Topic: Sources of finance: debt

Search 500 + past questions and counting.

  • Filter by Professional Bodies

  • Filter by Subject

  • Filter by Series

  • Filter by Topics

  • Filter by Levels

  • 14 Marks

FM – Nov 2024 – L2 – Q1a – Sources of Finance

Compare equity and debt financing for business expansion using rights issue and loan notes.

GoodLife Innovations is planning to expand its operations, which will boost its profit before interest and tax by 20%. The company is evaluating whether to fund the GH¢4,000,000 needed for this expansion through equity or debt financing.

If equity financing is chosen, the company will offer a 1-for-5 rights issue to existing shareholders at a 20% discount to the current ex-dividend share price of GH¢5 per share. The par value of the ordinary shares is GH¢1 per share. Alternatively, if debt financing is selected, GoodLife Innovations will issue 20,000 8% loan notes, each with a par value of GH¢200.

The following information was extracted from the financial statement prior to raising new finance:

GH¢’000 Amount
Profit before interest and tax 3,194
Finance costs (interest) (630)
Taxation (564)
Profit after tax 2,000
Equity & Liability:
Ordinary shares 5,000
Retained earnings 10,976
Long-term liabilities: 7% loan notes 9,000
Total equity & liabilities 24,976

GoodLife Innovations currently has a price/earnings ratio of 12.5 times. Corporate tax is payable at a rate of 22%.

Required:
i) Calculate the theoretical ex-rights price per share. 
ii) Calculate the revised earnings per share after the business expansion:

  • assuming equity finance is adopted.
  • assuming debt finance is adopted. 
    iii) Determine the revised share prices under both financing methods after the business expansion. 
    iv) Determine which financing method should be used for the planned business expansion using computations for interest cover and share price changes.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2024 – L2 – Q1a – Sources of Finance"

  • 20 Marks

FM – DEC 2023 – L2 – Q4 – Capital rationing | Introduction to Investment Appraisal | Sources of finance: debt

Explanation of capital rationing concepts, NPV and profitability index calculations, and factors influencing debt finance decisions.

a) In periods of difficult global financial environment, raising of capital is a challenge necessitating the need for prudent and best use of scarce capital for projects.

Required:
i) Explain the term capital rationing. (2 marks)
ii) Distinguish between soft capital rationing and hard capital rationing giving an example each. (3 marks)

b) Akonta Ghana Ltd has excess funds of GH¢200 million and is looking for attractive investment opportunities that will yield a return of 15% per annum or better to deploy the funds. An extract from a Feasibility report submitted by a team of investment and project experts is as follows:

Project Initial Investment Required (GH¢) Constant Annual Cash Inflow (GH¢) Project Life (Years)
A 80,000,000 36,000,000 4
B 40,000,000 23,000,000 3
C 78,000,000 30,000,000 5
D 40,000,000 20,000,000 4
E 40,000,000 22,000,000 3

The cash flows per project are constant for the life span of each project and each project is divisible for the purpose of capital allocation.

Required:
i) Calculate the Net Present Values (NPVs) of each project. (7 marks)
ii) Rank the projects using Profitability Index and allocate the GH¢200 million among the projects. (3 marks)

c) There are many sources of debt finance available to a company which has viable and profitable investment opportunities to utilise the funds. It is, however, very important for the Finance Manager to do a thorough work before deciding the type and source of debt finance to tap into.

Required:
Explain THREE (3) factors a Finance Manager should consider when deciding the type of debt finance to raise. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – DEC 2023 – L2 – Q4 – Capital rationing | Introduction to Investment Appraisal | Sources of finance: debt"

  • 20 Marks

FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

a) TekApps is a small technology company that develops financial technology (FinTech) applications for mobile devices. The company is selling one of its highly rated FinTech apps to a financial institution. The financial institution has proposed the following strategic payment options for TekApps’ consideration:

Strategy 1: An immediate payment of GH¢1.2 million followed by payments of GH¢50,000 at the end of each quarter during the next five years.

Strategy 2: Payment of GH¢55,000 at the beginning of each month for the next five years.

TekApps’ required rate of return is 25% per annum.

Required:
i) Identify the type of cash flow pattern described under each option. (3 marks)
ii) Compute the present value of the cash flows for each strategy and advise TekApps on the best payment option. (7 marks)

b) BKB Entertainment Ltd (BKB) currently borrows at an average rate of 24% per annum. The Treasury Manager of the company believes that BKB can borrow at a lower interest rate if its creditworthiness is assessed and rated by a rating agency. He has therefore recommended to the Board of Directors to consider requesting a credit rating.

Required:
i) Explain TWO (2) benefits of credit rating to BKB. (4 marks)
ii) Advise the directors on THREE (3) factors rating agencies will consider in determining the company’s credit rating. (6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management"

  • 20 Marks

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.

