Question Tag: Stock Market Listing

a) Lease or Buy decision could be a tough call to make, especially considering that different industries benefit more than others from leasing or buying outright depending on the specific needs of that sector.

Freda Automobile (Freda), an emerging automobile company has taken a decision to provide a new Toyota Land Cruiser for its Chief Executive Officer (CEO). The company is considering whether to buy or lease. The Toyota Land Cruiser has a useful life of six years and will cost GH¢1,000,000 to buy and will be funded with a bank loan. The Finance Director provided the borrowing interest rate for the loan at 22% per annum. The annual repairs and maintenance cost when the V8 is bought is GH¢18,000. The corporate tax rate is currently 25% paid in the same year the profit is made. The capital allowance on the V8 is 25% per annum on reducing balance basis.

Alternatively, the Toyota Land Cruiser could be leased at a rental cost of GH¢250,000 per annum for six years payable at the beginning of each year.

Required:
i) Explain TWO (2) reasons why Freda will prefer leasing option to outright buy. (4 marks)
ii) Calculate the Net Present Value (NPV) for the buy option. (5 marks)
iii) Calculate the Net Present Value (NPV) for the lease option. (4 marks)
iv) Based on your computations in ii) and iii) above, advise management which option should be considered. (2 marks)

b) The Ghana Stock Exchange (GSE) market has recently been intensifying its public education for Ghanaian companies to list on the stock market to raise the needed capital for expansion and growth. You have been approached by owners of Asafo Ghana Ltd who have expressed interest in getting listed on the stock market but have limited knowledge on what they stand to benefit by listing their company on the market.

Required:
Explain FOUR (4) advantages Asafo Ghana Ltd could derive from listing on GSE. (5 marks)