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a) Markwei Pharmaceuticals Ltd plans to import active ingredients to produce vitamin syrup. The company’s managers are considering three financing options for the cedi equivalent of an invoice value of GH¢2.5 million. The options are detailed below:
Option 1: Use supplier’s credit. The credit term is 1.5/10 net 45.
Option 2: Issue a commercial paper to raise the money from the Ghanaian money market. The commercial paper will pay interest at the rate of 18% per annum. Issue costs totaling GH¢15,000 will be incurred.
Option 3: Obtain a 3-month bank loan. The interest rate on the loan is 22% per annum. Loan arrangement and processing fees are expected to be GH¢5,000.
Required:
i) Compute the effective annual cost of each financing option and recommend the most cost-effective option. (10 marks)
ii) Explain TWO (2) advantages of financing the invoice through the issue of a commercial paper instead of a bank loan. (5 marks)
b) Abongo Shoes Ltd (Abongo) imports leather from Italy. Abongo’s demand for euros to settle its import bills exposes its cash flow to foreign exchange risk. Abongo’s Management is looking for internal strategies they can deploy to hedge the company’s currency risk exposure as external hedging strategies might be too expensive for the company.
Required:
Explain TWO (2) internal strategies for managing foreign currency risk exposures that Abongo’s Management can use. (5 marks)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
The recent financial sector clean-up in Ghana has created tough economic times for borrowers and investors and has tightened Financial Institutions’ appetite for granting credit and depositors’ appetite for depositing or placing funds with Financial Institutions, thereby creating a tight liquidity situation in the market.
Required:
As an expert in Financial Management, explain the difference between credit risk and liquidity risk. (3 marks)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
a) Payback method refers to the period of time it takes for the cash flows to cover the initial cost of investment or recoup the initial cost of investment. The period is usually calculated in years.
Required:
Identify TWO advantages and TWO disadvantages of using the payback method in investment appraisal.
(4 marks)
b) DÉCOR Ltd is analyzing the purchase of a new machine to produce product Z. The machine is expected to cost GH¢2,000,000. Production and sales of product Z are forecast as follows:
| Year | 1 | 2 | 3 | 4 |
|---|---|---|---|---|
| Production & Sales (units/year) | 70,000 | 106,000 | 150,000 | 72,000 |
The current selling price is GH¢30 per unit and is expected to increase by 5% a year. The current variable cost is GH¢18 per unit and is expected to increase by 6% per year. Fixed costs will remain the same, but an increase in working capital is required. Analysis of historical data of the levels of working capital of product Z indicates that, at the start of each year, investment in working capital will need to be 10% of sales revenue of that year.
The company pays tax at 25% per year in the year in which taxable profit occurs. The tax liability is reduced by the capital allowance on the machinery, and DÉCOR Ltd can claim on a straight-line basis over the four-year life of the proposed investment (capital allowance rate of 25% per annum). The new machine will have zero scrap value at the end of the four years. The cost of capital is 15% per year.
Required:
Calculate the Net Present Value (NPV) of the proposed investment and advise whether the proposed investment should be undertaken.
(11 marks)
c) An American company sells goods to a Ghanaian buyer for US$280,000 when the exchange rate is $1 = GH¢4.20. The Ghanaian buyer is allowed three months’ credit, and when the American company eventually receives the US dollars three months later and exchanges them for dollars, the exchange rate has moved to $1 = GH¢4.60.
Required:
i) What was the foreign exchange loss to the Ghanaian buyer?
(3 marks)
ii) Explain currency risk in relation to the above.
(2 marks)
iii) Explain transaction risk in relation to the above.
(2 marks)
iv) What will be the effect of the above on the company’s trading profits?
(3 marks)
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a) AD Ventures imports tomato paste from Italy for sale in Ghana. AD Ventures typically buys the tomato paste on an open account and pays the euro invoice value two months after receipt of goods. AD Ventures has suffered heavy exchange rate losses of late due to the continuous depreciation of the Ghanaian cedi against the euro. AD Ventures will receive a consignment of tomato paste on 15th May 2016. The value of this consignment is EUR540,000, which must be settled in two months’ time (settlement deadline being 15th July 2016).
