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  • 20 Marks

FM – May 2018 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate two corporate bonds for investment based on price, yield to maturity, and duration.

Kazaure Limited has a cash surplus of N20m, which the financial manager is keen to invest in corporate bonds. He has identified two potential investment opportunities in two different companies which are both rated A by the major credit rating agencies.

Bond A: The issuer plans to raise an N500m 2-year bond with a coupon rate of 10%. The bond is redeemable at a premium of 8% to nominal value.

Bond B: The issuer plans to raise an N800m 3-year bond with a coupon rate of 12% and redeemable at par.

The annual spot yield curve for government bonds is:

Term Spot Yield
1-Year 9.50%
2-Year 10.40%
3-Year 10.50%

Extract from a major credit rating agency’s website:

Rating 1-Year Spread 2-Year Spread 3-Year Spread
AAA 6 16 28
AA 15 25 40
A 20 30 50

Required:

a. For a nominal value of N1,000, calculate the theoretical issue prices of the two bonds and indicate how many of each of the bonds Kazaure Limited can buy, assuming it invests in only one of them. (5 Marks)
Note: Calculate issue prices to the nearest Naira.

b. Irrespective of your answer in (a), assume Bond A is issued at ₦1,054 and Bond B is issued at N1,026. Calculate the yield to maturity of each bond at the time of issue. (5 Marks)

c. Calculate the duration of each bond. What does duration measure? (6 Marks)

d. If you expect interest rates to increase in the market, which of the two bonds, A or B, would you like to buy and why? (4 Marks)
Note: No calculation is required.

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  • 20 Marks

CR – Nov 2023 – L3 – SB – Q4 – Financial Instruments (IFRS 9)

Discuss IFRS 9 derecognition rules, trade receivables factoring, and FVTOCI investment strategy for Pelumi Limited.

a. Derecognition of financial instruments is the removal of a previously recognised financial asset or liability from an entity’s statement of financial position.

Required:
Discuss the rules of IFRS 9 – Financial Instruments relating to the derecognition of a financial asset. (10 Marks)

b. Royal Business Limited (RBL) held a portfolio of trade receivables with a carrying amount of N40 million as of May 31, 2022. At that date, the entity entered into a factoring agreement with Hexlinks Bank Limited (HBL), whereby it transfers the receivables in exchange for N36 million in cash. Royal Business Limited has agreed to reimburse the factor (HBL) for any shortfall between the amount collected and N36 million. Once the receivables have been collected, any amount above N36 million, less interest on this amount, will be repaid to Royal Business Limited. Royal Business Limited has derecognised the receivables and charged N4 million as a loss to profit or loss.

Required:
Explain how the rules of derecognition of the financial assets will affect the portfolio of trade receivables in Royal Business Limited’s financial statements. (3 Marks)

c. During the year 2021, Pelumi Limited invested in 800,000 shares in an NGX quoted company. The shares were purchased at N4.54 per share. The broker collected a commission of 1% on the transaction. Pelumi Limited elected to measure their shares at fair value through other comprehensive income (FVTOCI). The quoted share price as of December 31, 2021, was N4.22 to N4.26. Pelumi Limited decided to adopt a ‘sale and buy back’ strategy for the shares to realise a tax loss and therefore sold the shares at the market price on December 31, 2021, and bought the same quantity back the following day. The market price did not change on January 1, 2022. The broker collected a 1% commission on both transactions.

Required:
Explain the IFRS 9 accounting treatment of the above shares in the financial statement of Pelumi Limited for the year ended December 31, 2021.
Note: Show relevant calculations. (7 Marks)

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  • 20 Marks

QT – Nov 2018 – L1 – Q7 – Probability

Calculate expected returns for investments, determine optimal strategy, and analyze student error distribution.

Royal Driving School is considering investing in a profitable project. The school is given the following investment alternatives and percentage rates of return.

Over the past 300 days, market conditions have been moderate for 150 days and good for 60 days.

