Topic: Corporate Governance and Financial Strategy

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FM – May 2017 – L3 – Q5 – Corporate Governance and Financial Strategy

Identify stakeholders involved in conflicts in different corporate decisions.

In each of the following situations, identify the stakeholders that could be involved in potential conflicts:

a. A large conglomerate ‘spinning off’ its divisions by selling them or setting them up as separate companies. (5 Marks)

b. A private company converting into a public company. (5 Marks)

c. A Japanese car manufacturer building new plants in other countries. (5 Marks)

(Total 15 Marks)

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FM – May 2023 – L3 – Q5b – Corporate Governance and Financial Strategy

Discuss ways to motivate managers to align with and achieve stakeholder objectives.

b. Discuss FOUR ways to encourage managers to achieve stakeholder objectives. (6 Marks)

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FM – Nov 2021 – L3 – Q4 – Corporate Governance and Financial Strategy

Assess LL's corporate objectives, the finance director's view, and treasury strategies within a low-interest economic environment.

Leye Limited (LL) is a privately-owned toy manufacturer in Nigeria, operating internationally as both a supplier and a customer. While privately owned, LL’s revenue and asset base are comparable to some publicly listed companies. It has numerous shareholders but has no plans for public listing. Major shareholders have expressed an interest in buying out smaller investors.

LL has a strong history of profitability, which satisfies both directors and shareholders. They avoid strategies that increase risk significantly, such as acquisitions or overseas manufacturing setups, accepting a comparatively lower growth rate than competitors.

The company’s capital structure is composed of 70% equity and 30% debt (based on book values), with debt comprising secured and unsecured bonds carrying interest rates between 7% and 8.5%, maturing in 5 to 10 years. In a low-inflation and potentially declining interest rate environment, the company treasurer is exploring refinancing options.

LL’s primary financial objective is annual dividend growth, with a non-financial objective of treating all stakeholders with fairness and equality. The Board is currently reassessing these objectives. While the new Finance Director advocates for shareholder wealth maximization as the sole objective, other directors favor a balanced approach, including goals such as profit after tax, return on investment, and operational performance improvements.

Required:

a. Evaluate the appropriateness of LL’s current objectives and the Finance Director’s suggestion. Discuss the issues the Board should consider in setting new corporate objectives, concluding with a recommendation. (10 Marks)

b. Discuss factors the treasury department should consider when formulating financing or refinancing strategies in the given economic context. Explain how these factors might influence the determination of corporate objectives. (10 Marks)

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FM – Nov 2020 – L3 – Q3 – Corporate Governance and Financial Strategy

Discusses the ethical responsibilities companies face in developing an ethical framework and how ethical considerations impact main functional areas.

a. What are the main responsibilities faced by companies when developing an ethical framework, and in what ways can these responsibilities be addressed? (10 Marks)

b. Discuss how ethical considerations impact on each of the main functional areas of a firm. (10 Marks)

 

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FM – Nov 2018 – L3 – Q7 – Corporate Governance and Financial Strategy

Analyze potential agency conflicts between company owners and managers and methods to mitigate these issues.

Agency theory was developed by Jenson & Meckling (1976), defining the agency relationship as a form of contract between a company’s owners and its managers, where owners appoint agents (managers) to manage the company on their behalf. As part of this arrangement, owners delegate decision-making authority to management. In this relationship, owners expect agents to act in their best interest.

Required:

a. Agency conflicts may arise in various ways. Discuss four of these conflicts. (9 Marks)

b. State four methods by which problems arising from these conflicts could be reduced. (6 Marks)

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FM – May 2018 – L3 – SC – Q7 – Corporate Governance and Financial Strategy

Corporate governance issues in relation to non-executive directors, shareholder-director conflicts, and bond covenants.

Nkata Plc. is a large publicly quoted company. The directors are currently debating a number of issues, including the following: (i) The role of non-executive directors in corporate governance. (ii) Conflict of interest between directors and shareholders. (iii) Bond covenants usually imposed by lenders.