The current spot exchange rate for the euro is GH¢4.7110/EUR. Financial pundits forecast that the Ghanaian cedi will depreciate against the euro in the coming months. The owner-manager of AD Venture, Akua Donkor, is worried about the probable foreign exchange loss her business may suffer when the invoice value is settled in two months’ time.
Akua Donkor has heard of the possibility of hedging AD Ventures’ currency exposure with a forward contract or futures contract but does not know what these contracts are. She has asked you to advise her on what to do to hedge against the underlying exposure relating to the EUR540,000 tomato paste consignment.
You would like to recommend a futures market hedge to Akua Donkor. You searched the derivatives market; and you found a futures contract on the euro that matures in August 2016. Other relevant details of the contract follow:
Required:
i) Explain to Akua Donkor FOUR differences between a forward contract and a futures contract. (4 marks)
ii) Currency risk exposure may be transaction risk, economic risk, or translation risk. Which of the three kinds of currency risk exposure is AD Ventures facing in relation to the EUR540,000 tomato paste consignment? Explain why. (4 marks)
iii) Explain to Akua Donkor THREE disadvantages of hedging the euro exposure with a futures hedge. (6 marks)
b) It has been observed that interest rates on debt securities or loans differ for different maturities. For the week ending 28th August 2015, the annual interest rate on the 1-year Government of Ghana note was 22.5% whereas the annual interest rate on the 2-year note was 23%.
Required:
With THREE reasons, explain why interest rates on debt securities and loans are different for different maturity periods. (6 marks)
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a) You have been appointed as the Finance Manager of Jaja Ltd and the expectation of the board is for you to provide education and working solution to their foreign exchange losses problem which your predecessor had no clue.
How will you explain the following? i) Foreign Exchange Risk (2 marks)
ii) Transaction Risk (2 marks)
iii) Translation Risk (2 marks)
iv) Economic Risk (2 marks)
b) Kaluu Ltd is a listed company on the Ghana Stock Exchange Market and showed the following performance. The following information was made available to you:
Required: i) What is the estimated cost of equity using the dividend growth model? (3 marks)
ii) What is the estimated cost of equity using the Capital Assets Pricing model? (3 marks)
c) i) Distinguish between repurchase agreement (repos) and reverse repos. (3 marks)
ii) A company enters into an agreement with a bank and it sells GH¢10 million government bonds with an obligation to buy back the security in 60 days. If the rate is 8.2%, what is the repurchase price of the bond? Assume 365 days in a year. (3 marks)
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Ahuodzen Pharmaceutical Ltd (Ahuodzen) imports chemicals to produce medicines in Ghana. It has received a consignment of chemicals from a supplier in India. The invoice value of US$2 million is payable two months from now. The Treasury Manager of Ahuodzen is worried about volatility in the cedi to US dollar exchange rate.
Required:
Explain how local currency invoicing would be used as a strategy for managing currency risk exposures and advise the Treasury Manager on the benefit and risk of handling Ahuodzen’s currency risk exposure using local currency invoicing. (5 marks)
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a) Adjei Departmental Stores’ demand for cash has been quite volatile recently, with the standard deviation in daily cash demand rising to GH¢60,000. The managers of the company are therefore considering using the Miller-Orr model to manage its cash flows. The minimum cash balance would be set to GH¢300,000. The annual interest rate is expected to be 18.25% while the cost of trading investments in securities is GH¢10,000 per transaction.
Required:
i) Compute the cash return point. (4 marks)
ii) Compute the upper cash limit. (2 marks)
iii) Explain how the minimum cash limit, upper cash limit, and cash return point would be used to manage the cash balances of Adjei Departmental Stores. (3 marks)
b) The Founder of a growing technology company has questioned her Chief Finance Officer about the company’s holdings of cash in demand deposit accounts and on hand when the money could be invested in financial securities for returns.
Required:
Explain to the Founder THREE (3) motives for holding cash. (6 marks)
c) Serwaa Home Décor Ltd, a trading company based in Ghana, usually buys foreign currency to settle invoices for imports. The Treasury Manager is considering ways of hedging the company’s foreign currency risk exposures. After considering various options available to her, she has settled on both forwards and futures contracts.
Required:
Explain TWO (2) advantages of currency forwards over currency futures contract. (5 marks)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
a) Markwei Pharmaceuticals Ltd plans to import active ingredients to produce vitamin syrup. The company’s managers are considering three financing options for the cedi equivalent of an invoice value of GH¢2.5 million. The options are detailed below:
Option 1: Use supplier’s credit. The credit term is 1.5/10 net 45.
