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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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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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Presented below are the common-sized financial statements of Towobo Ltd over the last five years:
Vertical Common-Sized Statements of Profit or Loss for the Years Ended 31 December
| % | 2022 | 2021 | 2020 | 2019 | 2018 |
|---|---|---|---|---|---|
| Revenue | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
| Cost of sales | (88.58) | (85.45) | (84.92) | (87.36) | (92.70) |
| Gross profit | 11.42 | 14.55 | 15.08 | 12.64 | 7.30 |
| Distribution & marketing costs | (1.00) | (0.86) | (0.83) | (1.15) | (0.87) |
| Administrative expenses | (0.74) | (0.79) | (0.88) | (0.85) | (0.73) |
| Other operating income | 2.06 | 1.78 | 0.77 | 0.58 | 0.69 |
| Other operating expenses | (1.36) | (0.86) | (1.21) | (1.20) | (0.94) |
| Profit from operations | 10.38 | 13.82 | 12.93 | 10.02 | 5.45 |
| Finance cost | (0.02) | (0.04) | (0.02) | (0.05) | (0.10) |
| Profit before tax | 10.36 | 13.78 | 12.92 | 9.97 | 5.35 |
| Tax | (3.25) | (3.98) | (4.05) | (3.25) | (2.61) |
| Profit after tax | 7.11 | 9.80 | 8.86 | 6.72 | 2.74 |
Vertical Common-Sized Statements of Financial Position as at 31 December
| % | 2022 | 2021 | 2020 | 2019 | 2018 |
|---|---|---|---|---|---|
| Non-current assets | |||||
| Property, plant & equipment | 8.49 | 8.55 | 15.50 | 20.27 | 23.33 |
| Intangible assets | 0.52 | 0.72 | 0.44 | 0.51 | 0.70 |
| Capital work-in-progress | 0.13 | 0.39 | 7.39 | 0.28 | 0.66 |
| Long-term loans & advances | 0.33 | 0.22 | 0.52 | 3.20 | 3.65 |
| Total non-current assets | 9.47 | 9.88 | 23.85 | 24.26 | 28.31 |
| Current assets | |||||
| Inventories | 14.20 | 13.19 | 25.51 | 40.61 | 32.25 |
| Receivables | 0.16 | 0.09 | 0.53 | 0.32 | – |
| Prepayments, advances, & other receivables | 22.33 | 17.65 | 6.21 | 10.69 | 20.33 |
| Short-term investments | 35.15 | 40.67 | 7.10 | – | – |
| Cash and bank balances | 18.69 | 18.52 | 36.80 | 24.12 | 19.11 |
| Total current assets | 90.53 | 90.12 | 76.15 | 75.74 | 71.69 |
| Total assets | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
| Equity | |||||
| Issued, subscribed & paid-up capital | 2.43 | 2.77 | 8.81 | 10.25 | 11.59 |
| Retained earnings | 16.50 | 10.69 | 18.24 | 3.78 | 0.62 |
| Other reserves | 10.10 | 11.91 | 21.95 | 22.74 | 7.20 |
| Total equity | 29.03 | 25.37 | 49.00 | 36.77 | 19.41 |
| Non-current liabilities | |||||
| Pensions liabilities | 0.16 | 0.12 | 0.51 | 0.38 | 0.36 |
| Deferred tax | 0.74 | 0.71 | 0.83 | – | – |
| Deferred revenue | 0.02 | 0.02 | 0.06 | 0.08 | 0.10 |
| Total non-current liabilities | 0.92 | 0.85 | 1.40 | 0.46 | 0.46 |
| Current liabilities | |||||
| Trade, dividend & other payables | 70.04 | 73.15 | 49.60 | 62.73 | 80.02 |
| Current portion of deferred revenue | 0.01 | 0.01 | 0.04 | 0.03 | – |
| Income tax | – | 0.62 | – | 0.01 | 0.11 |
| Total current liabilities | 70.05 | 73.78 | 49.60 | 62.77 | 80.13 |
| Total equity & liabilities | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
Required:
As the Financial Advisor to ABC Mutual Funds, report on the financial health or otherwise of Towobo Ltd based on the vertically analysed financial statements and advise ABC Mutual Funds on whether to invest in Towobo Ltd. Your report should focus on the profitability and cost control analysis, asset structure, capital structure, and working capital structure.
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A mining company in Ghana intends to buy a vehicle (Pajero) for official use under a finance lease arrangement or an outright purchase. The cost profile of the vehicle is as follows:
i) Outright Purchase: Cost at GH¢80,000.
ii) Finance Lease Arrangement: Cost inclusive of interest is GH¢105,000, to be paid over three years. The interest component is GH¢30,000 to be spread over the three years.
