Subject: FINANCIAL MANAGEMENT

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FM – Nov 2024 – L2 – Q5c – Public-Private Partnerships (PPP)

Discuss types of PPP arrangements and their suitability for a highway project.

Question

Public-Private Partnerships (PPP) involve collaboration between government and a private sector company that can be used to finance, build and operate projects. Financing a project (for example, a highway) through PPP can allow a project to be completed sooner or make it a possibility in the first place.

Required:
Given the following types of PPP arrangements, discuss each of them and how they can be suitable for a highway project:

i) Build-Operate-Transfer (BOT)
ii) Design-Build-Finance-Operate (DBFO)
iii) Service Concession

Answer

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Tags: BOT, DBFO, Infrastructure Financing, Public-Private Partnerships, Service Concession
Level: Level 2

Topic: Public-Private Partnerships (PPP)
Series: Nov 2024

FM – Nov 2024 – L2 – Q5b – Overdue Debt Collection

Steps to collect overdue debts in financial management.

Question

Outline the steps to be followed to collect overdue debts.

Answer

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Tags: Credit control, Debt Collection, Financial management, Late Payments, Payment Recovery, Receivables
Level: Level 2

Topic: Management of receivables and payables
Series: Nov 2024

FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

Question

Abaa LTD, a company that manufactures and sells electronic appliances, has been facing challenges with its accounts receivable management. Currently, the company allows its customers 60 days of credit. Due to the highly competitive market, Abaa LTD has been experiencing an increasing amount of bad debts and delayed payments, which has adversely affected its cash flow and profitability. To address these issues, the company’s Finance Manager is considering several strategic changes:

Reduction in Credit Period: Reducing the credit period from 60 days to 45 days. It is estimated that this change could reduce sales by 5% due to the stricter credit terms, but it would also decrease the bad debt ratio from 4% to 2% of sales.
Offering Early Payment Discounts: Introducing a 2% discount for customers who pay within 30 days. The company anticipates that 30% of its customers will take advantage of this discount, which would improve cash flow and reduce the average collection period by 15 days.
Engagement of a Factor: The company is also considering engaging a factoring company to manage its receivables. The factor would advance 80% of the invoice value upon the sale of goods at 200 basis points below the company’s cost of capital and charge a 3% fee on all sales. The factor is expected to reduce the bad debt ratio to 1% of sales and further reduce the average collection period by 20 days. Engaging the factor will lead to annual administrative savings of GH¢90,000.

Abaa LTD’s current annual sales are GH¢20 million, and the variable cost of sales is 60% of sales. The company’s cost of capital is 12% per annum.

Required:
Evaluate the financial implications of the following:
i) Reduction in Credit Period
ii) Offering Early Payment Discounts
iii) Engagement of a Factor
iv) Recommend the appropriate method to manage the credit sales

Answer

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Tags: Accounts Receivable, Bad Debts, Cash Flow, Cost of Capital, Credit Period, Early Payment Discounts, Factoring, Working Capital
Level: Level 2

Topic: Management of receivables and payables
Series: Nov 2024

FM – Nov 2024 – L2 – Q4b – Procurement and Tendering Procedures

Discuss circumstances under which single-source procurement is appropriate and functions of the Entity Tender Committee.

Question

The Farms and Gardens Authority (FGA), a public entity, wants to buy 100 computers and 20 printers for its administrative offices. The Chief Executive Officer (CEO) is considering using the single-source procurement method to procure the computers and printers while pushing back on the recommendations of the Entity Tender Committee.

Required:

i) State TWO circumstances under which single-source procurement would be appropriate for the goods the FGA wants to procure.

ii) Advise the CEO on TWO functions the Entity Tender Committee is expected to perform in the FGA’s procurements.

Answer

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Tags: Procurement, Procurement Laws, Public Financial Management, Public Sector, Single source procurement, Tender Committee, Tendering
Level: Level 2

Topic: Public sector financial management reforms
Series: Nov 2024

FM – Nov 2024 – L2 – Q4a – Business Valuation

Valuing a company using the discounted cash flow model and price multiples.

