1 Question One The overall corporate objective of most firms is to maximize the value of the firm for the owners. Apparently in their bid to achieve the above objective, management of firms makes decisions as to choice of best alternatives available, use and/or allocate resources among available alternatives as well as engage in exchanges and/or operations and other activities. Required: a) Concisely outline the key decision areas of concern that financial managers of corporate organizations mostly focus on. (6 marks) b) How are the shareholders of firms able to ensure that the value of their firms is maximized? (6 marks) c) Differentiate between corporate ownership and corporate management. How does the separation of corporate ownership and corporate management present problems in corporate life? (5 marks) d) Enumerate and explain any three (3) cost(s) associated with agency problem(s). (3 marks) Question Two You are the newly recruited Finance Officer of FYG Pharmaceutical Ltd, a household pharmaceutical enterprise based in Kumasi. You ascertained that, FYG Pharmaceutical Ltd is considering investing GHC5,175,000.00 in a COVID-19 related vaccine project that is expected to yield an average return of 6.67% on investment for four years. At the end of this period the project shall be liquidated for a value determined as 25% of initial investment. FYG Pharmaceutical Ltd's weighted average cost of capital (WACC) is 10%. GOOD LUCK! FYG/ABM ACC481 1 Required: a) With the aid of memo, you are required to submit for the attention of the Finance Director your estimation of the present value of FYG Pharmaceutical Ltd's cash flow expectations at the end of the fourth year. (12 marks) b) In your memo, suggest three (3) potential sources of finance for this project. You are to include your possible recommendation(s) together with reasons. (5 marks) c) Differentiate between capital market and primary market. (3 marks) % % % 22.42 20.03 14.99 13.82 12.80 13.24 Question Three You are a graduate from one of the reputable universities in Ghana with BSc Accounting degree working with one of the finance houses in Accra that specializes in provision of project capital support to medium to large firms. Your institution recently received an application for project financing from Gbadago Enterprise Limited. This application has been assigned to your team for initial evaluation and analysis. Enclosed with the application package is Gbadago Enterprise Limited's Common Size Statement of Financial Position for the years ended 31st December as set out below: 2013 2012 2011 Non-Current Assets Property, Plant and Equipment 53.23 51.12 51.96 Current Assets Inventories 20.15 Trade Receivables 12.38 Cash & Bank Balances 13.86 46.77 48.88 48.04 Total Assets 100.00 100.00 100.00 Current Liabilities Creditors Bank Overdraft 2.04 1.36 Long-Term Liabilities 2 Loans 2.72 13.81 Net Assets 58.42 Represented By: Stated Capital 15.94 16.64 16.63 Income Surplus 26.65 Revaluation Surplus 2.54 2.65 Capital Surplus 11.96 12.49 87.63 77.42 58.42 7.62 7.41 25.50 87.63 77.42 57.18 45.63 2.66 12.48 GOOD LUCK! FYG/ABM ACC481 N Required: a) As the team head, you are required to present a project report that set out your evaluation of the financial performance of Gbadago Enterprise Limited for the relevant years. You are to ensure that, your evaluation report covers profitability, liquidity and gearing analysis as well as your recommendations (if any) and basis of the recommendations. (12 marks) b) Enumerate at least four (4) limitations of financial ratios. (4 marks) c) Explain why Gbadago Enterprise Limited seeks for external sources of finance despite its high amount of retained earnings? (4 marks) Question Four a. Discuss any five (5) cash control measures that may be taken by management of firms to discourage fraudulent financial activities within organizations. (5 marks) b. Differentiate between speculative and transactional motives for holding cash by business organizations. (2 marks) C. Alfreda Company Ltd presented the following estimates and policies for your perusal for the year 2020: 1. Monthly sales and purchases Month Units Produced and sold Purchases February 5,500 at CH12/unit GH20,000 March 6,800 at CH15/unit GH18,000 April 7,200 at CHC20/unit GH30,000 May 9,900 at GHc25/unit GH032,000 11. Repairs and maintenance cost is estimated at GH20,400 each month (20% of this amount was estimated for depreciation). 