Economic and regulatory environment

FM – Nov 2023 – L2 – Q1 – Cost of capital | Economic and regulatory environment

Distinguish between expansionary and contractionary monetary policies, discuss the impact of raising the monetary policy rate, and calculate the cost of equity and WACC for Moli Ltd.

Question

a) Monetary policies are seen either as expansionary or contractionary depending on the level of growth within the economy. The Bank of Ghana, which is responsible for pursuing sound monetary policies, has recently raised the monetary policy rate by 150 basis points.

Required:
i) In reference to the statement above, distinguish between expansionary monetary policy and contractionary monetary policy. (4 marks)
ii) Would you describe the raise in the monetary policy rate as an expansionary or contractionary monetary policy action? Explain. (2 marks)
iii) Explain TWO (2) implications of raising the monetary policy rate for the financial performance of businesses. (4 marks)

b) Moli Ltd is financed by a mixture of equity and debt capital in the ratio of 2:1. The pre-tax cost of debt is 25% whilst the risk-free interest rate is 15%. The available market information puts the average stock market return on equity at 22%. The equity beta value of Moli Ltd has been estimated as 0.9. The corporate tax rate is 30%.

Required:
i) Calculate the cost of equity. (4 marks)
ii) Calculate the weighted average cost of capital. (6 marks)

Answer

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Topic: Cost of capital, Economic and regulatory environment
Series: NOV 2023

FM – July 2023 – L2 – Q1 – Economic and regulatory environment | Sources of finance: debt

Discuss the conflicts between management and shareholders, costs associated with appointing management, and calculate the yield and cost of different debt financing options for Gologo Ghana Ltd.

Question

a) Shareholders of a large company substantially delegate the management of their business to agents (managers). Decision-making authority is also delegated to management. In a perfect condition, Management is expected to give priority to the interest of shareholders rather than their personal interest.

Required:
i) In reference to the above, explain THREE (3) areas of conflict between Management and Shareholders. (6 marks)
ii) Explain TWO (2) aspects of cost to shareholders in appointing an agent (Management). (4 marks)

b) Gologo Ghana Ltd is making a choice between issuing a public bond and placing the debt privately for GH¢600 million.

The public offer will be in GH¢100,000 denominations and carry a coupon or interest payment of 25% per annum. The bond will, however, sell for GH¢96,000 each. The issuing and underwriting cost will be 5% of the market value and is tax deductible.

The private placement will attract an interest rate of 26% per annum, and the company will receive the full face value of the loan. In both cases, the debt will be repaid after 20 years. The tax rate for the company is 30%.

Required:
i) Calculate the annual yield (%) the buyers of the public bond will earn. (3 marks)
ii) Compute the cost of both the bond and the private debt. (7 marks)

Answer

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Tags: Agency theory, Bond issuance, Cost of Debt, Private placement
Level: Level 2

Topic: Economic and regulatory environment, Sources of finance: debt
Series: JULY 2023

FM – NOV 2021 – L2 – Q1 – Economic and regulatory environment | Sources of finance: equity

Functions of the Securities and Exchange Commission and National Insurance Commission; calculation and analysis of a rights issue by LIGRI Bank Ghana Ltd.

Question

a. The Securities and Exchange Commission and the National Insurance Commission are part of a list of regulators established by an Act of Parliament. They play a very critical role in the regulation of the financial services sector in the country.

Required:
i) Explain THREE (3) main functions played by the Securities and Exchange Commission in Ghana. (6 marks)
ii) Explain TWO (2) functions performed by the National Insurance Commission in Ghana. (4 marks)

b) LIGRI Bank Ghana Ltd generates a profit after tax of 15% on shareholders’ funds. The current capital structure of the bank is as follows:

Item	GH¢
Ordinary shares	40,000,000
Reserves	80,000,000
Total	120,000,000

The management, with the board’s approval, wishes to raise GH¢50,000,000 from a rights issue to expand their existing operations in the country. The return on shareholders’ funds will not change. The current ex-dividend market price is GH¢4 per share. The right issue price proposed by the Finance Director is GH¢3.8 per share.

