Subject: ADVANCED FINANCIAL MANAGEMENT

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FR – May 2018 – L2 – Q4 – Consolidated Financial Statements (IFRS 10)

Assess the financial performance and position of two companies using specified ratios and explain the limitations of ratio analysis.

Question

Ibadan Nigeria Limited is considering acquiring a suitable private limited liability company. The board of directors engaged a financial consultant to analyze the financial position of two companies, Abuja Limited and Rivers Limited, which are both receptive to the acquisition. The draft financial statements of the two companies are as follows:

Statements of Profit or Loss

a. Draft a report to the chairman of the board of directors of Ibadan Limited to assess the financial performance and position of the two companies using the following specific ratios: (12 Marks) i. Profitability ratios: Gross profit percentage and net profit margin. ii. Liquidity ratios: Acid test ratio, current ratio, trade receivable period. iii. Long-term financial stability ratios: Gearing ratio and proprietary ratio. iv. Efficiency ratios: Total asset turnover and non-current asset turnover.

b. Explain the limitations of ratio analysis and further information that may be useful to the board of directors when making the acquisition decision. (8 Marks)

Answer

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Tags: Acquisition, Efficiency Ratios, Financial Analysis, Liquidity Ratios, Long-term Stability Ratios, Profitability Ratios, Ratio Analysis
Level: Level 2

Topic: Consolidated Financial Statements (IFRS 10)

AFM – Nov 2016 – L3 – Q5b – Emerging issues in finance and financial management

Compare the functions of the IMF and World Bank and outline challenges faced by the IMF in West Africa.

Question

The International Monetary Fund (IMF) and the World Bank are institutions in the United Nations system. They are twin intergovernmental pillars supporting the structure of the world’s economic and financial order.

Required:
i) Compare and contrast THREE functions of the International Monetary Fund (IMF) and the World Bank. (3 marks)
ii) Explain TWO challenges being faced by the IMF in attaining its objectives in West African Countries. (2 marks)

Answer

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Tags: Economic Development, Global financial institutions, IMF, International monetary cooperation, World Bank
Level: Level 3

Topic: Emerging issues in finance and financial management
Series: NOV 2016

AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Demonstrate how YSL can hedge currency risk using futures contracts and calculate the result of the hedge.

Question

YSL is a company located in the USA that has a contract to purchase goods from Japan in two months’ time on 1st September. The payment is to be made in yen and will total 140 million yen. The managing director of YSL wishes to protect the contract against adverse movements in foreign exchange rates and is considering the use of currency futures. The following data are available:

Spot foreign exchange rate: $1 = 128.15 yen
Yen currency futures contracts on SIMEX (Singapore Monetary Exchange)
- Contract size: 12,500,000 yen
- Contract prices (US$ per yen):
  - September: 0.007985
  - December: 0.008250

Assume that futures contracts mature at the end of the month.

Required:
i) Illustrate how YSL might hedge its foreign exchange risk using currency futures. (5 marks)
ii) Explain the meaning of basis risk and show what basis risk is involved in the proposed hedge. (5 marks)
iii) Assuming the spot exchange rate is 120 yen/$1 on 1 September and that basis risk decreases steadily in a linear manner, calculate what the result of the hedge is expected to be. Briefly discuss why this result might not occur. (5 marks)
(Margin requirements and taxation may be ignored.)

Answer

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Tags: Basis risk, Currency Futures, Currency Hedging, Foreign Exchange Risk, Risk Management
Level: Level 3

Topic: Hedging against financial risk: Non-derivative techniques
Series: NOV 2016

AFM – Nov 2016 – L3 – Q4b – Financial strategy formulation

Discuss three advantages and three disadvantages of ABC Ltd being acquired in a leveraged buyout (LBO).

Question

ABC Ltd is a listed company that operates in the Information Technology industry. The company has been experiencing losses for several years now, and its reserves are fast depleting. Its earnings per share have been negative for the past three years. A team of the company’s largest shareholders and some managers are considering acquiring the company in a leveraged buy-out (LBO).

Required:
Discuss THREE advantages and THREE disadvantages of ABC Ltd being acquired in an LBO.

Answer

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Tags: Advantages and disadvantages, Corporate finance, Financial restructuring, LBO, Leveraged buyout
Level: Level 3

Topic: Financial strategy formulation
Series: NOV 2016

AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers

Calculate the NPV of Mama Ltd's acquisition of Papa Ltd and determine the value of the combined entity and an appropriate share exchange ratio.

