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Alpha PLC is an entity which has grown in recent years by acquiring established businesses. Alpha PLC is contemplating acquiring Betta Limited and Gamma Limited, both operating in the same industry as Alpha PLC. The management of Alpha PLC has indicated a total acquisition price of N12 million for each company. The following financial statements provide insight into the performance and financial position of both Betta Limited and Gamma Limited as at September 30, 2020:
| Betta Ltd (N’000) | Gamma Ltd (N’000) | |
|---|---|---|
| Revenue | 25,000 | 40,000 |
| Cost of sales | (19,000) | (32,800) |
| Gross profit | 6,000 | 7,200 |
| Distribution costs | (800) | (1,400) |
| Administrative expenses | (450) | (900) |
| Finance costs | (250) | (900) |
| Profit before tax | 4,500 | 4,000 |
| Income tax expense | (900) | (1,000) |
| Profit for the year | 3,600 | 3,000 |
| Betta Ltd (N’000) | Gamma Ltd (N’000) | |
|---|---|---|
| Non-current assets | ||
| Property, plant and equipment | ||
| – Property | – | 3,000 |
| – Owned plant and equipment | 4,800 | 2,000 |
| – Leased plant and equipment | – | 5,300 |
| Total non-current assets | 4,800 | 10,300 |
| Current assets | ||
| Cash at bank and in hand | 1,600 | 200 |
| Trade receivables | 1,600 | 5,100 |
| Inventories | 1,600 | 3,400 |
| Total current assets | 4,800 | 8,700 |
| Total assets | 9,600 | 19,000 |
| Equity and liabilities | ||
| Ordinary shares (N1.00 each) | 1,000 | 2,000 |
| Revaluation surplus on property | – | 900 |
| Retained earnings | 1,600 | 2,700 |
| Total equity | 2,600 | 5,600 |
| Non-current liabilities | ||
| Finance lease obligation | – | 4,200 |
| 5% loan notes (Dec 2026) | 5,000 | – |
| 10% loan notes (Dec 2026) | – | 5,000 |
| Total non-current liabilities | 5,000 | 9,200 |
| Current liabilities | ||
| Trade payables | 1,250 | 2,100 |
| Finance lease obligation | – | 1,000 |
| Tax payable | 750 | 1,100 |
| Total current liabilities | 2,000 | 4,200 |
| Total equity and liabilities | 9,600 | 19,000 |
Required:
a. Write a memo to the Director of Alpha PLC advising him on how to make the investment decision considering the performance and financial position of Betta Limited and Gamma Limited for the year ended September 30, 2020. (14 Marks)
b. What other qualitative factors should the management of Alpha PLC take into consideration assuming Gamma Limited is a foreign subsidiary? (6 Marks)
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Sunmola Funds (SF) Plc. has a portfolio of short-term investments in the shares of four quoted companies.
| Company | Holding |
|---|---|
| Tomiwa (T) | 100,000 shares |
| Pascal (P) | 155,000 shares |
| Binta (B) | 260,000 shares |
| Yetunde (Y) | 420,000 shares |
You have the following additional information:
| Company | Beta | Market Value Per Share (Kobo) | Expected Total Return on Investment p.a (%) |
|---|---|---|---|
| T | 1.55 | 280 | 21.0 |
| P | 0.65 | 340 | 12.5 |
| B | 1.26 | 150 | 18.0 |
| Y | 1.14 | 9.5 | 18.5 |
The market risk premium is 10% per year, and the risk-free rate is 6% per year.
Required:
a. Estimate the Beta of SF Plc.’s short-term investment portfolio. (4 Marks)
b. Recommend, giving your reasons, whether the composition of SF Plc.’s short-term investment portfolio should be changed using relevant calculations. (10 Marks)
Hint: Consider the alpha values of the shares and the propriety of investing short-term funds in equity.
c. Explain THREE factors that a financial manager should take into account when investing in marketable securities. (6 Marks)
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Omidan Local Government Council has N20,000,000 to invest, if there is an assurance that the investment will earn at least 12% p.a. In view of this, the following projects are being considered:
If none of the projects is undertaken, Omidan Local Government Council will invest the N20,000,000 in a risk-free security that will earn interest of 12% p.a.
Required:
Assess and advise Omidan Local Government Council on which of the projects to be undertaken using Net Present Value (NPV) method.
