The choice of whether to repatriate earnings from a foreign subsidiary is one of the most important decisions in multinational financial management.
Dividend repatriations represent significant financial flows for parent companies and contribute to dividend payments. The factors that affect dividend repatriation policies can be grouped as follows:

• Financing factors
  Repatriation policies may reflect financing concerns of parents who draw on subsidiary cash flows to finance domestic expenses. Two examples of such domestic expenses are dividend payments to external shareholders and capital expenditures in the home countries.
• Dividend policy
  Dividend repatriations from foreign affiliates may also offer an attractive source of finance for payments of dividends to common shareholders especially when the parent company may prefer a smooth dividend payment pattern and domestic profitability is in decline.
  The dividend payments of a subsidiary may also be affected by the dividend policy of the parent company. For example if the parent company operates a constant payout ratio policy, then the subsidiary will have to adopt a constant payout ratio policy too.
• Tax regime and dividend payments
  Tax considerations are thought to be the primary reason for the dividend policies inside the multinational firm. For example, the parent company may reduce its overall tax liability by receiving larger amounts of dividends from subsidiaries in countries where undistributed earnings are taxed.
• Managerial control
  Another reason that may determine repatriation policies is the inability to fully monitor foreign managers, especially when affiliates are partially owned.
  The desire to control corporate managers around the world carries implications for dividend policies. A multinational firm’s central management can use financial flows within the firm to evaluate the financial prospects and needs of wide-ranging affiliates and to limit the discretion of foreign managers.
  It may be sensible to mandate dividend payments to monitor foreign managers, limits their ability to misallocate funds, and to extract returns on investments.
• Timing of dividend payments
  The timing of payments may also be equally important. For example, a subsidiary may adjust its dividend payments to a parent company in order to benefit from expected movements in exchange rates. A company would like to collect early (lead) payments from currencies vulnerable to depreciation and to collect late (lag) from currencies which are expected to appreciate.
  Also given that tax liabilities are triggered by repatriation, these tax liabilities can be deferred by reinvesting earnings abroad rather than remitting dividends to parent companies.
  The incentive to defer repatriation is much stronger for affiliates in low-tax countries, whose dividends trigger significant parent tax obligations, than they are for affiliates in high-tax countries – particularly since taxpayers receive net credits for repatriations from affiliates in countries with tax rates that exceed the parent country tax rate.

Convert all the cash flows into Ghana Cedis (GH¢)

So overall, Nsawam Limited needs to pay amounts equivalent to GH¢11m to Paakro, Receive GH¢4.5m from Mangoase and pay GH¢5m to Asaman Limited.

OR

So overall, Nsawam Limited needs to pay amounts equivalent to GH¢11m to Paakro, Receive GH¢4.5m from Mangoase and pay GH¢5m to Asaman Limited.

• Credit controls
  This could be achieved through legislation and through the guidelines of the Central Bank of Ghana. The amount of funds available to the banks for commercial credit and the interest rates are directly regulated by the government through CBN. The effects will be to make borrowing more difficult since credit controls will affect the cost and available of funds, the share values, and the profit levels.
• Taxation
  Government policies on taxation will have an impact on the company’s cash flow by way of withholding tax on interest, dividends etc, sales tax, capital allowances claimable and balancing charges.
  Company taxation via allowances claimable could restrict or encourage investment in fixed assets (qualifying capital expenditure) and will determine the acceptable or rejection of certain projects as well as the method of financing such ventures.
  Personal income taxation affects corporate funds since it reduces personal disposable income or may encourage savings/investments. Both personal income and capital gains taxes affect shareholders preference for dividends against retentions and vice versa, hence posing dividend decision problems for the financial manager especially where the company has a wide spread of shareholders.
• Custom duties, tariffs and other trade barriers
  These can encourage or discourage imports/exports. Complete ban of products or high custom duties or tariffs will affect investment decisions covering these products and their close substitutes. This may also encourage backward integration and local sourcing of imported raw materials and spare parts.
• Control of income, prices, dividends etc.
  The effect of Productivity Prices and Incomes Boards guidelines through restriction of dividends and wage/price increases is a shortage of funds otherwise available for increase in cost of capital, and diversion of income seeking investors’ funds into non-equity stocks.
• Exchange controls
  For a country like ours that is heavily dependent on overseas trade, exchange controls will have serious effects on foreign exchange available and the prevailing exchange rates. With the second – tier foreign exchange market, most financial managers are finding it extremely difficult to plan adequately for purchase of foreign exchange. In addition, the rationing of foreign exchange in IFEM has restricted investment in projects that require imported heavy duty machinery and equipment.