Required:
i) Calculate the expected return for each type of investment. (4 marks)
ii) Determine the optimum investment strategy for Royal Driving School. (3 marks)

b) The number of errors made by 294 students of Royal Driving School in their first attempt at a driving test is grouped in the following frequency distribution:

Number of Errors Number of Students
7 – 13 3
14 – 20 12
21 – 27 23
28 – 34 44
35 – 41 54
42 – 48 56
49 – 55 43
56 – 62 24
63 – 69 23
70 – 76 12

Required:
i) Compute an estimate of the mean and mode for the distribution. (3 marks)
ii) Construct an ogive for the distribution. (4 marks)
iii) Using the ogive in (ii) above, estimate the median for the distribution. (3 marks)
iv) Use the ogive in (ii) above to estimate the percentage of errors within one standard deviation of the mean. (3 marks)

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  • 10 Marks

AFM – May 2019 – L3 – Q1a – Economic environment for multinational organisations

Compare joint ventures and licensing for foreign expansion and explain five strategic reasons for a firm to engage in FDI.

“Oil-rich Ghana’s sovereign wealth fund Ghana Development Board (GDB) has already invested in a number of real estate and infrastructure projects around the world, including a $2.5 billion joint venture with Petro Nigeria Ltd and a scheme to create a carbon-neutral city in Ghana”.

Required:

i) Compare the use of joint ventures as opposed to licensing for GDB if it wishes to expand abroad and outline the advantages and disadvantages of both joint ventures and licensing. (5 marks)

ii) Explain FIVE (5) strategic reasons for Foreign Direct Investment (FDI), for a firm wishing to expand. (5 marks)

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  • 5 Marks

AFM – May 2016 – L3 – Q4b – International investment and financing decisions, Economic environment for multinational organizations

Describe five strategic reasons that might motivate a company to undertake foreign direct investment. —------------------------------------------------------------------ Question: b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management's decision to undertake the Foreign Direct Investment (FDI). (5 marks) Answer: Strategic Reasons for Foreign Direct Investment (FDI) Access to New Markets By establishing a manufacturing facility in foreign countries, the company gains access to new markets, enabling it to expand its customer base and increase market share. This helps diversify the company’s revenue sources and reduces dependency on the domestic market. (1 mark) Cost Reduction Manufacturing in regions with lower production and labor costs can significantly reduce operational expenses. Asia and Europe might offer cost advantages such as cheaper raw materials, lower wages, or favorable tax policies, making FDI a cost-effective decision. (1 mark) Proximity to Resources Setting up operations closer to key resources (such as raw materials or skilled labor) reduces transportation costs and ensures a more efficient supply chain. This proximity can also lead to better quality control and faster production cycles. (1 mark) Government Incentives Many countries offer incentives such as tax holidays, grants, or subsidies to attract foreign investments. These incentives can lower the company’s overall costs and improve profitability, making FDI an attractive option. (1 mark) Strategic Positioning Against Competitors Establishing a presence in key international markets can be a defensive move to counter competitors who are already operating in those regions. By entering these markets, the company can strengthen its competitive position and ensure it does not lose out on potential opportunities. (1 mark) ========== Let me know if you'd like to proceed with the next part or have any further modifications! Describe five strategic reasons that might motivate a company to undertake foreign direct investment. —------------------------------------------------------------------ Question: b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management's decision to undertake the Foreign Direct Investment (FDI). (5 marks) Answer: Strategic Reasons for Foreign Direct Investment (FDI) Access to New Markets By establishing a manufacturing facility in foreign countries, the company gains access to new markets, enabling it to expand its customer base and increase market share. This helps diversify the company’s revenue sources and reduces dependency on the domestic market. (1 mark) Cost Reduction Manufacturing in regions with lower production and labor costs can significantly reduce operational expenses. Asia and Europe might offer cost advantages such as cheaper raw materials, lower wages, or favorable tax policies, making FDI a cost-effective decision. (1 mark) Proximity to Resources Setting up operations closer to key resources (such as raw materials or skilled labor) reduces transportation costs and ensures a more efficient supply chain. This proximity can also lead to better quality control and faster production cycles. (1 mark) Government Incentives Many countries offer incentives such as tax holidays, grants, or subsidies to attract foreign investments. These incentives can lower the company’s overall costs and improve profitability, making FDI an attractive option. (1 mark) Strategic Positioning Against Competitors Establishing a presence in key international markets can be a defensive move to counter competitors who are already operating in those regions. By entering these markets, the company can strengthen its competitive position and ensure it does not lose out on potential opportunities. (1 mark) ========== Let me know if you'd like to proceed with the next part or have any further modifications! Describe five strategic reasons that might motivate a company to undertake foreign direct investment.