Required:

a. Discuss the role of non-executive directors in the corporate governance of a listed public company.
(4 Marks)

b. Identify and discuss three areas where the interests of shareholders and directors may conflict, leading the directors to pursue objectives other than maximizing shareholders’ wealth.
(6 Marks)

c. Identify five examples of covenants that might be attached to bonds and discuss briefly the advantages and disadvantages of each to companies.

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FM – Nov 2023 – L1 – SC – Q7 – Corporate Governance and Financial Strategy

Analyze FP’s dividend payout impact on stock price using forward P/E ratio, ROE, and sustainable growth rate.

Ope plc has N10m 5 percent convertible bonds in issue. The option to convert into 40 N1 ordinary shares is open only for one more year; they must be either converted in one year’s time or left as ordinary bonds until nine years’ time when they will be redeemed at par. The current share price is ₦1.60, and the annual growth rate in the share price is 15 percent per annum. The current required return on Ope’s equity is 25 percent, its business being relatively risky.

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Ife plc has 100,000 warrants outstanding, each entitling the holder to subscribe for one N1 ordinary share at 90 kobo any time during the next 3 years. The current share price is 57 kobo, and the capital growth is expected to be constant at 12 percent p.a. in the future. The current price of the warrant is 10 kobo.

Required:

a. Calculate the current value of Ope’s convertibles as straight debt, i.e., ignoring the option to convert and the value if conversion were to take place today. Would you expect the market value of the convertible to be above or below each of these amounts and why? (5 Marks)

b. By how much should the share price of Ope Plc rise before holders would be induced to convert, on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

d. Based on the projected capital growth for Ife Plc, would you expect holders of the warrants to exercise them before expiry? What is the minimum annual growth rate of the share price necessary to induce holders to exercise their warrants? (2 Marks)

(Total 15 Marks)

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FM – Nov 2023 – L1 – SC – Q6 – Corporate Governance and Financial Strategy

Explain conflicts of interest between shareholders and managers and assess the impact of lower interest rates on a typical company.

a. State and explain examples of conflicts of interest that may exist between shareholders and managers. (9 Marks)

b. Explain the likely implications for a typical company of lower interest rates. (6 Marks)

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FM – Nov 2022 – L3 – Q7 – Corporate Governance and Financial Strategy

Analyze the Chairman's proposals to improve EPS and discuss methods to align stakeholder objectives.

The Chairman of Opeyemi plc, a company listed on the Alternative Investment Market, has circulated a memorandum to the company’s directors and senior managers which contains the following statements:

“Looking to the year ahead, there are a number of measures which I propose to increase the company’s earnings per share (EPS).

Payments to trade creditors should be made as late as possible, even if this means extending our credit beyond the terms allowed by our suppliers. The company currently runs a substantial overdraft, and this measure will cut the level of bank interest and charges.

Relatively high capital expenditure in recent years has resulted in substantial depreciation charges in the profit or loss account. All capital spending, including that on the Oloro II project – designed to reduce toxic emissions from the manufacturing plant – should be postponed except where such spending can be shown to be essential to current operations.

Staff pay should be frozen at this year’s level for the forthcoming year. The company’s sponsorship of the local charity events run by the Staff Social Club should also, regrettably, be ended.

By boosting profits and therefore EPS, these measures will help us to achieve the highest possible stock market capitalisation.”

Required:

a. Prepare a response to the Chairman’s proposals which examines the possible consequences of the proposals for the price of the company’s shares and for the company’s stakeholders. (9 Marks)

b. Discuss FOUR ways that encourage managers to achieve stakeholder objectives. (6 Marks)

(Total 15 Marks)

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FM – Nov 2017 – L3 – Q5 – Corporate Governance and Financial Strategy

Identify stakeholder financial objectives and discuss methods to incentivize directors to maximize shareholder wealth.

Private sector companies have multiple stakeholders who are likely to have divergent interests.

Required:

(a) Identify FIVE stakeholder groups and discuss briefly their financial objectives.
(10 Marks)

(b) Explain ways in which companies’ directors can be encouraged to achieve the objective of maximisation of shareholders’ wealth.
(5 Marks)

(Total 15 Marks)

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FM – May 2017 – L3 – Q5 – Corporate Governance and Financial Strategy

Identify stakeholders involved in conflicts in different corporate decisions.