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BonBone Company Ltd wants to make a decision on which of the two machines to purchase. Each will involve a GH¢10,000 investment. The expected net incremental cash flows are given by the table below:
| Year | Machine I (GH¢) | Machine II (GH¢) |
|---|---|---|
| 1 | 5,000.00 | 2,000.00 |
| 2 | 4,000.00 | 3,000.00 |
| 3 | 2,000.00 | 5,000.00 |
| 4 | 2,000.00 | 4,000.00 |
Required:
i) If the company’s cost of capital is 10%, calculate the Net Present Value (NPV) of Machine I and Machine II and determine which machine should be purchased for higher returns. (8 marks)
ii) If the initial investment for Machine I is changed to GH¢4,000 and Machine II is changed to GH¢2,000, calculate the Internal Rate of Return (IRR) for Machine I and Machine II. (6 marks)
iii) If the IRRs in (ii) above are to be used as the basis of selection, determine which machine should be purchased for higher returns. (2 marks)
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Find Related Questions by Tags, levels, etc.
You have received a prize amount of GH¢5,000 and you wish to invest it for five years. The two alternatives are to use a bank account where the 14% per annum gross rate is compounded monthly or a savings fund where the 14.5% per annum gross rate is compounded annually.
Required:
i) Calculate the size of each fund at the end of the five years. (Ignore tax considerations). (8 marks)
ii) Calculate the effective annual interest rate of the bank account investment. (4 marks)
iii) Advise your client on the basis of your calculations. (2 marks)
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Rosa Kurablah Ltd (Kurablah) plans to invest in ordinary shares for a period of fifteen years, after which she will sell out, buy a lifetime room and board membership in a retirement home, and retire. She feels that Senchi Ltd (Senchi) is currently, but temporarily, undervalued by the market. Kurablah expects Senchi’s current earnings and dividend to double in the next fifteen years. Senchi’s last dividend was GH¢3, and its stock currently sells for GH¢35 a share.
Required:
i) If Kurablah requires a 12 percent return on her investment, will Senchi be a good buy for her?
(3 marks)
ii) What is the maximum that Kurablah could pay for Senchi and still earn her required 12 percent?
(2 marks)
iii) What might be the cause of such a market undervaluation?
(3 marks)
iv) Given Kurablah’s assumptions, what market capitalization rate for Senchi does the current price imply?
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ABC Manufacturing Ltd (ABC) is an indigenous Ghanaian company that manufactures components used in air conditioners. The company now wants to manufacture air conditioners for sale in Ghana. Though the manufacture of air conditioners will be a completely new business, directors of ABC plan to integrate it into the company’s core business.
ABC has premises it considers suitable for the project. This premises was acquired two years ago at the cost of GHS50,000. ABC will acquire and install the needed machinery immediately, so production and sales can commence during the first year. The directors of ABC intend to develop the project for five years and then sell it to a suitable investor for an after-tax consideration of GHS20 million.
The following data are available for the project:
ABC Ltd pays tax at 25% on taxable profits. Tax is payable in the same year the profit is earned. ABC Ltd uses 25% as its discount rate for new projects but the directors feel that this rate may not be appropriate for this new venture.
Currently, ABC can borrow at 500 basis points above the five-year Treasury note yield rate. Ghana’s government is enthused by the venture and has offered ABC a subsidized loan of up to 60% of the investment funds required at an interest rate of 200 basis points above the five-year Treasury note yield rate. ABC plans to use debt capital to finance the project by taking advantage of the government’s subsidized loan and raising the balance through a fresh issue of 5-year debentures. Issues costs, which can be assumed to be tax-deductible expenses, will be 5% of the gross proceeds from the debenture offer. The financing strategy for the project is not expected to affect the company’s borrowing capacity in any way.
ABC Ltd will be the first indigenous Ghanaian company to manufacture air conditioners in Ghana. However, it will be competing with XYZ Ltd, a listed company with majority shares held by foreign investors. The cost of equity of XYZ Ltd is estimated to be 20% and it pays tax at 22%. XYZ has 10 million shares in issue that are trading at GHS5.5 each, and bonds with total market value of GHS40 million.
The five-year Treasury note yield rate is currently 10% and the return on the market portfolio is 18%.
Required:
Evaluate, on financial grounds, whether ABC should implement the project or not. (20 marks)
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You are the Financial Consultant of Nkoso Funds, a pension fund in Ghana. Your company has identified two companies which you have been asked to evaluate as possible investments. The two companies, Trokaa Plc (Trokaa Plc) and Krokro Plc (Krokro Plc), are both publicly held and similar in size. Assume that all other publicly available information, including all climate, sustainability, and governance disclosures, have already been analysed and the decision concerning which company’s shares to acquire depends on their cash flow data given below:
Statement of cash flows for the years ended December 31, 2023 and 2022 Trokaa Plc Krokro Plc
Required:
a) Conduct a horizontal analysis for each of the two companies. (6 marks)
b) Write a report to the investment manager of Nkoso Funds discussing the relative strengths and weaknesses of each of the two companies. Conclude your report by recommending one company’s share as an investment avenue. (14 marks)
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Find Related Questions by Tags, levels, etc.
