Question Tag: Public Sector Objectives

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FM – Nov 2021 – L3 – Q5 – Corporate Governance and Stakeholder Management

Analyze criteria for setting objectives in public and private sectors, addressing stakeholder needs and potential consequences of unmet objectives.

a. Ibile is a local government entity financed approximately equally by central government funding and local taxation. The central government funding allocation is primarily determined on a per capita basis, adjusted for the level of deprivation or special needs within Ibile’s region. A small portion of Ibile’s revenue comes from the private sector, such as renting out City Hall for private events.

Ibile’s Main Objectives:

  • Enhance the region’s economic prosperity and attractiveness as a place to live and work.
  • Provide service excellence in health and education for the local community.

b. Layo is a large, publicly listed entity with extensive commercial and geographical interests. It has historically established its headquarters in Ibile’s region, which is unusual for a company of its size, as such entities typically base their HQ in a capital or major city.

Layo’s Main Objectives:

  • Financial: Achieve an average annual increase of 10% in shareholder wealth.
  • Non-Financial: Maintain favorable treatment of various stakeholders, including local communities where it operates.

Layo’s total net assets are valued at ₦1.5 billion with a gearing ratio of 45% (debt to debt plus equity), consistent with industry norms. The company is currently exploring options to raise significant capital to fund an acquisition.

Required:

Discuss the criteria that each entity (Ibile and Layo) must consider when setting objectives, taking into account the needs of their main stakeholder groups. Reference the consequences each might face if it fails to achieve its stated objectives.

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FM – AUG 2022 – L2 – Q1 – Cost of capital

Evaluates the objectives of public sector institutions and the calculation of cost of capital components.

a) Public Sector Institutions exist generally not to make business profit. In view of this, there are other objectives that such sectors aspire to achieve in the performance of their functions.

Required:
i) Explain THREE (3) core objectives of Public Sector Institutions. (8 marks)
ii) Distinguish between financial objectives and non-financial objectives of a firm. (2 marks)

b) Baaday Company Ltd is a Ghanaian registered company engaged in the importation and exportation of general goods. The company issued GH¢600 million bonds at a coupon of 25% per annum. The bonds are irredeemable. Baaday Company Ltd pays a tax rate of 25% and the issue cost is 2% on the value of the bonds issued, which is tax-deductible. Additionally, the company has sold GH¢900 million worth of shares, and the issue cost for the shares is 5% of the value of the shares issued, which is also tax-deductible. The Company shareholders require a return of 30% per annum.

Required:
i) Calculate the cost (in percentage terms) of servicing the bonds. (3 marks)
ii) Calculate the amount raised from the sale or issue of the shares. (2 marks)
iii) Compute the amount the company should earn annually to be able to meet the return expectation of the suppliers of funds. (2 marks)
iv) Compute the Weighted Average Cost of Capital (WACC) for Baaday Company Ltd. (3 marks)

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FM – Nov 2021 – L3 – Q5 – Corporate Governance and Stakeholder Management

Analyze criteria for setting objectives in public and private sectors, addressing stakeholder needs and potential consequences of unmet objectives.

a. Ibile is a local government entity financed approximately equally by central government funding and local taxation. The central government funding allocation is primarily determined on a per capita basis, adjusted for the level of deprivation or special needs within Ibile’s region. A small portion of Ibile’s revenue comes from the private sector, such as renting out City Hall for private events.

Ibile’s Main Objectives:

  • Enhance the region’s economic prosperity and attractiveness as a place to live and work.
  • Provide service excellence in health and education for the local community.

b. Layo is a large, publicly listed entity with extensive commercial and geographical interests. It has historically established its headquarters in Ibile’s region, which is unusual for a company of its size, as such entities typically base their HQ in a capital or major city.

Layo’s Main Objectives:

  • Financial: Achieve an average annual increase of 10% in shareholder wealth.
  • Non-Financial: Maintain favorable treatment of various stakeholders, including local communities where it operates.

Layo’s total net assets are valued at ₦1.5 billion with a gearing ratio of 45% (debt to debt plus equity), consistent with industry norms. The company is currently exploring options to raise significant capital to fund an acquisition.

Required:

Discuss the criteria that each entity (Ibile and Layo) must consider when setting objectives, taking into account the needs of their main stakeholder groups. Reference the consequences each might face if it fails to achieve its stated objectives.

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FM – AUG 2022 – L2 – Q1 – Cost of capital

Evaluates the objectives of public sector institutions and the calculation of cost of capital components.

a) Public Sector Institutions exist generally not to make business profit. In view of this, there are other objectives that such sectors aspire to achieve in the performance of their functions.

Required:
i) Explain THREE (3) core objectives of Public Sector Institutions. (8 marks)
ii) Distinguish between financial objectives and non-financial objectives of a firm. (2 marks)

b) Baaday Company Ltd is a Ghanaian registered company engaged in the importation and exportation of general goods. The company issued GH¢600 million bonds at a coupon of 25% per annum. The bonds are irredeemable. Baaday Company Ltd pays a tax rate of 25% and the issue cost is 2% on the value of the bonds issued, which is tax-deductible. Additionally, the company has sold GH¢900 million worth of shares, and the issue cost for the shares is 5% of the value of the shares issued, which is also tax-deductible. The Company shareholders require a return of 30% per annum.

Required:
i) Calculate the cost (in percentage terms) of servicing the bonds. (3 marks)
ii) Calculate the amount raised from the sale or issue of the shares. (2 marks)
iii) Compute the amount the company should earn annually to be able to meet the return expectation of the suppliers of funds. (2 marks)
iv) Compute the Weighted Average Cost of Capital (WACC) for Baaday Company Ltd. (3 marks)

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