks or issues
  Lower rank for dealing with construction permits suggests that One-Village may face the risk of government frustration which might create room for bribery and corruption.
• The lower score for paying taxes suggests that One-Village may face uncertainty and inconvenience about taxes, which may make its compliance with tax laws difficult. Frequent changes in tax laws and ambiguity about the position of the tax law would increase the risk of One-Village failing to honour its tax obligations.
• The lower rank for trading across borders suggests that country may be restricting free flow international trade or the country is otherwise not accessible to other countries. The risk of trade restrictions may make it difficult for One-Village to
  import machinery and inputs into the country.
• One-Village may face legal risks, particularly those related to enforcement of intellectual and other property rights and enforcing contracts. The lower score for registering property and enforcing contracts are testaments to the presence of this risk.
• Besides the political and legal risks, One-Village may also face some financial risks. Key of them is the risk of bankruptcy. Although it appears that it is easier to get credit in the destination country, the directors should be concerned about risk of insolvency as the score for resolving insolvency is low.
• Other issues that should be considered are the following:
  1. Impact of its operations on the environment. For instance, the effect of damming a river to create water reservoirs on shelters around the river bank.
  2. Ethical issues relating to recruitment, compensations to residents affected by their operations, abuse of market power when dealing with suppliers and customers etc.
  3. Cultural differences between its home country and the destination country.             (Any 4 points)

Suggested solutions/recommendations

• On the risk of government frustration, One-Village should negotiate with the government for a favourable investment environment. Further, it should begin regulatory processes early, so it can complete the project on schedule even when there
  are delays granting permits. The directors should be mindful of bribery and corruption as the firm goes through regulatory procedures.
• On tax compliance, One-Village should engage experts in the destination country’s tax system for advice on meeting tax obligations. Considering the importance of irrigation to farming in Sub-Saharan Africa, One-Village could negotiate for a stable tax regime during its presence in the country.
• On the legal risks, One-Village should consider international arbitration to enforce property rights and contracts. It should also do well to comply with existing laws and plan for changes in them. In case of intellectual property, operations should be
  structured to limit technology transfer.
• On the risk of bankruptcy, One-Village should reduce debt financing for the project as resolving insolvency could be difficult.        (Any 4 points)
  

Appraisal of Irrigation Project in Ghana using Adjusted present value (APV)
Step 1: Computation of the base NPV

Step 2: Calculation of PV of financing side effects
Financing side effects that apply in this case are –
**the issue cost and its associated tax shield
**annual interest payments on debt financing
**benefit from subsidized loan from the government
Necessary adjustments for the financing side effects follow.

Notes:
**It is assumed that the entire issue costs will be expensed in the first year.
**PV of tax shield and subsidy benefit are based on the risk-free interest rate. It may be discounted at the company’s cost of debt.

Step 3: Compute APV by adjusting base case NPV for financing side effects

Conclusion: As the APV is positive, the value of One-Village will increase if the proposed damming and irrigation project is implemented. It should be implemented.

Workings:
1. Ungeared cost of equity
The ungeared cost of equity may be estimated based on MM Proposition II with tax or the CAPM.
Using MM Proposition II with tax:

One-Village’s geared cost of equity, ke(g) = 25%
Value of One-Village’s equity = 10m x GH¢3.5 = GH¢35m
Value of One-Village’s debt = GH¢10m
One-Village’s tax rate, t = 22%
Cost of debt, kd = 14% (taken to be the risk-free interest rate as per MM view)

Using the CAPM:
With CAPM, obtain ungeared (or asset) beta of One-Village and put it into CAPM to obtain ungeared cost of equity as under:
Equity beta of One-Village is 2.75:

Putting ungeared (or asset) beta into CAPM yields an ungeared cost of equity of 21.6%:

𝑘𝑒(𝑢) = 0.14 + 1.9022(0.18 − 0.14) = 0.216

Note: The ungeared cost of equity may be rounded to 22% to read present value interest factors from interest factor tables.

2. Terminal value
As after-tax operating cash flows will grow at a constant rate of 5% every year after year five to perpetuity, the terminal value at the end of the fifth year is computed using the Gordon’s growth model as under:

‘Exchange exposure’ relates to the vulnerability of a company to risk arising from changes in the rate of exchange of a foreign currency is facing transaction exposure because he is vulnerable to adverse movements in the rate of exchange of the foreign currency.

‘Pre-acceptance exposure’ refers to risks arising in the period between the date of the exporters quote and the date on which the content is accepted.
Pre-acceptance exposure can be minimized by:

• Setting a short time limit within which the contract must be accepted ; or
• Buying a forward option to sell the foreign currency forward.
  

‘Post-acceptance exposure’ refers to risks arising in the period between the date of the exporters quote and the date on which the contract is accepted and the date on which the foreign purchaser sends the foreign currency to the exporter.

Post-acceptance exposure can be minimized by;

• Borrowing the foreign currency now, to be repaid out of the sales proceeds when they arrive. The advantages are cheapness and simplicity ;
• Selling the foreign currency forward. The advantage is the certainty of the amount of cedis to be received, without committing cedis resources at the outset.