Question

Djokoto PLC (Djokoto) has 12 million ordinary shares outstanding and no other long-term debt. The Finance Director of Djokoto, Adepa, estimates that Djokoto’s free cash flows at the end of the next three years will be GH¢0.5 million, GH¢0.6 million, and GH¢0.7 million, respectively. After Year 3, the free cash flow will grow at 5% yearly forever. The appropriate discount rate for this free cash flow stream is determined to be 15% annually.

In a separate analysis based on ratios, Adepa estimates that Djokoto will be worth 10 times its Year 3 free cash flow at the end of the third year. Adepa gathered data on two companies comparable to Djokoto: Mesewa and Dunsin. It is believed that these companies’ price-to-earnings, price-to-sales, and price-to-book-value per share should be used to value Djokoto.

The relevant data for the three companies are given in the table below:

Variables	Mesewa	Dunsin	Djokoto
Current Price Per Share	7.20	4.50	2.40
Earnings Per Share	0.20	0.15	0.10
Revenue Per Share	3.20	2.25	1.60
Book Value Per Share	1.80	1.00	0.80

Required:
i) Estimate Djokoto’s fair value based on the discounted cash flows model. (5 marks)
ii) Compute the following ratios for the comparable companies:

P/E Ratio (2 marks)
Price-to-Sales Ratio (2 marks)
Price-to-Book-Value Ratio (2 marks)
iii) Based on the valuation results, discuss whether an investor should buy, sell, or hold Djokoto shares. Justify your recommendation. (4 marks)
iii) Identify two advantages and two disadvantages of business combinations.

Answer

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Tags: Business Valuation, Discounted Cash Flow, Financial Modelling, Price-Earnings ratio, Price-to-Book Ratio, Price-to-Sales Ratio
Level: Level 2

Topic: Business valuations
Series: Nov 2024

FM – Nov 2024 – L2 – Q3b – Mobile Money vs Traditional Banking

Discuss the disadvantages of mobile money compared to traditional banking services.

Question

The development of mobile money in Ghana has provided a section of the population with banking services that were previously not accessed. This expansion in financial inclusion is seen as a positive step towards boosting economic activity and alleviating poverty. However, there are some disadvantages to mobile money compared to a traditional bank account.

Required:
Explain FOUR disadvantages of mobile money compared to a traditional bank account.

Answer

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Tags: Banking Services, Financial Inclusion, Financial Literacy, Mobile Money, Regulation, Traditional Banking, Transaction Fees
Level: Level 2

Topic: Treasury management
Series: Nov 2024

FM -NOV 2024 – L2 – Q3a – Foreign Exchange Risk Management

Explaining foreign exchange risk types and calculating the impact of forward contract hedging.

Question

a) Dadisen PLC manufactures and sells pharmaceutical products in Ghana. It imports a significant portion of its pharmaceutical inputs from the USA. However, it only sells its products in Ghana. The company is considering establishing its foothold in The Gambia, Liberia, and Sierra Leone markets.

i) Dadisen PLC reports its results in its home currency. It pays for its purchases from the USA in US dollars but receives payments for its sales in Ghana cedis. All sales from Gambia, Liberia, and Sierra Leone are expected to be transferred into US dollar accounts each week. On average, the company generally takes 90 days to pay its suppliers and receives payment from its debtors within 60 days. In paying its suppliers, the company relies on bank overdrafts at an annual rate of 10%.

Over the last few years, the company has found that sales have been quite predictable, and it has been possible to plan sales levels and purchases of goods in advance. However, the company does not have adequate management skills for its foreign currency exposure. As a result, the company has reported exchange rate losses since 2020. The company is currently considering whether the forex exposure could be better managed.

