Question Tag: Financial risk

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  • 5 Marks

SCS – Nov 2024 – L3 – Q2a – Approaches to Risk Management

Discusses risk management approaches to address identified risks in BOGML.

Approaches to risk management in BOGML – Advice to the board of directors

The following are the risk management approaches that the board of BOGML can adopt to manage the following risks identified in the company:

Risk A

  • Description: Low probability but high impact, e.g., pandemics, natural disasters.
  • Approach: Risk Transfer or Risk Sharing
  • Since this risk has a low likelihood of occurring but can result in severe financial losses, the company should consider transferring this risk or sharing risk. This can be done through the company taking full or partial (i.e. sharing of risk) insurance policies specifically designed for catastrophic events, such as business interruption insurance, pandemic insurance, or property insurance that covers natural disasters. Since the impact will be high when the risk occurs, the company can take insurance to pass on the high impact on the company to the insurance company which has to compensate BOGML in the event that the risk does occur.
  • The risk could also be shared through BOGML forming partnerships and collaborating with other OMCs to undertake investment in their oil stations.
  • The company should also develop a disaster recovery and business continuity plan to manage potential impacts effectively.

Risk B

  • Description: High likelihood but low financial impact, e.g., labor turnover and software downtime due to internet instability.

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  • 5 Marks

AFM – May 2016 – L3 – Q3c – The role of the treasury function in multinationals

Prepare a memo explaining the potential benefits of treasury centralization for multinational subsidiaries.

c) Drake Limited is a Ghanaian-registered multinational company with FIVE subsidiaries in Europe, Asia, and Africa. These subsidiaries have traditionally been allowed a large amount of autonomy, but Drake Limited is proposing to centralize most of the group’s treasury management operations.

Required:
Acting as Group Head of Finance for Drake Limited, prepare a memo suitable for distribution to Senior Management of each of the subsidiaries, explaining the potential benefits of treasury centralization. (5 marks)

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  • 3 Marks

FM – May 2021 – L2 – Q3d – Working Capital Management

Discuss one merit and one demerit of engaging the services of a debt factoring agency.

Discuss ONE (1) merit and ONE (1) demerit of engaging the services of a debt factoring agency. (3 marks)

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  • 6 Marks

FM – May 2021 – L2 – Q3a – Capital Structure

Discuss the main difficulties associated with highly geared companies.

a) Shareholders and Management of companies generally agree that it is good to introduce gearing into a company’s financing structure to enhance returns to shareholders. Excessive debt and gearing above a level that a company can comfortably afford is risky.

Required:

State and explain THREE (3) main difficulties associated with highly geared companies. (6 marks)

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  • 10 Marks

FM – May 2020 – L2 – Q1b – Capital structure | Portfolio theory and the capital asset pricing model (CAPM)

Analyze the degree of operating and financial leverage for two subsidiary companies to determine the implications for their capital structure.

Firm A and Firm B are both subsidiary companies of Groupe Trojan Electronics. The directors of Groupe Trojan Electronics are reviewing the capital structure of the two subsidiary companies. You have been engaged to advise the directors on the appropriate capital structure for the subsidiaries.

You have obtained extracts from the financial results of the two companies for the past financial year and projection of the annual results for the current year, which is in its first quarter.

Required:

i) Compute the degree of operating leverage for each of the two companies. Based on the degree of operating leverage you obtain, advise the directors on the relative level of business risk associated with the two subsidiaries and the implication of that for capital structure design. (5 marks)

ii) Compute the degree of financial leverage for each of the two companies. Based on the degree of financial leverage you obtain, advise the directors on the relative level of financial risk associated with the two subsidiaries and the implication of that for capital structure design. (5 marks)

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  • 20 Marks

FM – Nov 2023 – L2 – Q4 – Capital structure | DCF: Risk and uncertainty

Explain systematic, business, and financial risk; compute expected NPV for projects; and discuss traditional and Modigliani-Miller views on gearing and WACC.

a) Understanding risk is key for a robust risk and control environment in modern business organisations.
Required:
In the light of the above, explain the following:
i) Systematic risk (2 marks)
ii) Business risk (2 marks)
iii) Financial risk (2 marks)

b) Quantum Investment Ltd in the past has been concentrating all its investments in one project that performed badly consistently over the past few years. They have therefore decided to adopt a diversification strategy by investing in projects A, B, and C. The table below presents the Net Present Value (NPV) of the projects under different states of the economy.

State of Economy Probability Project A Project B Project C
Bad 0.2 GH¢10 million GH¢12 million GH¢15 million
Average/Normal 0.5 GH¢20 million GH¢22 million GH¢30 million
Good 0.3 GH¢35 million GH¢40 million GH¢45 million

The company has GH¢200 million for investments in these three projects:
Project A = GH¢40 million
Project B = GH¢60 million
Project C = GH¢100 million

Required:
Compute the expected NPV for each of the three projects. (9 marks)

c) In capital structure decisions, there are two views of gearing and weighted average cost of capital (WACC): the traditional view and the Modigliani-Miller view.
Required:
Explain the two views with respect to gearing and WACC. (5 marks)

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  • 5 Marks

SCS – Nov 2024 – L3 – Q2a – Approaches to Risk Management

Discusses risk management approaches to address identified risks in BOGML.

