The investment decision considers the benefits of investing cash either in projects or in working capital or even in high yield deposit accounts. This is important to shareholders as it will determine the cash flows which are generated by the company and will ultimately affect the dividends paid and the share price. Assessing projects can sometimes be difficult as the returns may be spread over many years making the cash flows harder to estimate. Shareholders will also be concerned to compare the risk as well as the return between profits, as a higher risk investment should carry a higher return to compensate.

The financing decision considers the source of the finance required for the business operations. This will be a mixture of equity and long-term debt finance; companies need to balance the benefits to their shareholders – debt is a cheaper form of finance as the returns required are lower (due to lower risk) and the debt interest is tax allowable, but excessive gearing can increase the risk to the company, and hence the shareholders, dramatically.

The dividend decision looks at how much of the surplus cash generated should be paid out to the shareholders, and how much retained for future investments. Companies often make two payments a year, and shareholders generally prefer a predictable, steadily rising, dividend rather than one which follows the fluctuations of the profits. A dividend policy is often declared for a number of years to give this predictability. A company which then delivers what it promises will generally be regarded as less risky, and hence more valuable, by shareholders.

The three decisions are, therefore, interrelated as the finance needed for viable projects will come from both internal funds, which have not been paid out as dividends, and externally raised finance. The mixture of funds raised and used will then affect the cost of capital, which in turn will affect the viability of investments.

Calculation of Amount Available if the Company is liquidated and its allocations.

Distributed as follows:

This means that:
(1) If the company had been liquidated, the preference shareholders will lose GH¢3,900 million of the arrears of preference dividends in addition to the total amount of stated capital.
(2) Ordinary shareholder would receive nothing

Analysis:
Allocation of losses 30:67.5
Preference Shareholders 30/97.5 @ 75,600 = 23,262
Ordinary shareholders 67.5/97.5 @ 75,600 = 52,338

If the reconstruction takes place, the total maximum loss would be GH¢75,600 million. Out of this, preference shareholder will suffer a loss of GH¢23,262 million whilst the ordinary shareholder would have to bear GH¢52,338 million.

Analysis of Bank/Cash Balance

Ex-right Price – Right issue Price
¢22.40 – ¢16 = ¢6.40

This is a clear indication that a shareholder should exercise his/her right or sell the shares when right issues are made. Taking no action will lead to loss of value of wealth.

Money Laundering constitutes an illegal act of concealing the identities of parties to financial transactions. It is a term used to describe the process by which criminals disguise the original ownership and control of the process of criminal conduct by making proceeds appear to have been derived from a legitimate source.

Risk-Based approach to anti money laundering – The risk-based approach is a means of allocating supervisory resources with the effect to targeting areas of higher risk of money laundering.

Steps of risk-based approach are as follows:
1. Identify the money laundering risk that are relevant to the business
2. Conduct detailed risk assessment on such areas as customer behavior and delivery channels.
3. Design and implement controls to manage and reduce any identified risks
4. Monitor the effectiveness of these controls and make improvements where necessary.
5. Maintain records of action taken and reasons for those action

A company could undertake foreign manufacturing establishment as a strategy to defend existing business due to the following;
1. Demand for local manufacture in foreign country;
2. Reduction in cost of transportation (cost savings);
3. Government policy on tariffs, taxes, import controls and legislations;
4. Challenges with agents and licenses;
5. The need to protect patents and intellectual property;
6. Protection of parent company shareholders against recession;
7. The search for profitable uses for under-employed resources;
8. The need to internationalize to match competitors, suppliers and customers
9. Fear of losing local market
10. Development of global plan and strategies.                          (Any 5 points)

1. Hedging – this is a strategy to mitigate exposure to risk by undertaking equal and opposite transactions. An example is currency risk and interest rate risk. It involves implementation of action to ensure certainty of business outcome.
2. Diversification – This involves strategies to avoid risk by spreading funds over a portfolio of investments. A portfolio of different investments with varying degrees of risk helps to reduce the overall risk of the business. This helps to prevent the concept of “putting all eggs in one basket”.
3. Risk Mitigation – This involves implementation of control to avoid investments in projects whose risk is higher than the shareholders required rate of return.

To:              All Directors of Foreign Subsidiaries
From:         Group Finance Director
Subject:      Benefits of Treasury Centralisation

It is proposed that the group will shortly centralize its treasury functions. Centralization of group treasury management function means that the decisions regarding currency management, short term investment and borrowing and financial risk management will be taken centrally rather than at subsidiary level.

