- 20 Marks
FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management
Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.
Question
a) TekApps is a small technology company that develops financial technology (FinTech) applications for mobile devices. The company is selling one of its highly rated FinTech apps to a financial institution. The financial institution has proposed the following strategic payment options for TekApps’ consideration:
Strategy 1: An immediate payment of GH¢1.2 million followed by payments of GH¢50,000 at the end of each quarter during the next five years.
Strategy 2: Payment of GH¢55,000 at the beginning of each month for the next five years.
TekApps’ required rate of return is 25% per annum.
Required:
i) Identify the type of cash flow pattern described under each option. (3 marks)
ii) Compute the present value of the cash flows for each strategy and advise TekApps on the best payment option. (7 marks)
b) BKB Entertainment Ltd (BKB) currently borrows at an average rate of 24% per annum. The Treasury Manager of the company believes that BKB can borrow at a lower interest rate if its creditworthiness is assessed and rated by a rating agency. He has therefore recommended to the Board of Directors to consider requesting a credit rating.
Required:
i) Explain TWO (2) benefits of credit rating to BKB. (4 marks)
ii) Advise the directors on THREE (3) factors rating agencies will consider in determining the company’s credit rating. (6 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Annuity, Cash Flow Patterns, Financial Decision-Making, Payment Options, Present Value
- Level: Level 2
- Topic: Discounted cash flow, Sources of finance: debt, Working Capital Management
- Series: DEC 2022