Required:
i) Calculate the total number of shares to be issued by the company. (3 marks)
ii) Determine the theoretical ex-right price per share after the issue. (3 marks)
iii) Calculate the new earnings per share after the rights issue. (3 marks)
iv) Comment on the calculations of the theoretical ex-right price calculated in ii) above. (1 mark)

Answer

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Tags: Earnings Per Share, National Insurance Commission, Rights Issue, Securities and Exchange Commission, Shareholders' Funds
Level: Level 2

Topic: Economic and regulatory environment, Sources of finance: equity
Series: NOV 2021

FM – Nov 2019 – L2 – Q1a – Economic and regulatory environment

Functions of Ghana's Securities and Exchange Commission and implications for corporate investing and financing activities.

Question

The financial sector is one of the most highly regulated sectors of any country. Notably, each industry under the financial sector has a special regulatory framework consisting of statutes to shape the conduct of participants in the industry and a regulator to foresee compliance and promote fairness and efficiency.

Required: i) Describe THREE (3) functions the Securities and Exchange Commission of Ghana (SEC) is expected to perform towards achieving fairness and efficiency in the securities industry. (6 marks)

ii) Explain TWO (2) implications of the regulatory functions of the SEC for corporate investing and financing activities. (4 marks)

Answer

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Tags: Corporate financing, Corporate investing, Regulatory functions, Securities and Exchange Commission
Level: Level 2

Topic: Economic and regulatory environment
Series: NOV 2019

FM – MAY 2018 – L2 – Q1 – Economic and regulatory environment

Discusses the effects of high interest rates on the economy, explores the agency problem, and explains why share price maximization is preferred to sales maximization.

Question

a) Economist has always maintained that to increase inflation, the government ought to implement a policy of high interest rate to dampen demand.

Required:
Identify the effects on the economy of a policy of high interest rate on expenditure and investments.

b) Agency problem is pervasive and exists in practically every organization whether a business, church, club, or government. Organizations try to solve it by instituting measures but no organization can remedy it completely.

Required:
i) What is the agency problem within the context of a limited liability company?

ii) Explain TWO causes of the agency problem.
(2 marks)

iii) Explain FOUR remedies to the agency problem.
(4 marks)

c) For a business, it is not necessary that profit should be the only objective; it may concentrate on various aspects such as maximization of share price, maximization of sales, capturing more market shares, return on capital employed among others, which will take care of profitability.

Required:
Explain why maximization of a company’s share price is preferred as a financial objective to maximization of its sales.
(6 marks)

Answer

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Tags: Agency Problem, Interest rates, Share Price Maximization
Level: Level 2

Topic: Economic and regulatory environment
Series: MAY 2018

FM – Nov 2023 – L2 – Q1 – Cost of capital | Economic and regulatory environment

Distinguish between expansionary and contractionary monetary policies, discuss the impact of raising the monetary policy rate, and calculate the cost of equity and WACC for Moli Ltd.

Question

Required:
i) Calculate the cost of equity. (4 marks)
ii) Calculate the weighted average cost of capital. (6 marks)

Answer

Find Related Questions by Tags, levels, etc.

Topic: Cost of capital, Economic and regulatory environment
Series: NOV 2023

FM – July 2023 – L2 – Q1 – Economic and regulatory environment | Sources of finance: debt

Discuss the conflicts between management and shareholders, costs associated with appointing management, and calculate the yield and cost of different debt financing options for Gologo Ghana Ltd.

Question

b) Gologo Ghana Ltd is making a choice between issuing a public bond and placing the debt privately for GH¢600 million.