Required:
Determine which of the options you would advise to be adopted.
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The following is the extract of financial statements – Financial position as at 31 December 2018 of the following companies:
| Item | Tiika (GH¢) | Taaka (GH¢) |
|---|---|---|
| Stated Capital | 1,000,000 | 1,000,000 |
| Retained Earnings | 600,000 | 600,000 |
| Share Deals | 30,000 | 30,000 |
| Total Equity | 1,630,000 | 1,630,000 |
Tiika is a Free Zone company, resident in Ghana. Taaka is also a company resident in Ghana, and both companies are engaged in the sale of tiles.
A Ghanaian who was living in the United States for a very long time has relocated to Ghana and has sought your opinion as a student of taxation to advise on the company to buy shares in. Your background checks indicate that the two companies have huge prospects.
Required:
Which of the companies will you advise this Ghanaian to invest in and why?
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Ayittey Ltd is an organization with two divisions: A and B, each with its own cost and revenue streams. Each of the two divisions is classified as an Investment center. The company’s cost of capital is 12%. Historically, investment decisions have been made by calculating the return on investment (ROI). A new manager who has recently been appointed in Division A has argued that using residual income (RI) to make investment decisions would result in ‘better goal congruence’ throughout the company. The data below shows the current position of the division as at the end of 31 December, 2016:
| Details of Projects | Project A | Project B |
|---|---|---|
| Capital required | GH¢ 82.8 million | GH¢ 40.6 million |
| Sales generated | GH¢ 44.6 million | GH¢ 21.8 million |
| Net Profit margin | 28% | 33% |
The company is seeking to maximize shareholders’ wealth. Assuming that Division A acquires a more efficient asset at GH¢15 million and Division B sold one of its assets with a written down value of GH¢24 million, and profits are expected to increase and decrease by GH¢11 million and GH¢5 million for Division A and B respectively.
Required:
i) Calculate both the current Return on Investment (ROI) and Residual Income (RI) for each of the divisions. (5 marks)
ii) Calculate and comment on the effect of the decision to invest in the new asset and disposal of some assets on the current ROI and RI. (7 marks)
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CVD Ghana Ltd, which is into the production and sale of COVID-19 vaccine in Ghana and abroad, plans to buy a new machine to expand the scope of its operations due to increased demand in both the local and the international markets.
The cost of the machine is GH¢24,000,000 and has a useful life of five years. The machine will require additional investment in working capital of GH¢2,700,000 at the beginning of the first year of operations. At the end of year five, the machine will be sold for scrap, with the scrap value expected to be 5% of the machine’s initial purchase cost. The company has no intention to replace the machine. Production and sales from the new machine are expected to be 1,000,000 packs per year.
The selling price per pack and variable cost per pack are as follows:
| Year | Selling Price per Pack (GH¢) | Variable Cost per Pack (GH¢) |
|---|---|---|
| 1 | 48 | 33 |
| 2 | 48 | 33 |
| 3 | 55 | 38 |
| 4 | 55 | 38 |
| 5 | 60 | 42 |
It is also estimated that incremental fixed costs arising from the machine’s operations will be GH¢4,800,000 per year. CVD Ghana Ltd has an after-tax cost of capital of 20%, which it uses as a discount rate in its investment appraisal. The company pays corporate tax at an annual rate of 25% per year. Capital allowance should be ignored.
Required:
i) Compute the Net Present Value of this project and advise CVD Ghana Ltd whether the investment is financially viable. (8 marks)
ii) Calculate the Internal Rate of Return of investing in the machine and advise whether it is financially viable. (5 marks)
iii) Explain the meaning of the term “sensitivity analysis” in the context of investment. (2 marks)
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a) In periods of difficult global financial environment, raising of capital is a challenge necessitating the need for prudent and best use of scarce capital for projects.
Required:
i) Explain the term capital rationing. (2 marks)
ii) Distinguish between soft capital rationing and hard capital rationing giving an example each. (3 marks)
b) Akonta Ghana Ltd has excess funds of GH¢200 million and is looking for attractive investment opportunities that will yield a return of 15% per annum or better to deploy the funds. An extract from a Feasibility report submitted by a team of investment and project experts is as follows:
| Project | Initial Investment Required (GH¢) | Constant Annual Cash Inflow (GH¢) | Project Life (Years) |
|---|---|---|---|
| A | 80,000,000 | 36,000,000 | 4 |
| B | 40,000,000 | 23,000,000 | 3 |
| C | 78,000,000 | 30,000,000 | 5 |
| D | 40,000,000 | 20,000,000 | 4 |
| E | 40,000,000 | 22,000,000 | 3 |
The cash flows per project are constant for the life span of each project and each project is divisible for the purpose of capital allocation.