Required:

Describe the following types of foreign currency exposure, giving examples of how they could impact the financial statements of Dadisen PLC:

Transaction risk
Translation risk
Economic risk

ii) The company estimates that it will need to borrow $1 million in three months’ time for a period of six months but is concerned about expected fluctuations in the exchange rate. The company is considering hedging this exposure using a currency forward contract. The company’s banker, GCB, has agreed to sell the US dollar forward for 9 months at GH¢17 to the dollar.

Required:
Compute the effect of the currency forward transaction on profitability if the spot exchange rate in 9 months is:

GH¢22
GH¢15

Answer

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Tags: Currency Forward Contracts, Economic Risk, Foreign Exchange Risk, Hedging, Transaction Risk, Translation Risk
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: Nov 2024

FM – Nov 2024 – L2 – Q2 – Investment Appraisal

Calculate the NPV of launching two new products, Agbui and Loloi, and advise on the investment decision.

Question

Santrofi PLC is a publisher that wants to expand its market share in magazine publications. The company plans to launch two new products, Agbui and Loloi, at the start of January 2025, which it believes will each have a 4-year life span. The sales mix is assumed to be fixed. The information below is relevant:

Expected sales volumes (units) for Agbui:

Year	1	2	3	4
Volume	30,000	55,000	50,000	15,000

The first year’s selling price and direct material costs for each Agbui unit will be GH¢31 and GH¢12, respectively. On the other hand, the company expects to sell 25% more Loloi units than Agbui. Both selling price and direct material cost of Loloi are expected to be 25% less than Agbui’s.
Incremental fixed production costs are expected to be GH¢500,000 in the first year of operation, apportioned based on revenue. Advertising costs will be GH¢250,000 in the first year of operation and then GH¢125,000 per year for the following two years.
To produce the two products, an investment of GH¢1 million in machinery and GH¢500,000 in working capital will be needed, payable at the start of the period. Santrofi PLC expects to recover GH¢600,000 from the sale of machinery at the end of the project life. Investment in machinery attracts a 100% first-year tax-allowable depreciation. The company has sufficient profit to take full advantage of the allowance in Year 1. For the purpose of reporting accounting profit, the company depreciates machinery on a four-year straight-line basis.
Revenue and costs are expected to be affected by inflation after the first year as follows:
- Selling price: 3% a year
- Direct material cost: 3% a year
- Fixed production cost: 5% a year
The company’s real discount rate is 10% for investment appraisal. Average inflation is deemed to be 3%. The applicable corporate tax rate is 25%.

Required:
Calculate the Net Present Value (NPV) of the proposed investment in the two products and advise the company on its investment appraisal.

Answer

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Tags: Corporate Tax, Discounted Cash Flow, Inflation, Investment Appraisal, Machinery Investment, Net Present Value
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: Nov 2024

FM – May 2016 – L3 – Q7 – Financing Decisions and Capital Markets

Comparing the cost of financing equipment replacement through an outright purchase funded by a loan versus a finance lease.

Question

MK Plc is considering the best way to finance the replacement for a particular high specification piece of equipment that has become too costly to maintain. The replacement equipment is estimated to have a useful life of 4 years with no residual value after that time.

Two alternative financing schemes are being evaluated:

Scheme A: Buy the equipment outright funded by a bank loan
Scheme B: Enter into a four-year finance lease

Scheme A: Buy outright, funded by a bank loan
MK Plc could purchase the equipment outright at a cost of N200 million on July 1, 2016. MK Plc can normally borrow at an annual interest rate of 13% per year.

Scheme B: Four-year finance lease
The equipment would be delivered on July 1, 2016, and MK Plc would pay a fixed amount of N58,790,000 each year in advance, starting on July 1, 2016, for four years. At the end of four years, ownership of the equipment will pass to MK Plc without further payment.

Other Information:

MK Plc has a cost of equity of 20% and WACC of 16%
MK Plc is liable to company tax at a marginal rate of 30%, which is settled at the end of the year in which it arises
Tax depreciation allowances on the full capital cost are available in equal instalments over the first four years of operation

You are required to:

a.