Alpha PLC is an entity which has grown in recent years by acquiring established businesses. Alpha PLC is contemplating acquiring Betta Limited and Gamma Limited, both operating in the same industry as Alpha PLC. The management of Alpha PLC has indicated a total acquisition price of N12 million for each company. The following financial statements provide insight into the performance and financial position of both Betta Limited and Gamma Limited as at September 30, 2020:
| Betta Ltd (N’000) | Gamma Ltd (N’000) | |
|---|---|---|
| Revenue | 25,000 | 40,000 |
| Cost of sales | (19,000) | (32,800) |
| Gross profit | 6,000 | 7,200 |
| Distribution costs | (800) | (1,400) |
| Administrative expenses | (450) | (900) |
| Finance costs | (250) | (900) |
| Profit before tax | 4,500 | 4,000 |
| Income tax expense | (900) | (1,000) |
| Profit for the year | 3,600 | 3,000 |
| Betta Ltd (N’000) | Gamma Ltd (N’000) | |
|---|---|---|
| Non-current assets | ||
| Property, plant and equipment | ||
| – Property | – | 3,000 |
| – Owned plant and equipment | 4,800 | 2,000 |
| – Leased plant and equipment | – | 5,300 |
| Total non-current assets | 4,800 | 10,300 |
| Current assets | ||
| Cash at bank and in hand | 1,600 | 200 |
| Trade receivables | 1,600 | 5,100 |
| Inventories | 1,600 | 3,400 |
| Total current assets | 4,800 | 8,700 |
| Total assets | 9,600 | 19,000 |
| Equity and liabilities | ||
| Ordinary shares (N1.00 each) | 1,000 | 2,000 |
| Revaluation surplus on property | – | 900 |
| Retained earnings | 1,600 | 2,700 |
| Total equity | 2,600 | 5,600 |
| Non-current liabilities | ||
| Finance lease obligation | – | 4,200 |
| 5% loan notes (Dec 2026) | 5,000 | – |
| 10% loan notes (Dec 2026) | – | 5,000 |
| Total non-current liabilities | 5,000 | 9,200 |
| Current liabilities | ||
| Trade payables | 1,250 | 2,100 |
| Finance lease obligation | – | 1,000 |
| Tax payable | 750 | 1,100 |
| Total current liabilities | 2,000 | 4,200 |
| Total equity and liabilities | 9,600 | 19,000 |
Required:
a. Write a memo to the Director of Alpha PLC advising him on how to make the investment decision considering the performance and financial position of Betta Limited and Gamma Limited for the year ended September 30, 2020. (14 Marks)
b. What other qualitative factors should the management of Alpha PLC take into consideration assuming Gamma Limited is a foreign subsidiary? (6 Marks)
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Sunmola Funds (SF) Plc. has a portfolio of short-term investments in the shares of four quoted companies.
| Company | Holding |
|---|---|
| Tomiwa (T) | 100,000 shares |
| Pascal (P) | 155,000 shares |
| Binta (B) | 260,000 shares |
| Yetunde (Y) | 420,000 shares |
You have the following additional information:
| Company | Beta | Market Value Per Share (Kobo) | Expected Total Return on Investment p.a (%) |
|---|---|---|---|
| T | 1.55 | 280 | 21.0 |
| P | 0.65 | 340 | 12.5 |
| B | 1.26 | 150 | 18.0 |
| Y | 1.14 | 9.5 | 18.5 |
The market risk premium is 10% per year, and the risk-free rate is 6% per year.
Required:
a. Estimate the Beta of SF Plc.’s short-term investment portfolio. (4 Marks)
b. Recommend, giving your reasons, whether the composition of SF Plc.’s short-term investment portfolio should be changed using relevant calculations. (10 Marks)
Hint: Consider the alpha values of the shares and the propriety of investing short-term funds in equity.
c. Explain THREE factors that a financial manager should take into account when investing in marketable securities. (6 Marks)
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Omidan Local Government Council has N20,000,000 to invest, if there is an assurance that the investment will earn at least 12% p.a. In view of this, the following projects are being considered:
If none of the projects is undertaken, Omidan Local Government Council will invest the N20,000,000 in a risk-free security that will earn interest of 12% p.a.
Required:
Assess and advise Omidan Local Government Council on which of the projects to be undertaken using Net Present Value (NPV) method.
