Advise:
The company should select Bond A for the Investment since it takes 4.4 years to recover the principal and interest compared to 5.06 years of Bond B. Bond B is risky.

This is a straightforward application of the Black and Scholes option pricing model. Each of the input components is stated in the question:

Current price   =  Present Value of the Project  = (24+4)  = GH¢28 million
Exercise price  = capital expenditure   = GH¢24 million
Exercise date = 2 years
Risk free rate = 5%
Volatility = 25%
Using the formula as specified:

.                       = 22.8452-16.9296 x 0.9048
.                       = 22.8452-15.3179
.                       = GH¢7·53 million
This implies that at the current time the project has a value equal to its net present value plus the value of the call option to delay, i.e., GH¢11·53 (7.53+ 4)

• The usage of a forward exchange contract. This is a contract, usually between a bank and its customer, for the purchase/sale of a specified amount of a stated foreign currency at an exchange rate fixed at the time the contract is made for performance at a future date agreed upon at the time of the contract.
• To borrow foreign currency. A Ghanaian company that has recognized the need to pay a certain amount in US dollars in two months’ time, can borrow that amount of US dollars now, thereby avoiding and reducing translation/conversion risks.
• To insert protection clauses. The exporter can incorporate a clause in the contract of sale, to adjust the selling price, if the exchange rate moves outside an agreed range. Also additional charges may be made as a result of conversion or translation changes which may be agreed to be borne by the importer.
• Export factoring. Where the exporter raises foreign finance through the usage of an international factor.
• To operate a domiciliary account. The company in this case maintains an account in a Ghanaian bank, but denominated in the desired foreign currency. Proceeds of export sales can then be used through this account to settle future commitments.
• Matching and Netting currencies. The idea here is to match receipts and payments in the foreign currency. In this case related amounts are offset in foreign currency if they fall due within the same time period.
• Incorporating a clause in the export contract which will specifically allow or disallow fluctuations in exchange rates. This is slightly different from protection clauses, since the adjustment is done on the exchange rate for payment especially in local currency.
• Foreign Currency Options.
• Foreign Currency Swaps.
• Foreign Currency Futures
• Discounting export bills or invoices with foreign finance houses.
• Negotiation of bills of exchange payable or discountable abroad.                                 (Any 5 points)
  

YSL can hedge using futures as follows.
• Use September futures, since these expire soon after 1 September, price of 1/0.007985 = 125.23 ¥/$.
• Buy futures, since it wishes to acquire yen to pay the supplier, and the futures are in Yen.
• Number of contracts 140m/12.5m = 11.2 contracts   (11 contracts)
• Tick size:  0.000001 x 12.5m = $12.50

Basis risk arises from the fact the price of a futures contract may not move as expected in relation to the value of the instrument being hedged. Basis changes do occur and thus represent potential profits/losses to investors. Typically, this risk is much smaller than the risk of remaining unhedged.

Basis risk is the difference between the spot and futures prices.
Spot price = 1/128.15
.                  = 0.007803
Basis = 0.007803 – 0.007985 = 182 ticks with 3 months to expiry
Basis with one month to expiry, assuming uniform reduction = 1/3 X 182 = 61 ticks
Spot price on 1 Sept = 1/120 = 0.008333
Therefore predicted futures price = 0.008333+0.000061= 0.008394

Outcome:
Futures market
Opening futures price      0.007985
Closing futures price       0.008394
Movement in ticks           409 ticks
Page 22 of 23
Futures market profit 409 x 11 x $12.50 = $56,238

Net outcome
.                                                                               $
Spot market payment (¥140m. 120)             1,166,667
Futures market profit                                       56,238
.                                                                           1,110,429
Hedge efficiency
56,238/74,197  = 76%

This hedge is not perfect because there is not an exact match between the exposure and the number of contracts, and because the spot price has moved more than the futures price due to the reduction in basis. The actual outcome is likely to differ since basis risk does not decline uniformly in the real world.