Approaches to risk management in BOGML – Advice to the board of directors

The following are the risk management approaches that the board of BOGML can adopt to manage the following risks identified in the company:

Risk A

  • Description: Low probability but high impact, e.g., pandemics, natural disasters.
  • Approach: Risk Transfer or Risk Sharing
  • Since this risk has a low likelihood of occurring but can result in severe financial losses, the company should consider transferring this risk or sharing risk. This can be done through the company taking full or partial (i.e. sharing of risk) insurance policies specifically designed for catastrophic events, such as business interruption insurance, pandemic insurance, or property insurance that covers natural disasters. Since the impact will be high when the risk occurs, the company can take insurance to pass on the high impact on the company to the insurance company which has to compensate BOGML in the event that the risk does occur.
  • The risk could also be shared through BOGML forming partnerships and collaborating with other OMCs to undertake investment in their oil stations.
  • The company should also develop a disaster recovery and business continuity plan to manage potential impacts effectively.

Risk B

  • Description: High likelihood but low financial impact, e.g., labor turnover and software downtime due to internet instability.

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  • 5 Marks

AFM – May 2016 – L3 – Q3c – The role of the treasury function in multinationals

Prepare a memo explaining the potential benefits of treasury centralization for multinational subsidiaries.

c) Drake Limited is a Ghanaian-registered multinational company with FIVE subsidiaries in Europe, Asia, and Africa. These subsidiaries have traditionally been allowed a large amount of autonomy, but Drake Limited is proposing to centralize most of the group’s treasury management operations.

Required:
Acting as Group Head of Finance for Drake Limited, prepare a memo suitable for distribution to Senior Management of each of the subsidiaries, explaining the potential benefits of treasury centralization. (5 marks)

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  • 3 Marks

FM – May 2021 – L2 – Q3d – Working Capital Management

Discuss one merit and one demerit of engaging the services of a debt factoring agency.

Discuss ONE (1) merit and ONE (1) demerit of engaging the services of a debt factoring agency. (3 marks)

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  • 6 Marks

FM – May 2021 – L2 – Q3a – Capital Structure

Discuss the main difficulties associated with highly geared companies.

a) Shareholders and Management of companies generally agree that it is good to introduce gearing into a company’s financing structure to enhance returns to shareholders. Excessive debt and gearing above a level that a company can comfortably afford is risky.

Required:

State and explain THREE (3) main difficulties associated with highly geared companies. (6 marks)

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  • 10 Marks

FM – May 2020 – L2 – Q1b – Capital structure | Portfolio theory and the capital asset pricing model (CAPM)

Analyze the degree of operating and financial leverage for two subsidiary companies to determine the implications for their capital structure.

Firm A and Firm B are both subsidiary companies of Groupe Trojan Electronics. The directors of Groupe Trojan Electronics are reviewing the capital structure of the two subsidiary companies. You have been engaged to advise the directors on the appropriate capital structure for the subsidiaries.

You have obtained extracts from the financial results of the two companies for the past financial year and projection of the annual results for the current year, which is in its first quarter.

Required:

i) Compute the degree of operating leverage for each of the two companies. Based on the degree of operating leverage you obtain, advise the directors on the relative level of business risk associated with the two subsidiaries and the implication of that for capital structure design. (5 marks)

ii) Compute the degree of financial leverage for each of the two companies. Based on the degree of financial leverage you obtain, advise the directors on the relative level of financial risk associated with the two subsidiaries and the implication of that for capital structure design. (5 marks)

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  • 20 Marks

FM – Nov 2023 – L2 – Q4 – Capital structure | DCF: Risk and uncertainty

Explain systematic, business, and financial risk; compute expected NPV for projects; and discuss traditional and Modigliani-Miller views on gearing and WACC.

a) Understanding risk is key for a robust risk and control environment in modern business organisations.
Required:
In the light of the above, explain the following:
i) Systematic risk (2 marks)
ii) Business risk (2 marks)
iii) Financial risk (2 marks)

b) Quantum Investment Ltd in the past has been concentrating all its investments in one project that performed badly consistently over the past few years. They have therefore decided to adopt a diversification strategy by investing in projects A, B, and C. The table below presents the Net Present Value (NPV) of the projects under different states of the economy.

State of Economy Probability Project A Project B Project C
Bad 0.2 GH¢10 million GH¢12 million GH¢15 million
Average/Normal 0.5 GH¢20 million GH¢22 million GH¢30 million
Good 0.3 GH¢35 million GH¢40 million GH¢45 million

The company has GH¢200 million for investments in these three projects:
Project A = GH¢40 million
Project B = GH¢60 million
Project C = GH¢100 million

Required:
Compute the expected NPV for each of the three projects. (9 marks)

c) In capital structure decisions, there are two views of gearing and weighted average cost of capital (WACC): the traditional view and the Modigliani-Miller view.
Required:
Explain the two views with respect to gearing and WACC. (5 marks)

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