b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management’s decision to undertake the Foreign Direct Investment (FDI). (5 marks)

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  • 10 Marks

FINANCIAL MANAGEMENT – MAY 2021 – L2 – Q1B – Discounted cash flow

Compute the effective annual interest rate and withdrawal amount for an investment account, and distinguish between annuity due and ordinary annuity.

Puma Beverages Plc currently operates a single processing plant in Tema. The company plans to install and run processing plants in four other regions in Ghana.

The Finance Manager has presented an investment and financing strategy for this expansion project to the Board of Directors for their study. The proposed investment strategy is that the company sets up the four processing plants in turns. Specifically, the company will install the first plant at the end of the fifth year from now, the second at the end of the sixth year from now, and the rest follow annually in that order.

The proposed financing strategy is that the company finances the expansion project with its retained earnings. To do this, the company should deposit GH¢100 million into an investment account today. The account will earn interest at an annual nominal interest rate of 16%, with monthly compounding through the account’s life. The company will withdraw even amounts from the account at the end of each year starting from the end of year five until the account is closed at the end of year eight (i.e., four withdrawals in all) to finance the installation of each of the four processing plants in line with the investment strategy.

Required:
i) Compute the effective annual interest rate on the investment account. (3 marks)
ii) Compute the even amount that should be withdrawn from the account at the end of each year from the fifth year to the eighth year such that the account balance reduces to zero upon the last withdrawal at the end of the eighth year. (5 marks)
iii) Distinguish between annuity due and ordinary annuity. (2 marks)

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  • 10 Marks

FM – April 2022 – L2 – Q3a – Simple interest and compound interest

Compute the terminal value of investments in Treasury bills and fixed deposits over a five-year period and analyze the investment strategy.

An online university is setting up an endowment fund for the financing of scholarship grants. A total of GH¢200 million has been raised through fundraising events. This amount will be invested continuously for 5 years before disbursements will be made from the fund. The Trustees of the Endowment Fund have received a tentative investment strategy from the appointed Investment Manager.

Below is an extract from the tentative investment strategy:

“The seed money will be invested in fixed-income securities and negotiated short-term investments to secure the protection of the principal while earning stable returns over the 5-year gestation period. To achieve this objective, the seed money will be invested as follows: 60% in Government of Ghana 91-day Treasury Bills, 40% in 6-month fixed deposit accounts with top-class universal banks in Ghana. Over the 5-year gestation period, the maturity value of each round of investment will be rolled over as they mature.”

Being the only Trustee with expertise in finance, your fellow Trustees have asked you to do some simulations to inform them about the growth of the fund in the gestation period based on the tentative investment strategy.

Required:
i) Suppose the annual nominal interest rate on the Government of Ghana 91-day Treasury bills will be 15.2514% in year 1, 15.4814% in year 2, 15.7565% in year 3, 15.9478% in year 4, and 16.2146% in year 5. Compute the terminal value of that component of the investment at the end of the fifth year. (5 marks)
ii) Suppose the average nominal interest rate on the fixed deposits will be 16.5% over the next five years. Compute the terminal value of that component of the investment at the end of the fifth year. (3 marks)
iii) Considering the proposed strategy that the maturity value of each round of investment is rolled over as they mature, explain whether the interest that would accrue on the investment over the entire investment period would effectively be a simple interest. (2 marks)

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  • 20 Marks

FM – May 2018 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate two corporate bonds for investment based on price, yield to maturity, and duration.

