THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) FINANCIAL MANAGEMENT QUESTION PAPER NOVEMBER 2014

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1 QUESTION 1 THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) (a) Currency management has become an increasingly important issue for many organizations as they become more dependent on purchasing goods and services on a global basis. (i) Assess four (4) main reasons for the volatility of exchange rates (ii) Compare the use of spot and forward exchange rates in the management of currencies by organizations in a supply chain (b) (i) Briefly discuss different forms of business acquisition (4 marks) (ii) Briefly discuss four (4) takeover defences (4 marks) Page 1 of 6

2 QUESTION 2 (a) Profin Financial Services granted a loan of GH 22,000 to its client at 12% compound annual interest to be repaid over the next six (6) years. As financial adviser to the client you are required to (i) Compute the size of the yearly payments (2 marks) (ii) Construct an amortization schedule. (4 marks) (b) When the market return is 12%, company A s shares give a return of 16%. When the market return rises to 14%, company A s shares give a return of 19%. The risk-free rate of return does not change. You are required to calculate: (i) (ii) What is company A s beta value? What is the risk-free return? (c) Carsley Ltd and Powell Ltd are planning to merge to form Stimac Ltd. It has been agreed that Powell s shareholders will accept three shares in Carsley for each share they hold. Other details are as follows: Carsley Ltd Powell Ltd Number of shares 40m 10m Annual earnings GH 10m GH 5.8m P/E ratio 8 10 Post-merger annual earnings of the enlarged company are expected to be eight percent (8%) higher than the sum of the earnings of each of the companies before the merger, due to economies of scale and other benefits. The market is expected to apply to P/E ratio of 9 to Stimac Ltd. Determine the extent to which the shareholders of Powell will benefit from the proposed merger. (8 marks) Page 2 of 6

3 QUESTION 3 Adepa Ltd has just acquired a large account. As a result it needs an additional GH 75,000 in working capital immediately. It has been determined that there are three feasible sources of funds: (a) Trade Credit: the company buys about GH 50,000 of materials per month on terms of 2/30, net 90. Discounts are taken. (b) Bank Loan: the firm s bank will loan GH 100,000 at 9%. A 20% compensating balance will be required. (c) A factor will buy the company s receivables (GH 100,000 per month), which have a collection period of 60 days. The factor will advance up to 75% of the face value of the receivables for an annual charge of 8%. The factor will also charge a 2% fee on all receivables purchased. It has been estimated that the factor s services will save the company a credit department expense and debts expense of GH 1,500 per month. You are required to determine which alternative should be selected. (15 marks) (b) The shares of ALOP Enterprise has a beta of 1.5 and that of Zebra Enterprise has a beta of 0.7. The risk free rate is 7% and the difference between the expected return on the market and the risk free rate is 8.5% Calculate the expected return on the two (2) securities. (5 marks) Page 3 of 6

4 QUESTION 4 (a) The chemical division of a company has a capital budget for 2014 of GH 1,000,000. The following capital investment proposals are submitted to the capital budgeting committee: Project Profitability Index Outlay (Gh ) , , , , , , , , , ,000 The company s cost of capital is 15% per annum. Project 2 and 8 are mutually exclusive; project 1 and 5 are mutually dependent. Decide which projects should the capital budgeting committee choose? (15 marks) Page 4 of 6

5 (b) What are the major considerations that the predator company has to take into account when deciding on how to finance a proposed take-over? (5 marks) QUESTION 5 Adomako plans to invest in ordinary shares for a period of fifteen years, after which he will sell out, buy a lifetime room-and-board membership in a retirement home and retire. He feels that Smirsh Ltd is currently, but temporarily, undervalued by the market. Adomako expects Smirsh s current earnings and dividend to double in the next fifteen years. Smirsh s last dividend per share was GH 3, and its share currently sells for GH 35 a share. (a) If Adomako requires a 12% return on his investment, will Smirsh be a good buy for him? (b) What is the maximum that Adomako could pay for Smirsh and still earn his required 12%? (4 marks) (c) What might be the cause of such a market undervaluation? (d) Given Adomako s assumptions, what market capitalization rate for Smirsh does the current price imply? (4 marks) Page 5 of 6

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