This will permit significant efficiency, improvements and cost savings. The major benefits will be as follows;

i) To enhance group decision making – Decisions will be taken in line with the tactical and strategic objectives of the group as a whole, rather than by individual subsidiaries which might from time to time have different objectives.
ii) Foreign exchange risk management – a central treasury can better appreciate the total foreign exchange exposure position of the group. Netting and matching of receivables and payables in different currencies will be possible allowing transactions cost savings as only the net amounts needed, be hedged or transmitted.
iii) Better knowledge will exist of total debt and cleared bank balances. This will facilitate interest rate hedging. Surplus cash from one subsidiary will be lent to other subsidiaries of relatively favorable rates.
iv) High Investment Returns – Cash may be aggregated and invested at better rates and borrowing may be possible at favourable rate, including from international markets to which individual subsidiaries would not have direct access.
v) Transfer prices will be centrally set to try to minimize the group tax bill.
vi) A centralized treasury functions with effective internal controls, will be able to prevent the possibility of major financial losses.
vii) A centralized treasury will be able to collect and analyze relevant economic and financial information and supply such information to the benefit of all subsidiaries.

Market Value of Plainview Farm Limited:
Using the Gordon’s growth model: g = rb
Where, r = return on investment
.           b = retention ratio
.           g = rb,      r = 0.16,      b = 0.25
.           g = 0.16 x 0.25 = 4%

Future Dividend in 1 year
= D1 (1 + g)
= 600 (1.04) = GH¢624million
Market Value (MV) = d/(r-g)

.                                = GH¢624m/(0.12-0.04)

.                                = GH¢7.8 billion

Market Value of Cottage Industries Limited:
r = 0.21,     b = 2/3
g = rb = 0.21 x 2/3

= 14%

Future Dividend in 1 year
100 (1.14) = GH¢114 million
Market Value (MV) = d/(r-g)

.                                = GH¢114m/(0.18-0.14)

.                               = GH¢2,850 billion

Plainview Farm Limited earning in 1 year                           GH¢m
.                    GH¢800 million x 1.04                                      832
Cottage Industries Limited
.                    GH¢300 million x 1.14                                      342
.                                                                                              1,174

Dividend in 1 year  GH¢1,174 million @ 40% =  GH¢469.60m
If r = 0.2 and b = 0.6
g = 0.2 x 0.6 = 0.12

Post-Acquisition Market Value:
MV   = GH¢469.6m/(0.16 – 0.12)  = GH¢11740 billion

Maximum Price   = GH¢11,740billion – GH¢2,850 billion

.                            = GH¢8,890 billion
Payable for Cottage Industries Limited is GH¢8,890 billion

• White Knight: A situation in which the target company looks for a friendly company where offer is more appealing for the takeover bid.
• Shark Repellant: This involves amending the company’s memorandum and articles of association in such a way that makes the takeover difficult for the acquiring company. An example is increasing the margin of majority votes required at an Annual General meeting called to approve such a takeover.
• Pac-man Defence: An anti-takeover strategy in which the target company tries to buy up the share of the acquiring company.
• Golden Parachutes: This refers to provision in the executives’ employment contract that call for payment of severance pay or other compensation should they lose their job as a result of a successful takeover.
• Poison-Pill: A strategy sometimes employed by target companies in a takeover bid to reduce the attractiveness of their securities/assets to the prospective acquiring firm. This is often done by enlarging the outstanding shares of a target company through a new issue of shares to its shareholders at a discount to the market price, thus making the takeover quite expensive to the prospective acquiring firm
  

ALTERNATIVELY:

ALTERNATIVELY:

Foreign Exchange risk is the probability that a company will be unable to adjust its prices and cost to offset changes in exchange rates. It also means the risk that the domestic currency value of cash flows denominated in foreign currency may vary due to changes in the foreign exchange rate.

Ways of heading against Foreign Exchange Risk
1. Forward Contract
This involves a contract, which is tailor-made (taken out for the exact amount of currency required. The future exchange rate is fixed at the time the contract is entered in to with the bank. The cost is then determined by the forward rate quoted by the bank.
2. Future Contract
This offers the opportunity to buy/sell currency in standard amount of a limited number of currencies at a specified time and rate.
3. Lead/Lag Payment
In the case of paying for goods in a foreign currency, it is possible to pay for the goods in advance and thereby fix the exchange rate at the spot rate.
4. Currency Options
Here, the firm has the possibility of buying (call) or selling (put) currency at an agreed rate usually at any time within a specified period.