Kazaure Limited has a cash surplus of N20m, which the financial manager is keen to invest in corporate bonds. He has identified two potential investment opportunities in two different companies which are both rated A by the major credit rating agencies.

Bond A: The issuer plans to raise an N500m 2-year bond with a coupon rate of 10%. The bond is redeemable at a premium of 8% to nominal value.

Bond B: The issuer plans to raise an N800m 3-year bond with a coupon rate of 12% and redeemable at par.

The annual spot yield curve for government bonds is:

Term Spot Yield
1-Year 9.50%
2-Year 10.40%
3-Year 10.50%

Extract from a major credit rating agency’s website:

Rating 1-Year Spread 2-Year Spread 3-Year Spread
AAA 6 16 28
AA 15 25 40
A 20 30 50

Required:

a. For a nominal value of N1,000, calculate the theoretical issue prices of the two bonds and indicate how many of each of the bonds Kazaure Limited can buy, assuming it invests in only one of them. (5 Marks)
Note: Calculate issue prices to the nearest Naira.

b. Irrespective of your answer in (a), assume Bond A is issued at ₦1,054 and Bond B is issued at N1,026. Calculate the yield to maturity of each bond at the time of issue. (5 Marks)

c. Calculate the duration of each bond. What does duration measure? (6 Marks)

d. If you expect interest rates to increase in the market, which of the two bonds, A or B, would you like to buy and why? (4 Marks)
Note: No calculation is required.

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  • 20 Marks

CR – Nov 2023 – L3 – SB – Q4 – Financial Instruments (IFRS 9)

Discuss IFRS 9 derecognition rules, trade receivables factoring, and FVTOCI investment strategy for Pelumi Limited.

a. Derecognition of financial instruments is the removal of a previously recognised financial asset or liability from an entity’s statement of financial position.

Required:
Discuss the rules of IFRS 9 – Financial Instruments relating to the derecognition of a financial asset. (10 Marks)

b. Royal Business Limited (RBL) held a portfolio of trade receivables with a carrying amount of N40 million as of May 31, 2022. At that date, the entity entered into a factoring agreement with Hexlinks Bank Limited (HBL), whereby it transfers the receivables in exchange for N36 million in cash. Royal Business Limited has agreed to reimburse the factor (HBL) for any shortfall between the amount collected and N36 million. Once the receivables have been collected, any amount above N36 million, less interest on this amount, will be repaid to Royal Business Limited. Royal Business Limited has derecognised the receivables and charged N4 million as a loss to profit or loss.

Required:
Explain how the rules of derecognition of the financial assets will affect the portfolio of trade receivables in Royal Business Limited’s financial statements. (3 Marks)

c. During the year 2021, Pelumi Limited invested in 800,000 shares in an NGX quoted company. The shares were purchased at N4.54 per share. The broker collected a commission of 1% on the transaction. Pelumi Limited elected to measure their shares at fair value through other comprehensive income (FVTOCI). The quoted share price as of December 31, 2021, was N4.22 to N4.26. Pelumi Limited decided to adopt a ‘sale and buy back’ strategy for the shares to realise a tax loss and therefore sold the shares at the market price on December 31, 2021, and bought the same quantity back the following day. The market price did not change on January 1, 2022. The broker collected a 1% commission on both transactions.

Required:
Explain the IFRS 9 accounting treatment of the above shares in the financial statement of Pelumi Limited for the year ended December 31, 2021.
Note: Show relevant calculations. (7 Marks)

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  • 20 Marks

QT – Nov 2018 – L1 – Q7 – Probability

Calculate expected returns for investments, determine optimal strategy, and analyze student error distribution.

Royal Driving School is considering investing in a profitable project. The school is given the following investment alternatives and percentage rates of return.

Over the past 300 days, market conditions have been moderate for 150 days and good for 60 days.

