THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA)

Transcription

1 THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) NOVEMBER 2011 EXAMINATIONS (PROFESSIONAL) PART 3 FINANCIAL MANAGEMENT (Paper 3.4) Attempt ALL Questions TIME ALLOWED: Reading & Planning - 15 Minutes Workings - 3 Hours Page 1 of 6

2 QUESTION 1 There is growing concern in the corporate world that organisations need to be socially responsible in order to enhance shareholders wealth. However, others are also of the opinion that social responsibility leads to erosion of corporate profitability. You are required to briefly explain whether value maximisation is inconsistent with social responsibility. (c) Briefly outline and explain the factors that influence the dividend policy of a company. Jomec Ltd is currently financed as follows: Cost Book Value Market Value % (GHS m) (GHS m) Ordinary share capital Debentures Jomec Ltd wishes to expand its business, for which a further GHS100 million of finance is required. The following options are being considered. Option (A) takes on GHS50 million debt plus GHS50 million equity; or Option (B) takes on GHS80 million debt plus GHS20 million equity. It is expected that the cost of the new debt will match that of the existing debt. However, due to the increased financial risk, it is estimated that the cost of equity will rise by 0.5% for option (A) and 2% for option (B). You are required to compute the existing WACC and the new WACC under the two options. (10 marks) QUESTION 2 Obuo Limited, an all equity financed food processing company is planning to raise debt finance to alter its capital structure. The managing director has called on you for financial advice. Page 2 of 6

3 Outline five (5) main factors you would propose to the managing director for consideration in choosing between equity finance and debt finance as sources of capital. The Board of directors of Nhyira bank Limited has recently passed a resolution to raise capital through right issue of shares to meet its minimum capital requirement before the deadline set by the Central Bank. The company intends to issue one (1) share for every 3 shares held by the existing shareholders at a 10% discount to its current share price. The company currently has 3 million ordinary shares in issue at a book value price of GHS1.00 per share. Nhyira Bank Limited maintains a payout ratio of 50% and earnings per share is currently GHS0.80. Dividend growth of 5% per annum is expected for the forseable future and the company s cost of equity is 12%. Issue cost arising out of the new issue of share shall amount to GHS300,000. a. Calculate, (i) the market price per share (1 marks) (ii) the capitalisation of Nhyira bank Limited (1 marks) b. Assuming the right issue takes place, calculate (i) the right issue price per share (2 marks) (ii) the cash proceeds from the right issue (2 mark) (iii) the theoretical ex-right price (2 marks) (iv) the market capitalisation after the right issue (2 marks) c. Ten years ago, God sway Ltd issued GHS2.5 million of 6% discounted debenture at GHS98 per GHS100 nominal. The debentures are redeemable in 6 years from now at a GHS2 premium over nominal value. They are currently quoted at GHS79 per debenture, ex interest. The company pays tax at the rate of 30%. Estimate the after tax cost of the debenture. Page 3 of 6

4 QUESTION 3 Kukua holds two bonds: a 30 year coupon bond with a face value of GHS30 million paying annual coupon of 8% and a 30 year zero coupon bond with a face value of GHS30 million. Suppose interest rates increase from 8% to 9%. Which bond will have the greater decline in price, the 30-year bond paying annual coupon of 8% or a 30-year zero coupon bond? Nana is applying to Ghana Home Loans for a mortgage of GHS200,000. The company is quoting 6% interest per annum. Nana would like to have a 25-year amortization period and wants to make a monthly payment. What will Nana s payments be per month? (c) An investment in an item of equipment would cost GHS75,000. It is estimated that sales in the first year would be GHS60,000 rising by 5% a year for the next four years. Variable costs would be 50% of sales. Annual fixed costs would be GHS20,000 in the first three years, rising to GHS30,000 in years 4 and 5. Fixed costs of 40% would be avoidable if the project did not go ahead. The scrap value of the equipment at the end of year 5 would be GHS5,000. The project would also require an investment in working capital of GHS15,000 at the start of year 1 rising to GHS20,000 at the start of year 2 and to GHS25,000 at the start of year 4. The company s cost of capital is 9%. Calculate the NPV of the project and suggest whether it should be undertaken. (12 marks) QUESTION 4 Outline four (4) advantages and four (4) disadvantages of preference share capital as a source of finance. Page 4 of 6

5 The Statement of Financial Position of XDS Ltd as at December 2010 was as follows: Liabilities GHS000 Assets GHS000 Share capital Income surplus Long term loans Short term loans Account payables ,100 Plant & Equipment Stock Accounts receivable Cash and Bank ,100 Sales for the year were GHS600,000 and are expected to increase by 20%. XDS Ltd expects a profit margin of 4% and dividend pay out ratio of 35%. You are required to compute the amount of external funds that XDS Ltd requires for (6 marks) (c) A company is offered a contract which has the following terms: An immediate cash outlay of GHS30,000 followed by cash inflow of GHS35,800 after 3 years. What is the company s rate of return on this contract? (d) Explain briefly what you understand by the following terms: (i) (ii) (iii) (iv) Systematic risk Unsystematic risk Weak Form Efficient Market Securities market line (6 marks) QUESTION 5 The Board of Directors of Onyameaseman Bank is launching a bid to take over Graceland Bank as part of its strategy to penetrate the Okuapeman banking industry. The following information was extracted from the 2010 financial statement of Graceland Bank. Shareholders fund GHS300,000 Ordinary shares GHS120,000 Dividend per share 50 Gp Dividend growth rate into perpetuity 5% Page 5 of 6

6 Additionally it was realised that Fixed Assets costing GHS80,000 had not been revalued since 2001 and it is expected to have a market value of GHS120,000. Kofi Abrente was reported dead three weeks ago so his debt of GHS10,000 cannot be realised. Expired inventory of GHS5,000 has to be disposed of. Zoomtiger will charge GHS8,000 to incinerate these items. You are required to advise Onyameaseman about: (i) (ii) the market value of Graceland bank using two valuation models assuming Onyameaseman Bank expects 25% rate of returns. State and explain clearly five (5) possible steps that management of Graceland Bank may employ to prevent the takeover. Mallam Attah Ltd needs to increase its working capital by investing to the tune of GHS200,000. The company has two alternative options as follows: Options One: To take a trade discount granted on the basis of 2/20 net 50. Option Two: Borrow from the Bank with an interest rate of 25% per annum. The bank requires a matching contribution of 20% to be put in a current account yielding no interest. The full loan amount will be booked in the name of Mallam Attah Ltd. Advise the company on which option it should select. (c) a. What are derivatives? b. Explain and give an example each of what swaps, forwards, features and options are. Page 6 of 6