Calculate which payment method is expected to be cheaper for MK Plc and recommend which should be chosen solely on the present value of the two alternatives as at July 1, 2016. (13 Marks)

b.

Discuss the appropriateness of the discount rate used in (a). (2 Marks)

Answer

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Tags: Discount rate, Equipment Financing, Financing, Lease, Loan, Present Value
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2016 – L3 – Q6b – Investment Appraisal Techniques

Calculating the betas, required rates of return, and stock prices for three securities based on market data and forecasts.

Question

The expected return on the market portfolio (estimated from past data) is 12% p.a. with a standard deviation of 15% and the risk-free rate of 4% p.a. The actual prices, last year dividends, and the covariances from three securities (A, B, C) with the market are given in the table below:

Security	Actual Price (N)	Last Year Dividend (N)	Covariance with Market
A	107	1.30	0.025650
B	618	18.00	0.018675
C	1,350	22.00	0.029025

You are required to:

i.

Calculate the betas and the required rates of return of securities A, B, and C. (3 Marks)

ii.

In the table below, you have the market consensus forecast of 12-month price targets, ex-dividends, and the expected dividend growth rate of the securities.

Security	12-month price target (N)	Dividend growth rate (%)
A	122.50	12
B	740.00	10
C	1,500.00	11

Assuming the dividends are paid in 12 months exactly, compute the required stock price for the 3 stocks and state your conclusion. (4 Marks)

iii.

Considering the results in (ii) above, explain briefly what will be your strategy? (1 Mark)

Answer

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Tags: Beta, CAPM, Dividends, Market Portfolio, Required Return, Stock valuation
Level: Level 3

Topic: Investment Appraisal Techniques

FM – May 2019 – L3 – Q7 – Working Capital Management

Evaluate the financial viability of accepting a new customer order and provide considerations for granting credit.

Question

V Plc. manufactures engineering equipment. The company has received an order from a new customer for five machines at N5,000,000 each. V Plc.’s terms of sale are 10 percent of the sales value payable with the order. The deposit has been received from the new customer. The balance is payable 12 months after acceptance of the order by V Plc.

V Plc.’s past experience has been that only 60 percent of similar customers pay within 12 months. Customers who do not pay within 12 months are referred to a debt collection agency to pursue the debt. The agency has in the past had a 50 percent success rate of obtaining immediate payment once they became involved. When they are unsuccessful, the debt is written off by V Plc. The agency’s fee is N500,000 per order, payable by V Plc. with the request for service. This fee is not refundable if the debt is not recovered.

As an accountant in V Plc.’s credit control department, and based on the company’s past experience and on discussions with the sales and credit managers, you do not expect the pattern of payment and collection to change.

Incremental costs associated with the new customer’s order are expected to be N3,600,000 per machine, 70 percent of these costs are for materials and are incurred shortly after the order has been accepted. The remaining 30 percent is for all other costs, which you can assume are paid shortly before delivery, i.e., in 12 months’ time. The company is not at present operating at full production capacity.

A credit bureau has offered to provide error-free credit information about the new customer if the price is right.

V Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.

Required:

a. Evaluate, from a purely financial point of view, if V Plc. should accept the order from the new customer based on the above information. (12 Marks)

b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 Marks)

Answer

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Tags: Credit control, Customer Order Evaluation, Financial Analysis, Risk Assessment
Level: Level 3

Topic: Working Capital Management

FM – May 2019 – L3 – Q6 – Interest Rate Risk Management

Evaluate the effect of using interest rate futures to hedge a loan and compare the total cost after hedging with an interest rate guarantee.

Question

You are the head of the treasury group of Top Flight Aviation (TFA), a Nigerian company. The company operates chartered international flights for the elites in the country.