Required:
i) Calculate the annual yield (%) the buyers of the public bond will earn. (3 marks)
ii) Compute the cost of both the bond and the private debt. (7 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Agency theory, Bond issuance, Cost of Debt, Private placement
Level: Level 2

Topic: Economic and regulatory environment, Sources of finance: debt
Series: JULY 2023

FM – NOV 2021 – L2 – Q1 – Economic and regulatory environment | Sources of finance: equity

Functions of the Securities and Exchange Commission and National Insurance Commission; calculation and analysis of a rights issue by LIGRI Bank Ghana Ltd.

Question

b) LIGRI Bank Ghana Ltd generates a profit after tax of 15% on shareholders’ funds. The current capital structure of the bank is as follows:

Item	GH¢
Ordinary shares	40,000,000
Reserves	80,000,000
Total	120,000,000

Answer

Find Related Questions by Tags, levels, etc.

Tags: Earnings Per Share, National Insurance Commission, Rights Issue, Securities and Exchange Commission, Shareholders' Funds
Level: Level 2

Topic: Economic and regulatory environment, Sources of finance: equity
Series: NOV 2021

FM – Nov 2019 – L2 – Q1a – Economic and regulatory environment

Functions of Ghana's Securities and Exchange Commission and implications for corporate investing and financing activities.

Question

Required: i) Describe THREE (3) functions the Securities and Exchange Commission of Ghana (SEC) is expected to perform towards achieving fairness and efficiency in the securities industry. (6 marks)

ii) Explain TWO (2) implications of the regulatory functions of the SEC for corporate investing and financing activities. (4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Corporate financing, Corporate investing, Regulatory functions, Securities and Exchange Commission
Level: Level 2

Topic: Economic and regulatory environment
Series: NOV 2019

FM – MAY 2018 – L2 – Q1 – Economic and regulatory environment

Discusses the effects of high interest rates on the economy, explores the agency problem, and explains why share price maximization is preferred to sales maximization.

Question

a) Economist has always maintained that to increase inflation, the government ought to implement a policy of high interest rate to dampen demand.

Required:
Identify the effects on the economy of a policy of high interest rate on expenditure and investments.

Required:
i) What is the agency problem within the context of a limited liability company?

ii) Explain TWO causes of the agency problem.
(2 marks)

iii) Explain FOUR remedies to the agency problem.
(4 marks)

Required:
Explain why maximization of a company’s share price is preferred as a financial objective to maximization of its sales.
(6 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Agency Problem, Interest rates, Share Price Maximization
Level: Level 2

Topic: Economic and regulatory environment
Series: MAY 2018

Topic: Economic and regulatory environment

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FM – Nov 2023 – L2 – Q1 – Cost of capital | Economic and regulatory environment

Distinguish between expansionary and contractionary monetary policies, discuss the impact of raising the monetary policy rate, and calculate the cost of equity and WACC for Moli Ltd.

FM – July 2023 – L2 – Q1 – Economic and regulatory environment | Sources of finance: debt

Discuss the conflicts between management and shareholders, costs associated with appointing management, and calculate the yield and cost of different debt financing options for Gologo Ghana Ltd.

FM – NOV 2021 – L2 – Q1 – Economic and regulatory environment | Sources of finance: equity

Functions of the Securities and Exchange Commission and National Insurance Commission; calculation and analysis of a rights issue by LIGRI Bank Ghana Ltd.

FM – Nov 2019 – L2 – Q1a – Economic and regulatory environment

Functions of Ghana's Securities and Exchange Commission and implications for corporate investing and financing activities.

FM – MAY 2018 – L2 – Q1 – Economic and regulatory environment

Discusses the effects of high interest rates on the economy, explores the agency problem, and explains why share price maximization is preferred to sales maximization.

FM – Nov 2023 – L2 – Q1 – Cost of capital | Economic and regulatory environment

Distinguish between expansionary and contractionary monetary policies, discuss the impact of raising the monetary policy rate, and calculate the cost of equity and WACC for Moli Ltd.

FM – July 2023 – L2 – Q1 – Economic and regulatory environment | Sources of finance: debt

Discuss the conflicts between management and shareholders, costs associated with appointing management, and calculate the yield and cost of different debt financing options for Gologo Ghana Ltd.

