Finance Strategy – NBC Institute

FM – Nov 2021 – L3 – Q4 – Corporate Governance and Financial Strategy

Assess LL's corporate objectives, the finance director's view, and treasury strategies within a low-interest economic environment.

Question

Leye Limited (LL) is a privately-owned toy manufacturer in Nigeria, operating internationally as both a supplier and a customer. While privately owned, LL’s revenue and asset base are comparable to some publicly listed companies. It has numerous shareholders but has no plans for public listing. Major shareholders have expressed an interest in buying out smaller investors.

LL has a strong history of profitability, which satisfies both directors and shareholders. They avoid strategies that increase risk significantly, such as acquisitions or overseas manufacturing setups, accepting a comparatively lower growth rate than competitors.

The company’s capital structure is composed of 70% equity and 30% debt (based on book values), with debt comprising secured and unsecured bonds carrying interest rates between 7% and 8.5%, maturing in 5 to 10 years. In a low-inflation and potentially declining interest rate environment, the company treasurer is exploring refinancing options.

LL’s primary financial objective is annual dividend growth, with a non-financial objective of treating all stakeholders with fairness and equality. The Board is currently reassessing these objectives. While the new Finance Director advocates for shareholder wealth maximization as the sole objective, other directors favor a balanced approach, including goals such as profit after tax, return on investment, and operational performance improvements.

Required:

a. Evaluate the appropriateness of LL’s current objectives and the Finance Director’s suggestion. Discuss the issues the Board should consider in setting new corporate objectives, concluding with a recommendation. (10 Marks)

b. Discuss factors the treasury department should consider when formulating financing or refinancing strategies in the given economic context. Explain how these factors might influence the determination of corporate objectives. (10 Marks)

Answer

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Topic: Corporate Governance and Financial Strategy

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

Question

Despite the global recession, demand for the company’s products has recently increased and is expected to grow over the next two years.

As part of a recent strategic review, the directors made the following projections for the years ending March 31, 2018, and March 31, 2019:

An anticipated annual revenue increase of 8% for each year.
Operating costs (excluding depreciation) expected to rise by 4% per year.
Tax rate to remain at 21%, payable in the year liability arises.
The trade receivables/revenue and trade payables/operating costs ratios will stay the same.
Inventory levels to increase by 10% in the year ending March 31, 2018, and then remain stable.
Non-current assets, including Lekki Plc.’s headquarters and factory, are not depreciated, and capital allowances are negligible.
Dividend growth rate to remain at 6% annually, with dividends declared at the year-end and paid the following year.
Purchase of new machinery at N8 million, financed through existing overdraft facilities. Machinery to be depreciated straight-line over 8 years with a N1 million residual value; capital allowances will apply at 18% reducing balance.
Finance costs are projected to increase by 50% in the year ending March 31, 2018, and remain stable thereafter.

Financial Statement Extracts (March 31, 2017):

Income Statement:
- Revenue: N60,240,000
- Operating Costs: N49,500,000
- Operating Profit: N10,740,000
- Finance Costs: N800,000
- Profit before Tax: N9,940,000
- Tax: N2,286,000
- Profit after Tax: N7,654,000
Statement of Financial Position:
- Assets:
  - Non-current Assets: N28,850,000
  - Current Assets:
    - Inventories: N9,020,000
    - Trade Receivables: N9,036,000
    - Cash and Equivalents: N396,000
- Equity and Liabilities:
  - Ordinary Share Capital: N16,700,000
  - Retained Earnings: N12,482,000
  - Non-current Liabilities: N8,000,000 (6% Debentures)
  - Current Liabilities: N10,120,000 (Trade Payables, Dividends)

Assume today is April 1, 2017.

a. Prepare a Forecast Financial Statement (Income Statement, Statement of Financial Position, and Cash Flow Statement) for each of the years ending March 31, 2018, and March 31, 2019.
(24 Marks)

Note: All calculations should be rounded up to the nearest N’000.

b. Beyond March 31, 2019, the directors are considering the disposal of a smaller subsidiary due to poor performance. The Finance Director suggests avoiding liquidation to minimize industrial relations issues.