Required:
i) Calculate the Net Present Values (NPVs) of each project. (7 marks)
ii) Rank the projects using Profitability Index and allocate the GH¢200 million among the projects. (3 marks)
c) There are many sources of debt finance available to a company which has viable and profitable investment opportunities to utilise the funds. It is, however, very important for the Finance Manager to do a thorough work before deciding the type and source of debt finance to tap into.
Required:
Explain THREE (3) factors a Finance Manager should consider when deciding the type of debt finance to raise. (5 marks)
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a) Sakyiama Poultry Farms is considering purchasing a new incubator that will improve its incubation efficiency to 90% as against the current 50%. The incubator, which is to be purchased immediately, will cost GH¢120,000. The incubator has a useful life of 4 years, after which it would be sold for scrap at GH¢10,000. The current contribution of GH¢3 per day-old chick will not change. The number of day-old chicks sold at 12,000 units per annum will increase by 80%. Fixed cost will be GH¢20,000 per annum. Sakyiama Farms has an after-tax cost of capital of 12.5% and pays tax in the year in which profit is made at a rate of 15% per annum. The farm is also entitled to capital allowance at 25% on a reducing balance.
i) Calculate the Net Present Value (NPV) and the viability of the investment. (7 marks)
ii) Calculate the Internal Rate of Return (IRR). (8 marks)
b) Two blue-chip companies – Abu Ltd and Ada Ltd are seeking to raise funds from venture capital to boost their production in order to satisfy demand for their solar-powered refrigeration and air-conditioning systems, which they developed through a joint venture. They have consulted you for advice.
Required:
Explain FIVE conditions that a venture capitalist will consider in accessing an application for funding. (5 marks)
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The four major decisions taken by a Finance Manager are:
i) Investment Decision
ii) Financing Decision
iii) Dividend Decision
iv) Liquidity Decision
Required:
Explain each of the above decisions citing an example of each. (10 marks)
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a) Toolo Ghana Ltd was recently formed as a special purpose vehicle (SPV) to provide a secondary market for investors involved in the domestic debt exchange programme who want to sell off their holdings for immediate cash.
The SPV was embarking on this special initiative as a one-off project; The company in year zero will acquire a total of GH¢500 million worth of bonds from investors and pay for all at the same time for cash.
Based on the projections, the expected cash inflows from the bonds are as follows:
A special investment in systems and software, computers and other fixed assets is GH¢6 million in year zero and tax deductible depreciation is on a straight-line basis with a scrap value of GH¢1 million. Salaries and wages and other administrative expenses will be GH¢1 million in year 1 and grow at 15% per annum on the previous year’s figure. Rent is also determined at GH¢0.5 million in year 1 and growing by GH¢100,000 each year.
The internal cost of capital is 22% whilst corporate tax rate is 25%.
Required:
i) Calculate the Net Present Value (NPV) of this project and advise whether Toolo Ltd should embark on the project.
(12 marks)
ii) Explain TWO (2) reasons why NPV is preferred to payback period.
(3 marks)
b) Soso Ghana Ltd is considering investing in project Sankofa which has been appraised to have an expected return of 25% per annum. The project’s beta is 1.9 and the risk-free interest rate is 14% per annum, which is 9% below the average return on equity stocks on the market.
Required:
Calculate the required return on project Sankofa and advise Soso Ghana Ltd whether it should invest in the project.
(5 marks)
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God is King Ltd has been printing all its magazines from Dubai due to the comparative cost advantage. The company is considering establishing its own printing department, and the R&D team has identified a printing machine which will meet the quality and cost specifications of God is King Ltd. The machine also has the capacity to print to meet the market needs of the company. The machine, which has a useful life of 5 years, will cost GHS800,000 and immediate installation cost will be GHS50,000. Fixed cost for maintaining the machine will be 170,000 per annum over the machine’s useful life and additional working capital of GHS30,000 will be introduced in year 2. The use of this machine will generate a contribution of GHS500,000 per annum for five (5) years. Corporate income tax rate, payable in arrears, is 25% and the company’s after-tax cost of capital is 20%. No capital allowance is permitted.
Required:
Calculate the NPV for the project and advise management on whether to accept or reject the project. (10 marks)
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