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)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

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

  • 6 Marks

FM – Nov 2019 – L2 – Q3b – Sources of finance: debt

Calculate the even amount to be deposited into a sinking fund to redeem bonds at maturity.

Wobete Ltd is offering 5 million units of 15-year bonds with a face value of GH¢100 each. Though the bonds are being offered at a price of GH¢95 each, the bonds will be redeemed at a premium of 10%. The annual coupon rate of the bonds is 15%. Interest is payable at the end of every six months.

A provision in the bond indenture requires that Wobete Ltd establishes a sinking fund to accumulate enough money to pay the total redemption value of the bonds upon maturity. To comply with this provision, Wobete Ltd plans to set aside an even amount at the end of each quarter over the next 15 years. Each of the even amounts that will be set aside will be invested at an annual interest rate of 12% with quarterly compounding.

Required:
Calculate the even amount that should be put into the sinking fund at the end of each quarter to raise enough money to pay the total redemption value of the bonds. (6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2019 – L2 – Q3b – Sources of finance: debt"

  • 10 Marks

FM – Nov 2017 – L2 – Q2b – Sources of finance: debt

Discuss the problems small firms encounter in raising capital in the Ghanaian financial markets.

Many small firms encounter a lot of problems in obtaining funds from the entire financial market to run their businesses. This problem has always accounted for their low performance in business.

Required:
What problems do small firms encounter in their efforts to raise capital in the Ghanaian financial markets? (10 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2017 – L2 – Q2b – Sources of finance: debt"

  • 5 Marks

FM – MAY 2019 – L2 – Q2c – Sources of finance: debt

Explain convertible debt and its advantages over bank loans with similar maturity.

If an existing public company chooses to issue shares, the financial market usually interprets this as a sign that the company’s share price is somewhat overvalued. To avoid this negative impression, a company may choose to issue convertible bonds, which bondholders are likely to convert to equity anyway should the company continue to do well.

Required:
Explain convertible debt and identify FOUR (4) attractions to a company of convertible debt compared to a bank loan of a similar maturity as a source of finance. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – MAY 2019 – L2 – Q2c – Sources of finance: debt"

  • 14 Marks

FM – Nov 2024 – L2 – Q1a – Sources of Finance

Compare equity and debt financing for business expansion using rights issue and loan notes.

GoodLife Innovations is planning to expand its operations, which will boost its profit before interest and tax by 20%. The company is evaluating whether to fund the GH¢4,000,000 needed for this expansion through equity or debt financing.

If equity financing is chosen, the company will offer a 1-for-5 rights issue to existing shareholders at a 20% discount to the current ex-dividend share price of GH¢5 per share. The par value of the ordinary shares is GH¢1 per share. Alternatively, if debt financing is selected, GoodLife Innovations will issue 20,000 8% loan notes, each with a par value of GH¢200.

The following information was extracted from the financial statement prior to raising new finance:

GH¢’000 Amount
Profit before interest and tax 3,194
Finance costs (interest) (630)
Taxation (564)
Profit after tax 2,000
Equity & Liability:
Ordinary shares 5,000
Retained earnings 10,976
Long-term liabilities: 7% loan notes 9,000
Total equity & liabilities 24,976

GoodLife Innovations currently has a price/earnings ratio of 12.5 times. Corporate tax is payable at a rate of 22%.

Required:
i) Calculate the theoretical ex-rights price per share. 
ii) Calculate the revised earnings per share after the business expansion:

  • assuming equity finance is adopted.
  • assuming debt finance is adopted. 
    iii) Determine the revised share prices under both financing methods after the business expansion. 
    iv) Determine which financing method should be used for the planned business expansion using computations for interest cover and share price changes.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2024 – L2 – Q1a – Sources of Finance"

  • 20 Marks

FM – DEC 2023 – L2 – Q4 – Capital rationing | Introduction to Investment Appraisal | Sources of finance: debt

Explanation of capital rationing concepts, NPV and profitability index calculations, and factors influencing debt finance decisions.

a) In periods of difficult global financial environment, raising of capital is a challenge necessitating the need for prudent and best use of scarce capital for projects.

Required:
i) Explain the term capital rationing. (2 marks)
ii) Distinguish between soft capital rationing and hard capital rationing giving an example each. (3 marks)

b) Akonta Ghana Ltd has excess funds of GH¢200 million and is looking for attractive investment opportunities that will yield a return of 15% per annum or better to deploy the funds. An extract from a Feasibility report submitted by a team of investment and project experts is as follows:

Project Initial Investment Required (GH¢) Constant Annual Cash Inflow (GH¢) Project Life (Years)
A 80,000,000 36,000,000 4
B 40,000,000 23,000,000 3
C 78,000,000 30,000,000 5
D 40,000,000 20,000,000 4
E 40,000,000 22,000,000 3

The cash flows per project are constant for the life span of each project and each project is divisible for the purpose of capital allocation.