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BonBone Company Ltd wants to make a decision on which of the two machines to purchase. Each will involve a GH¢10,000 investment. The expected net incremental cash flows are given by the table below:
| Year | Machine I (GH¢) | Machine II (GH¢) |
|---|---|---|
| 1 | 5,000.00 | 2,000.00 |
| 2 | 4,000.00 | 3,000.00 |
| 3 | 2,000.00 | 5,000.00 |
| 4 | 2,000.00 | 4,000.00 |
Required:
i) If the company’s cost of capital is 10%, calculate the Net Present Value (NPV) of Machine I and Machine II and determine which machine should be purchased for higher returns. (8 marks)
ii) If the initial investment for Machine I is changed to GH¢4,000 and Machine II is changed to GH¢2,000, calculate the Internal Rate of Return (IRR) for Machine I and Machine II. (6 marks)
iii) If the IRRs in (ii) above are to be used as the basis of selection, determine which machine should be purchased for higher returns. (2 marks)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
You have received a prize amount of GH¢5,000 and you wish to invest it for five years. The two alternatives are to use a bank account where the 14% per annum gross rate is compounded monthly or a savings fund where the 14.5% per annum gross rate is compounded annually.
Required:
i) Calculate the size of each fund at the end of the five years. (Ignore tax considerations). (8 marks)
ii) Calculate the effective annual interest rate of the bank account investment. (4 marks)
iii) Advise your client on the basis of your calculations. (2 marks)
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Rosa Kurablah Ltd (Kurablah) plans to invest in ordinary shares for a period of fifteen years, after which she will sell out, buy a lifetime room and board membership in a retirement home, and retire. She feels that Senchi Ltd (Senchi) is currently, but temporarily, undervalued by the market. Kurablah expects Senchi’s current earnings and dividend to double in the next fifteen years. Senchi’s last dividend was GH¢3, and its stock currently sells for GH¢35 a share.
Required:
i) If Kurablah requires a 12 percent return on her investment, will Senchi be a good buy for her?
(3 marks)
ii) What is the maximum that Kurablah could pay for Senchi and still earn her required 12 percent?
(2 marks)
iii) What might be the cause of such a market undervaluation?
(3 marks)
iv) Given Kurablah’s assumptions, what market capitalization rate for Senchi does the current price imply?
Find Related Questions by Tags, levels, etc.
ABC Manufacturing Ltd (ABC) is an indigenous Ghanaian company that manufactures components used in air conditioners. The company now wants to manufacture air conditioners for sale in Ghana. Though the manufacture of air conditioners will be a completely new business, directors of ABC plan to integrate it into the company’s core business.
ABC has premises it considers suitable for the project. This premises was acquired two years ago at the cost of GHS50,000. ABC will acquire and install the needed machinery immediately, so production and sales can commence during the first year. The directors of ABC intend to develop the project for five years and then sell it to a suitable investor for an after-tax consideration of GHS20 million.
The following data are available for the project:
ABC Ltd pays tax at 25% on taxable profits. Tax is payable in the same year the profit is earned. ABC Ltd uses 25% as its discount rate for new projects but the directors feel that this rate may not be appropriate for this new venture.
Currently, ABC can borrow at 500 basis points above the five-year Treasury note yield rate. Ghana’s government is enthused by the venture and has offered ABC a subsidized loan of up to 60% of the investment funds required at an interest rate of 200 basis points above the five-year Treasury note yield rate. ABC plans to use debt capital to finance the project by taking advantage of the government’s subsidized loan and raising the balance through a fresh issue of 5-year debentures. Issues costs, which can be assumed to be tax-deductible expenses, will be 5% of the gross proceeds from the debenture offer. The financing strategy for the project is not expected to affect the company’s borrowing capacity in any way.
ABC Ltd will be the first indigenous Ghanaian company to manufacture air conditioners in Ghana. However, it will be competing with XYZ Ltd, a listed company with majority shares held by foreign investors. The cost of equity of XYZ Ltd is estimated to be 20% and it pays tax at 22%. XYZ has 10 million shares in issue that are trading at GHS5.5 each, and bonds with total market value of GHS40 million.
The five-year Treasury note yield rate is currently 10% and the return on the market portfolio is 18%.
Required:
Evaluate, on financial grounds, whether ABC should implement the project or not. (20 marks)
Find Related Questions by Tags, levels, etc.
You are the Financial Consultant of Nkoso Funds, a pension fund in Ghana. Your company has identified two companies which you have been asked to evaluate as possible investments. The two companies, Trokaa Plc (Trokaa Plc) and Krokro Plc (Krokro Plc), are both publicly held and similar in size. Assume that all other publicly available information, including all climate, sustainability, and governance disclosures, have already been analysed and the decision concerning which company’s shares to acquire depends on their cash flow data given below:
Statement of cash flows for the years ended December 31, 2023 and 2022 Trokaa Plc Krokro Plc
Required:
a) Conduct a horizontal analysis for each of the two companies. (6 marks)
b) Write a report to the investment manager of Nkoso Funds discussing the relative strengths and weaknesses of each of the two companies. Conclude your report by recommending one company’s share as an investment avenue. (14 marks)
Find Related Questions by Tags, levels, etc.
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