The primary difference between the International Monetary Fund, or IMF, and the World Bank lies in their respective purposes and functions. The IMF exists primarily to stabilize exchange rates, while the World Bank’s goal is to reduce poverty. Both organizations were established as part of the Bretton Woods Agreement in 1945. Their functions among others are:

• The International Monetary Fund promotes monetary cooperation internationally and offers advice and assistance to facilitate building and maintaining a country’s economy. The IMF also provides loans and helps countries develop policy programs that solve balance of payment problems if a country cannot obtain financing sufficient to meet its international obligations. The loans offered by the IMF, however, are loaded with conditions. Often, a loan provided by the IMF as a form of “rescue” for countries in serious debt ultimately only stabilizes international trade and eventually results in the country repaying the loan at rather hefty interest rates. For this reason, the IMF has many critics worldwide.
• The World Bank‘s purpose is to aid long-term economic development and reduce poverty in developing countries. It accomplishes this by making technical and financial support available to countries. The bank initially focused on rebuilding infrastructure in Western Europe following World War II, and then turned its operational focus to developing countries. World Bank support helps countries reform inefficient economic sectors and implement specific projects, such as building health centers and schools or making clean water and electricity more widely available. World Bank assistance is typically long term, funded by countries that are members of the bank through the issuing of bonds. The World Bank also has a pool of about $200 billion with which to offer aid to less-developed countries. The bank’s loans, however, are not used as a type of bailout, as in IMF style, but as a fund for projects that help develop an underdeveloped or emerging market nation and make it more productive economically.
  

• Governance Structure and Key policy issues.
• Managing capital movements and preventing crisis.
• How to develop partnership for develop, Millenium development goals and the provision of global public goods.
  

Leveraged buyout involves the acquisition or purchase of a company (usually a publicly listed company) with substantial use of debt financing. The buyers in an LBO include existing shareholders, managers, and employees.

Potential Advantages:
Usually a publicly listed company that is acquired through an LBO is converted to a private company (i.e. delisted from the stock exchange). On the assumption that the LBO results in ABC being converted to a private company, the following advantages would be enjoyed:

• It will save money from meeting listing requirements.
• Its share value would be less volatile as it will no longer be vulnerable to instability and inefficiencies in the stock market.
• Management can concentrate on long-term needs of the business rather than meeting the short-term needs of shareholders (earning some profit and paying some dividend in the short-term even at the expense of future earnings potential).
• Shareholders would be closer to management. This reduces agency problems and the attendant agency costs.

Besides the advantages that would be derived from delisting the company, there are some potential benefits associated with the involvement of managers in the LBO. The increased stake of managers in the business can increase their commitment and effort with the potential to create more value to the company.

Finally, the huge amount of debt that would come with the LBO can bring potential benefits to the restructured company. First, high interest payments reduces taxable income, which results in lower tax liability. Other factors held constant, the tax shield will enhance the value of the company. Second, the huge debt would somehow make the restructured company less attractive to predators; and so would be protected from hostile takeover bids.

Potential disadvantages:
Some potential disadvantages will result from delisting the company from the stock exchange. One is the reduction in the marketability of its stock, which might have a negative effect on the value of its stock. Compliance with public listing rules is believed to bring about good corporate governance. Unless the restructured ABC clearly demonstrates otherwise, it may be rated low on good corporate governance practices in the minds of the public. This might have negative effect on its credit rating.

A potential disadvantage of ABC being acquired through an LBO is high risk of bankruptcy due to high financial obligations. The success of an LBO is influenced greatly by ability to meet the high interest obligation that comes with the increased debt level. If the restructured company is not able to generate enough income and cash flows, it would default on its huge financial obligations and ultimately go bankrupt.

Appraisal of the proposed acquisition
.                                                                          Mama Ltd                Papa Ltd
Shares in issue                                                 10 million                  5 million
Market price                                                     GHS6.00                   GHS4.50
Value of equity (10,000,000 x 6.0)                 60,000,000
.                         (5,000,000 x 4.5)                                                      22,500,000
Value of debt                                                   40,000,000
After-tax cost of debt                                           22%

NPV and post-acquisition value
Computation of NPV:
The NPV of an acquisition is the gain from the acquisition less the cost of the acquisition:
The gain from the acquisition is the PV of synergy from the acquisition:

Cost saving = given as GHS600,000 every year perpetually
As the firm has both equity and debt in its capital structure, the appropriate cost of capital to use as discount rate is the WACC.