Option 2: Issue a commercial paper to raise the money from the Ghanaian money market. The commercial paper will pay interest at the rate of 18% per annum. Issue costs totaling GH¢15,000 will be incurred.
Option 3: Obtain a 3-month bank loan. The interest rate on the loan is 22% per annum. Loan arrangement and processing fees are expected to be GH¢5,000.
Required:
i) Compute the effective annual cost of each financing option and recommend the most cost-effective option. (10 marks)
ii) Explain TWO (2) advantages of financing the invoice through the issue of a commercial paper instead of a bank loan. (5 marks)
b) Abongo Shoes Ltd (Abongo) imports leather from Italy. Abongo’s demand for euros to settle its import bills exposes its cash flow to foreign exchange risk. Abongo’s Management is looking for internal strategies they can deploy to hedge the company’s currency risk exposure as external hedging strategies might be too expensive for the company.
Required:
Explain TWO (2) internal strategies for managing foreign currency risk exposures that Abongo’s Management can use. (5 marks)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
The recent financial sector clean-up in Ghana has created tough economic times for borrowers and investors and has tightened Financial Institutions’ appetite for granting credit and depositors’ appetite for depositing or placing funds with Financial Institutions, thereby creating a tight liquidity situation in the market.
Required:
As an expert in Financial Management, explain the difference between credit risk and liquidity risk. (3 marks)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
a) Payback method refers to the period of time it takes for the cash flows to cover the initial cost of investment or recoup the initial cost of investment. The period is usually calculated in years.
Required:
Identify TWO advantages and TWO disadvantages of using the payback method in investment appraisal.
(4 marks)
b) DÉCOR Ltd is analyzing the purchase of a new machine to produce product Z. The machine is expected to cost GH¢2,000,000. Production and sales of product Z are forecast as follows:
| Year | 1 | 2 | 3 | 4 |
|---|---|---|---|---|
| Production & Sales (units/year) | 70,000 | 106,000 | 150,000 | 72,000 |
The current selling price is GH¢30 per unit and is expected to increase by 5% a year. The current variable cost is GH¢18 per unit and is expected to increase by 6% per year. Fixed costs will remain the same, but an increase in working capital is required. Analysis of historical data of the levels of working capital of product Z indicates that, at the start of each year, investment in working capital will need to be 10% of sales revenue of that year.
The company pays tax at 25% per year in the year in which taxable profit occurs. The tax liability is reduced by the capital allowance on the machinery, and DÉCOR Ltd can claim on a straight-line basis over the four-year life of the proposed investment (capital allowance rate of 25% per annum). The new machine will have zero scrap value at the end of the four years. The cost of capital is 15% per year.
Required:
Calculate the Net Present Value (NPV) of the proposed investment and advise whether the proposed investment should be undertaken.
(11 marks)
c) An American company sells goods to a Ghanaian buyer for US$280,000 when the exchange rate is $1 = GH¢4.20. The Ghanaian buyer is allowed three months’ credit, and when the American company eventually receives the US dollars three months later and exchanges them for dollars, the exchange rate has moved to $1 = GH¢4.60.
Required:
i) What was the foreign exchange loss to the Ghanaian buyer?
(3 marks)
ii) Explain currency risk in relation to the above.
(2 marks)
iii) Explain transaction risk in relation to the above.
(2 marks)
iv) What will be the effect of the above on the company’s trading profits?
(3 marks)
Find Related Questions by Tags, levels, etc.
a) AD Ventures imports tomato paste from Italy for sale in Ghana. AD Ventures typically buys the tomato paste on an open account and pays the euro invoice value two months after receipt of goods. AD Ventures has suffered heavy exchange rate losses of late due to the continuous depreciation of the Ghanaian cedi against the euro. AD Ventures will receive a consignment of tomato paste on 15th May 2016. The value of this consignment is EUR540,000, which must be settled in two months’ time (settlement deadline being 15th July 2016).
The current spot exchange rate for the euro is GH¢4.7110/EUR. Financial pundits forecast that the Ghanaian cedi will depreciate against the euro in the coming months. The owner-manager of AD Venture, Akua Donkor, is worried about the probable foreign exchange loss her business may suffer when the invoice value is settled in two months’ time.
