Question Tag: Bond Servicing

a) Public Sector Institutions exist generally not to make business profit. In view of this, there are other objectives that such sectors aspire to achieve in the performance of their functions.

Required:
i) Explain THREE (3) core objectives of Public Sector Institutions. (8 marks)
ii) Distinguish between financial objectives and non-financial objectives of a firm. (2 marks)

b) Baaday Company Ltd is a Ghanaian registered company engaged in the importation and exportation of general goods. The company issued GH¢600 million bonds at a coupon of 25% per annum. The bonds are irredeemable. Baaday Company Ltd pays a tax rate of 25% and the issue cost is 2% on the value of the bonds issued, which is tax-deductible. Additionally, the company has sold GH¢900 million worth of shares, and the issue cost for the shares is 5% of the value of the shares issued, which is also tax-deductible. The Company shareholders require a return of 30% per annum.

Required:
i) Calculate the cost (in percentage terms) of servicing the bonds. (3 marks)
ii) Calculate the amount raised from the sale or issue of the shares. (2 marks)
iii) Compute the amount the company should earn annually to be able to meet the return expectation of the suppliers of funds. (2 marks)
iv) Compute the Weighted Average Cost of Capital (WACC) for Baaday Company Ltd. (3 marks)