Cost of equity, ke is estimated from the CAPM:

𝑘𝑒=𝑟𝑓+𝛽𝑖(𝐸(𝑟𝑚)−𝑟𝑓)

𝑘𝑒=0.2+1.2(0.05)=0.26
Cost of the acquisition is the excess of the purchase consideration over the value of the target:

𝐶𝑜𝑠𝑡=𝐶𝑎𝑠ℎ 𝑜𝑓𝑓𝑒𝑟−𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑃𝑎𝑝𝑎

𝐶𝑜𝑠𝑡=𝐺𝐻𝑆25,000,000−𝐺𝐻𝑆22,500,000=𝐺𝐻𝑆2,500,000

The NPV is then computed as Gain less Cost:

𝑁𝑃𝑉 = 𝐺𝑎𝑖𝑛 − 𝐶𝑜𝑠𝑡=𝐺𝐻𝑆2,459,016−𝐺𝐻𝑆2,500,000= (𝐺𝐻𝑆40,984)

Advice based on NPV:
The negative NPV suggests that if the acquisition happens, the value of Mama would reduce by GHS 40,984. Therefore, the directors of Mama should discard the acquisition plan.

𝑃𝑜𝑠𝑡−𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒

𝑃𝑜𝑠𝑡−𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 = 𝐺𝐻𝑆60,000,000+𝐺𝐻𝑆22,500,000+𝐺𝐻𝑆2,459,016−𝐺𝐻𝑆2,500,000

𝑃𝑜𝑠𝑡−𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 = 𝐺𝐻𝑆82,459,016𝑚

The number of shares Mama should issue to shareholders of Papa can be calculated based on market price as under:

The share exchange ratio between Mama and Papa may be expressed as 3:4 or 0.75:1. That is Mama should issue 3 shares of its ordinary stock for every 4 shares in Papa (or 75 shares of Mama for every 100 shares in Papa).

The Net present value = -8754 + 1,537+1,599+1,650+1,695+3,063 = 790,000
The positive NPV shows the project is worthwhile.

W2, cost of capital
(1+i)=(1+r)(1+h)=(1+0.06)(1+0.047)=1.11, hence 11%

In order to use CAPM we shall need to derive a suitable equity beta for Sunland Co. This will be done by first finding a suitable asset beta (based on the asset betas of the 2 parts of the business) and gearing up to reflect Sunland Co’s 50:50 gearing level. Retail industry: the asset beta of retail operations can be found from the industry information as follows: (assuming the debt beta is zero)

Manufacturing industry: Similarly, the asset beta for manufacturing operations is:

Sunland Co asset beta: Hence, the asset beta of Sunland will be a weighted average of these two asset betas: ß a (Sunland) = (0.75 × 1.02) + (0.25 × 0.92) = 1.00.

Sunland Co equity beta: So, regearing this asset beta now gives: 1.00 = ße × [50/(50 + 50(1 – 0.30))] So, ße = 1.00/0.59 = 1.69

Sunland Co cost of equity, using CAPM: Ke = RF + ß (E(RM) – RF) = 3% + (1.69 × 6%) = 13.1%

Advantages:

• If KK Chemicals set up its own subsidiary to handle the production, it will be able to protect its production secrets and technology from being replicated. With licensing, KK Chemicals will have to disclose its production process and technology to the licensee and risk replication.
• KK Chemicals will maintain total control over the quality of the products. Controlling the quality of the product under licensing is a bit difficult.
• With a subsidiary, KK Chemicals will earn all the revenue from the sale of the product and not just a small percentage of it as royalty. That is setting up in the host country would be a more effective way of growing the company’s earnings.

Disadvantages

• Setting up a subsidiary in the host country requires a substantial amount of money. This may cause the company to restrict dividend payments to make more earnings available to finance the operation or borrow more. Lower dividends may not meet shareholders’ expectation while high borrowing will increase financial risk.
• Setting up a subsidiary in the host country exposes the company to higher political risk than licensing would do. Political risks such as expropriation, business interruption in times of political unrest or ethnic tensions, blocked funds, changes in shareholding rules could be avoided with licensing.
  

Blocked funds refers to the situation where the government of the host country uses exchange controls to block the flow of foreign exchange into and out of the country. When this happens, KK Chemicals would not be able to remit cash returns back home. KK Chemicals can deal with blocked funds by doing any of the following:

• Sell goods or services to the subsidiary and obtain payment.
• License the subsidiary to use its production processes protected by patent for royalties.
• Offer management services to the subsidiary for a fee.
• Give more loan (rather than equity) finance to the subsidiary for interest payment.