Question

a) The Directors of Mama Ltd (Mama), a large listed company, are considering an opportunity to
acquire all the shares of Papa Ltd (Papa), a small listed company with a highly efficient
production technology.
Mama has 10 million shares of common stock in issue that are currently trading at GH¢6.00
each. Papa Ltd has 5 million shares of common stock in issue, each of which is trading at
GH¢4.50.
If Papa is acquired and integrated into the business of Mama, the production efficiency of the
combined entity would increase and save the combined business GH¢600,000 in operating
costs each year to perpetuity.
Though Mama operates in the same industry as Papa, its financial leverage is higher than that
of Papa. Mama’s total debt stock is valued at GH¢40 million, and its after-tax cost of debt is
22%. The beta of Mama’s common stock is 1.2. The return on the risk-free asset is 20% and
the market risk premium is 5%.
Required:
Suppose Mama offers a cash consideration of GH¢25 million from its existing funds to the
shareholders of Papa for all of their shares.
i) Calculate the NPV of the acquisition, and advise the directors of Mama on whether to
proceed with the acquisition or not. (8 marks)
ii) Calculate the value of the combined entity immediately after the acquisition. (3 marks)
iii) Suppose Mama would like to acquire all the shares in Papa by offering fresh shares of its
own common stock to the shareholders of Papa. Advise the directors on the appropriate
share exchange ratio based on market price.

Answer

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Tags: Acquisition valuation, Corporate finance, Mergers and Acquisitions, NPV, Synergy
Level: Level 3

Topic: Valuation of acquisitions and mergers
Series: NOV 2016

AFM – May 2017 – L3 – Q5b – Treasury and Advanced Risk Management Techniques

Explanation of internal and external factors influencing transfer pricing decisions for multinational companies like Kofas Ltd.

Question

One of the key considerations for multinational companies is to decide on the price at which goods and services are transferred from one member of a group to another.

Kofas Ltd has been operating in four countries: Ghana, Nigeria, UK, and USA. The parent company and the subsidiaries have decided to use a transfer pricing policy.

Required:
You have been approached as a consultant to advise on the internal and external factors that will facilitate the transfer of goods and services from one member of the group to another. (10 marks)

Answer

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Tags: External factors, Internal Factors, multinational companies, Profit Maximization, Transfer Pricing
Level: Level 3

Topic: Treasury and Advanced Risk Management Techniques
Series: MAY 2017

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

Question

The Board of Directors of Aduana Enterprise has approved an expansion project which will require a cash inflow of GH¢10 million. The investment duration will be 6 months, and management is considering taking a fixed interest rate loan from its bankers. The loan will be required in three months from the date of board’s approval.

Management of Aduana is considering hedging its risk exposure using a Forward Rate Agreement (FRA). The 3-9 months’ FRA rate at the transaction date was 5%.

Required:
If the spot rate at the settlement date is 8%, calculate the following:
i) Settlement value (3 marks)
ii) Loan amount required (2 marks)
iii) Interest on the loan (2 marks)
iv) Effective interest rate (3 marks)

Answer

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Tags: Forward Rate Agreement, FRA, Interest calculation, Interest rate hedging, Loan management
Level: Level 3

Topic: Hedging against financial risk: Non-derivative techniques
Series: MAY 2017

AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation

Distinguishing between leveraged buy-out and recapitalization, identifying types of reconstruction, and describing steps in financial reconstruction.

Question

There are many possible reasons why management would wish to restructure a company’s finances. A reconstruction scheme might be agreed upon when a company is in danger of being put into liquidation.

Required:
i) Distinguish between a leveraged buy-out and leveraged recapitalisation. (4 marks)
ii) What are the THREE main types of reconstruction? Describe them briefly. (3 marks)
iii) Describe the procedures that should be followed when designing a financial reconstruction scheme. (3 marks)

Answer

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Tags: Financial reconstruction, Leveraged buy-out, Organizational restructuring, Recapitalization
Level: Level 3

Topic: Business reorganisation, Financial reconstruction
Series: MAY 2017

AFM – May 2017 – L3 – Q4a – Sources of finance and cost of capital

Explanation of Eurobonds, their advantages, and problems associated with their use in Ghana's international borrowing.

Question

The government of Ghana has been borrowing in the international financial market by issuing “Eurobonds” to finance projects in Ghana. There has been a keen debate on the borrowing by the government.

Required:
i) As a Finance Officer, explain what Eurobond is all about. (3 marks)
ii) Identify THREE advantages that have been cited for the government using Eurobonds. (3 marks)
iii) Evaluate FOUR problems associated with the use of international borrowing, especially Eurobonds in Ghana. (4 marks)

Answer

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Tags: Eurobonds, Government Finance, International borrowing, Risk Management
Level: Level 3

Topic: Sources of finance and cost of capital
Series: MAY 2017

AFM – May 2017 – L3 – Q3c – Valuation of acquisitions and mergers

Factors to be considered by the directors and shareholders in evaluating the worthiness of the takeover proposal.