Required: Discuss three non-liquidation methods to divest the subsidiary.
(6 Marks)

Answer

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Tags: Cash Flow Statement, Divestment Options, Finance Strategy, Forecast Financial Statements, Income Statement, Statement of Financial Position, Subsidiary
Level: Level 3

Topic: Financial Planning and Forecasting
Series: NOV 2017

FM – Nov 2021 – L3 – Q4 – Corporate Governance and Financial Strategy

Assess LL's corporate objectives, the finance director's view, and treasury strategies within a low-interest economic environment.

Question

Required:

Answer

Find Related Questions by Tags, levels, etc.

Topic: Corporate Governance and Financial Strategy

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

Question

Despite the global recession, demand for the company’s products has recently increased and is expected to grow over the next two years.

As part of a recent strategic review, the directors made the following projections for the years ending March 31, 2018, and March 31, 2019:

An anticipated annual revenue increase of 8% for each year.
Operating costs (excluding depreciation) expected to rise by 4% per year.
Tax rate to remain at 21%, payable in the year liability arises.
The trade receivables/revenue and trade payables/operating costs ratios will stay the same.
Inventory levels to increase by 10% in the year ending March 31, 2018, and then remain stable.
Non-current assets, including Lekki Plc.’s headquarters and factory, are not depreciated, and capital allowances are negligible.
Dividend growth rate to remain at 6% annually, with dividends declared at the year-end and paid the following year.
Purchase of new machinery at N8 million, financed through existing overdraft facilities. Machinery to be depreciated straight-line over 8 years with a N1 million residual value; capital allowances will apply at 18% reducing balance.
Finance costs are projected to increase by 50% in the year ending March 31, 2018, and remain stable thereafter.

Financial Statement Extracts (March 31, 2017):

Income Statement:
- Revenue: N60,240,000
- Operating Costs: N49,500,000
- Operating Profit: N10,740,000
- Finance Costs: N800,000
- Profit before Tax: N9,940,000
- Tax: N2,286,000
- Profit after Tax: N7,654,000
Statement of Financial Position:
- Assets:
  - Non-current Assets: N28,850,000
  - Current Assets:
    - Inventories: N9,020,000
    - Trade Receivables: N9,036,000
    - Cash and Equivalents: N396,000
- Equity and Liabilities:
  - Ordinary Share Capital: N16,700,000
  - Retained Earnings: N12,482,000
  - Non-current Liabilities: N8,000,000 (6% Debentures)
  - Current Liabilities: N10,120,000 (Trade Payables, Dividends)

Assume today is April 1, 2017.

a. Prepare a Forecast Financial Statement (Income Statement, Statement of Financial Position, and Cash Flow Statement) for each of the years ending March 31, 2018, and March 31, 2019.
(24 Marks)

Note: All calculations should be rounded up to the nearest N’000.

Required: Discuss three non-liquidation methods to divest the subsidiary.
(6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cash Flow Statement, Divestment Options, Finance Strategy, Forecast Financial Statements, Income Statement, Statement of Financial Position, Subsidiary
Level: Level 3

Topic: Financial Planning and Forecasting
Series: NOV 2017

Question Tag: Finance Strategy

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FM – Nov 2021 – L3 – Q4 – Corporate Governance and Financial Strategy

Assess LL's corporate objectives, the finance director's view, and treasury strategies within a low-interest economic environment.

Required:

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

FM – Nov 2021 – L3 – Q4 – Corporate Governance and Financial Strategy

Assess LL's corporate objectives, the finance director's view, and treasury strategies within a low-interest economic environment.

Required:

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

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FM – Nov 2021 – L3 – Q4 – Corporate Governance and Financial Strategy

Assess LL's corporate objectives, the finance director's view, and treasury strategies within a low-interest economic environment.

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FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

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FM – Nov 2021 – L3 – Q4 – Corporate Governance and Financial Strategy

Assess LL's corporate objectives, the finance director's view, and treasury strategies within a low-interest economic environment.

Required:

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FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

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