111. Wages and salaries payable per month is estimated at GHC16,000, iv. 60% of all sales are paid promptly by cash and the rest collected as follows: 1. 80% the month following the sale; 2. The rest, the month following. v. The company is allowed one month credit for all purchases made. vi. The payment plan is as follows: 1. 60% the month after the credit period; GOOD LUCK! FYG/ABM ACC481 3 2. The rest payable in the month that follows. vii. Commission receivable is expected to be GHC25,200 for April; whiles Insurance payable is GH15,000 per month Required: You are required to prepare a Cash Budget for Alfreda Company Ltd covering the months of March April and May, 2020. (13 marks) Question Five a) Explain three factors that discourage businessmen from adopting the Net Present Value technique in evaluating capital investment projects. (3 marks) b) Agyenkwah Company Ltd is considering investing in a Gym that costs GH4900,000. This investment may last for 5 years with an estimated scrap value of GHC150,000. The company depreciates fixed assets on cost. The profits/(losses) from this venture are expected to be: Year 2 3 5 P/L (GHC) (50,000) 95,000 300,000 185,000 130,000 1 Required: Using the Pay Back technique, should the company embark on this project? Explain your answer. (7 marks) c) Nyamedea Company Ltd intends to invest in a restaurant or guest house project. The company needs an amount of CHC1,090,000 to build the restaurant; and GHc3,500,000 for the Guest House The following are the expected cash flows from the two projects: Years Restaurant Guest House GHC GHC 150,000 960,000 2 210,000 1,830,000 350,000 2,020,000 390,000 2,500,000 3 4 Required: Should management decide to use the Net Present Value technique, assuming a cost of capital of 15% for the Restaurant and 12% for the Guest House, which of the two projects would you advise them to embark upon? (10 marks) GOOD LUCK! FYG/ABM ACC481 1 Question One The overall corporate objective of most firms is to maximize the value of the firm for the owners. Apparently in their bid to achieve the above objective, management of firms makes decisions as to choice of best alternatives available, use and/or allocate resources among available alternatives as well as engage in exchanges and/or operations and other activities. Required: a) Concisely outline the key decision areas of concern that financial managers of corporate organizations mostly focus on. (6 marks) b) How are the shareholders of firms able to ensure that the value of their firms is maximized? (6 marks) c) Differentiate between corporate ownership and corporate management. How does the separation of corporate ownership and corporate management present problems in corporate life? (5 marks) d) Enumerate and explain any three (3) cost(s) associated with agency problem(s). (3 marks) Question Two You are the newly recruited Finance Officer of FYG Pharmaceutical Ltd, a household pharmaceutical enterprise based in Kumasi. You ascertained that, FYG Pharmaceutical Ltd is considering investing GHC5,175,000.00 in a COVID-19 related vaccine project that is expected to yield an average return of 6.67% on investment for four years. At the end of this period the project shall be liquidated for a value determined as 25% of initial investment. FYG Pharmaceutical Ltd's weighted average cost of capital (WACC) is 10%. GOOD LUCK! FYG/ABM ACC481 1 Required: a) With the aid of memo, you are required to submit for the attention of the Finance Director your estimation of the present value of FYG Pharmaceutical Ltd's cash flow expectations at the end of the fourth year. (12 marks) b) In your memo, suggest three (3) potential sources of finance for this project. You are to include your possible recommendation(s) together with reasons. (5 marks) c) Differentiate between capital market and primary market. (3 marks) % % % 22.42 20.03 14.99 13.82 12.80 13.24 Question Three You are a graduate from one of the reputable universities in Ghana with BSc Accounting degree working with one of the finance houses