Question

Discuss briefly any other factors that the directors and shareholders of both companies might consider in assessing the worthwhileness of the proposed takeover. (4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Mergers and Acquisitions, Shareholders, Synergies, Takeover considerations, Transaction costs
Level: Level 3

Topic: Valuation of acquisitions and mergers
Series: MAY 2017

FR – May 2018 – L2 – Q4 – Consolidated Financial Statements (IFRS 10)

Assess the financial performance and position of two companies using specified ratios and explain the limitations of ratio analysis.

Question

Statements of Profit or Loss

b. Explain the limitations of ratio analysis and further information that may be useful to the board of directors when making the acquisition decision. (8 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Acquisition, Efficiency Ratios, Financial Analysis, Liquidity Ratios, Long-term Stability Ratios, Profitability Ratios, Ratio Analysis
Level: Level 2

Topic: Consolidated Financial Statements (IFRS 10)

AFM – Nov 2016 – L3 – Q5b – Emerging issues in finance and financial management

Compare the functions of the IMF and World Bank and outline challenges faced by the IMF in West Africa.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Economic Development, Global financial institutions, IMF, International monetary cooperation, World Bank
Level: Level 3

Topic: Emerging issues in finance and financial management
Series: NOV 2016

AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Demonstrate how YSL can hedge currency risk using futures contracts and calculate the result of the hedge.

Question

Spot foreign exchange rate: $1 = 128.15 yen
Yen currency futures contracts on SIMEX (Singapore Monetary Exchange)
- Contract size: 12,500,000 yen
- Contract prices (US$ per yen):
  - September: 0.007985
  - December: 0.008250

Assume that futures contracts mature at the end of the month.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Basis risk, Currency Futures, Currency Hedging, Foreign Exchange Risk, Risk Management
Level: Level 3

Topic: Hedging against financial risk: Non-derivative techniques
Series: NOV 2016

AFM – Nov 2016 – L3 – Q4b – Financial strategy formulation

Discuss three advantages and three disadvantages of ABC Ltd being acquired in a leveraged buyout (LBO).

Question

Required:
Discuss THREE advantages and THREE disadvantages of ABC Ltd being acquired in an LBO.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Advantages and disadvantages, Corporate finance, Financial restructuring, LBO, Leveraged buyout
Level: Level 3

Topic: Financial strategy formulation
Series: NOV 2016

AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers

Calculate the NPV of Mama Ltd's acquisition of Papa Ltd and determine the value of the combined entity and an appropriate share exchange ratio.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Acquisition valuation, Corporate finance, Mergers and Acquisitions, NPV, Synergy
Level: Level 3

Topic: Valuation of acquisitions and mergers
Series: NOV 2016

AFM – May 2017 – L3 – Q5b – Treasury and Advanced Risk Management Techniques

Explanation of internal and external factors influencing transfer pricing decisions for multinational companies like Kofas Ltd.

Question

One of the key considerations for multinational companies is to decide on the price at which goods and services are transferred from one member of a group to another.

Kofas Ltd has been operating in four countries: Ghana, Nigeria, UK, and USA. The parent company and the subsidiaries have decided to use a transfer pricing policy.

Answer

Find Related Questions by Tags, levels, etc.

Tags: External factors, Internal Factors, multinational companies, Profit Maximization, Transfer Pricing
Level: Level 3

Topic: Treasury and Advanced Risk Management Techniques
Series: MAY 2017

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

Question

Management of Aduana is considering hedging its risk exposure using a Forward Rate Agreement (FRA). The 3-9 months’ FRA rate at the transaction date was 5%.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Forward Rate Agreement, FRA, Interest calculation, Interest rate hedging, Loan management
Level: Level 3

Topic: Hedging against financial risk: Non-derivative techniques
Series: MAY 2017

AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation

Distinguishing between leveraged buy-out and recapitalization, identifying types of reconstruction, and describing steps in financial reconstruction.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial reconstruction, Leveraged buy-out, Organizational restructuring, Recapitalization
Level: Level 3

Topic: Business reorganisation, Financial reconstruction
Series: MAY 2017

AFM – May 2017 – L3 – Q4a – Sources of finance and cost of capital

Explanation of Eurobonds, their advantages, and problems associated with their use in Ghana's international borrowing.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Eurobonds, Government Finance, International borrowing, Risk Management
Level: Level 3

Topic: Sources of finance and cost of capital
Series: MAY 2017

AFM – May 2017 – L3 – Q3c – Valuation of acquisitions and mergers

Factors to be considered by the directors and shareholders in evaluating the worthiness of the takeover proposal.

Question

Discuss briefly any other factors that the directors and shareholders of both companies might consider in assessing the worthwhileness of the proposed takeover. (4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Mergers and Acquisitions, Shareholders, Synergies, Takeover considerations, Transaction costs
Level: Level 3

Topic: Valuation of acquisitions and mergers
Series: MAY 2017

Subject: ADVANCED FINANCIAL MANAGEMENT

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FR – May 2018 – L2 – Q4 – Consolidated Financial Statements (IFRS 10)

Assess the financial performance and position of two companies using specified ratios and explain the limitations of ratio analysis.