It is now December 31, and TFA needs to borrow £60 million from a UK bank to finance a new air jet. The borrowing and the purchase will be in three months’ time, and the borrowing will be for a period of six months.

You have decided to hedge the relevant interest rate risk using interest rate futures. Your expectation is that interest rates will increase from 13% by 2% over the next three months.

In the month of March, the current price of Sterling 3-month futures is 87.25. The standard contract size is £500,000.

Required:

a. Set out calculations of the effect of using the futures market to hedge against movements in the interest rate if:
(i) Interest rates increase from 13% by 2% and the futures market price moves by 2%;
(ii) Interest rates increase from 13% by 2% and the futures market price moves by 1.75%;
(iii) Interest rates fall from 13% by 1.5% and the futures market price moves by 1.25%;

In each case, show the hedge efficiency. The time value of money, taxation, and margin requirements should be ignored.

b. Show, for the situations in (a) above, whether the total cost of the loan after hedging would have been lower with the futures hedge chosen by the treasurer or with an interest rate guarantee which the treasurer could have purchased at 13% for a premium of 0.25% of the size of the loan to be guaranteed.

The time value of money, taxation, and margin requirements should be ignored.

(Total: 15 Marks)

Answer

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Tags: Futures Contracts, Hedging, Interest Rate Futures, Loan financing
Level: Level 3

Topic: Interest Rate Risk Management

FM – May 2019 – L3 – Q5 – Portfolio Management

Evaluate whether an option price is fair for hedging Yaro Plc. shares, and explain how changes in volatility and the risk-free rate affect the value of a call option.

Question

You are the portfolio manager of an asset management company based in Kano. Your company has in its portfolio 27,750,000 shares of Yaro Plc., a company listed on the Nigerian Stock Exchange. The shares are currently trading at N3.60 per share.

Your company plans to sell the shares in six months’ time to pay dividends, and you plan to hedge the risk of Yaro’s shares falling by more than 5% from their current market value. A decision has therefore been taken to buy an over-the-counter option to protect the shares. A merchant bank has offered to sell an appropriate six-month option to your company for N1,250,000.

Yaro’s share price has an annual standard deviation of 13%, and the risk-free rate is 4% per year.

Required:

a. Evaluate whether or not the price at which the merchant bank is willing to sell the option is a fair price.

b. Explain briefly (without any calculations) how a decrease in the value of each of the following variables is likely to change the value of a call option:
i. Volatility of the stock price
ii. Risk-free rate

(Total: 15 Marks)

Answer

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Tags: Call Option, Hedging, Options, Risk Management
Level: Level 3

Topic: Portfolio Management

FM – May 2019 – L3 – Q4 – Portfolio Management

Evaluate abnormal returns for shares and bonds, calculate required returns for a pension fund portfolio, and assess its active management strategy.

Question

The managers of a pension fund follow an active portfolio management strategy. They try to purchase shares and bonds that show a positive abnormal return (positive alpha factor in the case of shares). The pension fund is required by law to hold at least 40% of its investments in bonds. N100million is currently available for
investment. Three shares and three bonds are being considered for purchase. The required return on bonds may be measured using a model similar to the capital asset pricing model, where beta is replaced by the relative duration of the individual bond (Di) and the bond market portfolio (Dm) i.e. Di/Dm.

Note: Assume the risk-free rate is 4 percent per year.

Required:

a. Evaluate whether or not any of the shares or bonds is expected to offer a positive abnormal return. (10 Marks)

b. The pension fund currently has the maximum permitted investment in shares and wishes to continue this strategy. It has a market value of N1,000 million and a beta of 0.62.

Required:
Calculate the required return from the pension fund if any shares and bonds with positive abnormal returns are purchased. State clearly any assumptions that you make. (4 Marks)

c. Discuss possible problems with the pension fund’s investment strategy. (6 Marks)

Answer

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Tags: Abnormal Returns, CAPM, Investment strategy, Portfolio Management
Level: Level 3

Topic: Portfolio Management

FM – May 2019 – L3 – Q3 – Corporate Restructuring

Evaluate three strategic proposals for Pinko Ltd., including immediate liquidation, a take-over offer, and reorganization, to determine Able Bank's financial outcome.