in Accra that specializes in provision of project capital support to medium to large firms. Your institution recently received an application for project financing from Gbadago Enterprise Limited. This application has been assigned to your team for initial evaluation and analysis. Enclosed with the application package is Gbadago Enterprise Limited's Common Size Statement of Financial Position for the years ended 31st December as set out below: 2013 2012 2011 Non-Current Assets Property, Plant and Equipment 53.23 51.12 51.96 Current Assets Inventories 20.15 Trade Receivables 12.38 Cash & Bank Balances 13.86 46.77 48.88 48.04 Total Assets 100.00 100.00 100.00 Current Liabilities Creditors Bank Overdraft 2.04 1.36 Long-Term Liabilities 2 Loans 2.72 13.81 Net Assets 58.42 Represented By: Stated Capital 15.94 16.64 16.63 Income Surplus 26.65 Revaluation Surplus 2.54 2.65 Capital Surplus 11.96 12.49 87.63 77.42 58.42 7.62 7.41 25.50 87.63 77.42 57.18 45.63 2.66 12.48 GOOD LUCK! FYG/ABM ACC481 N Required: a) As the team head, you are required to present a project report that set out your evaluation of the financial performance of Gbadago Enterprise Limited for the relevant years. You are to ensure that, your evaluation report covers profitability, liquidity and gearing analysis as well as your recommendations (if any) and basis of the recommendations. (12 marks) b) Enumerate at least four (4) limitations of financial ratios. (4 marks) c) Explain why Gbadago Enterprise Limited seeks for external sources of finance despite its high amount of retained earnings? (4 marks) Question Four a. Discuss any five (5) cash control measures that may be taken by management of firms to discourage fraudulent financial activities within organizations. (5 marks) b. Differentiate between speculative and transactional motives for holding cash by business organizations. (2 marks) C. Alfreda Company Ltd presented the following estimates and policies for your perusal for the year 2020: 1. Monthly sales and purchases Month Units Produced and sold Purchases February 5,500 at CH12/unit GH20,000 March 6,800 at CH15/unit GH18,000 April 7,200 at CHC20/unit GH30,000 May 9,900 at GHc25/unit GH032,000 11. Repairs and maintenance cost is estimated at GH20,400 each month (20% of this amount was estimated for depreciation). 111. Wages and salaries payable per month is estimated at GHC16,000, iv. 60% of all sales are paid promptly by cash and the rest collected as follows: 1. 80% the month following the sale; 2. The rest, the month following. v. The company is allowed one month credit for all purchases made. vi. The payment plan is as follows: 1. 60% the month after the credit period; GOOD LUCK! FYG/ABM ACC481 3 2. The rest payable in the month that follows. vii. Commission receivable is expected to be GHC25,200 for April; whiles Insurance payable is GH15,000 per month Required: You are required to prepare a Cash Budget for Alfreda Company Ltd covering the months of March April and May, 2020. (13 marks) Question Five a) Explain three factors that discourage businessmen from adopting the Net Present Value technique in evaluating capital investment projects. (3 marks) b) Agyenkwah Company Ltd is considering investing in a Gym that costs GH4900,000. This investment may last for 5 years with an estimated scrap value of GHC150,000. The company depreciates fixed assets on cost. The profits/(losses) from this venture are expected to be: Year 2 3 5 P/L (GHC) (50,000) 95,000 300,000 185,000 130,000 1 Required: Using the Pay Back technique, should the company embark on this project? Explain your answer. (7 marks) c) Nyamedea Company Ltd intends to invest in a restaurant or guest house project. The company needs an amount of CHC1,090,000 to build the restaurant; and GHc3,500,000 for the Guest House The following are the expected cash flows from the two projects: Years Restaurant Guest House GHC GHC 150,000 960,000 2 210,000 1,830,000 350,000 2,020,000 390,000 2,500,000 3 4 Required: Should management decide to use the Net Present Value technique, assuming a cost of capital of 15% for the Restaurant and 12% for the Guest House, which of the two projects would you advise them to embark upon? (10 marks) GOOD LUCK! FYG/ABM ACC481