You're reporting an error for "FR – May 2018 – L2 – Q4 – Consolidated Financial Statements (IFRS 10)"

AFM – Nov 2016 – L3 – Q5b – Emerging issues in finance and financial management

Compare the functions of the IMF and World Bank and outline challenges faced by the IMF in West Africa.

You're reporting an error for "AFM – Nov 2016 – L3 – Q5b – Emerging issues in finance and financial management"

AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Demonstrate how YSL can hedge currency risk using futures contracts and calculate the result of the hedge.

You're reporting an error for "AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques"

AFM – Nov 2016 – L3 – Q4b – Financial strategy formulation

Discuss three advantages and three disadvantages of ABC Ltd being acquired in a leveraged buyout (LBO).

You're reporting an error for "AFM – Nov 2016 – L3 – Q4b – Financial strategy formulation"

AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers

Calculate the NPV of Mama Ltd's acquisition of Papa Ltd and determine the value of the combined entity and an appropriate share exchange ratio.

You're reporting an error for "AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers"

AFM – May 2017 – L3 – Q5b – Treasury and Advanced Risk Management Techniques

Explanation of internal and external factors influencing transfer pricing decisions for multinational companies like Kofas Ltd.

You're reporting an error for "AFM – May 2017 – L3 – Q5b – Treasury and Advanced Risk Management Techniques"

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

You're reporting an error for "AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques"

AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation

Distinguishing between leveraged buy-out and recapitalization, identifying types of reconstruction, and describing steps in financial reconstruction.

You're reporting an error for "AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation"

AFM – May 2017 – L3 – Q4a – Sources of finance and cost of capital

Explanation of Eurobonds, their advantages, and problems associated with their use in Ghana's international borrowing.

You're reporting an error for "AFM – May 2017 – L3 – Q4a – Sources of finance and cost of capital"

AFM – May 2017 – L3 – Q3c – Valuation of acquisitions and mergers

Factors to be considered by the directors and shareholders in evaluating the worthiness of the takeover proposal.

You're reporting an error for "AFM – May 2017 – L3 – Q3c – Valuation of acquisitions and mergers"

FR – May 2018 – L2 – Q4 – Consolidated Financial Statements (IFRS 10)

Assess the financial performance and position of two companies using specified ratios and explain the limitations of ratio analysis.

You're reporting an error for "FR – May 2018 – L2 – Q4 – Consolidated Financial Statements (IFRS 10)"

AFM – Nov 2016 – L3 – Q5b – Emerging issues in finance and financial management

Compare the functions of the IMF and World Bank and outline challenges faced by the IMF in West Africa.

You're reporting an error for "AFM – Nov 2016 – L3 – Q5b – Emerging issues in finance and financial management"

AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Demonstrate how YSL can hedge currency risk using futures contracts and calculate the result of the hedge.

You're reporting an error for "AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques"

AFM – Nov 2016 – L3 – Q4b – Financial strategy formulation

Discuss three advantages and three disadvantages of ABC Ltd being acquired in a leveraged buyout (LBO).

You're reporting an error for "AFM – Nov 2016 – L3 – Q4b – Financial strategy formulation"

AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers

Calculate the NPV of Mama Ltd's acquisition of Papa Ltd and determine the value of the combined entity and an appropriate share exchange ratio.

You're reporting an error for "AFM – Nov 2016 – L3 – Q4a – Valuation of acquisitions and mergers"

AFM – May 2017 – L3 – Q5b – Treasury and Advanced Risk Management Techniques

Explanation of internal and external factors influencing transfer pricing decisions for multinational companies like Kofas Ltd.

You're reporting an error for "AFM – May 2017 – L3 – Q5b – Treasury and Advanced Risk Management Techniques"

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

You're reporting an error for "AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques"

AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation

Distinguishing between leveraged buy-out and recapitalization, identifying types of reconstruction, and describing steps in financial reconstruction.

You're reporting an error for "AFM – May 2017 – L3 – Q4b – Financial reconstruction, Business reorganisation"

AFM – May 2017 – L3 – Q4a – Sources of finance and cost of capital

Explanation of Eurobonds, their advantages, and problems associated with their use in Ghana's international borrowing.

You're reporting an error for "AFM – May 2017 – L3 – Q4a – Sources of finance and cost of capital"

AFM – May 2017 – L3 – Q3c – Valuation of acquisitions and mergers

Factors to be considered by the directors and shareholders in evaluating the worthiness of the takeover proposal.

You're reporting an error for "AFM – May 2017 – L3 – Q3c – Valuation of acquisitions and mergers"

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