Question

ble Bank, on April 24, 2019, received the following statement of financial position prepared for its customers, Pinko Limited (PL):

Statement of financial position as at April 20, 2019

PL is a long-established company which traded profitably until a few years ago. Following the expiration of exclusive patent rights on a particularly profitable product line, results declined dramatically. Over the last twelve months, the company’s cash flow problems have steadily increased. The overdraft facility at present stands at N45m and carries a second charge on the company’s freehold property.

A meeting has been arranged to consider the company’s future. The above statement of financial position will be presented at the meeting and the following proposals will be discussed:

Proposals:

(a) Immediate liquidation of the company
In these circumstances, it is estimated that the freehold property would realize N65,000,000, the plant N21,000,000, the inventory N40,000,000, and the receivables would pay up in full. Preferential payables, included in the statement of financial position figure for payables, amounted to N27,000,000.

(b) Tayo Limited (TL) has made an offer to take over the entire business activities of PL
Under the terms of the offer, Able Bank would receive 80% of the balance due, but repayment would not be made until exactly one year from the date of the creditors’ meeting. No further interest would be considered to accrue on the balance due to Able Bank (AB) during the twelve-month period.

(c) Reorganization and capital reconstruction
The management of PL is planning a reorganization of the company’s activities which will restore profitability to reasonable levels almost immediately. The reorganization will be linked with a capital reconstruction scheme. Under this scheme:

The existing shareholders will be asked to accept two ₦1 shares in exchange for every five shares currently held.
The bank will be asked to accept 10,000,000 ₦1 shares as consideration for one-half of the present overdraft.
If this proposal is acceptable to creditors, the shareholders have indicated their willingness to take up a further 30,000,000 ₦1 shares for cash, and the balance remaining outstanding to the bank would be repaid from the proceeds of this issue.
The directors are confident that if this proposal is put into effect, profits of ₦40,500,000 per annum will be earned for the foreseeable future, of which two-thirds will be paid out as dividends and the remainder reinvested.

Notes:

Assume that the bank earns 15% per annum on all its lending and that the amounts in the statement of financial position include interest that accrued to date.
Assume, for convenience, that any adopted proposal would be implemented immediately with payments received immediately unless otherwise stated.
Ignore expenses of realization and liquidation, and assume that no changes have occurred between April 20 and April 24, 2019.

Required:

a. Calculate the amounts which Able Bank would receive under each of the three proposals. (10 Marks)
b. Examine the relative financial merits of the proposals from the viewpoint of Able Bank. (10 Marks)

(Total: 20 Marks)

Answer

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Tags: Capital Reconstruction, Debt Recovery, Liquidation
Level: Level 3

Topic: Corporate Restructuring

FM – May 2019 – L3 – Q2 – Strategic Performance Measurement

Calculate and analyze PH Plc.’s financial performance using EPS, dividend yield, dividend cover, and P/E ratio metrics.

Question

The following financial information is available for PH Plc:

Year	2014	2015	2016	2017
Earnings attributed to ordinary shareholders (₦m)	200	225	205	230
Number of ordinary shares (millions)	2,000	2,100	2,100	1,900
Price per share (kobo)	220	305	290	260
Dividend per share (kobo)	5	7	8	8

Assume that share prices are as at the last day of each year.

Required:

a. Calculate PH Plc.’s earnings per share, dividend yield, dividend cover, and price/earnings ratio. Explain the meaning of each term and state their limitations. (14 Marks)
b. Explain why the changes that occurred in the figures calculated in (a) above over the past four years might have happened. (6 Marks)

Answer

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Tags: Dividend Cover, Dividend Yield, EPS, Financial Analysis, P/E Ratio
Level: Level 3

Topic: Strategic Performance Measurement

FM – May 2019 – L3 – Q1 – Mergers and Acquisitions

Evaluate the synergy expected from a proposed merger between Pako Plc. and RT Plc. using free cash flow analysis, and discuss limitations and alternatives.