Required:
i) Calculate the expected return for each type of investment. (4 marks)
ii) Determine the optimum investment strategy for Royal Driving School. (3 marks)

b) The number of errors made by 294 students of Royal Driving School in their first attempt at a driving test is grouped in the following frequency distribution:

Number of Errors Number of Students
7 – 13 3
14 – 20 12
21 – 27 23
28 – 34 44
35 – 41 54
42 – 48 56
49 – 55 43
56 – 62 24
63 – 69 23
70 – 76 12

Required:
i) Compute an estimate of the mean and mode for the distribution. (3 marks)
ii) Construct an ogive for the distribution. (4 marks)
iii) Using the ogive in (ii) above, estimate the median for the distribution. (3 marks)
iv) Use the ogive in (ii) above to estimate the percentage of errors within one standard deviation of the mean. (3 marks)

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  • 10 Marks

AFM – May 2019 – L3 – Q1a – Economic environment for multinational organisations

Compare joint ventures and licensing for foreign expansion and explain five strategic reasons for a firm to engage in FDI.

“Oil-rich Ghana’s sovereign wealth fund Ghana Development Board (GDB) has already invested in a number of real estate and infrastructure projects around the world, including a $2.5 billion joint venture with Petro Nigeria Ltd and a scheme to create a carbon-neutral city in Ghana”.

Required:

i) Compare the use of joint ventures as opposed to licensing for GDB if it wishes to expand abroad and outline the advantages and disadvantages of both joint ventures and licensing. (5 marks)

ii) Explain FIVE (5) strategic reasons for Foreign Direct Investment (FDI), for a firm wishing to expand. (5 marks)

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  • 5 Marks

AFM – May 2016 – L3 – Q4b – International investment and financing decisions, Economic environment for multinational organizations

Describe five strategic reasons that might motivate a company to undertake foreign direct investment. —------------------------------------------------------------------ Question: b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management's decision to undertake the Foreign Direct Investment (FDI). (5 marks) Answer: Strategic Reasons for Foreign Direct Investment (FDI) Access to New Markets By establishing a manufacturing facility in foreign countries, the company gains access to new markets, enabling it to expand its customer base and increase market share. This helps diversify the company’s revenue sources and reduces dependency on the domestic market. (1 mark) Cost Reduction Manufacturing in regions with lower production and labor costs can significantly reduce operational expenses. Asia and Europe might offer cost advantages such as cheaper raw materials, lower wages, or favorable tax policies, making FDI a cost-effective decision. (1 mark) Proximity to Resources Setting up operations closer to key resources (such as raw materials or skilled labor) reduces transportation costs and ensures a more efficient supply chain. This proximity can also lead to better quality control and faster production cycles. (1 mark) Government Incentives Many countries offer incentives such as tax holidays, grants, or subsidies to attract foreign investments. These incentives can lower the company’s overall costs and improve profitability, making FDI an attractive option. (1 mark) Strategic Positioning Against Competitors Establishing a presence in key international markets can be a defensive move to counter competitors who are already operating in those regions. By entering these markets, the company can strengthen its competitive position and ensure it does not lose out on potential opportunities. (1 mark) ========== Let me know if you'd like to proceed with the next part or have any further modifications! Describe five strategic reasons that might motivate a company to undertake foreign direct investment. —------------------------------------------------------------------ Question: b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management's decision to undertake the Foreign Direct Investment (FDI). (5 marks) Answer: Strategic Reasons for Foreign Direct Investment (FDI) Access to New Markets By establishing a manufacturing facility in foreign countries, the company gains access to new markets, enabling it to expand its customer base and increase market share. This helps diversify the company’s revenue sources and reduces dependency on the domestic market. (1 mark) Cost Reduction Manufacturing in regions with lower production and labor costs can significantly reduce operational expenses. Asia and Europe might offer cost advantages such as cheaper raw materials, lower wages, or favorable tax policies, making FDI a cost-effective decision. (1 mark) Proximity to Resources Setting up operations closer to key resources (such as raw materials or skilled labor) reduces transportation costs and ensures a more efficient supply chain. This proximity can also lead to better quality control and faster production cycles. (1 mark) Government Incentives Many countries offer incentives such as tax holidays, grants, or subsidies to attract foreign investments. These incentives can lower the company’s overall costs and improve profitability, making FDI an attractive option. (1 mark) Strategic Positioning Against Competitors Establishing a presence in key international markets can be a defensive move to counter competitors who are already operating in those regions. By entering these markets, the company can strengthen its competitive position and ensure it does not lose out on potential opportunities. (1 mark) ========== Let me know if you'd like to proceed with the next part or have any further modifications! Describe five strategic reasons that might motivate a company to undertake foreign direct investment.