Required:
i) Calculate the Net Present Values (NPVs) of each project. (7 marks)
ii) Rank the projects using Profitability Index and allocate the GH¢200 million among the projects. (3 marks)

c) There are many sources of debt finance available to a company which has viable and profitable investment opportunities to utilise the funds. It is, however, very important for the Finance Manager to do a thorough work before deciding the type and source of debt finance to tap into.

Required:
Explain THREE (3) factors a Finance Manager should consider when deciding the type of debt finance to raise. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – DEC 2023 – L2 – Q4 – Capital rationing | Introduction to Investment Appraisal | Sources of finance: debt"

  • 20 Marks

FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

a) TekApps is a small technology company that develops financial technology (FinTech) applications for mobile devices. The company is selling one of its highly rated FinTech apps to a financial institution. The financial institution has proposed the following strategic payment options for TekApps’ consideration:

Strategy 1: An immediate payment of GH¢1.2 million followed by payments of GH¢50,000 at the end of each quarter during the next five years.

Strategy 2: Payment of GH¢55,000 at the beginning of each month for the next five years.

TekApps’ required rate of return is 25% per annum.

Required:
i) Identify the type of cash flow pattern described under each option. (3 marks)
ii) Compute the present value of the cash flows for each strategy and advise TekApps on the best payment option. (7 marks)

b) BKB Entertainment Ltd (BKB) currently borrows at an average rate of 24% per annum. The Treasury Manager of the company believes that BKB can borrow at a lower interest rate if its creditworthiness is assessed and rated by a rating agency. He has therefore recommended to the Board of Directors to consider requesting a credit rating.

Required:
i) Explain TWO (2) benefits of credit rating to BKB. (4 marks)
ii) Advise the directors on THREE (3) factors rating agencies will consider in determining the company’s credit rating. (6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management"

  • 20 Marks

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.

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)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

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

  • 6 Marks

FM – Nov 2019 – L2 – Q3b – Sources of finance: debt

Calculate the even amount to be deposited into a sinking fund to redeem bonds at maturity.

Wobete Ltd is offering 5 million units of 15-year bonds with a face value of GH¢100 each. Though the bonds are being offered at a price of GH¢95 each, the bonds will be redeemed at a premium of 10%. The annual coupon rate of the bonds is 15%. Interest is payable at the end of every six months.

A provision in the bond indenture requires that Wobete Ltd establishes a sinking fund to accumulate enough money to pay the total redemption value of the bonds upon maturity. To comply with this provision, Wobete Ltd plans to set aside an even amount at the end of each quarter over the next 15 years. Each of the even amounts that will be set aside will be invested at an annual interest rate of 12% with quarterly compounding.

Required:
Calculate the even amount that should be put into the sinking fund at the end of each quarter to raise enough money to pay the total redemption value of the bonds. (6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2019 – L2 – Q3b – Sources of finance: debt"

  • 10 Marks

FM – Nov 2017 – L2 – Q2b – Sources of finance: debt

Discuss the problems small firms encounter in raising capital in the Ghanaian financial markets.

Many small firms encounter a lot of problems in obtaining funds from the entire financial market to run their businesses. This problem has always accounted for their low performance in business.

Required:
What problems do small firms encounter in their efforts to raise capital in the Ghanaian financial markets? (10 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2017 – L2 – Q2b – Sources of finance: debt"

  • 5 Marks

FM – MAY 2019 – L2 – Q2c – Sources of finance: debt

Explain convertible debt and its advantages over bank loans with similar maturity.

If an existing public company chooses to issue shares, the financial market usually interprets this as a sign that the company’s share price is somewhat overvalued. To avoid this negative impression, a company may choose to issue convertible bonds, which bondholders are likely to convert to equity anyway should the company continue to do well.

Required:
Explain convertible debt and identify FOUR (4) attractions to a company of convertible debt compared to a bank loan of a similar maturity as a source of finance. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – MAY 2019 – L2 – Q2c – Sources of finance: debt"

Elevate your professional expertise across key business domains with our comprehensive training programs

Our offerings

Contact Info

  • +233203701923
    +233543919232
  • info@nbcinstitute.com

Customer

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope

NBC Institute

Hello! How can I help you today?
Oops!

This feature is only available in selected plans.

Click here to view all plans

Click on the login button below to login if you’re already subscribed to a plan or click on the upgrade button below to upgrade your current plan.

Login
Upgrade Plan

If you’re not subscribed to a plan, click on the button below to choose a plan

Subscribe to a plan