In each of the following situations, identify the stakeholders that could be involved in potential conflicts:

a. A large conglomerate ‘spinning off’ its divisions by selling them or setting them up as separate companies. (5 Marks)

b. A private company converting into a public company. (5 Marks)

c. A Japanese car manufacturer building new plants in other countries. (5 Marks)

(Total 15 Marks)

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FM – May 2023 – L3 – Q5b – Corporate Governance and Financial Strategy

Discuss ways to motivate managers to align with and achieve stakeholder objectives.

b. Discuss FOUR ways to encourage managers to achieve stakeholder objectives. (6 Marks)

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FM – Nov 2021 – L3 – Q4 – Corporate Governance and Financial Strategy

Assess LL's corporate objectives, the finance director's view, and treasury strategies within a low-interest economic environment.

Leye Limited (LL) is a privately-owned toy manufacturer in Nigeria, operating internationally as both a supplier and a customer. While privately owned, LL’s revenue and asset base are comparable to some publicly listed companies. It has numerous shareholders but has no plans for public listing. Major shareholders have expressed an interest in buying out smaller investors.

LL has a strong history of profitability, which satisfies both directors and shareholders. They avoid strategies that increase risk significantly, such as acquisitions or overseas manufacturing setups, accepting a comparatively lower growth rate than competitors.

The company’s capital structure is composed of 70% equity and 30% debt (based on book values), with debt comprising secured and unsecured bonds carrying interest rates between 7% and 8.5%, maturing in 5 to 10 years. In a low-inflation and potentially declining interest rate environment, the company treasurer is exploring refinancing options.

LL’s primary financial objective is annual dividend growth, with a non-financial objective of treating all stakeholders with fairness and equality. The Board is currently reassessing these objectives. While the new Finance Director advocates for shareholder wealth maximization as the sole objective, other directors favor a balanced approach, including goals such as profit after tax, return on investment, and operational performance improvements.

Required:

a. Evaluate the appropriateness of LL’s current objectives and the Finance Director’s suggestion. Discuss the issues the Board should consider in setting new corporate objectives, concluding with a recommendation. (10 Marks)

b. Discuss factors the treasury department should consider when formulating financing or refinancing strategies in the given economic context. Explain how these factors might influence the determination of corporate objectives. (10 Marks)

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FM – Nov 2020 – L3 – Q3 – Corporate Governance and Financial Strategy

Discusses the ethical responsibilities companies face in developing an ethical framework and how ethical considerations impact main functional areas.

a. What are the main responsibilities faced by companies when developing an ethical framework, and in what ways can these responsibilities be addressed? (10 Marks)

b. Discuss how ethical considerations impact on each of the main functional areas of a firm. (10 Marks)

 

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FM – Nov 2018 – L3 – Q7 – Corporate Governance and Financial Strategy

Analyze potential agency conflicts between company owners and managers and methods to mitigate these issues.

Agency theory was developed by Jenson & Meckling (1976), defining the agency relationship as a form of contract between a company’s owners and its managers, where owners appoint agents (managers) to manage the company on their behalf. As part of this arrangement, owners delegate decision-making authority to management. In this relationship, owners expect agents to act in their best interest.

Required:

a. Agency conflicts may arise in various ways. Discuss four of these conflicts. (9 Marks)

b. State four methods by which problems arising from these conflicts could be reduced. (6 Marks)

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FM – May 2018 – L3 – SC – Q7 – Corporate Governance and Financial Strategy

Corporate governance issues in relation to non-executive directors, shareholder-director conflicts, and bond covenants.

Nkata Plc. is a large publicly quoted company. The directors are currently debating a number of issues, including the following: (i) The role of non-executive directors in corporate governance. (ii) Conflict of interest between directors and shareholders. (iii) Bond covenants usually imposed by lenders.