FM – NOV 2021 – L2 – Q1 – Economic and regulatory environment | Sources of finance: equity

Functions of the Securities and Exchange Commission and National Insurance Commission; calculation and analysis of a rights issue by LIGRI Bank Ghana Ltd.

FM – Nov 2019 – L2 – Q1a – Economic and regulatory environment

Functions of Ghana's Securities and Exchange Commission and implications for corporate investing and financing activities.

FM – MAY 2018 – L2 – Q1 – Economic and regulatory environment

Discusses the effects of high interest rates on the economy, explores the agency problem, and explains why share price maximization is preferred to sales maximization.

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FM – Nov 2023 – L2 – Q1 – Cost of capital | Economic and regulatory environment

Distinguish between expansionary and contractionary monetary policies, discuss the impact of raising the monetary policy rate, and calculate the cost of equity and WACC for Moli Ltd.

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FM – July 2023 – L2 – Q1 – Economic and regulatory environment | Sources of finance: debt

Discuss the conflicts between management and shareholders, costs associated with appointing management, and calculate the yield and cost of different debt financing options for Gologo Ghana Ltd.

You're reporting an error for "FM – July 2023 – L2 – Q1 – Economic and regulatory environment | Sources of finance: debt"

FM – NOV 2021 – L2 – Q1 – Economic and regulatory environment | Sources of finance: equity

Functions of the Securities and Exchange Commission and National Insurance Commission; calculation and analysis of a rights issue by LIGRI Bank Ghana Ltd.

You're reporting an error for "FM – NOV 2021 – L2 – Q1 – Economic and regulatory environment | Sources of finance: equity"

FM – Nov 2019 – L2 – Q1a – Economic and regulatory environment

Functions of Ghana's Securities and Exchange Commission and implications for corporate investing and financing activities.

You're reporting an error for "FM – Nov 2019 – L2 – Q1a – Economic and regulatory environment"

FM – MAY 2018 – L2 – Q1 – Economic and regulatory environment

Discusses the effects of high interest rates on the economy, explores the agency problem, and explains why share price maximization is preferred to sales maximization.

You're reporting an error for "FM – MAY 2018 – L2 – Q1 – Economic and regulatory environment"

FM – Nov 2023 – L2 – Q1 – Cost of capital | Economic and regulatory environment

Distinguish between expansionary and contractionary monetary policies, discuss the impact of raising the monetary policy rate, and calculate the cost of equity and WACC for Moli Ltd.

You're reporting an error for "FM – Nov 2023 – L2 – Q1 – Cost of capital | Economic and regulatory environment"

FM – July 2023 – L2 – Q1 – Economic and regulatory environment | Sources of finance: debt

Discuss the conflicts between management and shareholders, costs associated with appointing management, and calculate the yield and cost of different debt financing options for Gologo Ghana Ltd.

You're reporting an error for "FM – July 2023 – L2 – Q1 – Economic and regulatory environment | Sources of finance: debt"

FM – NOV 2021 – L2 – Q1 – Economic and regulatory environment | Sources of finance: equity

Functions of the Securities and Exchange Commission and National Insurance Commission; calculation and analysis of a rights issue by LIGRI Bank Ghana Ltd.

You're reporting an error for "FM – NOV 2021 – L2 – Q1 – Economic and regulatory environment | Sources of finance: equity"

FM – Nov 2019 – L2 – Q1a – Economic and regulatory environment

Functions of Ghana's Securities and Exchange Commission and implications for corporate investing and financing activities.

You're reporting an error for "FM – Nov 2019 – L2 – Q1a – Economic and regulatory environment"

FM – MAY 2018 – L2 – Q1 – Economic and regulatory environment

Discusses the effects of high interest rates on the economy, explores the agency problem, and explains why share price maximization is preferred to sales maximization.

You're reporting an error for "FM – MAY 2018 – L2 – Q1 – Economic and regulatory environment"

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