Akua Donkor has heard of the possibility of hedging AD Ventures’ currency exposure with a forward contract or futures contract but does not know what these contracts are. She has asked you to advise her on what to do to hedge against the underlying exposure relating to the EUR540,000 tomato paste consignment.
You would like to recommend a futures market hedge to Akua Donkor. You searched the derivatives market; and you found a futures contract on the euro that matures in August 2016. Other relevant details of the contract follow:
Required:
i) Explain to Akua Donkor FOUR differences between a forward contract and a futures contract. (4 marks)
ii) Currency risk exposure may be transaction risk, economic risk, or translation risk. Which of the three kinds of currency risk exposure is AD Ventures facing in relation to the EUR540,000 tomato paste consignment? Explain why. (4 marks)
iii) Explain to Akua Donkor THREE disadvantages of hedging the euro exposure with a futures hedge. (6 marks)
b) It has been observed that interest rates on debt securities or loans differ for different maturities. For the week ending 28th August 2015, the annual interest rate on the 1-year Government of Ghana note was 22.5% whereas the annual interest rate on the 2-year note was 23%.
Required:
With THREE reasons, explain why interest rates on debt securities and loans are different for different maturity periods. (6 marks)
Find Related Questions by Tags, levels, etc.
a) You have been appointed as the Finance Manager of Jaja Ltd and the expectation of the board is for you to provide education and working solution to their foreign exchange losses problem which your predecessor had no clue.
How will you explain the following? i) Foreign Exchange Risk (2 marks)
ii) Transaction Risk (2 marks)
iii) Translation Risk (2 marks)
iv) Economic Risk (2 marks)
b) Kaluu Ltd is a listed company on the Ghana Stock Exchange Market and showed the following performance. The following information was made available to you:
Required: i) What is the estimated cost of equity using the dividend growth model? (3 marks)
ii) What is the estimated cost of equity using the Capital Assets Pricing model? (3 marks)
c) i) Distinguish between repurchase agreement (repos) and reverse repos. (3 marks)
ii) A company enters into an agreement with a bank and it sells GH¢10 million government bonds with an obligation to buy back the security in 60 days. If the rate is 8.2%, what is the repurchase price of the bond? Assume 365 days in a year. (3 marks)
Find Related Questions by Tags, levels, etc.
Ahuodzen Pharmaceutical Ltd (Ahuodzen) imports chemicals to produce medicines in Ghana. It has received a consignment of chemicals from a supplier in India. The invoice value of US$2 million is payable two months from now. The Treasury Manager of Ahuodzen is worried about volatility in the cedi to US dollar exchange rate.
Required:
Explain how local currency invoicing would be used as a strategy for managing currency risk exposures and advise the Treasury Manager on the benefit and risk of handling Ahuodzen’s currency risk exposure using local currency invoicing. (5 marks)
Find Related Questions by Tags, levels, etc.
a) Adjei Departmental Stores’ demand for cash has been quite volatile recently, with the standard deviation in daily cash demand rising to GH¢60,000. The managers of the company are therefore considering using the Miller-Orr model to manage its cash flows. The minimum cash balance would be set to GH¢300,000. The annual interest rate is expected to be 18.25% while the cost of trading investments in securities is GH¢10,000 per transaction.
Required:
i) Compute the cash return point. (4 marks)
ii) Compute the upper cash limit. (2 marks)
iii) Explain how the minimum cash limit, upper cash limit, and cash return point would be used to manage the cash balances of Adjei Departmental Stores. (3 marks)
b) The Founder of a growing technology company has questioned her Chief Finance Officer about the company’s holdings of cash in demand deposit accounts and on hand when the money could be invested in financial securities for returns.
Required:
Explain to the Founder THREE (3) motives for holding cash. (6 marks)
c) Serwaa Home Décor Ltd, a trading company based in Ghana, usually buys foreign currency to settle invoices for imports. The Treasury Manager is considering ways of hedging the company’s foreign currency risk exposures. After considering various options available to her, she has settled on both forwards and futures contracts.
Required:
Explain TWO (2) advantages of currency forwards over currency futures contract. (5 marks)
Find Related Questions by Tags, levels, etc.
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