MEMORANDUM
To               : Board of Directors
From           : Finance Director
Date            : August 14th 2017
Subject        : Proposed Export Business
It has been proposed that the company should utilize its surplus capacity by opening up export business to a number of countries. The following are some of the main points which will need consideration before a final decision is made.

i) Export Pricing and Profitability
First, extensive market research will have to be carried out in the countries under consideration to ascertain:
* Whether there is a demand for our products;
* Whether we would have any direct competition for our goods;
* The quality and price of competitors’ products;
* Whether the price we could charge for our products in that country would achieve the profit margin the company requires.

Depending upon the outcome of these initial investigations, consideration would then have to be given to the pricing and invoicing of the products abroad.
The export price would obviously not only have to cover our normal costs, overheads and profit margin, but also take into consideration any further costs associated with selling goods abroad such as transport, distribution, shipping and insurance costs. However, as there exists some surplus capacity, the items for export may be priced on variable or marginal cost basis.
The potential effect of the variability of exchange rates on pricing policy must also be considered. These effects could be reduced or eliminated in the following ways:

By invoicing in our own currency. This would eliminate the possibility of loss due to exchange rate fluctuations as it transfers any exchange risk to the buyer. However, this could have a detrimental effect on sales and thereby, profit.

By invoicing in the buyer’s own currency but including an ‘extra’ profit in the invoiced price to cover possible exchange losses. However, this policy has the danger of possibly making our price uncompetitive.
By invoicing in dollars – Fluctuation of the dollar against other currencies would affect our exposure.     (2.5 marks)

ii) Credit terms and methods of obtaining payment
When deciding upon credit terms to be offered to foreign customers, consideration must be made of the additional time lag involved in sales to foreign countries.
In addition to the period of trade credit granted there is also the time involved in the shipment of goods to the country and the time taken to transfer the funds back.

This brings us to the choice of the method of obtaining payment. There are several ways in which payment in foreign currency can be received:
* By cheque or bank transfer
* By a bill of exchange drawn on the customer by the company
* By a documentary credit facility (or letter of credit). The documentary credit system works as follows:
-The buyer and seller agree to a sales contract which provides for payment through a documentary credit;
-The buyer then requests a bank in his country to issue a letter of credit in favour of the exporter;
-This bank guarantees payment to the exporter provided that the exporter complies with the terms and conditions set out in the letter of credit such as presenting a transport document, copies of the invoice, certificate of insurance, etc.       (2.5 marks)

iii) Risk Avoidance
The exchange risk can be avoided by one of three methods.
By selling the currency forward. By this means the exporter can be sure of the exact amount of cedis he will receive. However, as there will be presumably many sales, the numerous foreign currency sales will have to be negotiated.

By borrowing the currency now. By this method the exporter would borrow foreign currency and sell the currency for cedis and then repay the loan from the sale proceeds. In this way short-term assets and liabilities are being matched in the same currency so as to eliminate exchange exposure. By this method one loan can be arranged to cover numerous sales.

By invoicing and receiving payment in our currency. However, as already mentioned this could have a detrimental effect on sales.               (2.5 marks)

iv) Forms of representation or local organization in export markets
If the company is to sell the goods in foreign countries then consideration must be given to how the goods will be sold. It will be necessary for the company to have some form of ground support in the countries concerned probably by selling through an overseas agent. Such agents might be found through an export organization such as the Ghanaian Export Promotion Board or with the help of a local bank. Consideration should also be given to the remuneration of such agents and the commission that they will be allowed.                  (2.5 marks)

Using the dividend valuation model the value of ordinary shares is given by:

• The calculations in part (a) are based on the dividend valuation model which depends on the belief that share prices are the discounted present value of the future dividend stream. There are strong theoretical justifications for this model in the context of a perfect capital market. However, in a less than perfect market the failure of the model to take any account of short run earnings (i.e. accounting profits) or underlying asset values, may limit its usefulness. There are further practical problems in applying the model which relates to determining the values of the constituent variables. Of these ‘g’ the anticipated growth rate and Ke, the cost of capital or required return, present particular problems. ‘g’ the anticipated future dividend growth. It is usually estimated by extrapolating past growth or by using the Gordon Growth Model. Whichever approach is taken the resulting estimate is inevitably suspect.
• Selecting an appropriate discount rate to convert future cash flows to a capital value also present special difficulty. Generally the appropriate rate reflects the risk-free rate and a premium for risk suitable for the share being valued. It is obviously difficult to determine such a rate. In this question the required return is given as 15%. This is used for both Red and Yellow and for all time periods. This in turn assumes that the risks associated with both companies over all relevant time periods are identical. This seems unlikely, particularly in view of the differences in growth rates for Red and Yellow. It would be more usual to assume that the very high growth in Yellow’s dividends during the first four years would result in riskier cash flows.
• Further practical difficulties would include the management organization of the post-merger company, competitive response and arranging the finance for the takeover.
• Finally, in transactions of this type there are inevitably tax consequences that would have to be carefully considered.
  