b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management’s decision to undertake the Foreign Direct Investment (FDI). (5 marks)

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  • 10 Marks

FINANCIAL MANAGEMENT – MAY 2021 – L2 – Q1B – Discounted cash flow

Compute the effective annual interest rate and withdrawal amount for an investment account, and distinguish between annuity due and ordinary annuity.

Puma Beverages Plc currently operates a single processing plant in Tema. The company plans to install and run processing plants in four other regions in Ghana.

The Finance Manager has presented an investment and financing strategy for this expansion project to the Board of Directors for their study. The proposed investment strategy is that the company sets up the four processing plants in turns. Specifically, the company will install the first plant at the end of the fifth year from now, the second at the end of the sixth year from now, and the rest follow annually in that order.

The proposed financing strategy is that the company finances the expansion project with its retained earnings. To do this, the company should deposit GH¢100 million into an investment account today. The account will earn interest at an annual nominal interest rate of 16%, with monthly compounding through the account’s life. The company will withdraw even amounts from the account at the end of each year starting from the end of year five until the account is closed at the end of year eight (i.e., four withdrawals in all) to finance the installation of each of the four processing plants in line with the investment strategy.

Required:
i) Compute the effective annual interest rate on the investment account. (3 marks)
ii) Compute the even amount that should be withdrawn from the account at the end of each year from the fifth year to the eighth year such that the account balance reduces to zero upon the last withdrawal at the end of the eighth year. (5 marks)
iii) Distinguish between annuity due and ordinary annuity. (2 marks)

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  • 10 Marks

FM – April 2022 – L2 – Q3a – Simple interest and compound interest

Compute the terminal value of investments in Treasury bills and fixed deposits over a five-year period and analyze the investment strategy.

An online university is setting up an endowment fund for the financing of scholarship grants. A total of GH¢200 million has been raised through fundraising events. This amount will be invested continuously for 5 years before disbursements will be made from the fund. The Trustees of the Endowment Fund have received a tentative investment strategy from the appointed Investment Manager.

Below is an extract from the tentative investment strategy:

“The seed money will be invested in fixed-income securities and negotiated short-term investments to secure the protection of the principal while earning stable returns over the 5-year gestation period. To achieve this objective, the seed money will be invested as follows: 60% in Government of Ghana 91-day Treasury Bills, 40% in 6-month fixed deposit accounts with top-class universal banks in Ghana. Over the 5-year gestation period, the maturity value of each round of investment will be rolled over as they mature.”

Being the only Trustee with expertise in finance, your fellow Trustees have asked you to do some simulations to inform them about the growth of the fund in the gestation period based on the tentative investment strategy.

Required:
i) Suppose the annual nominal interest rate on the Government of Ghana 91-day Treasury bills will be 15.2514% in year 1, 15.4814% in year 2, 15.7565% in year 3, 15.9478% in year 4, and 16.2146% in year 5. Compute the terminal value of that component of the investment at the end of the fifth year. (5 marks)
ii) Suppose the average nominal interest rate on the fixed deposits will be 16.5% over the next five years. Compute the terminal value of that component of the investment at the end of the fifth year. (3 marks)
iii) Considering the proposed strategy that the maturity value of each round of investment is rolled over as they mature, explain whether the interest that would accrue on the investment over the entire investment period would effectively be a simple interest. (2 marks)

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