Question

Pako Plc. will soon announce a take-over bid for Ronke Tina (RT) Plc., a company in the same industry. The initial bid will be an all-share bid of four Pako shares for every five RT Plc. shares. The most recent annual data relating to the two companies are shown below:

The take-over is expected to result in cost saving in advertising and distribution, reducing the operating costs (including depreciation) of Pako from 76% of sales to 70% of sales. The growth rate of the combined company is expected to be 6% per year for four years and 5% per year thereafter. RT’s debt obligations will be taken over by Pako. The corporate tax rate is expected to remain at 30%.

Sales and costs relevant to the decision may be assumed to be in cash terms.

Required:

a. Estimate how much synergy is expected to be created from the take-over, using free cash flow to the firm analysis for each individual company and the potential combined company. State clearly any assumptions that you make.
Note: The weighted average cost of capital of the combined company is assumed to be 9%. (20 Marks)

b. Discuss any five limitations of the above estimates. (5 Marks)

c. Explain, generally, three advantages and two disadvantages of expansion through merger and acquisition rather than through organic growth. (5 Marks)
(Total: 30 Marks)

Answer

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Tags: Free Cash Flow, Growth Analysis, M&A, Synergy, WACC
Level: Level 3

Topic: Mergers and acquisitions

FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

Question

Build Nigeria Plc. (BNP) is a giant construction company with head office in Kano, Nigeria. It is involved in construction of roads, dams, airfields, etc., in many parts of the country. Recently, the company won construction contracts across a number of African countries. One of the contracts is for the construction of a dam for a country in Central Africa whose currency is Central African Dollar (C$). The dam has now been completed, and the retention money of C$210,000,000 is due for settlement in one year’s time.
The current spot exchange rate is C$40 = N1. Risk-free rate is 5% in Nigeria and 25% in the foreign country.
The Chief Finance Officer (CFO) of BNP is worried about the above financial statistics and concluded that BNP will lose as much as N840,000 due to exchange rate movements between now and the end of the year when the retention money is received.

Required:
Explain, showing all relevant calculations, how the CFO arrived at the potential loss of N840,000. (4 Marks)

b. In another contract in a country in the ECOWAS sub-region (with currency of W$), BNP expects the following payment and receipt in six months’ time:
You are provided with the following financial data:

Spot exchange rate:
N per W$1 = 1.4735 – 1.4755

Money Market Rates:

Deposit % Borrowing %

Nigeria 13.25

West African Country 6.5

Required:
Show how BNP can make use of money market hedge to mitigate the foreign exchange risk inherent in the above payment and receipt. Show all workings and the necessary steps.

(7 Marks)

c. Discuss TWO advantages and TWO disadvantages of forward exchange contracts.

(4 Marks)

Deposit %	Borrowing %
Nigeria	13.25
West African Country	6.5

Answer

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Tags: Currency Movements, Exchange Rate Risks, Forward Contracts, Money Market Hedging, Multinational Finance, Risk Mitigation
Level: Level 3

Topic: Foreign Exchange Risk Management
Series: NOV 2014

FM – Nov 2014 – L3 – SC – Q6b – Financing Decisions and Capital Markets

Examine reasons for conflict of interest between shareholders and bondholders.

Question

Discuss any FIVE reasons why conflict of interest may exist between shareholders and bondholders. (5 Marks)

Answer

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Tags: Bondholders, Conflict of Interest, Financing decisions, Governance, Risk Management, Shareholders
Level: Level 3

Topic: Financing Decisions and Capital Markets
Series: NOV 2014

FM – Nov 2014 – L3 – SC – Q6a – Treasury Management

Discuss transfer pricing and its implications for multinational companies with subsidiaries in foreign countries.