Covenants to bondholders limit the scope of shareholders / managers to confiscate wealth from bondholders for themselves. Such covenants would include agreements to refrain from, (a negative covenant) certain activities or to engage in certain activities (a positive covenant)
Types of bond covenant include:

• Regularly provide bondholders with audited statement of the firm’s financial position and any material changes to it, (a bonding covenant).
• Not disposing / selling off the assets of the company, (an asset covenant),
• Not subordinating their existing debt by issuing new debt or borrowing additional funds that rank above claims by existing bondholders if the firm was in financial distress and able to meet all its financial commitments, (a financial covenant),
• Not paying out large dividends to themselves (or engaging in a share repurchase scheme), (a dividend covenant) and / or ensuring that a sufficient levels of profit are reinvested back into the firm to finance future growth, (a reinvested covenant)
• Limit the values for key financial ratios in the firm, e.g. a minimum ratio of tangible assets total debt, interest cover, gearing level, net working capital etc., (financial ratio covenants),
• Preventing the firm from engaging in merger and takeover activities (a merger covenant).                        (Any 3 points)
  

Only firms with no debt in their capital structure should use the cost of equity to discount project cash flows, and only those projects that are very similar to a firm’s exiting assets should be discounted using that rate.

Firms with both debt and equity should use the WACC as long as they are evaluating a project that is similar to their existing assets. In part (a) we were asked to calculate the cost of capital that APP sold use as a discount rate when appraising new marginal investment opportunities. In this case the original WACC of 7.85% is appropriate.

When a firm is making an investment that is very different from its existing investments, then it shouldn’t use the company’s cost of equity or it’s WACC. Similarly if a firm is considering major investment that is expected to change its operating and financial leverage, then it shouldn’t use the company’s cost of equity or it’s WACC.

Cost of Capital:
Cost of Equity (using CAPM) = Rf + [Ba x (Rm – Rf)]
Rf = 3%
Rm = 8%
Ba = 1.4%
Cost of Equity (using CAPM)  = 3% + [1.4 x (8% – 3%)]
.                                                   = 3% + [1.4 x (5%)]
.                                                   = 3% + [0.070]
.                                                   = 10. 00%

OR

.     =0.8/11.7  = 0.068  ;  g= 0
.     =6.8%

We can find the average of the two methods or use any of the answers.
Average= (6.8+10)/2 = 8.4%

The 8% irredeemable debentures:
The yield on this can be estimated solving for Kd in the following perpetuity formula: Po = 1
Kd = the after tax cost of debt
Note: tax of 12.5% must be deducted from the interest payments
I.e. interest is GH¢4.00 per nominal GH¢100, every six months
Hence after tax payment = GH¢4.00 = (1-0.125) = GH¢3.5 per nominal GH¢100,
Po = 1/ Kd where: Po = GH¢106.00 and I = GH¢3.50
=> Kd = I / Po

.           = 3.5 / 106

.           = 3.30% semiannual (ie. 6.60% annually)

Cost of preference shares
Its preference shares has a GH¢5.00 nominal value
Dividend on the preference shares is 6%
Current market price of the preference shares is GH¢6.00
Cost of preference shares is = Actual Dividend / current market price
.                                            = (6% x GH¢5.00) / GH¢6.00
.                                           = (GH¢0.30) / GH¢6.00
.                                           = 0.05 = 5.00%

Market Value of the capital Structure
The market value of Equity:
Current cum div share price           GH¢12.50
Current numbers of shares            1,000,000
Expected dividend                           GH¢800,000
Expected dividend per share         GH¢0.80
Current Ex div share price              GH¢11.70
Current equity market value          GH¢11,700,000

The market value of the irredeemable Debt
= the current market price, (ex interest) per bond X # of bonds issued
The 8% irredeemable debentures
= GH¢106.00 x (6,000,000 / 100)
= GH¢106.00 x (60,000)
= GH¢6,360,000

The market value of the Preference shares
= the current market price, (ex div) per share x # of shares issued
= GH¢6.00 x (5,000,000 / GH¢5.00)
= GH¢6.00 x (1,000,000)
= GH¢6,000,000

• The usage of a forward exchange contract: This is a contract, usually between a bank and its customers, 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 of 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.
• To match 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 to 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.
• Discounting export bills or invoices with foreign finance houses.
• Negotiating of bills of exchange payable or discountable abroad.                      (Any 3 points)
  

Portfolio Risk (β)
Beta of (Treasuring Bills) = 0
Beta of Market = 1
Hence Portfolio  = {40% x 0} x {60% x 1}
.                          = 0.6