Required:

a. Discuss the role of non-executive directors in the corporate governance of a listed public company.
(4 Marks)

b. Identify and discuss three areas where the interests of shareholders and directors may conflict, leading the directors to pursue objectives other than maximizing shareholders’ wealth.
(6 Marks)

c. Identify five examples of covenants that might be attached to bonds and discuss briefly the advantages and disadvantages of each to companies.

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FM – Nov 2023 – L1 – SC – Q7 – Corporate Governance and Financial Strategy

Analyze FP’s dividend payout impact on stock price using forward P/E ratio, ROE, and sustainable growth rate.

Ope plc has N10m 5 percent convertible bonds in issue. The option to convert into 40 N1 ordinary shares is open only for one more year; they must be either converted in one year’s time or left as ordinary bonds until nine years’ time when they will be redeemed at par. The current share price is ₦1.60, and the annual growth rate in the share price is 15 percent per annum. The current required return on Ope’s equity is 25 percent, its business being relatively risky.

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Ife plc has 100,000 warrants outstanding, each entitling the holder to subscribe for one N1 ordinary share at 90 kobo any time during the next 3 years. The current share price is 57 kobo, and the capital growth is expected to be constant at 12 percent p.a. in the future. The current price of the warrant is 10 kobo.

Required:

a. Calculate the current value of Ope’s convertibles as straight debt, i.e., ignoring the option to convert and the value if conversion were to take place today. Would you expect the market value of the convertible to be above or below each of these amounts and why? (5 Marks)

b. By how much should the share price of Ope Plc rise before holders would be induced to convert, on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

d. Based on the projected capital growth for Ife Plc, would you expect holders of the warrants to exercise them before expiry? What is the minimum annual growth rate of the share price necessary to induce holders to exercise their warrants? (2 Marks)

(Total 15 Marks)

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FM – Nov 2023 – L1 – SC – Q6 – Corporate Governance and Financial Strategy

Explain conflicts of interest between shareholders and managers and assess the impact of lower interest rates on a typical company.

a. State and explain examples of conflicts of interest that may exist between shareholders and managers. (9 Marks)

b. Explain the likely implications for a typical company of lower interest rates. (6 Marks)

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FM – Nov 2022 – L3 – Q7 – Corporate Governance and Financial Strategy

Analyze the Chairman's proposals to improve EPS and discuss methods to align stakeholder objectives.

The Chairman of Opeyemi plc, a company listed on the Alternative Investment Market, has circulated a memorandum to the company’s directors and senior managers which contains the following statements:

“Looking to the year ahead, there are a number of measures which I propose to increase the company’s earnings per share (EPS).

Payments to trade creditors should be made as late as possible, even if this means extending our credit beyond the terms allowed by our suppliers. The company currently runs a substantial overdraft, and this measure will cut the level of bank interest and charges.

Relatively high capital expenditure in recent years has resulted in substantial depreciation charges in the profit or loss account. All capital spending, including that on the Oloro II project – designed to reduce toxic emissions from the manufacturing plant – should be postponed except where such spending can be shown to be essential to current operations.

Staff pay should be frozen at this year’s level for the forthcoming year. The company’s sponsorship of the local charity events run by the Staff Social Club should also, regrettably, be ended.

By boosting profits and therefore EPS, these measures will help us to achieve the highest possible stock market capitalisation.”

Required:

a. Prepare a response to the Chairman’s proposals which examines the possible consequences of the proposals for the price of the company’s shares and for the company’s stakeholders. (9 Marks)

b. Discuss FOUR ways that encourage managers to achieve stakeholder objectives. (6 Marks)

(Total 15 Marks)

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FM – Nov 2017 – L3 – Q5 – Corporate Governance and Financial Strategy

Identify stakeholder financial objectives and discuss methods to incentivize directors to maximize shareholder wealth.

Private sector companies have multiple stakeholders who are likely to have divergent interests.

Required:

(a) Identify FIVE stakeholder groups and discuss briefly their financial objectives.
(10 Marks)

(b) Explain ways in which companies’ directors can be encouraged to achieve the objective of maximisation of shareholders’ wealth.
(5 Marks)

(Total 15 Marks)

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