Question

Nimega Plc is a Nigeria-based multinational company that has subsidiaries in two foreign countries. Both subsidiaries trade with other group members and with four third-party companies.

You are required to present SIX arguments for and FOUR arguments against centralized treasury management in a multinational organization.

(10 Marks)

Answer

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Tags: Group Structures, International trade, multinational companies, Nigeria-Based Companies, Subsidiaries, Transfer Pricing
Level: Level 3

Topic: Treasury management
Series: NOV 2014

Subject: FINANCIAL MANAGEMENT

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FM – Nov 2024 – L2 – Q5c – Public-Private Partnerships (PPP)

Discuss types of PPP arrangements and their suitability for a highway project.

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FM – Nov 2024 – L2 – Q5b – Overdue Debt Collection

Steps to collect overdue debts in financial management.

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FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

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FM – Nov 2024 – L2 – Q4b – Procurement and Tendering Procedures

Discuss circumstances under which single-source procurement is appropriate and functions of the Entity Tender Committee.

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FM – Nov 2024 – L2 – Q4a – Business Valuation

Valuing a company using the discounted cash flow model and price multiples.

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FM – Nov 2024 – L2 – Q3b – Mobile Money vs Traditional Banking

Discuss the disadvantages of mobile money compared to traditional banking services.

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FM -NOV 2024 – L2 – Q3a – Foreign Exchange Risk Management

Explaining foreign exchange risk types and calculating the impact of forward contract hedging.

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FM – Nov 2024 – L2 – Q2 – Investment Appraisal

Calculate the NPV of launching two new products, Agbui and Loloi, and advise on the investment decision.

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FM – May 2016 – L3 – Q7 – Financing Decisions and Capital Markets

Comparing the cost of financing equipment replacement through an outright purchase funded by a loan versus a finance lease.

a.

b.

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FM – May 2016 – L3 – Q6b – Investment Appraisal Techniques

Calculating the betas, required rates of return, and stock prices for three securities based on market data and forecasts.

i.

ii.

iii.

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FM – May 2019 – L3 – Q7 – Working Capital Management

Evaluate the financial viability of accepting a new customer order and provide considerations for granting credit.

Required:

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FM – May 2019 – L3 – Q6 – Interest Rate Risk Management

Evaluate the effect of using interest rate futures to hedge a loan and compare the total cost after hedging with an interest rate guarantee.

Required:

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FM – May 2019 – L3 – Q5 – Portfolio Management

Evaluate whether an option price is fair for hedging Yaro Plc. shares, and explain how changes in volatility and the risk-free rate affect the value of a call option.

Required:

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FM – May 2019 – L3 – Q4 – Portfolio Management

Evaluate abnormal returns for shares and bonds, calculate required returns for a pension fund portfolio, and assess its active management strategy.

Required:

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FM – May 2019 – L3 – Q3 – Corporate Restructuring

Evaluate three strategic proposals for Pinko Ltd., including immediate liquidation, a take-over offer, and reorganization, to determine Able Bank's financial outcome.

Proposals:

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FM – May 2019 – L3 – Q2 – Strategic Performance Measurement

Calculate and analyze PH Plc.’s financial performance using EPS, dividend yield, dividend cover, and P/E ratio metrics.

Required:

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FM – May 2019 – L3 – Q1 – Mergers and Acquisitions

Evaluate the synergy expected from a proposed merger between Pako Plc. and RT Plc. using free cash flow analysis, and discuss limitations and alternatives.

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FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

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FM – Nov 2014 – L3 – SC – Q6b – Financing Decisions and Capital Markets

Examine reasons for conflict of interest between shareholders and bondholders.

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FM – Nov 2014 – L3 – SC – Q6a – Treasury Management

Discuss transfer pricing and its implications for multinational companies with subsidiaries in foreign countries.

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